George Carlin and Erga Omnes: the Petrobras Bribery Scandal Expands

On this date in 2008 George Carlin died. If you grew up in the late 1960s or early 1970s and you had anti-parental or anti-establishment inklings, which of course all teenagers do, you knew about George Carlin. In the early 1960s, Carlin was a relatively clean-cut, conventional comic. But around 1970, he reinvented himself as an eccentric, biting social critic and commentator. In this new incarnation, Carlin began appealing to a younger, hipper audience. He grew out his hair and added a beard together with a wardrobe in the stereotypically hippie style.

Carlin’s comedy also became counter-culture, not Cheech and Chong, hippy-dippy dopers, but with pointed jokes about religion, politics yet with frequent references to drugs. His second album with his new routine, FM/AM, won a Grammy Award for Best Comedy Recording. My favorite cut was the 11 O’Clock News. But it was his third album Class Clown that had, what I believe, to be the greatest comedy monologue ever, the profanity-laced routine “Seven Words You Can Never Say on Television.” When it was first broadcast on New York radio, a complaint led the Federal Communications Commission (FCC) to ban the broadcast as “indecent.” The US Supreme Court later upheld the order, which remains in effect today. The routine made Carlin a hero to his fans and got him in trouble with radio brass as well as with law enforcement; he was even arrested several times, once during an appearance in Milwaukee, for violating obscenity laws.

Interestingly I thought about Carlin and his pokings of the Establishment (AKA The Man) when I read several articles over the weekend about the recent spate of arrests around the Petrobras bribery and corruption scandal. In article in the Wall Street Journal (WSJ), entitled “Brazil Probe Sweeps Up Corporate Magnates” Will Connors, Rogerio Jelmayer and Paul Kiernan reported that “Brazilian officials arrested the heads of two Latin American construction giants, alleging they helped to mastermind a cartel that stole billions of dollars from state-run oil company Petrobras with the help of corrupt politicians to whom they paid kickbacks.” Also arrested with the heads of the two companies, Marcelo Odebrecht, head of Odebrecht SA and Chief Executive Officer (CEO) of Andrade Gutierrez, Otávio Azevedo.

The WSJ article reported that “Odebrecht is Latin America’s largest construction conglomerate, with business in the U.S., Europe and Africa, and whose head, Marcelo Odebrecht, is a household name in Brazil. Andrade Gutierrez has business in 40 countries. The privately owned companies are deeply involved in the development of stadiums and infrastructure for the 2016 Summer Olympics in Rio de Janeiro.” Moreover, Odebrecht is reported to have “a presence in 21 countries”. Obviously a question is if the company had engaged in bribery and corruption in Brazil, did they do so in any of the other countries in which they are doing business?

Interestingly, these arrests “come months after the heads of other construction companies were detained by Brazilian authorities.” Indeed in a BBC article in , entitled “Petrobras scandal: Top construction bosses arrested in Brazil”, David Gallas said, “Odebrecht had been named by former Petrobras executives as one of the companies that allegedly paid bribes in exchange for contracts with the oil firm, but until now the firm had not been targeted by investigators.” The WSJ article quoted Brazilian prosecutor Carlos Fernando dos Santos Lima who said at a news conference that the executives from the two companies had not been arrested earlier as the entities, “had a more sophisticated system for making the alleged bribe payments, using foreign bank accounts in Switzerland, Monaco and Panama, so it took longer to prove their case.” David Fleischer, a Brasilia based political analyst, quoted in the WSJ article was even more circumspect. He said, “The prosecutors are very careful. If you’re going after big fish you want to make sure you can take them down.”

Brazilian police said the arrests were “Erga omnes” which the WSJ translated from Latin as “towards all”. I thought about that statement in light of the ongoing debate about enforcement of the Foreign Corrupt Practices Act (FCPA) here in the US. On one side is the Chamber of Commerce and their allies who raise the ever-burgeoning cry that the Department of Justice (DOJ) needs to prosecute the invidious ‘Rogue employees’ who violate the FCPA. You will notice they never want the DOJ to look at the executives who might facilitate payment of bribes in the first place; whether through faux commitment to doing business in compliance, failing to properly allocate resources to compliance and ethics, simply rewarding those employees who git ‘er done no matter what the circumstances or (my favorite) putting a paper program in place and calling it a best practices compliance program.

Indeed those progenitors of relaxed enforcement want the DOJ to back off and let them do business the old fashioned way. However, if the bribery and corruption news from the first half of this year has told the world anything, it is about the dire effects of allowing such illegal conduct to take place and warning against slacking off laws which mandate doing business without bribery and corruption. In another WSJ article, entitled “Roots of a Brazilian Scandal That Weighs Heavily on the Nation’s Economy, Politics”, Marla Dickerson noted, “The scandal has crippled Petrobras, Brazil’s largest and most important company. In late April, the company wrote off more than $16 billion related to losses from graft and overvalued assets. The company’s woes have all but paralyzed the nation’s oil and gas sector. Hurt by slumping oil prices and strapped for cash, Petrobras has slashed investments, sparking a wave of credit downgrades, bankruptcies and layoffs among its suppliers that the weighed on Brazil’s economy.”

I wonder what George Carlin might have thought about all of this. He might have said that what else would you expect but I am relatively certain he would have done so while also sticking his thumb in the eye of The Man. 

For a YouTube version of the 11 O’Clock News, click here.

For a YouTube version of the 7 words you can never say on television, 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, 2015

 

Why Should Americans Care About the FIFA Indictments? Part IV – Corruption is a Global Scourge

Today, I conclude my four-part series on the above question posed to me recently by a colleague. In Part I, I responded that only the US government had the wherewithal and will to do so and that it continued the administration’s fight against the scourge of corruption. For Part II I focused on corruption on the pitch and how bribery and corruption ‘changes the truth of the game’ of soccer (AKA Football). In Part III, I reviewed why American citizens should care that US companies are not engaged in bribery and corruption. Today we look at reason number four of why Americans should care about the Department of Justice (DOJ) bringing indictments against the 14 named defendants who were all associated with the governing body of international soccer, the Fédération Internationale de Football Association (FIFA). Up today is the invidiousness of corruption, that it is not a victimless crime and how its scourge hurts countries.

Jack Warner, the former FIFA Executive Committee member and head of the North American regional soccer federation CONCACAF, is alleged to have received a $10MM bribe to swing votes to South Africa so that it could land the hosting of the 2010 World Cup. However Warner had (allegedly) been previously paid by Morocco for his votes. The Sunday Times, in an article entitled “‘Please, this is very secret’ –the explosive claims of bribery and vote-rigging that Fifa decided to kick into the long grass”, reported that two former FIFA officials, Ismail Bhamjee and Michel Bacchini told the paper that Warner had been paid $1MM by Morocco to secure his vote but Warner double-crossed the country by selling out to South Africa for $10MM. Where is a little honor among crooks? The answer may be in the character of Jack Warner, who is a Minister of Parliament in Trinidad and was once a government minister, but resigned because of fraud allegations. Is that the type of character you really want in your government? What do you thing that type of politician will do when faced with an ethical dilemma? (Hint-take the money)

What about South Africa and its role as an alleged bribe payor? South Africa originally denied any payment was made. However, in an article in the Sunday Times, entitled “Trinidad’s ‘Robin Hood’ plots escape from sheriff”, Tony Allen-Mills reported that the country later changed its story to say that the payment was made to Warner “to fund football development.” Even assuming it was a charitable donation, one can only conclude there were zero protections around the payment.

For we next were told that South Africa did not actually make the payment but FIFA did directly. Amazingly, and pulling a full 180 degree Bat-Turn from his previous positions, the Secretary General of FIFA, Jérôme Valcke said on Wednesday said that he had authorized a $10 million payment to Warner after a full 13 days of denying it. The Sunday Times also reported that US authorities were investigating former FIFA President Sepp Blatter about a meeting, where he was present, and this payment was discussed.

Whoever made the payments, Ed Thomas, in a BBC online article entitled “Fifa corruption: Documents show details of Jack Warner ‘bribes’”, reported that this $10MM was not used for any soccer development in Trinidad but was used by Warner himself. Thomas reported that three payments were made into CONCACAF accounts controlled by Warner, one on January 4, 2008, one on February 1, 2008 and a final payment on March 10, 2008; all adding up to $10MM. Thomas also reviewed documents to show how the money was either laundered and then paid back to Warner or simply used to pay Warner’s personal expenses such as personal loans and credit card bills.

To those who maintain that bribery is a victimless crime, simply imagine what a country like Trinidad could do with $10MM to invest in its soccer programs and infrastructure? How many youth academies could be funded with that amount of money? How many soccer fields could be built? The answers is lots and lots but when corruption is so endemic that a $10MM bribe can be paid with such ease, with no oversight or even questions being raised, it is the citizens of Trinidad who are the victims.

But more than simply Jack Warner and his corruption in Trinidad are at play here. Even world soccer power Brazil has welcomed the investigation into FIFA, as one of those arrested was José Maria Martin, the former head of Brazil’s soccer federation, the CBF. Writing in the Financial Times, (FT) Joe Leahy, in an article entitled “Arrests sparks hope of cleaner Brazilian game”, wrote, “For Brazil, his arrest prompted hopes that finally one of the dirtiest institutions, football, might be held to account.” He quoted Flávio de Leão Bastos Pereira, a professor of criminal law at Mackenzie University in Sao Paulo for the following, “This could stimulate the necessary changes in Brazilian football in terms of greater professionalism, ethics and transparency.”

Apparently endemic corruption reigned in the country that has won five World Cup championships for many years with multiple persons involved in the corruption. Unfortunately for some (at this point unknown) US company or companies, payments were made through a third party agent, “Jose Hawilla – the head of Brazilian based marketing company Traffic and one of the main paymasters behind the corruption at Fifa”. So much money went through Hawilla that in his guilty plea agreement he agreed to forfeit $151MM in his profits.

Interestingly, and probably for an entirely different set of reasons, Brazilian President Dilma Rousseff announced that she welcomed the investigation. In another FT article, entitled “Fifa corruption scandal threatens to engulf Nike as sponsors raise pressure”, Joe Leahy and Mark Odell reported that the President wanted an outside agency to investigation corruption around the CBF because soccer was run by private organizations and the public prosecutors had been unable to crack it. She was quoted as saying “I say that if it needs to be investigated, investigate it – all the world cups, everything.” This is certainly a refreshing change from her attitude towards the investigation into corruption at Petrobras.

The point to all this is that corruption is a global scourge. I, and many others, believe it is a component of political instability and terrorism. But the FIFA scandal shows how corruption, which may appear to be victimless and not appear to hurt anyone, can, does and has destroyed the fabric if not the soul of some of the world’s greatest institutions. Even if you simply think it is much to-do about a game, we all should have some expectation that games will be played fairly with the best team on any given day. Unfortunately the FIFA scandal shows that ‘fixing’ has been there for a long time. The world’s most popular game deserves better. As Americans we should all want to fight the scourge of corruption wherever it might appear and we certainly believe that there should be a level playing field for all who want to compete.

So to my friend who started me on this four-part journey of why Americans should care about the FIFA scandal, I hope that I have persuaded you why you should care. For the rest of you, I hope you have enjoyed this series. One of the joys of blogging and podcasting is engaging with readers and listeners. So keep those questions coming and you too can help me engage in the fight against the global scourge of bribery and corruption.

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, 2015

Why Should Americans Care About the FIFA Indictments? Part III – Corruption and US Companies

Today, I continue my four-part series on the above question posed to me recently by a colleague. In Part I, I wrote that only the US government had the wherewithal, tools and will to do so. Yesterday, I focused on corruption on the pitch and how bribery and corruption ‘changes the game’ of soccer (AKA Football). Today is the third of my of my four reasons on why Americans should care about the Department of Justice (DOJ) bringing their indictments against the 14 named defendants who were all associated with the governing body of international soccer, the Fédération Internationale de Football Association (FIFA). Up today is the corruption and US companies.

While there were no US companies specifically identified in the indictments, there were allegations that bribes were paid and pocketed in connection with the sponsorship of the Brazilian national soccer team by “a major U.S. sportswear company.” This company was later determined to be Nike. In an initial statement Nike denied any involvement in the payment of bribes and said they were cooperating with the relevant authorities. However, they later changed this original statement to say, “Like fans everywhere we care passionately about the game and are concerned by the very serious allegations. Nike believes in ethical and fair play in both business and sport and strongly opposes any form of manipulation or bribery. We have been cooperating, and will continue to cooperate, with the authorities.”

Nike is not alone in its World Cup sponsorship as there are numerous other American companies involved, both sportswear manufacturers and other retailers, such as those from the beverage industry. The involvement of US companies and companies subject to the Foreign Corrupt Practices Act (FCPA) brings up the specter of the FCPA for companies involved in FIFA sponsorship and marketing partnerships. I do not see this as an issue so much about level playing fields for business or even the greater benefits that US companies can bring even when they are required to pay bribes. (The latter argument was used by Wal-Mart apologists around the company’s payments of bribes to do business in Mexico as benefiting the people of Mexico. Let us be quite clear-the bribes paid by Wal-Mart benefitted Wal-Mart and its income from its Mexican operations.)

Information in the indictments was quite damning about the involvement of a company identified as ‘sportswear company A or E’. In a Financial Times (FT) article, entitled “Fifa corruption scandal threatens to engulf Nike as sponsors raise pressure”, Joe Leahy and Mark Odell reported one of the cooperating defendants Jose Hawilla, owner of Traffic Group and who has pled guilty, acted as a third party agent for Nike’s landmark 1996 agreement to allow Nike to fit out the Brazilian national soccer team. Moreover, the article noted, “The prosecutors said that additional financial terms between Traffic and the unnamed sportswear company were not reflected in the CBF agreement. Under these terms, the company agreed to pay a Traffic affiliate with a Swiss bank account an additional $30m in ‘base compensation’ on top of the $160m it paid to the CBF. Three days later, the company and Traffic signed a one-page contract saying the CBF had authorized Traffic to invoice Nike directly “for marketing fees earned upon successful negotiation and performance of the agreement”. Anyone see any Red Flags in that scenario?

Beyond the criminal side of the FCPA, there is the civil side enforced by the Securities and Exchange Commission (SEC) through the Accounting Provisions, which consist of the books and records provisions and the internal controls provisions. According to the FCPA Guidance, “The FCPA’s accounting provisions operate in tandem with the anti-bribery provisions and prohibit off-the-books accounting. Company management and investors rely on a company’s financial statements and internal accounting controls to ensure transparency in the financial health of the business, the risks undertaken, and the transactions between the company and its customers and business partners. The accounting provisions are designed to “strengthen the accuracy of the corporate books and records and the reliability of the audit process which constitute the foundations of our system of corporate disclosure.””

As was made clear with the recent BHP Billiton FCPA enforcement action, violations of the accounting provisions do not apply only to brib­ery-related violations of the FCPA. The FCPA Guidance states these provisions “stand alone to help investors have assurance that all public companies account for all of their assets and liabilities accurately and in reasonable detail.” For the books and records provisions this means that US public companies must “make and keep books, records, and accounts, which, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the issuer.” For the internal controls provisions, US public companies must provide a system of internal controls that “provide reasonable assurances regarding the reliability of financial reporting and the preparation of financial statements.” In other words, the accounting provisions are designed to protect investors in addition to working towards preventing, detecting and remediating bribery and corruption.

In addition to these basic legal requirements, which are all set out in the FCPA and violation thereof could lead to criminal or civil exposure; there will be the costs. The FCPA Professor has identified “three buckets” of costs relating to an alleged FCPA violation. The first is the pre-resolution investigative and remediation costs, the second is the fine and penalty assessment and the third is the post-resolution implementation costs. It is generally recognized that buckets one and three can be up to two to six times the amount of the fine and penalty.

But with the FIFA scandal, there will be another huge factor for companies to consider and that is the negative publicity. This scandal is the largest worldwide corruption case ever brought. It is also the highest profile corruption case ever brought. It will command attention for years to come. If any US companies are linked to bribery and corruption at FIFA, their name will be dragged through the international press ad nauseum. If there are leaks about information on companies before they investigate or get out ahead of any allegations, which may spill into the press, it will certainly not look good.

For a taste of this you can look to the accounting firm KPMG, who is the auditor for FIFA. In a story originally reported by Francine McKenna at the Wall Street Journal (WSJ) and later reported by the New York Times (NYT), KPMG has blessed FIFA’s books since at least 1999. In the NYT piece, entitled “As FIFA case grows, focus turns to its auditors”, Lynnley Browning wrote that the KPMG audits “only heightens the puzzling disconnect between the different pictures that are emerging of FIFA as an organization: riddled with bribes and kickbacks in the view of prosecutors yet spotless according to the outsider most privy to its internal financial dealings.” How well do you think KPMG will come out of this?

The bottom line is that any US company or any other entity subject to the FCPA had better take a close look at its dealings with FIFA, regional soccer federations such as CONCACAF and national soccer federations. A full review is in order starting with who you did business with and how you did business with them. As Mike Brown would say, “follow the money” and see where it went, if you can account for it and if it was properly recorded on your company’s books and records. Finally, now would be a very propitious time to review your internal controls; for even if you had a robust paper system of internal controls like BHP Billiton did, if it is simply a check-the-box exercise or even worse you do not follow the internal compliance controls you have in place, you should begin remediation now.

As to why Americans should care about US companies engaging in corruption, that answer would seem to be straightforward. Companies which engage in bribery and corruption mislead investors and diminish the marketplace of information to base investments upon. If a company is engaging in bribery and corruption, they never report it in their books and records; they always try to hide it so that it cannot be detected. Usually poor internal controls exist, which can allow bribery and corruption to exist or even the possibility of it, once again demeaning the value of a company if that company cannot assure its investors that funds will be paid out with the approval of management. Further, contracts or other business obtained through bribery and corruption presents a false picture of the true financial health of a company as it allows profits obtained through illegal means to be booked as legitimate. Finally, if a company is engaging in bribery and corruption, the financial cost to the company can be astronomic. There is only one Wal-Mart that can sustain hundreds of millions dollars spent to investigate allegations of bribery and corruption and remediate any issues. Avon spent north of $500MM on its pre-resolution investigation and remediation. All of this does not even get to the issue of inflated stock values and the inevitable shareholder derivative litigation. Lastly, there is reputational damage. If a company is willing to engage in bribery and corruption as a part of a business strategy do you want to invest in the organization?

As an American should I care about US companies involved in the FIFA corruption scandal? If the facts reported in the FT are close to correct, I would certainly think so. If monies were paid by a ‘sportswear’ company in the form of marketing fees to Traffic or even a flat $40MM payment to a Traffic affiliates Swiss bank account, this is something which should not be tolerated.

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, 2015

 

 

 

 

Why Should Americans Care About the FIFA Indictments? Part II – Corruption Changes the Truth of the Game

Today, I continue my (now) four-part series on the above question posed to me recently by a colleague. (I know I wrote that it would be a three-part series but as usual I got carried away when I started writing.) Yesterday, I wrote that only the US government had the wherewithal, tools and will to do so. Today, I focus on the second of my four reasons on why Americans should care about the Department of Justice (DOJ) bringing their indictments against the 14 named defendants who were all associated with the governing body of international soccer, the Fédération Internationale de Football Association (FIFA). Up today is the corruption in the game of international soccer (AKA Football).

Corruption never stands alone because once bribes are paid for one thing, a business, entity or person opens themselves up to other situations involving bribery and corruption. So if a company hires someone with a propensity to pay bribes, such a person would have no compunction in defrauding the company in other ways. Put another way, a tiger doesn’t change its stripes very often. Take South Africa, the country which is alleged to have paid Jack Warner a $10MM bribe to secure his vote and the votes of those in the regional soccer federation he controlled, CONCACAF, to be awarded the right to host the 2010 World Cup.

Last year the New York Times (NYT) reported that the entire FIFA referee system came under great concern because of match-fixing allegations that swirled around the South African soccer federation. Given what we know now about how that organization operated is it any wonder other parts would be corrupt? And it turned out that FIFA knew about it all along.

In a NYT 2014 ‘Rigged’ two part series, entitled “Fixed Soccer Matches Cast Shadow Over World Cup” and “Inside the Fixing: How a Gang Battered Soccer’s Frail Integrity”, reporters Declan Hill and Jeré Longman wrote about a NYT investigation of match fixing ahead of the 2010 World Cup in South Africa. The articles provided an unusually detailed look at the ease with which professional gamblers can fix matches. The article reviewed an “internal, confidential report by FIFA, soccer’s world governing body. FIFA’s investigative report and related documents, which were obtained by The New York Times and have not been publicly released, raise serious questions about the vulnerability of the World Cup to match fixing.” The reporters noted that the FIFA “report found that the match-rigging syndicate and its referees infiltrated the upper reaches of global soccer in order to fix exhibition matches and exploit them for betting purposes. It provided extensive details of the clever and brazen ways that fixers apparently manipulated “at least five matches and possibly more” in South Africa ahead of the World Cup. As many as 15 matches were targets, including a game between the United States and Australia, according to interviews and emails printed in the FIFA report.”

These NYT articles detailed how betting syndicates would target the national football associations that are charged with selecting and supplying the referees in international matches. The articles pointed out how the betting syndicates would find the weakest link in any security or compliance system and then exploit it. In the 2010 World Cup it was both the South African football association that signed contracts and its allowing the betting syndicates to select the referees for games to actually bribery of referees themselves which were the root causes of the corruption.

Imagine the difference if the South African soccer federation was not corrupt and had won the rights to host the 2010 World Cup on the strength of their bid, not their payment of bribes. Think the tone down through organization about corruption and bribery would have been any different if down the line, they knew the top of the organization was committed to winning the bid (and did so) through legal means?

Yet the corruption of individual soccer matches at the international level continued into the 2014 World Cup. In a The Telegraph article, entitled “Football match-fixing: Ghana deal casts cloud over World Cup finals in Brazil”, reporters Claire Newell, Holly Watt and Ben Bryant detailed that the “Ghana Football Association calls in police after undercover investigation by The Telegraph and Channel Four’s Dispatches programme finds that the President of Ghana’s FA agreed for the team to play in international matches that others were prepared to rig.”

They wrote, “The president of the country’s football association then met the undercover reporter and investigator, along with Mr Forsythe and Mr Nketiah, and agreed a contract which would see the team play in the rigged matches, in return for payment. The contract stated that it would cost $170,000 (£100,000) for each match organised by the fixers involving the Ghanaian team, and would allow a bogus investment firm to appoint match officials, in breach of Fifa rules. “You [the company] will always have to come to us and say how you want it to go…the result,” said Mr Forsythe. “That’s why we will get the officials that we have greased their palms, so they will do it. If we bring in our own officials to do the match… You’re making your money. You have to give them [the referees] something… they are going to do a lot of work for you, so you have to give them something,” said Mr Nketiah, who is also the chief executive of the Ghanaian football club Berekum Chelsea and sits on the management committee of the Ghana U20 national team.”

In a meeting prior to the 2014 World Cup, when Ghana was playing warm-up matches in the US, Forsythe and Nketiah introduced the undercover team to Kwesi Nyantakyi, the president of the Ghana FA. In a meeting in “Florida, the president agreed to a contract that stated each match would cost the investment company $170,000 and that they could appoint the match officials for each game. A contract was drawn up that specified that “The Company will appoint and pay for the cost of the referees/match officials in consultation with an agreed Fifa Member association(s),” in direct breach of the rules that prohibit third parties from appointing officials, in order to protect their impartiality. During the meeting, the president suggested that the fictional investment company put on two matches after the World Cup to prove that they were able to organise games.”

But even more troubling is that FIFA itself has directly affected the integrity of international soccer. In an article in The Sunday Times, entitled “Special One appalled by €5m Fifa payment”, reporter Jonathan Northcraft wrote about the reaction of Chelsea manager Jose Mourinho (AKA the ‘Special One’) to the revelations that the FIFA Executive Committee paid the Football Association of Ireland, €5 million in bribe money “to drop legal action after a controversial goal gave France victory over Ireland in a playoff for the 2010 World Cup.” The issue revolved around the on-field illegal handball played by French striker Thierry Henry that “went unsanctioned in the second leg of their playoff in 2009. The FAI launched a legal appeal to become the ‘33^rd team’ at the World Cup but stopped proceedings after receiving the payment from Fifa.”

So now the FIFA scandal has gone from paying bribes to fixing game venues to corrupting contracts to changing how games are decided. Mourinho was quoted, “This one, for me, is the end of the world. You change the truth of the game for €5m? What next? Because more stories will come for sure.”

Why should Americans care about the about FIFA indictments? I realize that most Americans do not hold the game of international soccer with the same passion as the rest of the world. But for anyone who loves sports, to have the worlds most premier sporting championship tinged with corruption and evidence of match fixing, as the Special One said, changes the truth of the game. That would seem to me to be reason enough to care.

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, 2015

 

 

FIFA, the DOJ and the Global Fight Against Corruption

The Department of Justice (DOJ) gave the global fight against anti-corruption a huge boost last week when it announced it was bringing charges against 14 members or persons associated with Fédération Internationale de Football Association (FIFA). To say that the scope and breadth of the charges were breathtaking really does not capture this moment in history for the anti-corruption advocates around the globe. FIFA had held itself above the law for so long, that it finally took the DOJ to start the process of rooting out the corruption that appears to have been endemic in the organization.

My FCPA Blog contributor colleagues Mike Scher and Alistair Craig, both writing in the FCPA Blog, respectively asked why we in the compliance community had not protested against FIFA corruption louder and what took the DOJ so long to prosecute? I have to disagree with both positions. The compliance community had worked to be a part of the solution at FIFA for some time. Both Transparency International and Alexandra Wrage at TRACE International worked to help bring transparency and accountability to FIFA. Both were summarily shown the door by FIFA and specifically Sepp Blatter. Just as an alcoholic cannot get sober until they become ready and willing, FIFA has not, until very recently, been willing or able to face its issues of corruption.

Moreover, even when FIFA gave the appearance about somehow even being remotely concerned about bribery and corruption, it was all for show. It asked former federal prosecutor Michael Garcia to internally investigate allegations of bribery and corruption around the awarding of the 2018 World Cup to Russia and the 2022 World Cup to Qatar, then summarily obstructed his investigation. Finally when Garcia did produce a report, FIFA shelved it and released a sham summary that Garcia promptly disavowed. Garcia resigned from FIFA due to the organization’s conduct over his report and its burial.

Even when national governments tried to do something about the bribery and corruption endemic in FIFA, they were stymied. Nigeria (of all places) tried to investigate allegations of match fixing around its national soccer federation. FIFA’s response? It decreed that Nigeria could face the ultimate sanction of being expelled from FIFA if the organization determined there had been unacceptable government interference. How’s that for playing ball?

Clearly FIFA demonstrated it was an organization that was unable to replace an institutional structure that fostered bribery and corruption when it re-elected Blatter last Friday for yet another five-year term as President. Yet Blatter resigned this week. Why did he do so? In an article in the BBC online it reported that Blatter said the mandate he was given at the time of his re-election (last Friday) no longer “seemed to be supported by everyone in the world of football.” He was reported to have said the organization need “profound restructuring.” Time was much blunter when it said, in an article entitled “FIFA’s Sepp Blatter Is Under Investigation for Corruption, Reports Say”, that “FIFA president Sepp Blatter is himself in the crosshairs of the corruption investigation that saw several of the organization’s top brass indicted over the past week, with U.S. officials reportedly saying that he was a target of their probe into world soccer’s governing body. The New York Times says that it was told by officials, speaking on condition of anonymity, that investigators hoped to work their way up to Blatter with the cooperation of the FIFA officials already taken into custody.”

On NPR’s All Things Considered, there was a report that senior FIFA officials were no longer gong to attend this month’s Women’s World Cup in Canada for fear of being arrested and extradited immediately to the US. Does that sound like a group of men who have nothing to hide? I am reminded of the 1960s magazine article and movie Suppose They Gave a War and Nobody Came? Truly the inmates are running the asylum.

What about the companies that sponsor FIFA, regional soccer federations and national soccer organizations and their role in all of this? In another BBC article, entitled “Fifa sponsors welcome Sepp Blatter’s resignation”, Emily Young reported that “both Visa and Coca-Cola repeated warnings that they expected a swift overhaul at Fifa. And McDonald’s said it hoped this would be the first step towards “gaining back trust from fans worldwide.”” I found this response by sponsors to be a key part in the international fight against bribery and corruption. Moreover, it demonstrated the role of all parties in fighting bribery and corruption.

Clearly it is not in the interest of any multi-national to be associated with a corrupt entity such as FIFA from a reputational perspective. But more than simply self-interest to protect their own brand name, companies have a role in the fight directly. This can be summed up by Scott Killingsworth in his writings on ‘private-to-private’ (P2P) solutions to the US Foreign Corrupt Practices Act (FCPA) or what I call a business solution to a legal problem. If you want to do business with a company, you should contractually mandate that company has an anti-corruption compliance program under the FCPA, UK Bribery Act or other recognized international standard.

The FIFA international bribery scandal and criminal enforcement action will be around for quite sometime to come. For the Chief Compliance Officer (CCO) or compliance practitioner in a US company there will be many lessons to be learned going forward, even if the initial criminal charges are against the bribe-takers for violations of Racketeer Influenced and Corrupt Organizations Act (RICO), money-laundering laws and tax evasion. Many of these lessons will be applicable to a FCPA or UK Bribery Act based best practices anti-corruption compliance program.

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, 2015

 

GSK in China-the Book

The year 2013 brought the anti-corruption compliance world a new situation as the Chinese government aggressively investigated, for the first time, a western company for bribery and corruption of Chinese citizens in China, based on Chinese domestic law. The company, GlaxoSmithKline PLC (GSK), was convicted of corruption in September 2014. I wanted to put together, in one volume, the background facts, information from the trials and conviction and add some of the most significant lessons to be learned for any compliance practitioner going forward. For these reasons, I am pleased to announce the publication of my latest book, GSK in China: Anti-Bribery Enforcement Goes Global which is now available through Amazon.com.

I believe that GSK will be a watershed in the global fight against bribery and corruption. Behavior and conduct, which was illegal under Chinese law but previously tolerated and even accepted by Chinese government officials, quickly became a quagmire that the company was caught in when charges of corruption were leveled against them last year. David Pilling, writing an article in the Financial Times (FT), entitled “Why corruption is a messy business”, said “Multinationals are discovering that there is only one thing worse than operating in a country where corruption is rampant: operating in one where corruption was once rampant – but is no longer tolerated.” GSK became the first western company to pay the piper when this new tune began to play.

When it began, it was not it clear why China’s Communist Party Chief Xi Jinping began his anti-corruption push. Some speculated that it was an attack on western companies for more political reasons that economic reasons. Others took the opposite tack that the storm, which broke with the bribery and corruption investigation of GSK, was China’s attack on western companies to either hide or help fix problems endemic to the Chinese economic system. My take is that his campaign has a different purpose but incorporates both political and economic reasons. That purpose is that Xi has recognized something that the US government officials, and most particularly the DOJ, have been preaching for some time. That is, the insidiousness of corruption and its negative effects on an economic system.

Xi and China have realized that corruption is a drain on the Chinese economic system. Publications as diverse as the Brookings Institute to the Wall Street Journal (WSJ) have noted that one of the reasons for the anti-corruption campaign is to restore the Chinese public’s faith in the ruling Communist Party. Bob Ward, writing in the WSJ article, entitled “The Risks in China’s Push to Root Out Wrong”, said, “China’s anticorruption drive began in late 2012 as a way to cleanse the ruling Communist Party and convince ordinary Chinese that the system isn’t rigged against them. Investigators are targeting some of China’s most powerful officials and disciplining tens of thousands of lower-echelon officials who party investigators contend got used to padding their salaries.” Cheng Li and Ryan McElveen, writing online for Brookings in an article entitled “Debunking Misconceptions About Xi Jinping’s Anti-Corruption Campaign”, wrote, “If there were ever any doubts that Xi could restore faith in a party that had lost trust among the Chinese public, many of those doubts have been dispelled by the steady drumbeat of dismissals of high-ranking officials since he took office.”

There have already been demonstrated economic benefits to China’s anti-corruption campaign. In September, Bloomberg reported that China’s fight against bribery and corruption could boost economic growth, generating an additional $70 billion for the budget, in summarizing economists’ forecasts. An article in the online publication Position and Promotions, reported that the bribery “could trigger a 0.1-0.5 percent increase in the world’s second-biggest economy, equivalent to $70 billion dollars.” This crackdown should also be welcomed by western companies, as “it could also benefit foreign companies operating on the Chinese market, who have experienced the negative effects of the omnipresent palm-greasing, according to Joerg Wuttke, president of European Chamber of Commerce in China.”

GSK’s actions during the pendency of this entire series of events will long be studied as one NOT to follow when faced with allegations of corruption and bribery. GSK sealed its own fate when they, in the face of credible allegations of bribery and corruption by a well-informed whistleblower, performed an investigation and came up with no evidence to support such allegations. It took the Chinese government less than 30 days to not only develop credible evidence but also secure confessions from GSK employees topped off with a very public corporate apology.

As with any good scandal there is a sex angle with a sex tape surfacing involving the GSK China Country Manager. This sex tape and GSK’s attempts to investigate its provenance led to the conviction of a husband and wife investigators, who are a UK and US citizen, in a trial for violations of Chinese privacy laws.

At the close this phase of GSK’s bribery and corruption saga in China, GSK in China – The Book, provides some thoughtful reflection, which you may be able to put to good use in your compliance program going forward. For the compliance practitioner there have been many specific lessons to be learned from GSK’s missteps. I think the clearest lesson is that the only real hope that a company has in today’s world is an effective, best practices anti-corruption compliance program. Whether it is designed to help a company comply with the US Foreign Corrupt Practices Act (FCPA), UK Bribery Act or other anti-corruption legislation, really does not matter. It is the only, and I mean only, chance your company will have when an issue in some far-flung part of the world splashes your company’s name across the world’s press.

But there may also be cause for celebration to those who have long preached against the evils of corruption, whether it is for economic reasons or for those who view the fight against anti-corruption as a part of the fight against terrorism. For if China is attacking domestic corruption, I believe that will lead other countries to do so as well. So while GSK may well suffer going forward, the fight against global bribery and corruption may just have moved a few feet forward.

For a copy of my new book GSK in China: Anti-Bribery Enforcement Goes Global in bound version, click here.

For a copy of my new book GSK in China: Anti-Bribery Enforcement Goes Global in Kindle version, 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, 2015

Bone-headed Moves on the Football Field and Idiotic Statements About Corruption

“Three things can happen when you throw the football, and two of them are bad.”

That football truism (allegedly) came from former Texas Longhorn head coach Darrell Royal. While he intoned it in a different era, Pete Carroll and his Seattle Seahawks proved it still to be valid in the most recent Super Bowl, Carroll called for a pass play on the one-yard line in the last minute of the game and his quarterback threw an interception. Was it the most idiotic call in Super Bowl history? I will leave that answer to the pundits but I will say that Carroll now has the ignominy of making two of the most bone-headed decisions of all-time in football, one in the Super Bowl and the second in College Football’s 2005 National Championship Game, which cost his team the game. Perhaps not what you might want as your epitaph.

For those of you who may have forgotten Carroll’s NCAA National Championship Game FUBAR, his team, the University of Southern California, needing to make one yard at the University of Texas (UT) 43 yard line to achieve a first down and ice the game, Carroll called a running play after pulling off the field that year’s Heisman Trophy winner Reggie Bush. That left one running back on the field and everyone on the field, everyone in the stands and watching the game knew the remaining running back, Lendale White, would get the ball. He did and was promptly stuffed by the UT defense. Vince Young then led UT down the field, scored and Texas won the National Championship. As a UT alum all I can say is, thanks Pete.

I thought about Carroll and his making not one but two idiotic calls for the ages as I have been studying the ongoing Petrobras bribery scandal. While the GlaxoSmithKline PLC (GSK) corruption enforcement action in China may well presage a new era of countries enforcing their local anti-bribery and anti-corruption laws, the Petrobras case may herald this too. The scandal came to the attention of many American’s in the fall of 2014 during Brazil’s Presidential election in a New York Times (NYT) article, entitled “Scandal Over Brazilian Oil Company Adds Turmoil to the Presidential Race”, where Simon Romero detailed the bribery scandal involving a former official of Petrobras, the Brazilian national oil company, named Paulo Roberto Costa. Mr. Costa was the person who oversaw the company’s refining operations. He has admitted to having engaged in the receipt of bribes for at least a 10 year period “equivalent to 3 percent of the value of the deals from the Brazilian construction companies that obtained the contracts” to build refineries. This amounted to literally millions being “stashed in bank accounts in Switzerland and the Cayman Islands.”

Costa who “was first arrested in March as part of a money laundering investigation by the federal police, has already agreed to surrender the $25 million fortune he hid in offshore accounts, his yacht and his luxury car, in addition to paying a fine of more than $2 million.” He “inflated budgets for new projects” by 3% and then had that amount kicked back to him as bribes. The allegations were verified “through an associate, Alberto Youssef, a black-market money dealer who testified that he helped launder funds in the scheme. Mr. Youssef, who has also accepted a plea deal, testified that more than a dozen of Brazil’s largest construction companies had paid hefty bribes to obtain lucrative Petrobras contracts.”

Further “He testified that a portion of the money was then handed to João Vaccari Neto, the treasurer of the Workers Party. Mr. Costa said that other top political allies of President Rousseff, including the leaders of both houses of Congress, Henrique Eduardo Alves and Renan Calheiros, also benefited from the kickbacks, according to a report by Veja, a Brazilian magazine.” Interestingly, President Rousseff “has also effectively acknowledged the prevalence of corruption inside the executive suites of Petrobras, while denying that she had known about the kickbacks when they were taking place.”

To say things have mushroomed would be almost likely citing Darrell Royal on passing the football to Carroll. Petrobras is in many ways the engine that drives the Brazilian economy. Not only is it directly responsible for the employ of upwards of 80,000 employees. It is also the continent’s largest company by market capitalization so the amount of work that it generates for the Brazilian economy is staggering.

Just as staggering is this bribery scheme in which it finds itself now engulfed. According to an article by Luciana Maglahaes and Rogerio Jelmayer in the Wall Street Journal (WSJ), entitled “Petrobras Ex-CEO Weighs In”, the company has “lost $80 billion, or 65% of its market share over the past five months.” The company has publicly said that it cannot estimate the amount of money it lost or was overcharged by. The WSJ article noted, “Prosecutors estimate that around $732 million may have been skimmed. But former Petrobras Chief Executive Maria das Graças Silva Foster, who resigned under pressure last week, said projects tied to the alleged scheme may be overvalued by as much as $31 billion.” Think about that number $31 billion in overcharges to the company.

So, how does Carroll and his bone-headed passing call work into this story? First of all it was not Carroll who made the call but the team’s Offensive Coordinator. Yet he did so because Carroll told him to call a passing play. In other words, idiotic tone at the top reigned and the employee base simply followed the boss’s wishes.

In the Petrobras corruption scandal, we were treated to remarks by José Sergio Gabrielli, the former Chief Executive Officer (CEO) of the company from 2005 to 2012. This was also one of the company’s most successful periods of financial growth. The former CEO has claimed not to know anything about any corruption issues that may have arisen during his tenure. Moreover, “Mr. Gabrielli said the alleged fraud was the work of a few bad apples inside the company, and not an indication of broader problems with corporate governance or internal controls at Petrobras.” He then added that the business generated by the company surely outweighed any nefarious effects by stating “Even if the numbers are huge…how much has Petrobras invested from 2003 to 2014? Probably it invested an average of $30 billion a year.” He also added it was really all much ado about nothing by noting that the press had blown the “scandal out of proportion”.

So there you have it encapsulated in three lines; the clearest articulation of a defense of bribery and corruption that I have recently seen. First it was the oldie but goodie rogue employee defense. (I mean there were 80,000 plus employees, how could you stop all of them from engaging in illegal conduct.) Second, look at all the money we made, so even if the corruption cost us $31bn we averaged that much per year while he was at the helm. Finally, it is really no big deal anyway and is all “blown out of proportion.”

Is it really any wonder Petrobras now finds itself in one of the world’s largest corruption scandals? If that is the attitude of the former CEO, do you think he communicated this laissez-faire attitude to his direct reports and that perhaps it cascaded down the organization? As to Carroll, if he gets back to a championship game, either in professional or college football, he might want to consider his play calling. As for the former CEO of Petrobras, Brazilian prosecutors are fighting to freeze his assets and his major complaint is that he has to deal with too many lawyers. Enough said.

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, 2015

GSK as a Watershed in the International Fight Against Bribery and Corruption

GlaxoSmithKline PLC (GSK) may well be a watershed in the global fight against bribery and corruption. Behavior and conduct, which was illegal under Chinese law but previously tolerated and even accepted by Chinese government officials, quickly became a quagmire that the company was caught in when charges of corruption were leveled against them last year. Many westerners were skeptical about the claims made against GSK and its head of China operations, Mark Reilly. That is one of the problems in paying bribes to government officials; it is always illegal under domestic law. David Pilling, writing an article in the Financial Times (FT) entitled “Why corruption is a messy business”, said “Multinationals are discovering that there is only one thing worse than operating in a country where corruption is rampant: operating in one where corruption was once rampant – but is no longer tolerated.”

When it began, it was not it clear why China’s Communist Party Chief Xi Jinping began his anti-corruption push. Some speculated that it was an attack on western companies for more political reasons that economic reasons. Others took the opposite tack that the storm, which broke with the bribery and corruption investigation of GSK, was China’s attack on western companies to either hide or help fix problems endemic to the Chinese economic system. My take is that his campaign has a different purpose but incorporates both political and economic reasons. That purpose is that Xi has recognized something that the US government officials and most particularly the Department of Justice (DOJ) have been preaching for some time. That is, the insidiousness of corruption and its negative effects on an economic system.

Xi and China have realized that corruption is a drain on the Chinese economic system. Publications as diverse as the Brookings Institute to the Wall Street Journal (WSJ) have noted that one of the reasons for the anti-corruption campaign is to restore the Chinese public’s faith in the ruling Communist Party. Bob Ward, writing in the WSJ article entitled “The Risks in China’s Push to Root Out Wrong”, said, “China’s anticorruption drive began in late 2012 as a way to cleanse the ruling Communist Party and convince ordinary Chinese that the system isn’t rigged against them. Investigators are targeting some of China’s most powerful officials and disciplining tens of thousands of lower-echelon officials who party investigators contend got used to padding their salaries.” Cheng Li and Ryan McElveen, writing online for Brookings, in an article entitled “Debunking Misconceptions About Xi Jinping’s Anti-Corruption Campaign”, wrote, “If there were ever any doubts that Xi could restore faith in a party that had lost trust among the Chinese public, many of those doubts have been dispelled by the steady drumbeat of dismissals of high-ranking officials since he took office.”

But the economic reasons behind the anti-corruption campaign are equally important. One of the more interesting articulations came from one disgraced former Chinese government official, who was one of the earliest senior officials to be charged with corruption. In a WSJ article by James T. Areddy, entitled “Chinese Ex-Official Admits to Corruption”, he wrote about the trial of Liu Tienan, the “former head of the National Energy Administration and senior director in the National Development Reform Commission” who had been arrested in May 2013. His trial finally came around in September 2014. At his trial he made some rather extraordinary statements. Areddy wrote that “Liu testified that reducing official power is key to curbing corruption: “The major point, which is based on my own experience, is to give the market a great deal of power to make decisions.”” But Liu did not end there, “as he explained his view that China’s state bureaucracies are too powerful and entrepreneurs are too weak. “Approvals should be developed in a system, rather by an individual’s actions. This would help prevent abuse of power for personal self-interest.””

Whether or not Liu thought those statements up on himself, a smart defense lawyer suggested he make them to reduce his sentence, or the Chinese government told him to say it as his role in the well-known show trials of the Chinese justice system; it really does not matter. That is one of the most incredible statements I have ever heard of coming out of anything close to an official Chinese statement or proceeding. Think about it; first Liu is saying that the Adam Smith’s ‘invisible hand’ of the market should be governing market decisions. Next, he speaks against the arbitrary nature in China for entrepreneurs in giving approval about how businesses can expand and grow in China. This arbitrary process should be replaced with objective criteria. It is almost if Lui is channeling his inner FCPA Professor when he speaks against artificial barriers to market entry. Finally, Liu attacks the small-mindedness of bureaucratic mentality in their use of power for self-interest.

There have already been demonstrated economic benefits to China’s anti-corruption campaign. In September, Bloomberg reported that China’s fight against bribery and corruption could boost economic growth, generating an additional $70 billion for the budget, in summarizing economists’ forecasts. An article in the online publication Position and Promotions, reported that the bribery “could trigger a 0.1-0.5 percent increase in the world’s second-biggest economy, equivalent to $70 billion dollars.” This crackdown should also be welcomed by western companies, as “it could also benefit foreign companies operating on the Chinese market, who have experienced the negative effects of the omnipresent palm-greasing, according to Joerg Wuttke, president of European Chamber of Commerce in China.” He was further quoted as saying, “It takes the stress away. You’re not afraid that somebody gets an order because he found a better champagne or something like that. It’s not Singapore yet, but it’s a very positive development”.

As we close this phase of GSK’s saga, I think some time for reflection is appropriate. For the compliance practitioner there have been many specific lessons to be learned from GSK’s missteps. However I think the clearest lesson is that the only real hope that a company has into today’s world is an effective, best practices anti-corruption compliance program. Whether it is designed to help a company comply with the Foreign Corrupt Practices Act (FCPA), UK Bribery Act or other anti-corruption legislation, it really does not matter. It is the only, and I mean only, chance your company will have when an issue in some far-flung part of the world splashes your company’s name across the world’s press.

But there may also be cause for celebration to those who have long preached against the evils of corruption, whether it is for economic reasons or for those who view the fight against anti-corruption as a part of the fight against terrorism. For if China is attacking domestic corruption, I believe that will lead other countries to do so as well. We are already seeing stirrings in India under new President Modi. So while GSK may well suffer going forward, the fight against global bribery and corruption may just have moved a few feet 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, 2014

The Simon-Sting Tour and New Information in Your Compliance Program

This past weekend I saw the first show in a multi-city tour by Sting and Paul Simon. I have never been a big Sting or Police fan but I am a huge Paul Simon fan, in all his musical incarnations. As it was their first show, there was no set list to review or other information that might have told me how they were going to try and make it work. But I am happy to report that it did work. They played a 33 song set over 2.5 hours; some solo with their own bands and some together with their combined bands and one very incredible acoustic duet of Phil Everly’s When Will I Be Loved as the 2^nd encore. It was certainly a night to remember.

I thought about this combination of two very disparate musical talents and their respective use of new information as I read a couple of newspaper articles over the weekend. The first was in the Saturday New York Times (NYT) by Suzanne Daley, entitled “So Many Bribes A Greek Official Can’t Recall Them All”, in which she reported on statements made by a former deputy in the Greek Defense Ministry, Antonis Kantas, and his involvement in the receipt of bribes while in the employ of the Greek government. At the Ministry, he “was able to amass nearly $19 million in just five years on the job.” These bribes were for items and projects not needed at all by the Greek military. It included the $2.3bn purchase of tanks for which no ammo was every purchased; $4bn for “noisy submarines that are not yet finished and sit today virtually abandoned in a shipyard outside Athens”; and an unidentified amount for “fighter planes without electronic guidance systems”.

In an orgy of un-needed spending, it was estimated that “Greece spent as much as $68 billion on weaponry” from 1996 to 2006 and that most of it was on borrowed money from countries and banks outside Greece. Tasos Tellloglou, an investigative reporter for the Greek daily newspaper Kathimerini, who has written extensively on the subject, estimated that “more than $2.7bn was spent on bribes” to secure this amount of spending. Rather amazingly, “Mr. Kantas admitted to taking bribes over 12 contracts, six with German companies, and two each with French, Swedish and Russian arms dealers. Some companies Mr. Kantas named have been convicted in other cases of bribery in the past. But others maintain that they have done nothing wrong. The makers of the tanks Greece bought, Krauss-Maffei Wegmann, say they are looking into the matter.” I am sure the US Department of Justice (DOJ) will be looking into the matter if they are not already doing so.

Daley’s article points towards the roll of all parties to stop bribery and corruption. It is the responsibility of the Greek government to ferret out such criminal actions but there is also a role for the home countries of the companies where the bribe payors are found. If they are in Germany, the UK or US and are subject to the Bribery Act or Foreign Corrupt Practices Act (FCPA) those countries need to bring down the full force of the law(s). But Daley’s article also makes clear the non-governmental actors; the businesses involved have a role. Companies must follow anti-bribery and anti-corruption laws and embed policies and procedures to stop such illegal conduct.

For the compliance practitioner, there is also a very clear message. If your company has been doing business in Greece over the past 10 years, I would suggest that you take a close look to see if there are any red flags present. You may want to audit your transactions. Given the information found in Daley’s articles, I would also suggest that you review all of your third parties and their billings and expenditures on your company’s behalf. Make sure that you know who is the ultimate beneficial owner of your third parties. You might also want to look at where payments were made and even if they were made in Greece you might want to review your payments into the Greek banking system, as it appears that Greek bankers may well have been part of the bribery and corruption problem as well.

The second article was in also in the NYT by James B. Stewart, entitled “Past Fictions, a Lack of Trust and No Deal in SAC Case”, and was about the recently convicted former SAC Capital Advisors trader Mathew Martoma. The article discussed some of the details of the trial and the evidence against Martoma. But the part I found most interesting about Martoma was that he had been expelled by Harvard Law School for altering his transcript and then sent it out as part of his application to 23 judicial clerkships. When this was discovered Martoma, acknowledging that he had altered his transcript as a prank, blamed mailing it out on his brother at his parents’ home. Martoma then actively fought disciplinary proceeding against him with other evidence, which was later discovered to be altered. Martoma presented such an unbelievable defense at his disciplinary hearing that even Stewart asked the question about his defense that “Does any of this even rise to the level of ‘the dog at my homework’?”

The final report of the disciplinary board said “Mr. Martoma’s account. His “manner before the board did not lend credence to his account.” It added, “The board was impressed also by the cumulation of improbable occurrences in his account, which made it more difficult to accept his explanation of individual events.” Further, the disciplinary board “concluded that Mr. Martoma “falsified his transcript, interviewed with judges under false pretenses, and gave untruthful answers to administrators at the Law School.”” Apparently this information was not sufficient for SAC Capital Advisors to see any red flags regarding his hiring.

The Martoma background employment checks, or rather the apparent lack thereof is a cautionary tale for any compliance practitioner. Most companies have a basic criminal background check and credit check. Some even have the ‘pee-in-a-cup check.’ Initially, I would note that the credit check is about the most useless thing imaginable for an adequate employment check. But beyond that, if an employee is moving up into the ranks of upper or senior management or your company is hiring directly into such a level; you need to perform an adequate background check. While I cannot tell you if Stephen Glass is sufficiently reformed to receive a license to practice law; I can certainly say that anyone who engages in the actions in which Martoma did at Harvard Law School, is not someone who you can trust to do business ethically in compliance with an anti-corruption law such as the FCPA.

If you have the chance to see the Sting-Simon tour do so. If not try and think about the merging of their disparate styles through the use of new information and what it might mean for your compliance program.

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

The FCPA and Fight Against Terrorism

I admit it took me awhile to finally get it. I have long wondered what could have caused the explosion in Department of Justice (DOJ) and Securities and Exchange Commission (SEC) enforcement of the Foreign Corrupt Practices Act (FCPA). Starting in about 2004, FCPA enforcement has not only been on the increase from the previous 25 years of its previous existence but literally exploded. Of course, I had heard Dick Cassin and Dan Chapman, most prominently among others, talk and write about FCPA enforcement as an anti-terrorism security issue post 9/11, but I never quite bought into it because I did not understand the theoretical underpinnings of such an analysis.

I recently finished listening to the Teaching Company’s “Masters of War: History’s Greatest Strategic Thinkers” by Professor Andrew Wilson of the Naval War College. It is a 24 lecture series on the content and historical context of the world’s greatest war strategists. In his lecture on ‘Terrorism as Strategy” Professor Wilson explained that corruption is both a part of the strategy of terrorism and a cause of terrorism. After listening to his lecture and reflecting on some of the world events which invoked both parts of his explanation, it became clear to me why FCPA enforcement exploded and, more importantly, why the US government needs to continue aggressive enforcement of the FCPA and encourage other countries across the globe to enact and enforce strong international and domestic anti-corruption and anti-bribery laws.

Corruption as a Terrorist Strategy

One need look no further than last fall’s massacre of civilians in Kenya at the Westgate Mall to see how terrorists use bribery and corruption. Dick Cassin, who has consistently written about the connection between bribery-corruption and security did so again after the attack, in a post entitled “The Price for Impunity is Higher Than Ever”, where he pointed to the continued corruption in Kenya and how this corruption led to guns and terrorists being able to cross the border and carry out the attack. Cassin said that the border controls are so porous due to corruption in Kenya that in a prior episode involving the UK Serious Fraud Office (SFO), the UK government had banned certain Kenyan government officials from traveling to the UK, in large part because the country failed to take action against obvious cases of bribery and corruption. He said, “The visa ban followed a criminal investigation by the U.K. Serious Fraud Office into contracts between the Kenyan government and U.K. shell businesses. The contracts for passport controls and border security systems went to phantom overseas companies at prices about ten times the actual cost. Kenya refused to cooperate and in early 2009 the SFO was forced to end its investigation.”

Giles Foden, in an article in The Guardian, entitled “Kenya: behind the terror is rampant corruption”, was even more specific about the culture of crime and corruption in Kenya, when he that corruption was one of the signature factors, which led to the massacre. He wrote, “In Kenya crime and terrorism are deeply linked, not least by the failure of successive Kenyan governments to control either. These attacks are part of a spectrum of banditry, with corruption at one end, terrorism at the other, and regular robbery in the middle. Money that should have been spent on security and other aspects of national infrastructure has been disappearing for generations.”

He concluded his piece with this warning, “You can gesture at the transnational problem of Islamist terrorism all you like, but it’s just hot air unless you invest in proper security on the ground in your own country, with the right safeguards to civil liberties. For now Kenya must mourn its dead. But unless the corruption stops, and real investment is made in the social fabric, Kenya will once again be faced with systemic shocks it is hardly able to deal with.”

Professor Wilson made it clear that terrorists incorporate these concepts into their overall strategy. If a country has strong border controls and government officials, which I believe is the situation here in the US and UK, then the terrorist will seek out a country friendly to the US or UK, where the government officials can be bribed or corrupted and use those as ports of entry. Similarly, they can directly attack civilians in a country like Kenya where the border is so porous that both terrorist and arms can flow through with impunity.

 Corruption as a Precursor to Terrorism

But, not only can corruption be used by terrorists, ironically, it can also be the cause of terrorism. One only need look at the Arab Spring and what started it. It was a lone fruit and vegetable seller, Mohammed Bourazizi, who doused himself in paint thinner and set himself on fire in front of a local municipal office because of the corruption of Tunisian government officials and police officers. Yuri Fedotov, head of the United Nations Office of Drugs and Crimes (UNODC) has said that the Arab Spring’s call for greater democracy was “an emphatic rejection of corruption and a cry for integrity” and that the international community must listen to the millions of people involved. At the center of the Arab Spring movement was a deep-seated anger at the poverty and injustice suffered by entire societies due to systemic corruption. Do you think there was any terrorism associated with the Arab Spring?

If one wants to look back a little further in history, I would submit that China is the most prime example of the 20^th century. For all the hand wringing about “Who Lost China”, I think a clear key was the endemic corruption of the Nationalist and their allies. Their corruption helped remove the moral authority of their government and allowed the Communists to take up that mantle in the 1940s. The Nationalists were certainly defeated on the battlefield but the groundwork was laid in large part due to the corruption of their government. It really did not matter how much money, foreign aid and material that the US government provided to Chaing Kai-Shek; his cronies and his government simply stole it, sold it or gave it away for other favors.

Moving to today’s news, the government of Thailand is currently under siege by its own citizens. While economic issues are certainly a part of the problem, so is the corruption of the government. The corruption is so bad that even China has scrapped a deal to purchase some 1.2MM tons of rice from Thailand. Michael Peel, writing in the Financial Times (FT), in an article entitled “China ditches Thai rice deal over concern on corruption”, pointed out that this “is about 14 percent of [Thailand’s] annual exports.” He said “Beijing was spooked by the Thai national anti-graft agency’s probe into the rice support programme.” One Thai government official said that the Chinese pulled out of the deal because they “lacked confidence to do business with us”. Peel also wrote that this program is “soaking up $4bn a year officially and much more by other estimates.” What does it say about a country’s government that the Chinese will not do business with because they are too corrupt?

Now I understand how terrorists use corruption both as a strategy and a tool.  Moreover, when you begin to understand these inter-related theoretical underpinnings of corruption and terrorism, you can see why aggressive enforcement of anti-corruption laws such as the FCPA and UK Bribery Act is so important and is here to stay. In another blog post entitled “9/11 and the FCPA” Cassin said, “What happened that day a decade ago changed the way the world looks at corruption. The tracks of the 9/11 perpetrators and those who helped them led back to corrupt third-world countries — Afghanistan, Sudan, Somalia, Yemen, and others. Those regimes had leaky borders, weak passport control, unreliable law enforcement agencies, poor anti-money laundering programs — just what the bad guys needed.”

I do not have any insight into the discussions of the Bush Administration after 9/11 about ways to fight terrorism. But just as governments have a role to play by being part of the solution, so do private businesses. Fedotov said that preventive action was needed by Chief Executive Officers (CEOs) in their boardrooms as much as by police on the streets or civil servants in their departments: “All of us must contribute to a culture of integrity. The eyes previously closed to corruption must become the open eyes of justice and equality.” For the DOJ and the SEC this means continued enforcement of the FCPA so that companies subject to the Act will move forward to do business in a way that does not start down the slippery slope to terrorism. Simply because the FCPA was passed in the post-Watergate era does not mean that it cannot be used for today’s problem.

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