FCPA Compliance and Ethics Blog

March 19, 2014

Miners Triumph and Opinion Release 14-01

Miners Win NCAAOn this date in 1966, the Texas Western University (now UTEP) Miners won the NCAA Basketball Championship, beating the University of Kentucky Wildcats. Now the first round has not even started by March 19, but it is not the date that made this event so noteworthy but the character of the teams. The Miners were the first team to start five African-Americans to win the NCAA championship. Adolph Rupp, who was making his final NCAA championship appearance that night after a long and storied career, coached the Wildcats. But on this night, the Miners clearly outplayed Rupp’s Wildcats, dominating them from the start to the finish.

I was thinking about the Miners and their triumph when I received a copy of the first Opinion Release of 2014, appropriately designated Opinion Release 14-01. In 14-01, the Department of Justice (DOJ) opined that paying a foreign government official for monies he was owed in the sale of a business interest that he owned prior to becoming a foreign government official would not be prosecuted as a Foreign Corrupt Practices Act (FCPA) violation. As intuitive as this decision might sound, there is, nevertheless, significant information for the compliance practitioner to take away from 14-01.

Background Facts

The Requestor had purchased Foreign Company A in 2007, from the Foreign Shareholder when he was a private citizen. To guarantee Foreign Shareholder’s participation, the parties’ agreement contained a five-year lock-in period that prohibited Foreign Shareholder from selling his interest prior to January 1, 2012. The Agreement did, however, allow Foreign Shareholder to leave Foreign Company A before the end of the five-year period if he were appointed to a minister level position or higher in the Foreign Country’s government.

In December 2011, Foreign Shareholder became a foreign government official under the FCPA when he was appointed to serve as a high-level official at Foreign Country’s central monetary and banking agency (“Foreign Agency”). Foreign Agency is responsible for bank and financial industry regulation and monetary policy. Upon his appointment, the Foreign Shareholder ceased to have any role or function at Foreign Company A, other than as a passive shareholder.

The now the foreign government official desired to sell his final interest in the company. However, under the formula for the repurchase of his interest, said interest was at zero value, primarily due to the financial crisis of 2008-9. Apparently the now foreign government official threatened to either sue or sell his interest to a third party and the Requestor decidedly did not want either eventuality. The parties agreed to another form of valuation and sought approval from the DOJ through its Opinion Release procedure regarding how to pay the now foreign government official under this new valuation.

Representations and Warranties by the Parties

The foreign government instrumentality involved did not regulate the Requestor but the Requestor has done business with said instrumentality in the past and would continue to do so. The now foreign government official informed the DOJ that he had not in the past “influenced or sought to influence, any decisions by Foreign Agency, Foreign Country’s government, or any third party with respect to” the entities in question and would not do so in the future. Additionally, the Requestor provided separate internal communications to the employees of the entity in question to the effect that their former owner was now a foreign government official and that “he is prohibited from participating in any discussion, consideration, or decision, or otherwise influencing any decision relating to the award of business” to the entity in question.

There were three additional representations, which I found significant, they were:

  • Requestor obtained a representation from now foreign government official that he has disclosed his ownership interest and the proposed sale of the shares in the entity in question to the relevant government authorities of Foreign Country and the relevant department at Foreign Agency, and the relevant government authorities have informed him that they approve or do not object to the sale of the shares.
  • Foreign Shareholder has warranted in writing that any payment to him to purchase the shares will be made to him solely as consideration for the shares, not in his official capacity or in exchange for any present or expected future official action.
  • The Requestor has received written assurance from local counsel in Foreign Country that the purchase of the shares is lawful in Foreign Country. 

DOJ Analysis

In its analysis, the DOJ focused on several factors. Initially, the DOJ noted that the commercial relationship began far before the individual at issue became a foreign government official. Further, even if the sales contract was not followed, because under it the foreign official would not have received fair value in the buy-out, the Requestor presented, “legitimate business considerations, prompted and justified the renegotiation of the buyout formula contained in the 2007 Agreement.” This justification was coupled with the new valuation set by “a leading, highly regarded, global accounting firm (the “Firm”) to determine the Shares’ value” and the apparent sharing of the entity’s financial information with the DOJ. The DOJ noted, “Requestor’s decision to engage the Firm to serve as the independent and binding arbiter of the value of the Shares provides additional assurance that the payment reflects the fair market value of the Shares, rather than an attempt to overpay Foreign Shareholder for a corrupt purpose. Neither Requestor nor Foreign Shareholder requested or obtained conditions or limitations on the valuation or the valuation formula prior to engaging the Firm, and the valuation was carried out strictly in accord with the terms of the engagement. There is no indication of either party requesting a minimum or specific valuation from the Firm or attempting to improperly influence the valuation.”

Equally important was the transparency involved. There was an “appropriate and meaningful disclosure of the parties’ relationship”. There was disclosure by the government official to his government of the relationship and pending sale. The “relevant government authorities of Foreign Country and the relevant department at Foreign Agency, and the relevant government authorities have informed him that they approve or do not object to the sale of the Shares.” Lastly, both the Requestor and the foreign government official involved had averred that he would not assist the US Company in obtaining or retaining business.

Discussion

For the compliance practitioner, there are several key points to consider. The first point is found in a footnote and it reads, “Following Requestor’s initial submission, the Department sent Requestor a letter seeking additional information on July 25, 2013. Requestor provided a partial response by letter on September 19, 2013, which was accompanied by significant backup documentation. Thereafter, the Department and counsel for Requestor had several follow up discussions to clarify certain issues. On February 13, 2014, Requestor provided a final submission that addressed the last outstanding issues raised by the Department.” This is the first time that I recall seeing a time line laid out in an Opinion Release. This gives a compliance practitioner some idea of the time frames involved in the process.

The second is the use of representations and warranties by the parties. In Opinion Release 13-01 a key component was an opinion from the Chief Legal Office of the foreign official’s country that the conduct in question would not violate that country’s laws. However in 14-01, the DOJ accepted representations that the foreign official in question would not pass on business in which he either had an interest or help the Relator to ‘obtain or retain’ business with the agency at which the foreign official now worked. This type of evidence is something that a company should now consider when designing protocols to satisfy issues similar to those presented in 14-01.

Next is the quality and quantity of payment(s) to be made to the now foreign official to cash him out and purchase his interest. Here the parties agreed to an independent valuation by an internationally recognized accounting firm. This provides some type of arms-length analysis. It also provides a market based approach to the payment issue so that there is evidence of true (or perhaps truer) market value, not some arbitrary number agreed to by the parties.

Finally, all the parties seemed to have documented everything. This clearly states to me the need for documentation, which can be reviewed and assessed by a regulator. As I often say the three most important things in FCPA compliance are: Document, Document and Document. I believe that Opinion Release 14-01 makes this point even clearer.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

January 16, 2014

Each Case is Unique – Drawing Lessons from Opinion Release 13-01

7K0A0032“Each case turns on its own facts.” How many times have you heard a representative of the Department of Justice (DOJ) or Securities and Exchange Commission (SEC) make that statement at a conference or other public event? The reality is that this is true and, in the context of Foreign Corrupt Practices Act (FCPA), both regulators look at the facts and circumstances around each case in making a wide range of assessments. While this is frustrating to business types, as a lawyer I find it to be not only an appropriate analysis but also an accurate way in which to look at things.

Late in 2013 the DOJ issued its only Opinion Release, that being Opinion Release 13-01. One of the things that this Opinion Release stands for is that each fact scenario presented under the FCPA must be evaluated on its own facts. While this maxim is certainly true, I believe that the Opinion Release goes further and provides significant information to the compliance practitioner for charitable donations going forward.

Facts

The Requestor is a partner with a US law firm which represents Foreign Country A in various international arbitrations. This business relationship has enabled the law firm to bill Foreign Country A for over $2 million throughout the past 18 month; it is further anticipated that in 2014, the fees on matters for Foreign Country A will exceed $2 million. During the course of representation, the Requestor has become a personal friend of Foreign Official, who works in Foreign Country A’s Office of the Attorney General (the “OAG”). This Foreign Official’s daughter suffers from a severe medical condition that cannot effectively be treated in Foreign Country A or anywhere in the region. The physicians treating Foreign Official’s daughter have recommended that she receive inpatient care at a specialized facility located in Foreign Country B. Requestor reports that the treatment will cost between approximately $13,500 and $20,500 and that Foreign Official lacks financial means to pay for this treatment for his daughter. The Requestor has proposed to pay the medical expenses of the daughter of this foreign office.

Representations

The Requestor made the following representations in submitting the request for an Opinion Release.

  • The Requestor’s intention in paying for the medical treatment of Foreign Official’s daughter is purely humanitarian, with no intent to influence the decision of any foreign official in Foreign Country A with regard to engaging the services of the Law Firm, Requestor, or any third person.
  • The funds used to pay for the medical treatment will be Requestor’s own personal funds. The Requestor will neither seek nor receive reimbursement from the Law Firm for such payments.
  • The Requestor will make all payments directly to the facility where Foreign Official’s daughter will receive treatment in Foreign Country B. Foreign Official will pay for the costs of his daughter’s related travel.
  • Foreign Country A is expected to retain the Law Firm to work on one new matter in the near future. Requestor is presently unaware of any additional, potential matters as to which Foreign Country A might retain the Law Firm. However, if such a matter develops, Requestor anticipates that Foreign Country A would likely retain the Law Firm given its successful track record and their strong relationship.
  • Under the law for Foreign Country A, any government agency, such as OAG, that hires an outside law firm must publicly publish a reasoned decision justifying the engagement. It is a crime punishable by imprisonment under the penal code of Foreign Country A for any civil servant or public employee to engage in corrupt behavior in connection with public contracting.

In addition to the representations made by the Requestor, there was also information presented which showed that the Foreign Official and Requestor have discussed this matter transparently with their respective employers. Both the government of Foreign Country A and the leadership of the Law Firm have expressly indicated that they have no objection to the proposed payment of medical expenses. Additionally, the Requestor has provided a certified letter from the Attorney General of Foreign Country A that represents the following:

  • The decision by the Requestor to pay for or not to pay for this medical treatment will have no impact on any current or future decisions of the OAG in deciding on the hiring of international legal counsel.
  • In the opinion of Foreign Country A’s Attorney General, the payment of medical expenses for Foreign Official’s daughter under these circumstances would not violate any provision of the laws of Foreign Country A.

DOJ Analysis

In its analysis, the DOJ noted that “A person may violate the FCPA by making a payment or gift to a foreign official’s family member as an indirect way of corruptly influencing that foreign official. See United States v. Liebo, 923 F.2d 1308, 1311 (8th Cir. 1991). However, “the FCPA does not per se prohibit business relationships with, or payments to, foreign officials.” FCPA Opinion Release 10-03 at 3 (Sept. 1, 2010). Rather “the Department typically looks to determine whether there are any indicia of corrupt intent, whether the arrangement is transparent to the foreign government and the general public, whether the arrangement is in conformity with local law, and whether there are safeguards to prevent the foreign official from improperly using his or her position to steer business to or otherwise assist the company, for example through a policy of recusal.”

But I found the meat of the analysis to the following line of the Opinion Release, “the facts represented suggest an absence of corrupt intent and provide adequate assurances that the proposed benefit to Foreign Official’s daughter will have no impact on Requestor’s or Requestor’s Law Firm’s present or future business with Foreign Country A.”

Discussion

This analysis was based on several factors which are worth highlighting:

  • No role in obtaining or retaining business – The Foreign Official involved does not play any role in the decision to award Foreign Country A’s legal business to Law Firm.
  • Full transparency – Both the Requestor and Foreign Official informed their respective employers of the proposed gift and neither has objected.
  • The gift is not illegal under local law – The Attorney General of Foreign Country A has expressly stated that the proposed gift is not illegal under Foreign Country A’s laws. This is further reinforced by Foreign Country A’s public contracting laws, which require transparent reasoning in contracting for legal work and criminally punish corrupt behavior.
  • Direct payment to third party provider – The Requestor will pay the medical provider directly, ensuring that the payments will not be improperly diverted to Foreign Official.

I believe that Opinion Release 13-01 demonstrates once again that there is significant room for creative lawyering in the realm of FCPA compliance. Obviously the DOJ responded favorably by its final decision that it would not prosecute under the facts presented to it. For the compliance practitioner, there are several key takeaways beyond simply noting that you are limited only by your legal imagination. First, and foremost, is transparency. Both the Requestor and Foreign Official openly discussed this issue with their employers and superiors. One or both of them went to the Attorney General of the country in question and sought an opinion on the legality of the payment of medical expenses so there was visibility at the highest levels of the Foreign Country’s government in addition to confirmation that the gift was in fact legal under the laws of the country involved. Next is that the Foreign Official in question did have decision making authority over the law firm obtaining or retaining business. Finally, the direct payment to the third party provider is always a critical element which should not be overlooked.

I know, understand and appreciate that this Opinion Release is limited to its facts and circumstances but it gives the compliance practitioner some excellent guidance on how to think through charitable donations under the FCPA.

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

January 23, 2013

The FCPA Guidance on the Ten Hallmarks of an Effective Compliance Program

Many commentators are still mining the Department of Justice (DOJ)/Securities and Exchange Commission (SEC) publication, A Resource Guide to the U.S. Foreign Corrupt Practices Act, (the “Guidance”), which was released last November. I continue to find nuggets to provide to the compliance practitioner, as do others. But as we are a Base 10 culture, today I want discuss the 10 points listed as the ‘Hallmarks of Effective Compliance Programs”. They are a change in style, but not content, from the prior 13 point minimum best practices that the DOJ has in the Deferred Prosecution Agreements (DPAs) since at least November, 2010 and, indeed, from prior information made available by the DOJ.

I.                   Where Have We Been

Beginning with at least the Metcalfe & Eddy Consent and Undertaking, filed in December, 1999, the DOJ has laid out its thoughts on what should go into a Foreign Corrupt Practices Act (FCPA) anti-corruption compliance program. In the Metcalfe & Eddy Consent and Undertaking, the DOJ laid out ten points of an effective FCPA anti-corruption compliance program. This was modified somewhat in Opinion Release 04-02, which laid out a best practices compliance program in 12 points, where the DOJ reviewed the proposal by an investment group who were acquiring certain companies and assets from ABB Ltd. ABB Vetco Gray Inc. and ABB Vetco Gray (UK) Ltd., two of the entities being acquired, had previously pled guilty to FCPA violations. The investment group desired to protect itself from further liability, to the extent possible, by proposing to the DOJ a comprehensive best practices compliance program. While the DOJ noted that this compliance program was not a shield against future violations, the DOJ would not “intend to take an enforcement action [against the investors] for violations of the FCPA prior to their acquisition from ABB.”

In the Panalpina DPA, issued in November, 2010, the DOJ laid out a 13 point minimum best practices compliance program. This number was changed this past summer when the Data Systems & Solutions LLC (DS&S) DPA was announced. In this enforcement action the DOJ listed 15 points on its minimum best practices FCPA anti-corruption compliance program. Then later in the summer, the DOJ moved to a 9 point compliance program in the Pfizer DPA. Even with all these changes in the number, the substance of each compliance program has remained the same.

II.                Where Are We Now? Hallmarks of Effective Compliance Programs

The Guidance cautions that there is no “one-size-fits-all” compliance program. It recognizes that depending on a variety of factors such as size, type of business, industry and risk profile that a company should determine what is appropriate for its own needs regarding a FCPA compliance program. But the Guidance makes clear that these ten points are “meant to provide insight into the aspects of compliance programs that DOJ and SEC assess”. In other words you should pay attention to these and use this information to assess your own compliance regime.

  1. Commitment from Senior Management and a Clearly Articulated Policy Against Corruption. It all starts with tone at the top. But more than simply ‘talk-the-talk’ company leadership must ‘walk-the-walk’ and lead by example. Both the DOJ and SEC look to see if a company has a “culture of compliance”. More than a paper program is required, it must have real teeth and it must be put into action, all of which is led by senior management. The Guidance states that “A strong ethical culture directly supports a strong compliance program. By adhering to ethical standards, senior managers will inspire middle managers to reinforce those standards.” This prong ends by stating that the DOJ and SEC will “evaluate whether senior management has clearly articulated company standards, communicated them in unambiguous terms, adhered to them scrupulously, and disseminated them throughout the organization.”
  2. Code of Conduct and Compliance Policies and Procedures. The Code of Conduct has long been seen as the foundation of a company’s overall compliance program and the Guidance acknowledges this fact. But a Code of Conduct and a company’s compliance policies need to be clear and concise. The Guidance makes clear that if a company has a large employee base that is not fluent in English such documents need to be translated into the native language of those employees. A company also needs to have appropriate internal controls based upon the risks that a company has assessed for its business model. Some of the risks a company should assess include “the nature and extent of transactions with foreign governments, including payments to foreign officials; use of third parties; gifts, travel, and entertainment expenses; charitable and political donations; and facilitating and expediting payments.”
  3. Oversight, Autonomy, and Resources. This section starts with a discussion on whether a company has assigned a senior level executive to oversee and implement a company’s compliance program. Not only must a company assign such a person with appropriate authority but that person, and the overall compliance function, must have “sufficient resources to ensure that the company’s compliance program is implemented effectively.” Additionally, the compliance function should report to the company’s Board of Directors or an appropriate committee of the Board such as the Audit Committee. Overall the DOJ and SEC will “consider whether the company devoted adequate staffing and resources to the compliance program given the size, structure, and risk profile of the business.”
  4. Risk Assessment. The Guidance states that “assessment of risk is fundamental to developing a strong compliance program”. Indeed, if there is one over-riding theme in the Guidance it is that a company should assess its risks in all areas of its business. The Guidance lists factors that a company should consider in any risk assessment. They are “the country and industry sector, the business opportunity, potential business partners, level of involvement with governments, amount of government regulation and oversight, and exposure to customs and immigration in conducting business affairs.” The Guidance is also quite clear that when the DOJ and SEC look at a company’s overall compliance program, they “take into account whether and to what degree a company analyzes and addresses the particular risks it faces.”
  5. Training and Continuing Advice. Communication of a compliance program is a cornerstone of any anti-corruption compliance program. The Guidance specifies that both the “DOJ and SEC will evaluate whether a company has taken steps to ensure that relevant policies and procedures have been communicated throughout the organization, including through periodic training and certification for all directors, officers, relevant employees, and, where appropriate, agents and business partners.” The training should be risk based so that those high risk employees and third party business partners receive an appropriate level of training. A company should also devote appropriate resources to providing its employees with guidance and advice on how to comply with their own compliance program on an ongoing basis.
  6. Incentives and Disciplinary Measures. This involves both the carrot and the stick. Initially the Guidance notes that a company’s compliance program should apply from “the board room to the supply room – no one should be beyond its reach.” There should be appropriate discipline in place and administered for any violation of the FCPA or a company’s compliance program. Additionally, the “DOJ and SEC recognize that positive incentives can also drive compliant behavior. These incentives can take many forms such as personnel evaluations and promotions, rewards for improving and developing a company’s compliance program, and rewards for ethics and compliance leadership.” These incentives can take the form of a part of senior management’s bonuses or simply recognition on the shop floor.
  7. Third-Party Due Diligence and Payments. Here the Guidance focuses on the ongoing problem area of third parties. The Guidance says that companies must engage in risk based due diligence to understand the “qualifications and associations of its third-party partners, including its business reputation, and relationship, if any, with foreign officials.” Next a company should articulate a business rationale for the use of the third party. This would include an evaluation of the payment arrangement to ascertain that the compensation is reasonable and will not be used as a basis for corrupt payments. Lastly, there should be ongoing monitoring of third parties.
  8. Confidential Reporting and Internal Investigation. This means more than simply a hotline. The Guidance suggests that anonymous reporting, and perhaps even a company ombudsman, might be appropriate to have in place for employees to report allegations of corruption or violations of the FCPA. Furthermore, it is just as important what a company does after an allegation is made. The Guidance states, “once an allegation is made, companies should have in place an efficient, reliable, and properly funded process for investigating the allegation and documenting the company’s response, including any disciplinary or remediation measures taken.” The final message is what did you learn from the allegation and investigation and did you apply it in your company?
  9. Continuous Improvement: Periodic Testing and Review. As noted in the Guidance, “compliance programs that do not just exist on paper but are followed in practice will inevitably uncover compliance weaknesses and require enhancements. Consequently, DOJ and SEC evaluate whether companies regularly review and improve their compliance programs and not allow them to become stale.” The DOJ/SEC expects that a company will review and test its compliance controls and “think critically” about its own weaknesses and risk areas. Internal controls should also be periodically tested through targeted audits.
  10. Mergers and Acquisitions. Pre-Acquisition Due Diligence and Post-Acquisition Integration. Here the DOJ and SEC spell out what it expects in not only the post-acquisition integration phase but also in the pre-acquisition phase. This pre-acquisition information is not something that most companies had previously focused on. Basically, a company should attempt to perform as much substantive compliance due diligence that it can do before it purchases a company. After the deal is closed, an acquiring entity needs to perform a FCPA audit, train all senior management and risk employees in the purchased company and integrate the acquired entity into its compliance regime.

As I commented earlier in this article, the DOJ and SEC have communicated what they believe are the important parts of a risk based, anti-corruption compliance program for many years. I do not think that a compliance defense could be set out any more succinctly. However, I do like things set out in Base 10 and the “Hallmarks of Effective Compliance Programs” is an excellent compilation of where we are and what you need in place to go forward. I recommend this as a good a starting point for any compliance practitioner to implement a new compliance program or to evaluate the state of an ongoing compliance regime so assess your company’s risks and use these hallmarks as a basis to move 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, 2013

October 8, 2012

Won’t Get Fooled Again: An Atypical Exploration under Opinion Release 12-01

As many readers of this blog know, I am an avid cyclist. I enjoy riding with rock and roll music blasting away in my ears. I even have lists on my iPod with such titles as 20 mile ride and 40 mile ride. Yesterday I decided to take pot luck and put it on ‘Shuffle’ and one of the songs selected for me was The Who classic “Won’t Get Fooled Again” from the timeless album Who’s Next. The ending line has stuck with me since I initially heard it back in the ’70s: “Meet the new boss, same as the old boss” which then follows with an ending crescendo of Keith Moon’s pounding drums, John Entwhisle’s sonic bass and Pete Townsend’s crashing electric guitar.

In a peculiar way that signature line crystalized my thinking about the latest Foreign Corrupt Practices Act (FCPA) Opinion Release from the Department of Justice (DOJ); that being Opinion Release 12-01 (12-01). As first noted by the FCPA Professor, in his post entitled “DOJ’s Recent Opinion Procedure Release Creates Additional “Foreign Official” Confusion”, 12-01 is dated September 18, 2012, but was apparently only publicly released last week. Pedaling away and listening to The Who it made me think of the evolving nature of not only best practices under the FCPA but also the DOJ’s thinking on the subject. So while the song’s ending line speaks of nothing changing, I realized the nature of FCPA analysis is and can be changing. So rather than being confused, I think that the DOJ has underlined again the fact intensive nature of the analysis required under the FCPA and how companies, if they used a reasoned approach for a specific FCPA issue or problem, can go a long way towards protecting themselves from potential FCPA liability or exposure.

I.                   The Underlying Representations

12-01 notes that a US lobbying firm, the Requestor desired to contract with a third party, the Consulting Company, which has, as one of its principals, a member of the Royal Family in a country where royalty exists. However, the country in question is not a monarchy and the Royal Family Member in question has only held one governmental position in the country’s government, in the late 1990’s. The work in question for which the Consulting Company would be hired is to lobby the country’s Foreign Embassy here in the US to represent the home country here in the US. The specific services that the Consulting Company would perform were stated as “strategic advice and counsel on public policy and business development issues of interest to the [Foreign Country Embassy], as well as make selected liaisons with U.S. and [Foreign Country] interlocutors on behalf of the [Foreign Country Embassy].”

1. Consulting Company Representations. 12-01 had three significant representations made by the Consulting Company. First, the Consulting Company represented that “none of its members, or principals are ‘foreign officials’ as that term is defined in the FCPA.” Second, the Consulting Company represented that it “principals and members are familiar with, and agree to abide by, the FCPA and all U.S. and [Foreign Country] anti-bribery and anticorruption laws.” Third, the Consulting Company has represented that it has “adopted the Good Practice Guidance on Internal Controls, Ethics and Compliance issued by the Organization for Economic Cooperation and Development (OECD) and have pledged that all partners and employees would be bound by the procedures covered in the Good Practices Guide.”

2.  Transparency. Here the Requestor represented that there would be full transparency in not only the home country of the Consulting Company but in the US as well. This would be accomplished through publishing not only the names of the parties to any contract, but the actual contract that the principals of the Consulting Company would sign individually.

3. Compensation. Here there were some interesting provisions listed in 12-01 which provided a level of detail not usually seen in previous Opinion Releases regarding the issue of compensation. First, the parties would agree “in advance on the scope of the Consulting Company’s work” for any set of services the Consulting Company provided. Additionally, any fee would be “at or below the amount charged by other entities…for such services.”

Thereafter, the Requestor anticipated “paying to the Consulting Company twenty percent of what it receives from the Foreign Country Embassy, so long as that percentage accurately reflects the amount of work provided.” The Requestor even went so far as to list the amount of money it is expecting to pay each principal of the Consulting Company on a monthly basis; that being $2,000 per month to each principal. Taking the 20% figure noted above the fee would work out to be $6,000 per month, to the Consulting Company, which equates to a fee of $30,000 per month for lobby services that the Requestor would bill the Foreign Embassy.

4. Contract Review. In a footnote, 12-01 states that “The proposed agreement also provides that “[b]oth [the Requestor] and [the Consulting Company] agree that [the Requestor] will submit this proposed contract to the United States Department of Justice (‘DOJ’) for review under its Foreign Corrupt Practices Act (‘FCPA’) Opinion Procedure and that this agreement will not become effective until such approval is received.””

II.                DOJ Analysis

After initially noting that “A person’s mere membership in the royal family of the Foreign Country, by itself, does not automatically qualify that person as a “foreign official” the DOJ goes on to reiterate its long held position that each question must turn on a “fact-intensive, case-by-case analysis” for resolution. The DOJ follows with a list of factors which should be considered. They include:

  1. The structure and distribution of power within a country’s government;
  2. A royal family’s current and historical legal status and powers;
  3. The individual’s position within the royal family; an individual’s present and past positions within the government;
  4. The mechanisms by which an individual could come to hold a position with governmental authority or responsibilities (such as, for example, royal succession);
  5. The likelihood that an individual would come to hold such a position;
  6. An individual’s ability, directly or indirectly, to affect governmental decision-making; and the (ubiquitous)
  7. Numerous other factors.

In addition to the above, the DOJ also relied upon the factors from District Courts, such as those expressed in United States v. Carson:

  • The foreign state’s characterization of the entity and its employees;
  • The foreign state’s degree of control over the entity;
  • The purpose of the entity’s activities;
  • The entity’s obligations and privileges under the foreign state’s law, including whether the entity exercises exclusive or controlling power to administer its designated functions;
  • The circumstances surrounding the entity’s creation; and
  • The foreign state’s extent of ownership of the entity, including the level of financial support by the state (e.g., subsidies, special tax treatment, and loans).

Finally, the DOJ also reviewed the factors that it set forth in its prior Opinion Release 10-03 for the following factors of whether a Royal Family Member is a foreign governmental official. These 10-03 factors are: “(i) how much control or influence the individual has over the levers of governmental power, execution, administration, finances, and the like; (ii) whether a foreign government characterizes an individual or entity as having governmental power; and (iii) whether and under what circumstances an individual (or entity) may act on behalf of, or bind, a government.”

Based upon its analysis, the DOJ concluded, “The Department concludes that the Royal Family Member does not presently qualify as a foreign official” for the purposes of the FCPA.

III.             Discussion

So how does all of the above relate to The Who and “Won’t Get Fooled Again”? I believe that 12-01 emphasizes that there is no ‘one-size-fits-all’ analysis under the FCPA. While I probably never would have made the determination that a Royal Family Member is not a foreign governmental official under the FCPA, 12-01 makes clear that every analysis stands on its own facts and circumstances. The reason I would not have ever opined that a Royal Family Member was not a foreign governmental official, is that I have only used the “status analysis” that was used by the Carson court

The FCPA Professor correctly points out that the DOJ has introduced a “duties analysis” into the mix. Where I disagree with him, is that I do not believe that the duties analysis is elevated above the status analysis from the Carson case, which focuses on the status of the entity within the foreign country itself. I think that both analyses were used by the DOJ in 12-01 and both analyses can be used going forward. So under the status analysis, the DOJ stated that “The Royal Family Member also cannot, by virtue of his membership in the royal family, ascend to a governmental position and has no benefits or privileges because of his status as a Royal Family Member.” But 12-01 goes onto incorporate a duties analysis as well when it stated “the Royal Family Member has no power to affect the Foreign Country government’s award of the engagement the Requestor seeks.”

One of the primary jobs of a lawyer is to take precedent from case law and apply them to the facts of a specific situation. In the FCPA arena there is a dearth of case law precedent but in most cases the DOJ has used two types of analysis of who is a foreign governmental official. It is not clear from 12-01 if the Requestor or the DOJ analyzed the facts as presented using both of these tests but, whether they were lawyers representing the Requestor or DOJ lawyers, kudos for coming up with a new legal argument to make by combining both the status analysis and the duties analysis.

But equally importantly to the novel argument made, is the use of the Opinion Release procedure itself. Recognizing that it took some seven months to obtain the formal Opinion Release does not take away from the power of the procedure. A lawyer was faced with what I would have termed an intractable problem; that being a Royal Family Member and the issue of a foreign governmental official. With some creativity in the legal argument and the use of the Opinion Release procedure, the Requestor was able to obtain a way forward which accomplished both its business goals and the goals of doing business in compliance with the FCPA.

I believe the ultimate takeaway from 12-01 is that the DOJ not only listens but it considers all the facts. In other words, not only does the analysis change as facts evolve but the final answer may change as well and it does not necessarily mean that the new boss will be the same as the old boss or you ‘won’t get fooled again’ into thinking there is absolutely, positively no way to manage a potential FCPA issue. One of your jobs as a lawyer is to be creative and Opinion Release 12-01 shows you that there is a way to do so.

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For a You Tube playing of the classic Who’s Next album cut of “Won’t Get Fooled Again” click here.

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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

May 11, 2011

What are the Essentials for a FCPA/Bribery Act/OECD Compliance Program?

In a recent article entitled, “Bribery and Corruption Compliance: the Playing Field Levels”, Timothy Coleman and Paul Lomas, attorneys from the law firm of Freshfields Bruckhaus Deringer discuss what they term the “tectonic shift” in anti-bribery and anti-corruption compliance internationally. The authors posit that increased enforcement of the US Foreign Corrupt Practices Act (FCPA); the release of the Organization of Economic Cooperation and Development (OECD) Good Practice Guidance on Internal Controls, Ethics and Compliance (OECD Good Practices); and the impending July 1 implementation date of the UK Bribery Act, have all acted to place “new burdens” on companies to have the highest standard of anti-bribery corruption programs in place.

The requirements of the FCPA are interpreted through the US Sentencing Guidelines, various Deferred Prosecution Agreements and Department of Justice Opinion Releases. The Bribery Act is interpreted through Guidance released by the UK Ministry of Justice. The OECD Good Practices contain its own commentary on interpretation. Using these documents, collectively called “the Sources” we will discuss the authors’ ten essential elements an anti-bribery and anti-corruption compliance program. The ten elements formulation is as follows:

  1. Risk Assessment-as all three of the Sources, speak to the need for risk assessments, the authors recommend that a company annually assess its risk for bribery and corruption and use this assessment as a guidelines to take steps to reduce the overall risk of such conduct.
  2. Implementation Generally-while the OECD Good Practices does not specifically address this element, it is contained within the FCPA and Bribery Act. The FCPA most generally says that an anti-corruption policy should be implemented while the Bribery Act more specifically recommends the embedding of “reasonable policies and procedures throughout the organization with an eye towards practical business issues.”
  3. Participation-this means involvement by all levels of an organization; including (a) appropriate ‘tone at the top’; (b) senior level involvement; (c) individual responsibility and (d) company-wide culture.
  4. Policies and Procedures-all three Sources require that written policies and procedures form the cornerstone for any anti-corruption and anti-bribery program. Care should be taken that it be written in plain English and not “by lawyers-for lawyers.”
  5. Enforcement-this is defined as internal company enforcement and here the authors point to not only ongoing monitoring, auditing and assessment but also granularity down to the individual employee level. There should be both a ‘carrot and stick’ approach so that employees are disciplined for compliance failures but also rewarded (and seen to be rewarded) for doing business through appropriate compliance avenues.
  6. Reporting and Response-under the FCPA, an anonymous reporting Hotline should be a component of a company’s overall compliance program. The Bribery Act calls it a ‘speak up’ line but whatever it is called, there should be recognized reporting mechanisms in place that allow an employee to report allegations of bribery and corruption and protections in place to guard against retaliation for such reporting.
  7. Third Party Compliance-all robust anti-bribery and anti-corruption programs discuss the risk of third parties. They all agree that this risk must be properly evaluated, investigated and managed going forward. Appropriate due diligence must be performed and compliance terms and conditions are important with all third parties. General oversight after the contract is signed is also a key element.
  8. Training-all the Sources of guidance state that training of a company employees, with an annual certification, is an important part of an effective anti-bribery and anti-corruption program. The Bribery Act extends this training to third parties.
  9. Periodic Review-it is important for a company to engage in a review on no less than an annual basis. The Sources list several areas that should be assessed. A company should determine if its overall program in effective both internally and externally. Additionally, if there are new best practices a company should assess whether those concepts should be brought into its anti-bribery and anti-corruption program. If a company moves into a new business areas or a new geographic area, these new risks should be assessed, evaluated and managed as well.
  10. Record Keeping and Internal Controls-both the FCPA and Bribery Act have language that makes clear that not only must books and records adequately reflect a company’s expenses but that internal controls are key defense and preventative measure against bribery and corruption.

The authors then advocate a three step implementation plan for an anti-bribery and anti-corruption program. This three step approach being with (1) Strategic Planning-where risks are assessed and then resources are dedicated to ameliorating or managing the risks; (2) Written Compliance Policy-every company should commit its entire anti-bribery and anti-corruption program to writing and distributed company-wide and to appropriate third parties; and (3) Implementation Plan-after risks are assessed a company-wide implantation plan should be created to begin to implement the policy beginning with the highest risks first and moving step-by-step throughout the company.

We congratulate the authors for a thoughtful paper which is great use to the compliance practitioner. If your company is implementing a compliance program, this article lays out a clear road map that you can follow. However the paper is equally of value to the company which needs to assess or review its overall anti-bribery and anti-corruption program. The authors use of the FCPA interpretations, the Bribery Act Guidance and OECD Good Practices are references point throughout the piece which provide an excellent resource for the compliance practitioner to gauge an ongoing compliance program. We welcome the authors’ contribution.

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

April 29, 2011

The Royal Wedding and the End of the ‘Halliburton’ Opinion Release

Today is a Royal wedding in England and in honor of the happy couple and the English House of Windsor we will take a look at the Foreign Corrupt Practices Act (FCPA) in the context of a merger and acquisition (M&A) of a British company.

Until recently, many FCPA practitioners had based decisions in the M&A context on Department of Justice’s (DOJ) Opinion Release, 08-02 (08-02), which related to Halliburton’s proposed acquisition of the UK entity, Expro. However, the recently released Deferred Prosecution Agreement (DPA) of Johnson & Johnson (J&J) may have changed the perception of practitioners regarding what is required of a company in the M&A arena related to FCPA due diligence, both pre and post-acquisition. In this post we will review the genesis of 08-02, the risk based approach that it advocated and the vigorous time frames, which it set forth, to accomplish the agreed to compliance investigations and opine on how these may have changed.

08-02 began as a request from Halliburton to the DOJ from issues that arose in the pre-acquisition due diligence of the target company Expro. Halliburton had submitted the following request to the DOJ specifically posing these three questions: (1) whether the proposed acquisition transaction itself would violate the FCPA; (2) whether through the proposed acquisition of Target, Halliburton would “inherit” any FCPA liabilities of Target for pre-acquisition unlawful conduct; and (3) whether Halliburton would be held criminally liable for any post-acquisition unlawful conduct by Target prior to Halliburton’s completion of its FCPA and anti-corruption due diligence, where such conduct is identified and disclosed to the Department within 180 days of closing.

I.                08-02 Conditions

 Halliburton committed to the following conditions, if it was the successful bidder in the acquisition:

1. Within ten business days of the closing. Halliburton would present to the DOJ a

comprehensive, risk-based FCPA and anti-corruption due diligence work plan which would address, among other things, the use of agents and other third parties; commercial dealings with state-owned customers; any joint venture, teaming or consortium arrangements; customs and immigration matters; tax matters; and any government licenses and permits. The Halliburton work plan committed to organizing the due diligence effort into high risk, medium risk, and lowest risk elements.

a. Within 90 days of Closing. Halliburton would report to the DOJ the results of its high risk due diligence.

b. Within 120 days of Closing. Halliburton would report to the DOJ the results to date of its medium risk due diligence.

c. Within 180 days of Closing. Halliburton would report to the DOJ the results to date of its lowest risk due diligence.

d.  Within One Year of Closing. Halliburton committed full remediation of any issues which it discovered within one year of the closing of the transaction.

Many lawyers were heard to exclaim, “What an order, we cannot go through with it.” However,  we advised our clients not to be discouraged because 08-02 laid out a clear road map for dealing with some of the difficulties inherent in conducting sufficient pre-acquisition due diligence in the FCPA context. Indeed the DOJ concluded 08-02 by noting, “Assuming that Halliburton, in the judgment of the Department, satisfactorily implements the post-closing plan and remediation detailed above… the Department does not presently intend to take any enforcement action against Halliburton.”

II.             Johnson & Johnson “Enhanced Compliance Obligations”

In the recently released J&J DPA, there is an Attachment D, which is entitled, “Enhanced Compliance Obligations.” This is a list of compliance obligations in which J&J agreed to undertake certain enhanced compliance obligations for at least the duration of its DPA. With regard to the acquisition context, Johnson and Johnson agreed to:

7. J&J will ensure that new business entities are only acquired after thorough FCPA and anticorruption due diligence by legal, accounting, and compliance personnel. Where such anticorruption due diligence is not practicable prior to acquisition of a new business for reasons beyond J&J’s control, or due to any applicable law, rule, or regulation, J&J will conduct FCPA and anticorruption due diligence subsequent to the acquisition and report to the Department any corrupt payments, falsified books and records, or inadequate internal controls as required by … the Deferred Prosecution Agreement.

 8. J&J will ensure that J&J’s policies and procedures regarding the anticorruption laws and regulations apply as quickly as is practicable, but in any event no less than one year post-closing, to newly-acquired businesses, and will promptly: For those operating companies that are determined not to pose corruption risk, J&J will conduct periodic FCPA Audits, or will incorporate FCPA components into financial audits.

a. Train directors, officers, employees, agents, consultants, representatives, distributors, joint venture partners, and relevant employees thereof, who present corruption risk to J&J, on the anticorruption laws and regulations and J&J’s related policies and procedures; and

b. Conduct an FCPA-specific audit of all newly-acquired businesses within 18 months of acquisition.

These enhanced obligations agreed to by J&J in the M&A context would seem to be less time sensitive than those agreed to by Halliburton in 08-02. In the J&J DPA, the company agreed to following time frames:

a.    18 Month-conduct a full FCPA audit of the acquired company.

b.    12 Month-introduce full anti-corruption compliance policies and procedures into the acquired company and train those persons and business representatives which “present corruption risk to J&J.”

So there is no longer a risk based approach as set out in 08-02 and the tight time frames are also relaxed. Once again we applaud the DOJ for setting out specific information for the compliance practitioner through the release of the J&J DPA. As many have decried 08-02 is a standard too difficult to satisfy in the real world of time constraints and budget cuts, the “Acquisition” component of the J&J DPA should provide those who have made this claim with some relief.

For a copy of Opinion Release 08-02, click here.

For a copy of the Johnson & Johnson Deferred Prosecution Agreement, click here.

We would be remiss if we did not wish Prince William and his bride, Kate, best wishes in their new journey together. No one puts on pomp and circumstance like the Brits so sit back, relax and enjoy the nuptials with a nice cup of tea.

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

August 25, 2010

Promotional Expenses Defense under the FCPA

I.       The Problem

So what is the problem with a US company paying for travel, room and board for foreign governmental officials to travel to the United States? The problem is that payment for such travel, lodging and expenses may run afoul of the prohibition against corrupt payments (or promises of them) made to obtain or retain business. The Foreign Corrupt Practices Act (FCPA) allows payments to foreign officials for expenses related directly to “the promotion, demonstration, or explanation of products or services” that are “reasonable and bona fide” 15 U.S.C. §§ 78dd-1(c)(2)(A) and 78dd-2(c)(2)(A). This affirmative defense, however, is notoriously hard to use (and easy to abuse), mainly because no one is quite sure what reasonable and bona fide really mean.

In his recent post on the FCPA Blog, UCLA student Kyle Sheahen, explored this issue in his discussion of his upcoming publication, entitled “I’m Not Going to Disneyland: Illusory Affirmative Defenses Under the Foreign Corrupt Practices Act”. In his paper, he sets forth his proposition that FCPA enforcement actions provide “uneven indicators or what conduct the government considers covered by the defense. Consequently, in the absence of authoritative judicial interpretation or clear regulatory guidance, corporate managers are required to make educated guesses as to whether contemplated payments will qualify as “bona fide” promotional expenses.”;   he cites the following cases:

PROMOTIONAL EXPENSE ENFORCEMENT BOX SCORE

Company Trip Locations Trip Costs & Perks Company Facilities Present
Lucent Technologies Disneyworld, Hawaii, Las Vegas, Grand Canyon, Niagara Falls, Universal Studios, NYC -$10 million in trips for 1000 Chinese governmental officials, including $34,000 for five days of sightseeing None of the travel destinations
Ingersoll-Rand Trip to Florence after trip to company facility in Vignate, Italy $1000 ‘pocket  money’ per attendee Facilities in Vignate but not in Florence
Metcaf & Eddy First trip-Boston, Washington, D.C., Chicago and Orlando. Second trip-travel to Paris, Boston and San Diego. First Class Travel and trip expenses for Egyptian governmental official and his family. Cash payments prior to trips of 150% of estimated daily expenses.  Wakefield Mass not in Washington DC, Chicago, Paris or Disney World (Orlando)
Titan Corporation   Reference in company books and records of $20,000 for promotional travel expenses. Not clear if ever funded (Remember a promise to pay=making a payment under the FCPA)  
Not cited in Sheahen Paper      
UTStarcom Hawaii, Las Vegas and New York City Up to $7 million on gifts and all expense paid trips to US None of the travel destinations

 While the Department of Justice (DOJ) and/or the Securities and Exchange Commission (SEC) brought enforcement actions against the above companies, this author believes that the facts of each enforcement action demonstrate that the expenses incurred by the companies were neither reasonable nor bona fide as required under the FCPA. These cases do not require a FCPA compliance professional to guess, educated or otherwise, as to whether the travel, lodging and expense payments listed above violated the FCPA. The payment amounts noted above in the Box Score are so beyond the pale of reasonableness to be prima facie evidence of corrupt intent. Of course, it really does not help your case with the DOJ if you do not have company facilities in Disney World.

  1. II.    Opinion Releases  

In addition to detailing the above enforcement actions, Mr. Sheahen also discusses guidance that may be gleaned from DOJ Opinion Releases on the Promotional Expenses defense. Here he points to substantive guidance for the FCPA practitioner. In 2007, the DOJ issued two FCPA Opinion Releases which offered guidance to companies considering whether to and, if so how to, incur travel, lodging and expenses for government officials. In Opinion Release 07-01, the Requestor Company desired to cover the domestic expenses for a trip to the United States by a six-person delegation of the government of an Asian country for an educational and promotional tour of one of the requestor’s US operations sites.

Opinion Release 07-01 laid out the specific representations made to the DOJ which led to the DOJ approving the travel to the US by the foreign governmental officials. These facts can provide good guidance to any company which seeks to bring such officials to the US for a legitimate business purpose. In Opinion Release 07-01, the representations made to the DOJ were as follows:

  • A legal opinion from an established US law firm, with offices in the foreign country, stating that the payment of expenses by the US Company for the travel of the foreign governmental representatives did not violate the laws of the country involved;
  • The US Company did not select the foreign governmental officials who would come to the US for the training program.
  • The delegates who came to the US did not have direct authority over the decisions relating to the US Company’s products or services.
  • The US Company would not pay the expenses of anyone other than the selected official.
  • The officials would not receive any entertainment, other than room and board from the US Company.
  • All expenses incurred by the US Company would be accurately reflected in this Company’s books and records.  

For  these representations, the DOJ noted, “Based upon all of the facts and circumstances, as represented by the requestor, the Department does not presently intend to take any enforcement action with respect to the proposal described in this request. This is because, based on the requestor’s representations, consistent with the FCPA’s promotional expenses affirmative defense, the expenses contemplated are reasonable under the circumstances and directly relate to “the promotion, demonstration, or explanation of [the requestor’s] products or services.”

In Opinion Release 07-02 the Requestor Company desired to pay certain domestic expenses for a trip within the United States by approximately six junior to mid-level officials of a foreign government for an educational program at the Requestor’s US headquarters prior to the delegates attendance at an annual six-week long internship program for foreign insurance regulators sponsored by the National Association of Insurance Commissioners (“NAIC”).

In Opinion Release 07-02 the representations made to the DOJ were as follows:

  • The US Company would not pay the travel expenses or fees for participation in the NAIC program.
  • The US Company had no “non-routine” business in front of the foreign governmental agency.
  • The routine business it did have before the foreign governmental agency was guided by administrative rules with identified standards.
  • The US Company would not select the delegates for the training program.
  • The US Company would only host the delegates and not their families.
  • The US Company would pay all costs incurred directly to the US service providers and only a modest daily minimum to the foreign governmental officials based upon a properly presented receipt.
  • Any souvenirs presented would be of modest value, with the US Company’s logo.
  • There would be one four-hour sightseeing trip in the city where the US Company is located.
  • The total expenses of the trip are reasonable for such a trip and the training which would be provided at the home offices of the US Company.  

As with Opinion Release 07-01, the DOJ ended this Opinion Release by stating, “Based upon all of the facts and circumstances, as represented by the Requestor, the Department does not presently intend to take any enforcement action with respect to the planned educational program and proposed payments described in this request. This is because, based on the Requestor’s representations, consistent with the FCPA’s  promotional expenses affirmative defense, the expenses contemplated are reasonable under the circumstances and directly relate to “the promotion, demonstration, or explanation of [the Requestor’s] products or services.” 15 U.S.C. § 78dd-2(c)(2)(A). 

III. Travel, Lodging and Expenses for Governmental Officials 

What can one glean from these two Opinion Releases? In light of the facts it  would seem that a US Company should be able to bring foreign officials into the United States for legitimate business purposes. A key component is that the guidelines are clearly articulated in a Compliance Policy. Based upon Releases Opinions 07-01 and 07-02, the following should be incorporated into a Compliance Policy regarding travel and lodging:

  • Any reimbursement for air fare will be for economy class.
  • Do not select the particular officials who will travel. That decision will be made solely by the foreign government.
  • Only host the designated officials and not their spouses or family members.
  • Pay all costs directly to the service providers; in the event that an expense requires reimbursement, you may do so, up to a modest daily minimum (e.g., $35), upon presentation of a written receipt.
  • Any souvenirs you provide the visiting officials should reflect the business and/or logo and would be of nominal value, e.g., shirts or tote bags.
  • Apart from the expenses identified above, do not compensate the foreign government or the officials for their visit, do not fund, organize, or host any other entertainment, side trips, or leisure activities for the officials, or provide the officials with any stipend or spending money.
  • The training costs and expenses will be only those necessary and reasonable to educate the visiting officials about the operation of your company. 

Incorporation of these concepts into a Compliance Policy is a good first step towards preventing any FCPA violations from arising, but it must be emphasized that they are only a first step. These guidelines must be coupled with active training of all personnel, not only on the Compliance Policy, but also on the corporate and individual consequences that may arise if the FCPA is violated regarding gifts and entertainment. Lastly, it is imperative that all such gifts and entertainment are properly recorded, as required by the books and records component of the FCPA. One of the FCPA violations alleged against UTStarcom was that it falsely recorded these trips as ‘training’ expenses, while the true purpose for providing these trips was to obtain and retain lucrative telecommunications contracts. All business gifts, entertainment and expenses must be properly recorded.

We commend Mr. Sheahen for his upcoming publication, in which he thoroughly discusses the “Local Law” defense under the FCPA in addition to the “Promotional Expenses” defense. His work will add to the discussion of these two affirmative defenses and assist companies in crafting their FCPA compliance program.

This article originally appeared in American Conference Institute Blog Site.

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, 2010

July 30, 2010

Compelled Giving and the FCPA

The recent post on charitable donations under the Foreign Corrupt Practices Act (FCPA) and Opinion Release 10-02 brought an interesting dialogue with fellow blogger, the FCPA Professor. The FCPA Professor raised the issue of “compelled giving” disguised as a requirement that a US company doing business overseas makes a charitable donation with the implicit understanding that such a requirement is mandated to obtain or retain business by a foreign governmental official and how such payments would be viewed under the FCPA. We believe that the underlying facts of the Opinion Release referenced demonstrate that the Department of Justice (DOJ) has recognized that compelled giving is a situation that is faced by US companies doing business overseas, if not on a regular basis, but certainly one that is not unknown.

In Venezuela energy service contracts with the national oil company, PDVSA requires that the foreign company must agree to invest an established percentage of the profits from each contract into the community in which it operates. This is negotiated with the Venezuelan government and can include cash or in-kind contributions of computers, equipment or appliances to schools, communities or organizations. This requirement may also be present in contracts for infrastructure opportunities including communications and transportation.

Although it is legal and a practice required by law in Venezuela, these payments have generated some questions with regards to compliance with the FCPA and similar laws of other countries. While not a payment to a governmental official, it is still a payment to a governmental entity for the purpose of securing a contract. It may also be that a governmental official sits on the Board of the local charity in question. Such issues require careful consideration.

There appears to be only one FCPA enforcement action based entirely upon charitable giving. It is the case of Schering-Plough Poland which paid a $500,000 civil penalty assessed by the Securities and Exchange Commission (SEC) in 2008. As reported in the FCPA Blog, the Company’s Polish subsidiary made improper payments to a charitable organization named the Chudow Castle Foundation, which was headed by an individual who was the Director of the Silesian Health Fund during the time period in question. Schering-Plough is a pharmaceutical company and the Director of the Health Fund provided money for the purchase of products manufactured by Schering-Plough as well as influencing medical institutions, such as hospitals, in their purchase of pharmaceutical products through the allocation of health fund resources. In addition to the above, the SEC found that Schering-Plough did not accurately record these charitable donations on the company’s books and records.

The FCPA Blog further reported that when asked about the guidelines regarding requests for charitable giving and the FCPA then Deputy Chief of the Criminal Division’s Fraud Section at the DOJ Mark Mendelsohn, said that any such request must be evaluated on its own merits. He advocated a “common sense” approach in identifying and clearing Red Flags. This would include determining if a governmental decision maker held a position of authority at the charity to which the donation would be made, whether the donation was consistent with a company’s overall pattern of charitable giving, who made the request for the donation and how was it made.

The series of Red Flags raised and cleared by the US company which was the subject of Opinion Release 10-02. After initially listing the 3 levels of due diligence in which the company had engaged prior to finalizing its choice of local entity to receive the donation in question; the DOJ noted that the donation ‘requested’ of the US company would be subject to the following controls:

  1. Payments of the donations would be staggered over a period of eight quarters rather than in one lump sum.
  2. Ongoing monitoring and auditing of the funds use for a period of five years.
  3. The donations would be specifically utilized for the building of infrastructure.
  4. The funds would not be paid to the parent of the organization receiving the grant and there was an absolute prohibition on compensating Board Members.
  5. The proposed grant agreement under which the funds would be donated had significant anti-corruption provisions which included a requirement that the local organization receiving the funds adopt an anti-corruption policy and that US company making the donation receive full access to the local organization’s books and records.

Both the underlying due diligence and the controls noted above led the DOJ to state “The Department is satisfied, however, that the Requestor has done appropriate due diligence and that the controls that it plans to institute are sufficient to prevent FCPA violations.”

In addition to the specific factors presented by the requesting US company in Opinion Release 10-02, the DOJ also listed several of the due diligence and/or controls that it had previously set forth in prior Opinion Releases relating to charitable donations. These included:

• certifications by the recipient that it will comply with the requirements of the FCPA;

• due diligence to confirm that none of the recipient’s officers or directors are affiliated with the foreign government at issue;

• a requirement that the recipient provide audited financial statements;

• a written agreement with the recipient restricting the use of funds to humanitarian or charitable purposes only;

• steps to ensure that the funds were transferred to a valid bank account;

• confirmation that contemplated activities had occurred before funds were disbursed; and

• ongoing auditing and monitoring of the efficacy of the program.

We believe that Opinion Release 10-02 addresses some of the concerns of US companies in the area of compelled giving; particularly in view of the enforcement action involving Schering-Plough. The DOJ, once again, has indicated that extensive due diligence, coupled with the best practices in compliance management going forward after the contract is executed, appear to be critical in its analysis. We also wish to thank our blog colleague the FCPA Professor for his timely and pointed questions which raised further interest in this area.

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, 2010

July 25, 2010

Opinion Release 10-02 and Charitable Donations under the FCPA

What is a company to do if, in order to obtain a contract with a foreign government, they must agree to invest a percentage of the proceeds of the transaction into the community in which it operates as a “charitable donation”? This is negotiated with the foreign government and can include cash or in-kind contributions of computers, equipment or appliances to schools, communities or organizations.

While not a payment to a governmental official, it is still a payment to a governmental entity for the purpose of securing a lucrative contract and requires careful consideration. This spectra is currently required in some countries by law and these payments have generated some questions with regard to compliance with the Foreign Corrupt Practices Act (FCPA) as such donations could be interpreted as corruptly giving or offering anything of value to any “foreign official” in order to assist “in obtaining or retaining business for or with, or directing any business to, any person . . . .” 15 U.S.C. § 78dd-2(a)(1).

As reported in Friday’s FCPA Blog, this past week the Department of Justice (DOJ) published its second FCPA Opinion Procedure Release of 2010, 10-02. The release dealt with a US based micro financial institution (MFI) operating in an unnamed Eurasian country. This MFI desired to convert its local operations from a “humanitarian status” to a commercial status. The relevant government licensing authority in the country in question required that as a condition precedent to obtaining this commercial license, the MFI would be required to make a substantial grant to some other local MFIs, providing a list of one or more that the US MFI could choose. The US MFI was concerned that by making such a donation a condition precedent and specifying the list of local MFIs to which the donation could be made, the US MFI could run afoul of the FCPA’s proscription of “corruptly giving or offering anything of value to any foreign official” in order to assist “in obtaining or retaining business for or with, or directing any business to, any person . . . .”

In stating that the DOJ “does not intend to take any enforcement action with regard to the proposed transaction” the Opinion Release specified the three levels of due diligence that the US MFI had engaged in on the proposed locals MFIs which were listed as eligible to receive the funding. The DOJ noted that [it] “is satisfied, however, that the Requestor has done appropriate due diligence and that the controls that it plans to institute are sufficient to prevent FCPA violations. As noted above, the Requestor [US MFI] conducted three rounds of due diligence. The controls that the Requestor proposes would ensure with reasonable certainty that the grant money from the Eurasian Subsidiary would not be transferred to officials of the Eurasian country.”

 In addition to the specific discussion of the due diligence performed by the US MFI and noting the controls it had put in place after the funding was scheduled to be made the DOJ also listed several of the due diligence and/or controls that it had previously set forth in prior Opinion Releases relating to charitable donations. These included:

• certifications by the recipient that it will comply with the requirements of the FCPA;

• due diligence to confirm that none of the recipient’s officers or directors are affiliated with

the foreign government at issue;

• a requirement that the recipient provide audited financial statements;

• a written agreement with the recipient restricting the use of funds to humanitarian or charitable purposes only;

• steps to ensure that the funds were transferred to a valid bank account;

• confirmation that contemplated activities had occurred before funds were

disbursed; and

• ongoing auditing and monitoring of the efficacy of the program.

Opinion Release 10-02 provides a wealth of information to the FCPA practitioner and  compliance counsel. It gives specific guidance on the levels of due diligence that a US company should go through when investigating a charitable institution selected, or suggested by a foreign governmental official, to be the recipient of a company’s charitable donations. Further it lists the controls that a US company can and should put in place, should it determine that a charitable donation is to be made. In short Opinion Release 10-02 gives significant guidance in pre-donation due diligence investigation, evaluation and post donation monitoring going forward to manage the process. Opinion Release 10-02 is a very large and helpful educational tool in the FCPA compliance arena. We welcome its release.

For a copy of Opinion Release 10-02, 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  

© Thomas R. Fox, 2010

June 15, 2010

FCPA Reporting-To Whom Does Your CCO Report?

There is an ongoing debate in the compliance arena as to whom a Chief Compliance Officer (CCO) should report. Should the CCO report to the Board of Directors or appropriate Board committee such as an Audit Committee or Compliance Committee? Or can a CCO report to a company’s General Counsel (GC) but have access to the Board of Directors for periodic, but no less than annual, reporting? Is there any specific guidance from the Foreign Corrupt Practices Act (FCPA) or any of the US government interpretations such as the US Sentencing Guidelines, Deferred Prosecution Agreement to which the DOJ and recalcitrant companies have entered into or Opinion Releases? Is one approach more right or more wrong than the other? 

US companies are reported to take both approaches. A recent survey released by the Society of Corporate Compliance and Ethics, entitled “The Relationship Between the Board of Directors and the Compliance and Ethics Officer”, dated April 2010, reported that of the publicly traded companies reporting only 41% had their CCO report directly to the Board of Directors. If the CCO did not report to the Board of Directors, the survey found such position could report to not only the GC but also the Chief Financial Officer (CFO) and other senior level positions within a company. The report concluded with two perspectives from its findings. First that as the proposed change in the US Sentencing Guidelines would require “a direct” relationship between a CCO and a Board of Directors, most publicly traded companies do not meet this obligation. Second, many compliance reports are “heavily vetted” before they are delivered to the Board of Directors so that it may be hard to for a Board to garner a true picture of a company’s compliance program. 

I.                   US Sentencing Guidelines 

Under the 2010 Amendments to the US Sentencing Guidelines which are now proposed to Congress, §8B2.1 (b)(2)(C) requires: 

Specific individual(s) within the organization shall be delegated day-to-day operational responsibility for the compliance and ethics program. Individual(s) with operational responsibility shall report periodically to high-level personnel and, as appropriate, to the governing authority, or an appropriate subgroup of the governing authority, on the effectiveness of the compliance and ethics program. To carry out such operational responsibility, such individual(s) shall be given adequate resources, appropriate authority, and direct access to the governing authority or an appropriate subgroup of the governing authority. 

Commentators have weighed in on this amendment. In a recent White Paper entitled “U.S. Sentencing Commission Amends Requirements for an Effective Compliance and Ethics Program”, the law firm of Gibson, Dunn and Crutcher noted that this amendment “could be problematic for corporations that vest overall responsibility for compliance in a senior member of management” such as the GC, while having operational responsibility of the company’s compliance function detailed to a subordinate to the GC. They raised the concern that such a reporting structure might allow the GC to act as a “filter in deciding which conduct warrants reporting” to the Board of Directors, if the CCO reported. This would also imply there was a problem if a GC, rather than Board of Directors, performed an annual evaluation or in some other manner controlled the actions of the CCO. 

II.                Opinion Release 04-02

Through the mechanism of the Opinion Release 04-02 the Department of Justice (DOJ) may have provided prior guidance. The Opinion Release dealt with certain Requestors which were desired in order to acquire a business that had admitted to FCPA violations. As part of the proposed purchase of this “Newco”, the Requestors agreed that this Newco would adopt a rigorous anti-corruption compliance code which would include the following element: 

(B)      The assignment to one or more independent senior Newco corporate officials, who shall report directly to the Compliance Committee of the Audit Committee of the Board of Directors, of responsibility for the implementation and oversight of compliance with policies, standards, and procedures established in accordance with Newco’s Compliance Code; [emphasis supplied] 

III.             Industry Debates 

There has been debate in the FCPA compliance world as to what this requirement specifies. At the recent Compliance Week 2010 Annual Conference, a panel consisting of representatives from the US Sentencing Commission indicated that they believed that this section only required that CCOs have access to a company’s Board of Directors. Such a requirement could be fulfilled through a reporting structure whereby a CCO reported to a GC but had access to report to the Board of Directors, even if the CCO went to the Board of Directors with the GC present, such as reporting structure was in compliance with the proposed Sentencing Guidelines. 

However, at the same conference, Assistant Attorney General, Criminal Division for the Department of Justice, Lanny Breuer said that a CCO should have direct access to a company’s Board of Directors suggesting that the CCO not have to report through a GC but report directly to the Board. Breuer opined that the change in the Sentencing Guidelines implies that the CCO should now report directly to the Board of Directors and not through another person, whether the GC, CFO, Head of Internal Audit or any other person in an organization. 

For yet a third perspective at the same conference, the question was put to a panel of members who sit on various Boards of Directors on multi-national US corporations, they responded that, as Board members, they only wanted the information to come to them so they could fulfill their obligations as Board members, they were not too concerned how it was presented to them or who did so. Further they were not concerned who the CCO reported to or which company officer or employee in the corporate structure evaluated the CCO. 

A recent webcast by the firm of Ernst and Young further delineated this dichotomy. When posed the question of to whom should the CCO report to; either directly to the Board or the GC, panelists Brian Loughman and Jeff Taylor both indicated that it was important for the CCO to report directly to the Board. Such a reporting structure made a much more positive impression on the Board (Loughman) and that less filter of the CCO’s information gave a stronger message to the Board (Taylor) than if the CCO reported through the GC. Loughman added that the change in the Sentencing Guidelines mandated this reporting structure. However, panelist Amy Hawkes responded that she did not believe the issue of who the CCO reported to was as important if there the appropriate ‘tone at the top’ by the Board. By this she explained that if the Board was committed to a compliance culture, it did not matter whether the CCO reported directly to the Board or to the Board through the GC. 

This direct reporting approach is utilized by Halliburton, to which I posed the following question, “Who does the Chief Compliance Officer report to in your Company and why does your company utilize this approach?” Susan Ponce, Senior Vice President and Chief Ethics and Compliance Officer of Halliburton responded, “At Halliburton, the Chief Ethics and Compliance Officer reports directly to the company’s Board of Directors, advising both the Audit Committee and the full Board on all matters relating to legal compliance issues.  We structured the CEC Office that way in order to leave no doubt that the CECO has direct, independent and unfettered access to our Board and support from board members and our senior executives.

 The answer to the initial question posed appears to have two correct responses. The guidelines and debate goes both ways. The key is in the actual reporting. As long as the CCO reports on a regular basis to the Board, both lines of authority are appear to be acceptable. 

So which approach does your company utilize? 

A shorter version of this post appeared in the FCPA Blog, to read 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, 2010

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