FCPA Compliance and Ethics Blog

August 9, 2013

Who Watches the Watchmen? A Look at Anti-Bribery Risks in the Legal Profession

Teodoro Obiang Mangue  has led a life that few could easily relate to.   At age 8, his father organized a coup against his uncle to assume the Presidency of Equatorial Guinea.  Thirty years later, his father continues to maintain a tight grip over the country and Teodoro (nicknamed “Teodorin”) has become the heir apparent, comfortably coasting for the time being as Minister of Agriculture and Forestry.

Equatorial Guinea is a small country of about 600,000 people on the west coast of Africa.  Much in Equatorial Guinea changed in the 1990s when large offshore oil deposits were discovered and the country quickly became one of the leading oil producers in sub-Saharan Africa.  But while the elite in government enjoyed their newfound wealth, none have enjoyed it with quite as much flair as Teodoro.  Among his list of expensive toys are  several Bugattis, a couple Ferraris, Lamborghinis and Bentleys,  a $38.5 million private jet, and a $30 million Malibu home bought in 2006 that was later ranked as the 6th most expensive residential purchase in the United States that year.  Not bad for someone whose official salary is only $60,000 a year.  The true tragedy of the situation, however, is that the majority of Equatorial Guineans live below the poverty line, and the country ranks 136 of the 186 nations on the United Nation’s Human Development Index.  This hasn’t stopped a playboy millionaire like Teodoro, though, who’s reportedly spent nearly $700,000 just to rent Microsoft co-founder Paul Allen’s 303-foot yacht for a weekend.

The Bribery Bar

For years, the international community has tried to expose Obiang’s illegitimate wealth, and in 2010, the United States Senate’s Permanent Subcommittee on Investigations published a scathing report on Obiang’s use of U.S. lawyers, bankers, real estate agents and escrow agents to launder $110 million in suspect funds out of Equatorial Guinea and into the United States.  The report, entitled Keeping Foreign Corruption Out of the United States: Four Case Histories, shows how two U.S. lawyers, Michael Berger and George Nagler, actively helped Obiang to circumvent U.S. anti-money laundering controls at U.S. banks by allowing him to use their attorney-client and law office accounts as conduits for his funds.  The two-step process of first transferring the funds to the lawyers’ attorney-client and law office accounts before transferring the funds to U.S. banks helped mask the fact that the funds were coming from Equatorial Guinea, which most banks flag as a high risk country due to its reputation for corruption.  According to the report, Mr. Berger and Mr. Nagler assisted Mr. Obiang to hide his identity from the banks by, among other things, setting up shell companies for Mr. Obiang and failing to disclose to the banks that Mr. Obiang was the beneficial owner of those companies.  “The Obiang case history,” summarized the Senate Subcommittee report, “demonstrates how a determined [politically exposed person] can employ the services of U.S. attorneys to bring millions of dollars in suspect funds into the United States through U.S. financial institutions.“

A few months after the Senate published its findings on Obiang, the International Bar Association, in cooperation with the Organization for Economic Co-operation and Development (OECD) and the United Nations Office on Drugs and Crime (UNODC), published the results of their own survey entitled Risks and threats of corruption and the legal profession.  The survey’s goal was to alert readers “to the unfortunate fact that lawyers are indeed approached to act as agents/middlemen in transactions that could reasonably be suspected to involve international corruption.”  Indeed, the results of the survey were disconcerting:

  • Nearly half of all respondents stated that corruption was an issue in the legal profession in their own jurisdiction;
  • More than a fifth of respondents said they have or may have been approached to act as an agent or middleman in a transaction that could reasonably be suspected to involve international corruption; and
  • Nearly 30 per cent of respondents said they’d lost business to corrupt law firms or individuals who have engaged in international bribery and corruption.

That lawyers are routinely involved in bribery schemes should come as little surprise to those in the FCPA bar. Some of the biggest cases brought under the Foreign Corrupt Practices Act have involved lawyers, including:

  • Hans Bodmer, a Swiss lawyer, who pleaded guilty in 2004 to helping move money in Viktor Kozeny’s scheme to bribe Azeri officials and gain control over the state-run oil company;
  • Jeffery Tessler, a British lawyer, who was hired by the TSKJ consortium to funnel bribes to high-ranking Nigerian officials regarding contracts to build liquefied natural gas facilities in Nigeria; and
  • Pablo Alegría Con Alonso and José Manuel Aguirre Juárez, two Mexican attorneys accused of assisting Walmart to deliver cash to mayors, city council members, urban planners, and all manner of government bureaucrats in Mexico in order to secure business in the country.

Legal Obligations

Why are members of the legal profession so often implicated in these bribery schemes?  Part of the problem may be due to a lack of client transparency.  In many countries, lawyers have no obligation to look into the source of their client’s funds, even if their client is a high-risk, politically exposed person.   In the US, for example, lawyers have been excluded under the Patriot Act to conduct anti-money laundering due diligence, unlike banks and other financial institutions.  Other countries that have no direct anti-money laundering measures applicable to lawyers include China, India and Canada.

Even when a lawyer is aware that their client is engaged in illegal behavior, many legal professionals may feel a contradictory obligation to refrain from revealing confidential information that they’ve gained as part of the attorney-client relationship.   This issue was brought center-stage in the early 2000s after the Enron, WorldCom and Tyco scandals, which showed just how much attorneys knew of the illicit behavior going on without doing anything to stop it.  Now, in the wake of Sarbanes Oxley, the American Bar Association’s Model Rules of Professional Conduct state that once a client has used the lawyer’s services in furtherance of a crime, the lawyer must withdraw completely from representation.

Still, many lawyers remain unaware of their responsibilities, especially those having to do with corruption.  As a result, the IBA has made it a goal to continue to inform lawyers of their duties not to perpetuate bribery schemes.  Earlier this year, it published an Anticorruption Guidance meant for bar associations around the world to develop anti-corruption initiatives that are relevant to practitioners in their jurisdictions, and last year, the IBA coordinated with the OECD, the UNODC and 40 law schools selected from various countries to pilot the use of anti-corruption training into the syllabus of law degrees.

Increasing Due Diligence

Another problem in this area is the fact that law firms are so rarely vetted themselves for anti-bribery.  In fact, more than two-thirds of respondents in the 2010 IBA survey said that their law firms had never been subject to anti-corruption or anti-money laundering due diligence conducted by foreign clients; more than 90 per cent stated that less than 25 per cent of clients required them to certify that they had any anti-corruption compliance program at all.  Often, that means that companies operating in foreign jurisdictions are choosing who to hire for legal advice based solely on reputation.  In its 2010 report, the IBA wrote “that clients are unaware of their own due diligence responsibilities and/or that they do not consider lawyers as intermediaries who could engage in corrupt acts and/or be subject to anti-corruption rules and regulations.”  The dilemma brings to mind the Latin phrase quis custodiet ipsos custodes?  –  “who watches the watchmen?“

As companies become increasingly aware of these risks, many are now asking to conduct at least some level of due diligence on their outside lawyers.   And if this was something that at one time would have been frowned upon in the legal profession, many foreign lawyers, like other third party intermediaries, are seeing due diligence as a way to distinguish themselves from their peers.  Earlier this Summer, TRACE International partnered with the Pan-African Lawyer’s Union (PALU) to offer free TRAC profiles to African lawyers and law firms.  The TRAC certification offers PALU law firms an online platform to rapidly exchange baseline due-diligence information with potential clients.  For those companies operating in the high-speed world of complex international commercial negotiations and international dispute resolution, TRAC is a quick and easy way to gain comfort with an outside law firm.


Lawyers, as guardians of the law, play a vital role in the fight against corruption.  Yet the unfortunate reality is that some abuse their positions to perpetuate bribery schemes.   Companies, aware that there is a growing expectation for them to conduct due diligence on a broader range of third parties, are now beginning to weigh outside counsel as potential risks.  After all, if bribery  doesn’t discriminate based on profession, then nor should a company’s due diligence program.  All of that is a good thing for honest lawyers, companies that want to do right, and, in the end, the innocent victims of corruption.

Severin Wirz, Attorney and Manager, Advisory Services ,TRACE International, Inc. He can be reached via email  at wirz@TRACEinternational.org and phone at 410) 990 0076.

TRACE is a non-profit membership association helping companies to raise their anti-bribery standards.  As part of its commitment to transparency in the legal profession, TRACE is waiving the fee for all attorneys and law firms who would like to subscribe to TRAC.  Simply visit www.tracnumber.com and apply the code: OPENLAW2013.  This code will remain valid for the whole month of August.   

July 29, 2013

What Is Due Diligence?

What is due diligence? When did due diligence begin? What does it really mean to perform due diligence? Further, how do you tie the information that you obtain in the due diligence process into your ongoing compliance program? I thought about those questions in the context of two very different types of information that I recently came across.

The first is Professor Donald Kagan’s 24 lecture series on Ancient Greece. Kagan, a professor at Yale, is considered to be one of the pre-eminent American scholars on Ancient Greece. I downloaded this lecture series on iTunes U, from the selection of Open Yale courses. For a non-Eli, such as myself, to have access to the lectures of Professor Kagan is a treat beyond words.

The Athenian democracy had many interesting features. The entire citizenship of Athens elected its leaders annually. One of the interesting features of the Athenian democracy was that before each election there would an exhaustive background investigation into each candidate, including their financial dealings, legal proceedings, military service and other relevant factors which might provide information on their character and fitness to hold office. After their one year tenure, there would be an audit of the former office holders’ finances to determine if anything was askance or if there was evidence of bribery and corruption. All of that sounds like a fairly robust program to determine the qualifications of a leader beforehand and then a backend determination if there was any indicia of bribery and corruption which could be further investigated if required.

Lest you think that there was no management of politicians during their term, there were 10 votes annually on whether a leader was doing his job. If there was a majority vote against the politician, he would have to go court to defend himself by proving that he was performing his job correctly and going to court in ancient Athens, meant a trial before the entire body of eligible voters. If the politician lost, he was thrown out before the end of his one year term. If he won, he reassumed his elected duties.

So the ancient Athenians had pre-election due diligence, management of the relationship during their annual term and then a post-relationship audit. Not too bad a system, particularly when you consider that it was developed over 2500 years ago.

The second item of interest was an article in the New York Times (NYT), High & Low Finance column of Floyd Norris, entitled “Intersection of Fraud and Traffic Violations”. The article was quite fascinating. It reported on a study by Robert Davidson, who teaches accounting at Georgetown University, along with Aiyesha Dey, of the University of Minnesota, and Abbie Smith, of the University of Chicago. Norris reported that “Their results are reported in a paper, “Executives’ ‘Off-the-Job’ Behavior, Corporate Culture and Financial Reporting Risk,” which is to appear in the Journal of Financial Economics.”

The bottom line is that if your company’s Chief Executive Officer (CEO) “likes to drive too fast, watch out. He may be more likely to commit fraud.” However, (and perhaps counter-intuitively) “If he lives too high on the hog, worry about whether he is paying enough attention to work to catch fraud being committed by his subordinates. And there may be a greater chance that the company is making mistakes in its accounting, though not fraudulently.”

The authors used some interesting investigative techniques for their paper. First they examined “fraud cases that the Securities and Exchange Commission [SEC] filed over the years — covering frauds that began between 1992 and 2004.” Next, the “researchers looked for other companies that were as similar as possible to the companies that were caught. Those companies were of similar size, had similar balance sheets and similar prefraud stock market performance as the fraudulent companies and were in the same industries.” This netted them “109 companies where fraud was detected and 109 similar ones where it was not.” The next step was the one that I found the most interesting, “The academics then hired private investigators to check out the bosses. They looked for past criminal records, including traffic violations, and they searched public records to see which cars, homes and boats the chief executives owned.”

Norris reported that while “The statistics are far from conclusive — 109 is not a large number — but they may take on a little more weight from the decision of the researchers to investigate an additional 164 chief executives. They came from 94 companies that were forced to restate their financial statements but were not accused of fraud by the S.E.C., and from 70 others chosen at random from the universe of companies that did not have fraud or accounting errors.” Norris believes what the report “could indicate is that people who are willing to violate one set of social norms are more likely to be willing to violate far more serious ones.”

I do not think that his last statement would be too controversial. However, the research went further. The authors of the report “also set out to if what they called unfrugal chief executives run companies that are fundamentally different from those run by bosses who spend less on themselves. To determine that required decisions on just what constituted unfrugal behavior. They settled on a definition involving ownership of homes, boats and cars, which is available from public records. Chief executives were deemed to be unfrugal if they owned a car that listed for more than $75,000, a boat that was more than 25 feet long or a house worth more than twice the average cost of a home near the company’s headquarters.”

Once again, the report findings seemed interesting. The researchers found that “Unfrugal chief executives are no more likely to commit fraud than their colleagues, but they are more likely to run companies where others commit fraud, and they are more likely to run companies that are forced to restate their financial statements.” In other words, they were playing with their expensive toys and not watching the shop.

Norris concludes his piece with the following, “I don’t think any of this proves that a traffic ticket should disqualify someone from running a public company. And it appears that most fraud is committed by chief executives who have no previous record of criminal behavior, so that is hardly the only thing a board should monitor. But the evidence may indicate that boards should routinely run background checks on top officers and on those being considered for such positions. If someone does have a bunch of traffic tickets, or worse, that could be an indication that deeper consideration is needed before that person is given control of a public company.”

I think that Norris has correctly articulated one of the key issues for any compliance practitioner in the due diligence process. What is the analysis that you should use? The FCPA Guidance provides a list of red flags which should be very large warning signs for a company in creating a business relationship with a third party. But beyond this well-known list of red flags, which information is relevant in assessing a third party, corporate CEO or other executive or simply a new hire. Does the fact that someone had a business failure and filed bankruptcy or has a low credit score mean they are prone to corruption? Or does that mean they have an entrepreneurial bend that would be an asset in a company? How about if they went through a major health issue and their health care provider and insurance carrier got into such a dispute over payment it affected the person’s credit score? What about multiple marriages, does that demonstrate a lack of stability?

So while Norris’ article does raise perhaps more questions than it has answers, you can take some solace in knowing that the due diligence process you have in your company is not new. The ancient Greeks used in 500 BCE.

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

April 10, 2013

Q: Do You Tell The Central Bank What To Do? A: ‘In Which Country’?

Last weekend in the Financial Times (FT) was a report by Tim Burgis of an interview he held over a lunch meeting with the Angolan Isabel dos Santos, who Forbes magazine recently declared “the continent’s first female billionaire.” Ms. dos Santos is the daughter of José Eduardo dos Santos, who has been Angola’s president for the past 33 years. The interview was a fascinating insight into how doing business in some countries under US or UK anti-corruption and anti-bribery laws can be so challenging.

Burgis quoted an un-named expert who described Angola as a place of “corny capitalism” where those with connections to “the Futungo, as the presidential coterie is known (after Futungo de Belas, the old presidential palace) have made fortunes.” Ms. dos Santos denied that she is involved in politics, claiming that she is only interested in business. Interestingly, Burgis quoted her as stating “I’m not involved in politics and I’ve never had any political role. I’ve never been in office. I’ve never taken any public administrative jobs. So, like I said, I don’t work with the government.”

Some of her business interests “include stakes in two Portuguese banks, BIC and BPI, and a communications group called ZON Multimédia and an indirect holding in Galp, a Portuguese energy group with assets from Mozambique to Venezuela.” While admitting that the “oil industry is politically driven” she insisted that in the business sectors in which she is involved “politics don’t come into it”, she says, even if her own big moment came when she was part of a consortium that won a public tender for Angola’s second mobile telephony licence in the late 1990s.”

Burgis noted that there are believed to be many ways for the well connected to make lots of money in Angola. He wrote, “There are, however, easy ways to make money if you’re connected in Angola, particularly in the resources industries, where top officials and generals have been known to take hidden stakes in ventures led by oil majors and to enjoy titles to diamond-bearing land.” He also went on to note that these systems may be perpetuating the overall poverty in African countries such as Angola when he said that “There are those who would say that corrupt models lie at the heart of the power structures that keep most Africans poor and unable to call their rulers to account.”

He noted that Ms. dos Santos has recently become involved in the energy sector through her partnership with the Portuguese businessman, Américo Amorim and his company Amorim Enereria. Burgis wrote “I ask her to clarify how those energy interests tie in with Sonangol, the Angolan state-owned oil company with assets from Iraq to Brazil that some critics perceive as a Futungo fiefdom. She fends off my questions before fixing me with the look one might give a particularly vexing eight-year-old. “The business is relatively complex because, when you structure a business, you have to look at different aspects from legislation to taxation, to governance, issues like that.”

Near the end of their lunch Burgis asks the following question do you “call up the governor of the central bank and tell him what to do? “In which country?” she quips. We laugh merrily.” She went on to explain how she did have the reputation for extraordinary power. Burgis quoted her as saying, “Well, it’s very difficult, I would imagine, to distinguish father and daughter. And maybe some of it comes as I’m doing my thing and my father being a very strong political African figure for so many years. Whatever he does is almost like some kind of cloud on top,” she says, reaching for the right metaphor and waving a hand over her head, as though her father were some celestial phenomenon. “So maybe some of these ideas come from this cloud-over effect from his position. But, no, I don’t call the central bank and I most certainly don’t give them instructions.”

Even from the head feigns, non-responsive and jocular tone of many of these answers, one can see just how challenging doing business in Angola can be for any company subject to the Foreign Corrupt Practices Act (FCPA) or UK Bribery Act. The first issue that would seem to pop up is just who are you doing business with and are they a Politically Exposed Person (PEP). Burgis specifically states “top officials and generals have been known to take hidden stakes in ventures led by oil majors”. Whether such interests are hidden or not, it is the responsibility of any US or UK company to perform the appropriate level of due diligence to ascertain whether they are doing business with such governmental officials. I have heard more than one Chief Compliance Officer (CCO) say that they had to pull the plug on a business proposition because they could not determine the beneficial owners of an entity with which they were considering doing business.

What about a country such as Angola, where people move freely between government and business. Once again if it is later determined that your company is in a joint venture or other business relationship, and your local partner obtains a government appointment during the pendency of the business relationship, it is up to your company to find out that information. This requires ongoing monitoring through company or software which alerts you when someone moves to becoming a PEP.

This is where it is critical that compliance terms and conditions be put into a contract for any such business relationship. Initially, you should have contract protections in place which require any business partner who obtains a government appointment to notify you. This should also be included with a clause that allows the contract to be terminated if the appropriate anti-corruption/anti-bribery protections cannot be put in place if such an eventuality occurs.

Clearly there are no easy answers to the quandary of doing business in a country such as Angola. With many of the top government officials, energy company higher-ups and extractive mineral elite not only closely related to each other but moving seamlessly between all three groups; a company under the FCPA or Bribery Act must tread very carefully. Or to quote the signature line from Hill Street Blues, “Let’s be careful out there.”

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

January 28, 2013

Boeing and the Conduct of Due Diligence on Sub-Suppliers

The Foreign Corrupt Practices Act (FCPA) act has language which makes illegal a direct or indirect act which might be used to obtain or retain business from prohibited parties. This has caused companies to begin to look at their suppliers as one area which might give them FCPA exposure. I have been considering the role of suppliers in a compliance program as I followed the issue of the smoldering batteries in the Boeing 787 Dreamliner.

As reported in a New York Times (NYT) article by James B. Stewart, entitled Japan’s Role in Making Batteries for Boeing, the construction of the batteries at issue was outsourced by Boeing to a Japanese company called GS Yuasa. Stewart’s article points out the need for close review of suppliers and what can happen if the quality does not meet the standards required for the project. However, I considered the article from the FCPA perspective. Stewart initially noted that “No one has claimed that GS Yuasa was chosen for the 787 for anything but merit.” But then he goes on to say that “Boeing has long been dogged by suspicion that in return for awarding major contracts to Japanese companies, which also receive subsidies from the Japanese government, the countries airlines buy Boeing aircraft almost exclusively.”

The question all of this raised for me is just how much due diligence should a company engage in for its suppliers? The first thing to note is that GS Yuasa is not a direct contractor to Boeing. The Japanese company is a subcontractor to a French company named Thales, which was contracted by Boeing to supply the electrical system. However, Stewart noted that Boeing approved the Thales/GS Yuasa contract and relationship. Does this mean that Boeing performed any kind of due diligence on GS Yuasa? The article does not specify any of these facts. However, Stewart asks the question of whether the outsourcing of this work was a for the benefit of sales of planes to Japan? He quotes Richard L. Aboulafia who said, “And then there’s Japan. All the normal ways of doing business are upended.” When asked if there might be a ‘quid pro quo’ Aboulafia said, “Yes, absolutely. But no one will talk about it, and no one can prove it.” He went on to say that in Japan “there is a unique relationship between the airlines, the suppliers and the government. The government supported the airlines, the government and the industries and they developed together. The government has enormous influence. They all work together.”

Are these questions which should be explored in due diligence? I think this situation brings up the issue of how far down in the supply chain that a company needs to go in performing due diligence. Many contracts with suppliers require that if there is a sub-supplier that sub needs to go through due diligence. However, in the case of GS Yuasa, Boeing had the right to select the supplier and if you have that right you probably need to perform due diligence on the supplier.

The key question that Stewart raises in his article is whether Boeing is using the hiring of GS Yuasa as leverage to gain sales to the Japanese government. GS Yuasa admitted that the battery component of its company is a money loser, even with the Boeing contract. This obviously raises the question of why the company is in such a business. The company also admitted that it had received subsidies to the tune of $3.5 billion from the Japanese Ministry of Economy, Trade and Industry to “begin mass production of lithium-ion batteries…”.

However, does Boeing has strong supplier relationships with other Japanese companies? In addition to the sales to Japan Air, Boeing works closely with Japan’s Defense Ministry and Boeing was quoted in the article as saying that it had “a long history of working together to meet Japan’s defense needs.” In addition to the hiring of GS Yuasa, Boeing said that its Japanese partners had “designed and developed 35 percent of the 787 airframe structure, including the main box wing, which is the first time Boeing has ever entrusted such a critical design component to another company.”

Stewart penultimately notes that “any questions about GS Yuasa may be premature.” In addition to the investigation of GS Yuasa, both the French company Thales and Securaplane, an American subsidiary of the UK engineering company Meggitt which makes the battery chargers, are also being looked at in connection with the fires aboard the Boeing planes. Stewart does believe the “whatever the outcome, experts said that with so many lives at stake, the design and manufacturing of new aircraft should be based solely on legitimate issues of cost and quality, and the selection process for suppliers should be transparent and untainted by other commercial or political concerns.

To end his article, Stewart quotes Aboulafia who states that “The greatest enemy of good aircraft is people who interfere with the freedom to shop for the highest quality.” I think that the same could be said in conjunction with the FCPA and the Supply Chain.  If a company allows inferior quality into its supply chain through the bribery or corruption that the FCPA is designed to stop it could well allow an inferior product to be constructed. While such actions may not have the catastrophic and very public impact that the apparent battery failures on the 787 have sustained the damage can be severe.

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

December 30, 2012

The Lilly FCPA Enforcement Action Part I – Key Lessons Learned on Sportsmanlike Conduct

Patriots PictureAs you see from today’s picture I am enthusiastically wearing a New England Patriots (classic) shirt. You may ask yourself why am I wearing this shirt? The reason is because of a rather rash wager I made with Jay Rosen, Vice President of Merrill Brink, earlier this month on the Patriots/Texans football game. (I also made the same wager with Matt Kelly, Editor of Compliance Week, who says he will use the photo for marketing Compliance Week 2013, good luck with that!) I can’t quite seem to remember the final score but I do recall that it was what we in Texas might call a full ‘butt-whoopin’. Up until that game, the Patriots were 19-1 at home in the month of December over the past ten years, after beating the Texans, they became 20-1. The key lesson I learned from this experience is to evaluate your risk and then manage that risk accordingly.

Earlier this month, the Securities and Exchange Commission (SEC) announced the settlement of the Eli Lilly and Company’s (Lilly) violations of the Foreign Corrupt Practices Act (FCPA). The enforcement action details a number of bribery schemes that Lilly had engaged in for many years in multiple countries. Indeed Lilly used four different styles of bribery schemes in four separate countries; all of which violated the FCPA. In China, corrupt payments were falsely called reimbursement of expenses; in Brazil, money that was characterized as a discount for distributor was used to pay a bribe; in Poland, charitable donations were falsely labeled and used to induce a Polish government official to approve the purchase of Lilly products; and, finally, Lilly’s subsidiary in Russia, paid bribes to Offshore Agents who were domiciled outside Russia and who performed no services for which they were compensated.

I think the most noteworthy information found in this enforcement action is that it provides significant guidance to the compliance practitioner on not only the different types of bribery schemes used, but more importantly, by reading into the types of conduct the DOJ and SEC finds violates the FCPA, it is valuable as a lesson on how to structure tools to manage FCPA risks going forward. In this post I will detail the bribery schemes that Lilly engaged in and in Part II, I will discuss how the Lilly enforcement action should inform your FCPA compliance program.

I.                   China – Use of False Expense Reports to Cover Improper Gifts and Cash Payments

In China, Lilly employees used the classic system of submitting inflated expense reports and using the excess reimbursements to pay bribes. More ominously, not only did the sales representatives engage in this tactic but their supervisors did and also instructed subordinates to do so as well. The list of gifts that were provided to Chinese government officials was as wide ranging as it was creative. There were gifts consisting of specialty foods, wines and a jade bracelet. There were paid trips to bath houses, karaoke bars and spas. There was money paid to purchase “door prizes and publication fees to government employed physicians.” It was even noted that bribes were paid consisting of cigarettes. In the SEC complaint it stated that “Although the dollar amount of each gift was generally small, the improper payments were wide-spread across the [China] subsidiary.”

II.                Brazil – Use of Distributor Discounts to Fund Bribes

In Brazil, Lilly sold drugs to distributors who then resold the products to both public and private entities. It was the classic distributor model where Lilly sold the drugs to the distributors at a discount and then the distributors would resell the products “at a higher price and then took their discount as compensation.” There was a fairly standard discount given to the distributors which generally ranged “between 6.5% and 15%, with the majority of distributors in Brazil receiving a 10% discount.”

However in early 2007, at the request of a Lilly sales manager, the company awarded an unusually high discount of between 17% and 19% to a distributor for the sale of a Lilly drug to the government of one of the states of Brazil. The distributor used approximately 6% of this additional discount to create a fund to pay Brazilian government representatives to purchase the Lilly drugs from him. Further, the Lilly sales manager who requested this unusual discount was aware of the bribery scheme. Moreover, this increase in the discount was approved by the company with no further inquiry as to the reason for the request or to substantiate the basis for such an unusually high discount. If there were any internal controls they were not followed.

III.             Poland – Use of Charitable Donations to Obtain Sales of Drugs

In Poland we see our old friend the Chudow Castle Foundation (Foundation). You may remember this charity as it was the subject of a prior SEC enforcement action involving Schering-Plough Corporation. The thing that got both Lilly and Schering-Plough into trouble was that the Foundation was controlled by the Director of the Silesian Health Fund (Director) and with this position he was able to exercise “considerable influence over the pharmaceutical products local hospitals and other health care providers in the region purchased.”

Just how did this bribery scheme camouflaged as a charitable donation work? Initially it started while Lilly was in negotiations with the Director for the purchase of one of Lilly’s cancer drugs for public hospitals and other health care providers in the region. The Director actually made a request for a donation directly to representatives of Lilly. Thereafter, the Foundation itself made “subsequent requests” for donations.

In addition to this obvious red flag, Lilly did no due diligence on the Foundation and falsely described the nature of the payments not once but three separate times with three separate descriptions. Lilly turned some of the monies over not to the Foundation, but to the Director for use at his “discretion”. Interestingly, the donations were not only made at or near the time of a contract execution, with one donation being made two days after the Director authorized the purchase of the drugs from Lilly.  Internally Lilly even discussed the size of a donation, calling it a “rebate” and said “it will depend on the purchases of medicines.”

IV.              Russia – Use of Offshore Agents Who Performed No Services

As with Brazil, Lilly used a distributor sales model in Russia. However, there was a further twist which got Lilly into FCPA hot water. Lilly would enter into an agreement with a third party other than the distributor who was selected by the government official making decisions on the purchase of Lilly products. The other third parties were usually not domiciled in Russia, nor did they have bank accounts in Russia. In other words, they were Offshore Agents who were paid a flat fee or percentage of the total sales with no discernible work or services performed.

There was little to no due diligence performed on these Offshore Agents. In one instance, detailed in the SEC Complaint, Lilly ran a Dun and Bradstreet report on a third party agent, coupled with an internet search on a third party domiciled in Cyprus. There was no determination of the beneficial ownership of this Offshore Agent nor was there any determination of the business services which this Offshore Agent would provide, subsequently this . This Offshore Agent was paid approximately $3.8MM. An additional  Offshore Agent, again in Cyprus, which Lilly conducted little to no due diligence on, received a $5.2MM commission. Under another such agreement, yet another Cypriot Offshore Agent received a commission rate of 30% of the total sale.

What about the services that these Offshore Agents provided to Lilly? First and foremost, they all had their own special “Marketing Agreement” which was actually a template contract prepared by Lilly. The services allegedly provided by these Offshore Agents included “immediate customs clearance” or “immediate delivery” of the product. There were other equally broad and vague descriptions such as “promotion of the products” and “marketing research”. But not only was there little if no actual evidence that these Offshore Agents provided such services; Lilly, or its regular in-country distributors, actually performed these services.

Unlike their experience in Poland, officials from Lilly simply inquired directly from government officials with whom it was negotiating if it could “donate or otherwise support various initiatives that were affiliated with public or private institutions headed by the government officials or otherwise important to the government officials.” As noted in the SEC Complaint, Lilly had neither the internal controls in place nor performed any vetting to determine whether it “was offering something of value to a government official for the purpose of influencing or inducing him or her to assist Lilly-Vostok in obtaining or retaining business.”

In my next post I will discuss how the compliance practitioner can use the information and facts presented in the Lilly enforcement action as teaching points to evaluate and enhance a company’s compliance program.

Although I rarely agree with Peggy Noone, I always read her Saturday column in the Wall Street Journal (WSJ) and would like to end my blogging year with the closing paragraph, which I quote in full, from her article entitled “About Those 2012 Political Predictions”:

Lesson? For writers it’s always the same. Do your best, call it as you see it, keep the past in mind but keep your eyes open for the new things of the future. And say what you’re saying with as much verve as you can. Life shouldn’t be tepid and dull. It’s interesting—try to reflect the aliveness in your work. If you’re right about something, good. If you’re wrong, try to see what you misjudged and figure out why. And, always, “Wait ’til next year.”

A safe and Happy New Year to all.

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

December 12, 2012

Doing More with Less in Your Compliance Program (Not the 2013 Astros)

It was reported today that the Houston Astros pitchers and catchers report for Spring Training on February 11, 2013, with position players reporting on February 15. I thought about how much I used to look forward to Spring Training in conjunction with the phrase that I think that most people are aware of ‘how to do more with less’. Could it be that my Astros will try and do more with less next year? Alas, I do not believe that will be the situation with the Astros, who have apparently decided to do ‘less with less’ by not spending any of the $80MM they receive from the local television contract on their $30MM payroll. Either new owner Jim Crane needs some serious money to service his mountain of debt or he is just keeping the money and laughing all the way home. One thing neither Jim Crane nor I am laughing about is the smack down the Houston Texas received by the New England Patriots on Monday Night Football this week. Being on the short side of two ‘friendly’ wagers for this game, keep checking out my blog, as you will soon see me gracing a Patriots jersey so stay tuned. And for Matt and Jay, I wear an XL.

The Astros upcoming season came to mind when I was reading a recent Corner Office section in the New York Times (NYT), where reporter Adam Bryant interviewed Sandra L. Kurtzig, chairwoman and Chief Executive Officer (CEO) of Kenandy, in an article entitled “Don’t Chase Everything That Shines”. One of the things that Kurtzig said which struck me was “I am conservative in hiring. I don’t over-hire. The reason is that you can get a lot more work done with fewer people. If you have a lot of people, you have to give them something to do, and you have to give them something to manage, and then you have to manage them. You can get a lot less done. So you want to have a core set of people while you’re really trying to discover your product, your direction, your market. And the more people you have, the more difficult it is to take risks because it affects a lot more people.”

Kurtzig takes this same attitude to making decisions, particularly in the area of business opportunities. She was quoted as saying, “I don’t run after “shiny objects.” That’s a mistake that a lot of people make in running a company, especially in starting one. They tend to get a lot of opportunities from people who want to partner with them. And these are just shiny objects, because there are very few partners that end up being right for your company. So I’m much more selective. If I hear something, I’m very quick to think, ‘Hey, that’s a shiny object; let’s get back to work.’ I think that’s what’s so distracting to a lot of companies — they see a big customer or some other distraction, and they spend too much time on it and they lose their way.” This thought about not running after shiny objects; I think that it may be one of the most overlooked aspects of due diligence on third parties. An evolving best practice regarding third parties must include a step that requires a business unit person to provide a business case as to why your company may need another third party to provide the services, goods or products; whether on the sales side or in the supply chain. This Business Justification should be obtained before you send out your questionnaire, assign a risk ranking or begin due diligence. There needs to be a valid business reason for going through the time and expense of looking at another third party representative and not simply because someone wants another company.

Kurtzig said that one thing she strongly believes in is transparency. She said that she is constantly asking her employees for their opinions. So, for instance, she asks “what they like about their job and what they don’t like about their job. What can we be doing better? In your previous job, how did you do it? What worked better and what worked worse than what we are doing now?” She believes that you must really listen to someone, “two-way conversations are an important ingredient for building a company. Nowadays, I hear that so many younger people who are starting companies are so used to working on the Internet that they tend to send only e-mails and communicate with their screens more than they communicate with people around them. You need to interact with people and not just your computers.”

I often write about the need to listen as a part of your compliance program. Today, Jeffery Spalding, Assistant General Counsel at Halliburton, spoke at the Hanson Wade Pharmaceutical Anti-Corruption Compliance Conference that I am attending in Philadelphia. One of the things he spoke about is the live compliance training that Halliburton puts on around the globe for its employees. In addition to the benefits of receiving live training, employees get to meet Jeff and put a face to a name. He gets to not only meet them but hear some of their concerns in person. This leads to much better chance that they will call him for compliance advice in the future. One of the key points he highlighted is that he listens and that engenders respect from the company’s employees across the globe.

I found the Kurtzig interview to provide some interesting and well placed management pointers which have application to a compliance program and are useful to compliance practitioners. Now if I could just get the Astros to use some of them.

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

November 9, 2012

The Red Scare: Knowledge and the Importance of Due Diligence

 Ed. Note-we continue our series of guest posts from our colleague Mary Shaddock Jones, who today looks at the importance of due diligence.

At midnight on November 9, 1989, East Germany’s rulers gave permission for the Berlin Wall, separating East and West Berlin, to be opened up.  Ecstatic crowds immediately began to clamber on top of the Wall and hack large chunks out of the 28-mile barrier.  I remember viewing the scene on T.V.  It was a momentous moment in world history.  For those of you who may not know, while East Germany never officially adopted a “red flag” for its country, on most official buildings, the national flag (black-red-gold with hammer and circle) was flown with a solid red flag flown next to it!  Twenty-two years later the “fall of the Red Flag of East Berlin”, seems like distant memory.  However, for businesses doing business internationally the “red flag” has once again come to represent a warning or a threat in terms of liability under the FCPA

The Lay Person’s guide to the FCPA published by the Department of Justice warns U.S. firms about their choice of overseas partners and agents. A bad choice is someone who is likely to make corrupt payments. That likelihood, the DOJ says, is usually indicated by warning signs called “red flags.” If there are red flags to start with, and if the intermediary does bribe a foreign official to help the business, the company will have trouble arguing it shouldn’t be responsible for an FCPA violation based on an indirect corrupt payment.

Red flags, as the name suggests are easy to spot, and include such things as: (1) unusual payment patterns or financial arrangements;  (2) a history of corruption in the country;  (3) a refusal by the foreign joint venture partner or representative to certify that it will not take any action that would cause the U.S. firm to be in violation of the FCPA; (4) unusually high commissions; (5) Lack of transparency in expenses and accounting records; (6) An apparent lack of qualifications or resources on the part of the joint venture partner or  representative to perform the services offered; and, (7) a recommendation from the local government of the intermediary to hire this particular third party.

Although red flags are often relatively easy to discover, the failure to look may result in a company being subject to severe penalties.  As a result,  prior to dealing with any third party, companies should conduct Due Diligence in an  attempt to discover whether the third party is involved in any prohibited corrupt practices or has some connection to a foreign government official that you may not be aware of.  Due diligence is thus an essential tool, as it allows one to acquire knowledge of any existing or potential “red flags”, thus enabling entities to make informed decisions on whether or not to interact with or transact business with certain persons and entities.

The practical pointer for today’s blog is this- The undeniable truth is that Companies must know who they are doing business with and, as importantly, why they are choosing to do business with this particular entity.  This requires the accumulation of information! In order to collect adequate information concerning prospective third-party Agents or Business Partners, many companies are now using a consistent set of tools, for example: (1) questionnaires requiring the person within the company who is recommending the retention of a third party to provide basic information such as the reasons for engagement, the specific services required, how prospective third-party individuals or companies were selected for possible service, relevant experience and capabilities of the prospective third party, whether the prospective third-party would need to interact with government officials, how much and in what manner the third party should be compensated, etc.; (2) a questionnaire submitted to the prospective third party requesting significant information regarding the ownership, physical location, management, experience, relationship to foreign government officials, references of the third party and an assurance by the third party that it understands and is willing to comply with anti-corruption laws and regulations; (3) some method of vetting the reputation and background of the prospective third-party representative or business partner. Ultimately,  the level of due diligence required will generally be commensurate with the level of perceived risk.

When conducting due diligence of high-risk third parties, one should typically employ the services of  third party professionals.  These professionals can help insure that the high risk third party does not pose potential FCPA liability through the use of various means such as: checks of corporate filings and business records, legal proceedings, Internet searches, and adverse media checks.  Furthermore,  many emerging markets and developing countries pose such a great risk of FCPA liability, that additional due diligence procedures including “in-country” (a/k/a “boots on the ground”) searches may be required such as: conducting searches of localized public records, phone interviews, site visits, and reference checks.

Consider the following policy language:

Under the U.S. FCPA,  the Company and its Personnel could be liable for indirect offers, promises of payments, or payments to any Government Official (or to private entity if the UK Bribery Act is involved) if such offers, promises, or payments are made through an Agent or Partner with the knowledge that a Government Official will be the ultimate recipient. As a result, it is important that the Company, through the Company Compliance Officer, consider the necessity of conducting anti-corruption due diligence on a prospective Agent or Partner. If after performing a risk assessment the Company concludes that a due diligence investigation should be conducted, then the extent of the investigation must be determined.  The degree of due diligence the Company will perform depends upon a lot of factors, including the dollar value of the arrangement, the expected contact with government officials, and the country at risk.  In making the determination, the Company will consider whether the transaction raises “red flags”.

Examples of common “red flags” with third parties are as follows:

  • The prospective acquisition target, Agent, or Partner insists that its identity remain confidential or refuses to divulge the identity of its owners, directors, or officers.
  • Family, business or other ‘special’ ties with government or political officials.
  • Reputation for violation of local law or company policy, such as prohibitions on commissions, or currency or tax law violations. Also negative press, rumors, allegations, investigations or sanctions.
  • The transaction or the prospective acquisition target, Agent, or Partner is or operates in a country where there is widespread corruption or a history of bribes and kickbacks
  • Requests from government officials or agencies to engage or hire specific third parties.
  • Inadequate credentials for the nature of the engagement or lack of an office or an established place of business.
  • Missing or inadequate documentation to support services and invoices. Unsupported charges or expenses, requests for payment of non-contracted amounts.
  • Convoluted or complex payment requests, such as payment to a third party or to accounts in other countries, requests for payments in cash or requests for upfront payment for expenses or other fees.
  • Requests for political, charitable contributions or other favors as a way of influencing official action.
  • Third party has a reputation for getting ‘things done’ regardless of circumstances or suggests that for a certain amount of money, he can fix the problem or “make it go away”.

All due diligence investigations conducted by the Company will include an analysis of potential “red flag” issues.  Investigations of potential “red flag” issues should be carefully documented and relevant documents, such as due diligence, questionnaires, reports, and compliance certificates, should be maintained by the Company Compliance Officer or his or her designee.

On Monday, we will examine contractual language to consider when contracting with approved Agents and Partners.  Stay tuned.

 Mary Shaddock Jones has practiced law for 25 years in Texas and Louisiana primarily in the international marine and oil service industries.  She was of the first individuals in the United States to earn TRACE Anti-bribery Specialist Accreditation (TASA).  She can be reached at msjones@msjllc.com or 337-513-0335. Her associate, Miller M. Flynt, assisted in the preparation of this series.  He can be reached at mmflynt@msjllc.com.

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.


November 7, 2012

DEEP LEVEL DUE DILIGENCE: What you need to know

Ed. Note-today we are pleased to have a guest post from our colleague Candice Tal.

Would you do business with an entity that has been in business less than 2 years, has no internet presence and uses a military-style compound that for it’s headquarters where no employees arrive to work each day?  This may well be the next reseller or distributor your company works with in Africa, or some parts of Russia or China. How about the entrepreneurial young executive that is starting a new business which has no physical office yet—is that a risk factor?  Is he still working for his old employer with whom you have a contractual relationship?  Is there any possibility, or even perception, of kickbacks there?  The old adage: “what you don’t know can’t hurt you” is certainly a reckless approach given today’s global anti-corruption initiatives.

Minimizing corporate liability exposure and effective regulatory compliance are key to your business’ global success.  Business expansion through global growth, investments, M&A transactions, joint ventures, private equity deals, and other financial transactions are all higher risk endeavors, especially in emerging markets where bribes are commonplace, business relationships are often opaque and information may be extremely hard to pin down.

So what do you need to know about your prospective business partners & how do you find out these kinds of details when you are sitting in an office 5,000 miles away?

Progressive levels of due diligence form a great approach to cost-effectively and rapidly demonstrating compliance with international regulations designed to detect and prevent bribery of foreign officials.  With FCPA fines and penalties averaging $18million, multi-level due diligence is a “no-brainer”.  In fact most large corporations today (nearly 80%) perform fast, basic due diligence reviews of suppliers, resellers, distributors and third party agents for AML, KYC, FCPA, & UKBA compliance.

Although important as a first step in preventing bribery, basic due diligence is only a limited tool in detecting and preventing a host of other corrupt and criminal activities.  Deeper levels of due diligence are essential steps in yielding valuable information to make critical business and financial decisions, and at the same time accomplish regulatory compliance.

First level due diligence typically consists of checking individual names and company names through several hundred Global Watch lists comprised of anti-money laundering, anti-bribery, sanctions lists & other financial corruption & criminal databases.  These global lists create a useful first-level screening tool to detect potential red flags for corrupt activities.  It is also a very inexpensive first step in compliance from an investigative viewpoint.  This basic level is extremely important for companies to complement their compliance policies and procedures; demonstrating a broad intent to actively comply with international regulatory requirements.

What are next levels of due diligence?  Supplementing these Global Watch lists with a deeper screening of international media (typically the major newspapers & periodicals from all countries) plus detailed internet searches, will often reveal other forms of corruption-related information and may expose  undisclosed or hidden information about the company, it’s key executives and associated parties.

This combined information creates a more effective screening for corruption compliance purposes.  Red/ yellow/green flag alerts based on these results can then be used to prioritize in-depth investigations. Summary reports should show the information sources reviewed and recommendations for further actions if indicated.  Green flags suggest no further actions based on findings; however the information sources  searched are limited and should not be considered the same as deep-level due diligence.  Red flags indicate the possibility is high that corruption, bribery, money laundering and or undue political influence may be likely, or is actively occurring.  Designing a multi-layered investigative approach from this point is essential in order to implement an effective business risk mitigation and compliance strategy.

These first two levels of due diligence alone are not sufficient if you have a substantial operation at stake, or a multi-million dollar investment, developing a new product, building a larger facility, developing a new market sector or creating a new supply chain for your existing products or services.  After all, why take risks when you don’t have to.

Next level due diligence should also include an in-depth background check of key executives or principal players.  These are not routine employment-type background checks which are simply designed to confirm existing information; but rather executive due diligence checks designed to investigate hidden, secret or undisclosed information about that individual.

Reputational information, involvement in other businesses, direct or indirect involvement in other law suits, history of litigious and other lifestyle behaviors which can adversely affect your business, and public perceptions of impropriety, should they be disclosed publically.

One litmus test would be: How would it look to the public and your shareholders if an executive immerses your company in questionable business practices or regulatory violations?

About 20% of executives do not check out well.  As the saying goes: “people are people”, and executives reflect most of the same issues seen in other employee groups.  Most frequently the adverse issues for executives involve undisclosed business dealings that may compromise your company’s new venture, SEC violations, criminal history, no degree(s) earned, loss of professional licensure, mis-statement of personal success/wealth, fraudulent activity and multiple bankruptcies.  In many parts of the world bribery and corruption are considered a normal part of business dealings.

Deep-level due diligence investigations are designed to supply you with comprehensive analysis of all available public records data supplemented with detailed field intelligence to identify known and more importantly unknown conditions.  Seasoned investigators who know the local language and are familiar with local politics bring an extra layer of depth assessment to an in country investigation.

Direction of the work and analyzing the resulting data is often critical to a successful outcome; and key to understanding the results both from a technical perspective and understanding what the results mean in plain English.  Investigative reports should include actionable recommendations based on clearly defined assumptions or preferably well-developed factual data points.

What are the benefits of Deep Level Due Diligence?  In addition to regulatory compliance and protecting your Board Of Directors, if a deal or business relationship is too risky the company has an informed option to re-negotiate or fundamentally change the terms of the deal, initiate damage control if needed, or even pull out of the deal entirely.

Comprehensive investigative reports will provide effective, meaningful results & actionable reports which are directly tied to corporate objectives.

Deep level due diligence should have a targeted approach articulated in a scope of work; these are not random investigations.  The more that is known about your corporate objectives from the start of the investigation, the more likely the investigators are to provide useful information.  All of this can be accomplished through NDA’s or other contract products.

Older style due diligence investigations used to include all available information, including vehicle descriptions, license plates & telephone numbers of all parties associated with the identified executives & businesses.  These old-school investigations were based on traditional law enforcement fact-gathering and evidence based reporting. However unless you plan to conduct an undercover investigation or sting operation, these data points are rarely of significance for due diligence purposes.

What is of concern in deep level due diligence:

  • Physical description / confirmation of the premises
  • Photographic evidence of facility
  • Evidence of employees showing up to work (not a “shop-front” façade)
  • Business operational & trade reputation
  • Other significant business intelligence
  • Undisclosed business information
  • Transaction evaluation
  • Competitive intelligence
  • Well-developed internet presence
  • Regional business scalability Issues
  • Issues preventing scalability (politics, lack of infrastructure to deliver goods, etc)
  • History of business criminal & civil lawsuits
  • Executive background check due diligence
  • Undisclosed personal information of key managers
  • Involvement in other business entities
  • Identity of key individuals
  • Financial assets
  • Bankruptcy history
  • Sources of wealth
  • Tax evasion
  • Confirming prior business sales (successes/failures)
  • Misrepresentations in company/exec background
  • Significant managerial issues
  • Criminal history
  • Civil litigation history
  • Records of other disputes
  • Environmental liabilities
  • SEC violations
  • Sanctions
  • Sales history
  • Client /supplier relationships
  • Procurement fraud
  • Political influence issues & public official relationships
  • Public relations issues
  • Executive & BOD lifestyle issues
  • Ties to organized crime
  • Known family connections to various groups (org crime, politicians, activist groups)

These are some of the issues that may impact the progression of a deal, result in adverse PR, or yield ethics violations or regulatory non-compliance issues.  In-country due diligence, using local investigators can reveal far more than public records information obtained in the more basic Tier 1 & 2 type investigations.  Careful analysis of the information obtained is key to successful investigative due diligence.

Controlling identified risk factors will often yield greater mid-range and long-term profitability with a relatively small capital outlay.  Due diligence investigations often form a key portion of large corporations’ emerging market & high growth markets success strategy in addition to meeting regulatory compliance objectives.

Deep level due diligence reports should provide corporate clients the assurance needed to comply with global anti-corruption regulations FCPA/UKBA and to engage in new markets with clearly identified and manageable risks.

For more information, contact: Candice Tal, CEO, Infortal Worldwide.

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.

October 21, 2012

Brother Can You Swop a Car? FCPA and Bribery Act Implications in the Barter Economy

While the economy has improved from the depths of the Bush Recession of 2008, things are not back where most businesses and governments would like them to be. One of the more interesting responses to the continuing economic doldrums that I have read about is the age old art of bartering. According to the International Reciprocal Trade Association (IRTA), the ongoing economic slump has encouraged companies to offset shrinking orders and ongoing skimpy credit from financial institutions to put excess products to use by bartering them. A recent article in the Financial Times (FT) by reporter Alicia Clegg, entitled “The art of good bartering”, further piqued my interest.

In her article, Clegg quoted Brian Petro, who has a blog entitled “Barterfanatic.com”, who said that bartering allows him continue operating his business through the exchange of goods. Additionally bartering is a way to overcome liquidity problems or by-pass currency restrictions. The IRTA says that bartering has increased substantially over the past four years or so in some of the following countries: the United States, Britain, the Netherlands, France, Italy, Spain, Portugal and “parts of Asia”.

The bartering system, as envisioned by the IRTA and others, has become quite a sophisticated system. Typically a smaller company will “barter their unsold goods and services through a barter exchange, selling to another exchange member in return for trade credits which can be used to buy something from another exchange member.” Larger businesses typically use a different model where they will barter slow moving stock with a trade barter company, who pays the company back in trade credits which the original entity will then use to purchase goods and services. Clegg reported that the barter exchange “typically charges buyer and seller a cash transaction fee of 5-6 percent.”

While the IRTA does have a Code of Ethics and Conduct for its members, it does not speak to anti-corruption or anti-bribery. While most people think that the biggest issue around bartering is tax,  because both buyers and sellers need to assign market values to what they buy and sell in the process, there is also a Foreign Corrupt Practices Act (FCPA) and UK Bribery Act compliance issue involved, which revolves around these exchanges or other intermediaries who facilitate barter deals by providing the credits for goods or services received.

What might the relationship of these intermediaries be under the FCPA or Bribery Act? Let’s take the Bribery Act since that law clearly bans all bribery and corruption between private entities not just with foreign government officials as set forth in the FCPA. Under the Bribery Act, a company can be liable  if someone who performs services on their behalf, like an employee or agent, pays a bribe specifically to get business, keep business, or gain a business advantage for the entity. It is not limited to agents, distributors, sales representatives and the like. The term in the Ministry of Justice’s Six Principles of Adequate Procedures is “associated persons” and an intermediary, such as a barter exchange or other similar entity, may well qualify as an associated person.

What if a barter exchange is based in a well-known money-laundering location? Think that might move up its risk profile? While the IRTA has on its website, that it is in “strategic partnership with the IRS Partnership Outreach” as a “collaborative effort to work with a major government group to educate business owners on reciprocal trade”, it does not take too much insight to see that other laws and regulations might be involved.

What are some of the questions you need to be asking from the compliance perspective if your business is going to engage in bartering? First, and foremost, is to know who you are doing business with and how you are doing business with them. If you are bartering through an exchange, you should perform due diligence on them as they may well be your agent under the FCPA and most probably an “associated person” under the Bribery Act. What compliance protocols do they have in place? Do you have any agreement with them that has FCPA or Bribery anti-corruption/anti-bribery terms and conditions? What rights do you have to protect your product after it has been exchanged?

Consider this “creatively structured” deal that Clegg wrote about. The automotive maker Kia struck an exchange with the UK bartering company Miroma, where Kia swopped some of its auto fleet with a publisher “in return for poster, cinema and press slots for Kia.” From the description in the FT article, it certainly sounded like Miroma acted as the agent for Kia in the series of transactions.

Just as my colleague Aaron Murphy wrote in his book “Foreign Corrupt Practices Act – a Practical Resource for Managers and Executives” about the FCPA issues that many retailers might face, the issues which companies engaging in bartering are in plain sight as well. However, just as those in retailing may not have looked closely and are now paying a high price to look, those companies which engage in bartering and who fail to look at the FCPA and Bribery Act as potential sources of liability should do so sooner rather than later.

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

© Thomas R. Fox, 2012

October 11, 2012

Send Lawyers, Guns and Money – Some Steps Law Firms Should Consider

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One of my favorite lawyer songs is the Warren Zevon classic “Lawyers, Guns and Money”. I was reminded of that song when I sat on a panel on Wednesday with Dan Chapman and Mike Volkov, where we discussed recent enforcement actions and due diligence under the Foreign Corrupt Practices Act (FCPA). Dan is the Chief Compliance Officer (CCO) at Parker Drilling here in Houston and one of the points he raised was the company’s need to put their outside counsel through FCPA due diligence similar to other vendors. He said that law firms would yell, scream, kick and whine vociferously that their collective honor was being questioned but Dan made clear that foreign (and sometimes US) outside counsel often deal with foreign governmental officials.

It’s been since the last millennium since I practiced law in a law firm, other than in my current incarnation as a solo practitioner. So to say things have changed for law firms in the 12+ years since I practiced with other lawyers might be saying that ‘water is wet’. I thought about how much things have changed as I was perusing this week’s edition of the Texas Lawyer and saw an article, entitled “Simple Steps to Prevent Fraud at a Firm”, by Jacob Harris, Assistant District Attorney for the Dallas County District Attorney’s Office, Specialized Crimes Division. Harris believes that when lawyers focus on the practicing of law and relegate everyday business responsibilities to non-lawyers, they expose the firm to theft and fraud. He writes that the best way for lawyers to reduce their law firm’s fraud risk “begins with the attorneys in charge getting more involved with their firm’s everyday business affairs.” To this end Harris proposes five “simple, routine tasks that significantly lower a firm’s fraud risk.”

  1. The lawyer in charge should receive and open mail. By personally receiving mail, an attorney can insure that no person in the firm has manipulated any items such as bank/credit card statements, vendor invoices or other types of mail which might involve or include accounts requiring payment. A common method used by fraudsters is “white out fraudulent transactions, making a copy of the statement and then replacing the statement into the envelope.” By reading all mail personally, a lawyer can assure this does not occur.
  2. That lawyer should also review statements and invoices. Embezzlers can often set up personal bank accounts with the same name as the firm accounts. Lawyers need to check for multiple payments on the same accounts, multiple payroll checks to the same person for the same payroll period and for checks to unknown persons and vendors. Invoices and payments should be matched up contracts for services or the purchase of goods.
  3. The attorney in charge should check online financial sources to review statements regularly and make sure that no one has changed passwords. With the increasing paperless world, banking is transacted online. More than one person at a law firm should know online and software passwords. This enables more and better monitoring.
  4. Owners and partners should understand who works for the firm and what everyone’s duties are at the firm. Just as with non-law firm businesses, there should be a segregation of duties as it reduces the chance of fraud and is a basic internal control technique of fraud prevention. Further knowing who works for a firm can prevent the “ghost-employee scam.”
  5. Lawyers should not assume others will detect fraud for them. Harris points out that “banks and certified public accountants normally do not catch thieves.” Simply because a check is made out to one party, does not mean that the same check cannot be deposited into a fraudster’s account. Further a fraudster may be operating with someone at a bank so lawyers need to verify that money sent to be deposited has actually been posted to the law firm’s back account.

Harris ends by noting that “by understanding how a [law] firm is vulnerable to fraud and making the proper adjustments to business practices, a firm can minimize its everyday fraud risk.” I found it useful to review some of these basic controls that my colleague Henry Mixon continually preaches on, many law firms neglect these basic controls. Dan Chapman’s comments on law firms as third party service providers who represent companies in front of government officials should also let lawyers know that companies may well begin anti-bribery due diligence on them. US law firms with international clients should also remember that if they represent a UK company in the US, it is the US law firm which is the international entity and that a UK company may be required under the UK Bribery Act to perform due diligence and require Bribery Act compliant anti-bribery terms and conditions included in the engagement letter.

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

© Thomas R. Fox, 2012

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