FCPA Compliance and Ethics Blog

February 20, 2014

C’Mon Man Or the End of the World?

Prepare End of the WorldIt’s the end of the world as we know it,

It’s the end of the world as we know it

It’s the end of the world as we know it, and I feel fine

 The above lyrics came from REM and they reflect how I generally feel about law firm and lawyer pronouncements about the Foreign Corrupt Practices Act (FCPA) enforcement because [SPOILER ALERT] I am a lawyer, I do practice law and I do work for a law firm, the venerable TomFoxLaw. The FCPA Professor regularly chides FCPA Inc. for their scaremongering tactics, usually monikered as ‘Client Alerts’. Mike Volkov is even more derisive when he calls them the FCPA Paparazzi and cites examples from his days in Big Law, where law firm marketing campaigns are centered around doomsday scenarios about soon-to-occur FCPA; UK Bribery Act; or [fill in the anti-corruption law here] prosecutions and enforcement actions. I usually take such law firm scaremonger and blathering’s to be about worth as much as the paper they are printed on. Indeed I chide the FCPA Professor and Monsieur Volkov for their protestations. In other words, I feel fine.

I am a proud card-carry member of FCPA Inc. because not only can I spell FCPA (and UKBA for that matter), I also make FCPA related pronouncements from time-to-time and practice law in the FCPA space. I think we generally do a pretty good job of getting information out there. But last week one missive occurred that not only met the above impugning adjectives but created a veritable tsunami of mis-information as it made its way from China to Europe and to the US that even I thought was beyond the pale. How absurd was it? So absurd that not only did the FCPA Professor and I agree about it, but we decided to post blogs about it today.

On February 5 a law firm client alert stated, “While the number of enforcement actions may decrease or hold steady, we can expect some “blockbuster” settlements in 2014 of matters that have long been under investigation.” Blockbuster…really? Do you think this law firm was implying that the Siemens record FCPA fine of $800MM, plus its equivalent $800MM fine in Germany, that’s a total of $1.6 bn for those of you keeping score at home, is seriously in danger of falling by the wayside in 2014? How about Halliburton’s comparatively paltry $579MM penalty? To be slapped aside like a green-skinned witch yelling, “I’m melting!” BAE coming in at No. 3 with a measly $400MM must be quaking it is British Wellington boots about now.

As inane as this comment was, the thing that attracted my attention was the tidal force wave by which this quote rode its way all the way to the US. By February 10th, this quote had morphed into the following, written in the South China Morning Post, “The United States is expected to impose “blockbuster” fines on companies bribing foreign officials this year, with China a likely target of US investigations, lawyers say. A report by US law firm WilmerHale predicts “blockbuster” settlements under the Foreign Corrupt Practices Act (FCPA). “US enforcement authorities have stated there are a number of very large settlements in the pipeline,” said Jay Holtmeier, a partner at WilmerHale. “Given the attention paid to China in recent years, it is a safe bet some of those large settlements will involve conduct in China.”” Two days later the full storm reached the shores of the US when this article was referenced in the Wall Street Journal’s (WSJ’s) Corruption Currents.

So now not only do we have ‘blockbuster’ FCPA settlements coming; we will have them coming out of China. Various marketing departments will use these statements as ‘authoritative’, yet another reason to purchase their company’s products or services.

There are plenty of great FCPA resources out there, which inform the compliance practitioner, or indeed the non-compliance specialist, about the costs of a FCPA enforcement action. But more importantly there is more than a wealth of free, at no cost, information about how to craft a compliance program with any anti-corruption law, which currently exists. There is the same amount of information about how to ‘do compliance’, once again free and available at no charge. Is it marketing? My answer is either yes or better yet; who cares? Good solid information is good solid information no matter what the motives behind putting it out there are.

But here is the problem with making such statements which newspapers then follow them up by brandishing them as even more dire predictions. Someone might actually believe it. Next Congress will want to investigate these ‘blockbuster’ settlements or, perhaps, why after it was reported that they were coming, the Department of Justice (DOJ) did not have any ‘blockbuster’ settlements in 2014?

I thought about writing this blog post around the tale of the Boy Who Cried Wolf but I realized there is always another law firm or lawyer out there will to say the end of the world is coming “this year”. But perhaps the better analogy is the ESPN segment entitled “C’Mon Man!” during which each color commentator will describe a play or series of plays that made them scratch their heads and say “C’Mon Man!” So while I generally feel fine about the information disseminated by and from FCPA Inc., my suggestion is that everyone just take a deep breath and consider such information for what it is worth.

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

© Thomas R. Fox, 2014

February 19, 2014

Welcome to the Hotel California: FCPA Enforcement

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

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

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

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

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

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

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

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

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

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

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

© Thomas R. Fox, 2014

February 12, 2014

Shirley Temple and Excellence in FCPA Training Video

Lead and LearnToday we honor one of the most interesting personalities of the 20th century, Shirley Temple, who died yesterday. She was probably the greatest child actress of all-time, being the lead grossing star for five straight years during the 1930s. But the thing I found most remarkable about this woman was her third career, after marriage and motherhood, in the US Diplomatic Corp. President Richard Nixon appointed her as a Representative UN. Nixon later appointed her as Ambassador to Ghana. President Ford named her to be the first female Chief of Protocol of the US. Finally, the first President Bush appointed her as Ambassador to Czechoslovakia. But whatever role Shirley Temple chose she did it with excellence.

Just as Ms. Temple had a commitment to excellence, so does my colleague, Mike Koehler, the FCPA Professor. Recently the FCPA Professor announced that he had partnered with Emtrain to create a best in class Foreign Corrupt Practices Act (FCPA) compliance training video. I had the opportunity to view the video and I can agree that it is certainly an excellent training video, which you should consider for use in your company’s ongoing compliance training and communication. As you would expect from the FCPA Professor, each slide is well documented and provides the basis for the training. However, the thing that I thought made the training stand out was the variety of techniques used throughout the video.

There are separate chapters on the following subjects: an Introduction to the FCPA, the social and business case for the FCPA, the definition of bribery under the Act, a definition of what constitutes “Anything of Value” under the Act, who is a Foreign Official under the Act and who else might be covered by the FCPA, what does it mean to “Obtain or Retain Business”, the high nature of Third Parties under the FCPA and how to manage that risk, what might be available as an exception to the Act and defenses under the FCPA, Books and Internal Controls, a discussion of the UK Bribery Act, Red Flags that you should be aware, creation of a FCPA compliance policy and self-reporting of violations to the DOJ/SEC and a summary section. After completion of the course you should be able to describe how corruption impedes global economic development and how it undermines the ability to compete fairly in business; outline three fundamental elements of a bribery offense that can lead to prosecution of companies as well as individuals; identify various red flags that can be indicators of bribery and outline how, and to whom, you should report concerns about possible bribery and corruption.

The video training includes the following:

  • Executive and non-executive versions
  • The ability to configure the course with company-specific policies, videos, graphics, text, and employee hotline or reporting information
  • 20+ video clips to illustrate real-world business scenarios that present risk
  • An Enforcement Risk Spectrum that helps learners “issue spot” bribery and corruption risk
  • The ability to use video scenes outside the e-Learning experience in live training, discussion groups, or company emails and reminders
  • A compliance Learning Management System (LMS), enabling an administrator to launch and track training efforts and generate audit-ready training reports showing time spent on each video, screen, policy, etc.
  • There will be productions available in Mandarin Chinese, Russian, Arabic, Portuguese, French, and other languages upon request.

But the video is more than simply a recitation of what is required under the FCPA. The thing that makes it stand out for me is the different types of training it employs to hold the listener’s attention. First is the length of 60 minutes for an executive/high risk trainee and a shorter length for those who do not fall into those categories. Next, for those who may desire to devolve deeply into the subject matter, are short concise descriptions of the legal and compliance concept involved in the discussions. For instance, in the section on the definition of bribery there is a discussion of the Organization for Economic Cooperation and Development (OECD) established standards to combat bribery and the United Nations Convention Against Corruption (UNCAC), which established guidelines for codes of conduct for public officials, transparent and objective procurement systems, and increased accounting and auditing standards for the private sector. Added to this is a short piece on the UK Bribery Act. All of these non-US laws are then tied into the FCPA so the listener will have a broad understanding of what they may be facing in any multi-national business from the anti-corruption compliance perspective. Significantly, and most soberingly, the video points out that according to the World Bank Institute, more than $1 trillion is paid globally in bribes each year. Some of the worst affected countries are the poorest ones in the world.

What I think makes the video unique and frankly enjoyable to watch, is that it  has several interactive features. The first is that it opens with an interactive pre-assessment that is designed to determine how much you already know about global bribery and corruption. From there, each section has a short interactive questionnaire at the conclusion of the video on the section’s topic. These features allow the participants to examine their own expertise and then self-assess the lessons that they have learned throughout the presentation. By making each session interactive, you not only hold the attention of the listener but also garner their participation in the training. Any time you can get participation in training, you are a long way towards having an effective training program.

There are a couple of other cool features. It allows your company to customize the training by attaching some of your key anti-corruption policies and procedures for review during the Policies section of the training. Additionally, and following my mantra of Document, Document and Document, after completion of the training, your participation is electronically noted for record keeping, along with a copy of the training materials. So when the regulators want to see not only who was trained but also the materials they were trained on, you have easily assessable records to document the event.

So when the FPCA Professor says he has created a best in class FCPA training program, I heartily agree. You can check out a demo version of the training video by clicking here.

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As many of you know, Jon Rydberg and I wrote and published a book at the end of last year, entitled “Global Anti-Corruption & Anti-Bribery Leadership Practical FCPA and U.K. Bribery Act Compliance Concepts for the Corporate Board Member, C-Suite Executive and General Counsel”. On Thursday, February 13, we will discuss our book in a webinar hosted by Hiperos LLC. Hiperos President, Greg Dickinson, will be interviewing Jon and myself about the book, its genesis and our thoughts on ‘doing compliance’ as opposed to simply having a compliance program. The event is free and you can find details and register by clicking 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, 2014

February 5, 2014

Compliance Defense– The Movie

OscarsIn honor of The Movie Channel’s annual 28 days of Oscar, the upcoming Academy Awards and inspired by Jay Rosen’s prior career and the FCPA Professors hypothetical discussion between a Chief Compliance Officer (CCO) and his Chief Executive Officer (CEO) last week, in a post entitled “It’s More Like Bronze Dust”; I thought I might write about Compliance Defense- The Movie. So starting with the Professor’s fictional Scenario B

Compliance Officer: Boss, I need more money and resources to devote to FCPA compliance.

Executive: Why?

Compliance Officer: Well, boss, an effective FCPA compliance program can reduce our legal exposure as a matter of law.

Executive: What do you mean?

Compliance Officer: Well, the money we spend on investing in FCPA best practices will be relevant as a matter of law.  In other words, if we make good faith efforts to comply with the FCPA when doing business in the international marketplace, we will not face any legal exposure when a non-executive employee or agent acts contrary to our compliance policies and/or circumvents our policies.

SIX MONTHS LATER…

 FADE IN

INTERIOR-OFFICE OF EXECUTIVE

In the heart of the energy capital of the world, in a darkened office, CEO reads a letter from the US Department of Justice (DOJ), which informs him that his company is under investigation for payments to third parties that may have violated the Foreign Corrupt Practices Act (FCPA).

CEO

(screaming) Ms. Pepper – what is this letter about?

MS. PEPPER – the long time admin for the CEO comes hurriedly comes into CEO’s massive office.

MS. PEPPER

It is a letter from the DOJ saying we’re under investigation for allegedly paying some bribes.

CEO

Well get me that Compliance Officer, what’s his name?

MS. PEPPER

Don’t you remember you let him go 3 months ago, after he installed that compliance program software you saw advertised at Office Depot?

CEO

Well then take a letter to the DOJ and tell them that we have a compliance program and that should be an absolute defense to any claims against us. They obviously don’t know how seriously we take compliance around here.

MS. PEPPER

I am not sure that is enough sir, I think that the program has to be effective.

CEO

What do you mean effective? After the CCO installed the compliance program on our computer server, everyone knew they had to follow it. The people who work here follow the law and I won the “Mr. Ethical Award” from the Chamber of Commerce last year. Everyone around here knows to follow the law.

MS. PEPPER

Sir, I think that the CCO said that it is more than having a compliance program in place; you actually have to do compliance. He might even have said you need to put some resources into it to show you were serious.

CEO

I spent $5,000 on that software program, which is pretty serious. Do you mean to say I have to do something else?

MS. PEPPER

Yes sir, I think that he said that not only does the program have to be effective, you have to be able to show it is effective.

CEO

Well that is about the stupidest thing I have ever heard, how are we supposed to compete if we can’t help out our friends so they stay our friends? And besides if any bribes were paid it’s because those greedy foreigners have their hands out. Surely we can’t be responsible for that?

The above dialogue is (hopefully) fictional. Unfortunately it may well be more close to the truth than we like to think. Those who have worked in the corporate world will know any costs which are indirect costs, such as compliance, are viewed as something to be avoided. This means spending money and providing personnel for compliance will be kept to the barest minimum. This is the major problem I see with thinking that a compliance defense is or should be a magic bullet for any corporation to use in a FCPA matter. Every compliance professional I have spoken with on this subject understands that your company will receive a free pass by having a written compliance program, then many companies will install such a paper program. For it is not having a program that is the critical factor but it is the doing of compliance, which makes a program effective.

Equally important is that for a compliance program to be effective, it has to evolve because both the sophistication of compliance and the risks in business evolve. Ten years ago, having a paper program was in the running to make your company an industry leader. Today, having only a paper program is a recipe for disaster. Just as risks evolve, so does the management of those risks. Continuous monitoring was not even considered 10 years ago. It has gone from an enhanced compliance solution, to a best practice, to a standard practice. Five years ago, most lawyers thought that distributors would not be subject to the FCPA because in a distributor sales model, they took title and risk of loss for the products they purchased. But it turns out that bribery and corruption can occur through a distributor sales model, just as it can through a sales agent model.

The clear model for all of this is the dramatic change that companies made in how they viewed safety on the job. Many point to the Exxon Valdez shipwreck as the seminal moment to see the shift in how safety was viewed by corporate America. Certainly after this event, Exxon made safety priority Number 1 in its corporate culture. As a trial lawyer defending corporations, I saw the shift to make safety ingrained into corporate culture in the energy industry, driven in large part by massive jury awards and high insurance premiums paid by corporations to cover those costs. The business solution was not only to put safety programs in place but also to run the business safely. This was drilled down even to those of us in corporate legal departments, not just the guys out on the drilling rigs or in the petrochemical plants.

In the corporate world there existed no magic bullet in the form of safety programs as an absolute defense to a company that violated its own or federal safety laws. Companies invested more money in safety because the costs of not doing so were greater. Under the FCPA, there currently is credit given for companies who have an effective compliance program. It is set out in the US Federal Sentencing Guidelines and discussed at some length in the FCPA Guidance. Such credit is given in the form of declinations to prosecute. While I wish that there was more public information made available on why the DOJ gives declinations, this lack of public information does not diminish the fact that they exist or that companies are clearly given credit for having an effective compliance program in place or simply doing compliance.

I began this post with a (hopefully) fictional dialogue. One thing I am not certain about though is what category it should sit in, comedy; drama or perhaps even tragedy. Enjoy the Oscar season.

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Although I do disagree with the FCPA Professor on the need for a compliance defense under the FCPA, one thing I do agree with him about is his creation of a best in class compliance training video, which he announced Monday. I have had the opportunity to view the full version and it is excellent recap of the FCPA and the obligations under the law. It has an interactive aspect that allows learning and practice with situations that is both instructive and enjoyable. As you would expect from the FCPA Professor, it has the text to drive greater understanding for those who might wish to do so. So if your company needs a first-rate FCPA training module, you should check this one out. You can do so by clicking 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, 2014

February 4, 2014

Who Had the Worse Day – Peyton Manning or Banks and Investment Funds?

Rue the DayThe Seattle Seahawks gave the Denver Broncos an old-fashioned tail-whoopin’ in Super Bowl history on Sunday. I admit that I was pulling for the old guy, Peyton Manning to pull out another one but I did like Seattle, particularly getting +2.5 points. Not that they needed them and I certainly did not see such a beat down coming. Manning’s reaction was about what you might assume from a professional at this stage of his career, measured yet clearly disappointed. Yes he had a very bad day and one that he will probably rue the day for some time down the road.

But there was some other news on Monday that may cause other groups to do more than ‘rue the day’. You know when you are on the front page of the Wall Street Journal (WSJ) in an article about the Foreign Corrupt Practices Act (FCPA) it has the distinct possibility to be unpleasant. The said WSJ, entitled “Probe Widens Into Dealings Between Financial Firms, Libya” by Joe Palazzolo, Michael Rothfield and Justin Baer, reported that the Justice Department has joined an ongoing Securities and Exchange Commission (SEC) probe into “banks, private equity funds and hedge funds that may have violated anti-bribery laws (IE. FCPA) in their dealings with Libya’s government-run investment fund.” Ominously the WSJ noted that the Department of Justice’s (DOJ) participation had not been previously reported. As the DOJ generally investigates potential criminal violations of the FCPA and the SEC generally investigates the civil side of things this could be quite ominous indeed.

The firms named in the WSJ article included the following: Credit Suisse Group AG, J.P. Morgan Chase & Co., Société Générale SA, the private-equity firm Blackstone Group LP and hedge-fund operator Och-Ziff Capital Management Group. This is in addition to the previous announcement that Goldman-Sachs was being investigated. All of the claims relate to “investment deals made around the time of the financial crisis and afterward, these people said. In the years leading up to Libya’s 2011 revolution, Western firms—encouraged by the U.S. government—raced to attract investment money from the North African nation, which was benefiting from oil sales and recently had opened to foreign investment.”

The WSJ reported that the investigation is centering on certain third parties involved in the transactions, “At the center of the probe is a group of middlemen, known as “fixers,” operating in the Middle East, London and elsewhere, people familiar with the matter said. The fixers established connections between investment firms and individuals with ties to leaders in developing markets, including those in the Gadhafi regime.” The government is looking into these third party’s “roles in arranging deals between financial firms and Libyan officials, people familiar with the matter said. The fixers acted as placement agents, similar to those in the U.S. who have come under scrutiny for steering investments to large public retirement funds. In some cases, the sovereign-wealth-fund fixers collected a “finder’s fee”.”  It was reported that “Some of the fixers had connections to at least two of Gadhafi’s sons—primarily his second son, Seif al-Islam Gadhafi, who was most involved with the sovereign-investment fund, according to people familiar with the matter. Seif al-Islam Gadhafi was captured by rebels.” Interestingly, many of the underlying facts now being investigated came to light only after the overthrow of the Gadhafi Regime.

Further north, another group may have an occasion to rue the day. As reported in the FCPA Blog, in a post entitled “More SNC-Lavaline execs face charges in ongoing corruption probe”, two former SNC-Lavalin officials were charged by the Royal Canadian Mounted Police (RCMP) last Friday. The two men charged were Stephane Roy, a former vice-president at SNC-Lavalin, who was charged with fraud, bribing a foreign public official, and contravening a United Nations economic measures act related to Libya. Also charged was former executive vice-president Sami Abdallah Bebawi with fraud, two counts of laundering the proceeds of a crime, four counts of possession of property obtained by crime, and one count of bribing a foreign public official. These charge, added to prior charges bring the number of former SNC-Lavalin executives to four for their conduct regarding allegations of bribery and corruption in Libya. This is in addition to another two company executives who were charged for bribery and corruption regarding a company project in Bangladesh.

And finally are our friendly bankers and their continuing anti-money laundering (AML) woes. Just last week, UBS Chief Executive Officer (CEO), Sergio Ermotti, said at the World Economic Forum in Davos that it was not right to criticize bankers for criminal acts “most of the bad behavior that has landed UBS and others in hot water was caused by small groups of rogue employees and doesn’t reflect broader cultural problems in the industry.” Criticism could not come from interested stakeholders, such as stockholders, or those who had money in his bank. Indeed criticism could not even come from regulators.

Apparently some regulators take their jobs a bit more seriously than Ermotti might like. Reuters reported, in an article entitled “Bankers anxious over anti-money-laundering push to go after individuals”, that at the Securities Industry Financial Markets Association conference, John Davidson, E*Trade Financial’s global head of AML, said that the “new push by regulators and lawmakers to hold individuals, rather than just institutions, accountable for regulatory violations involving money laundering is spooking members of the U.S. financial industry.” He further said that this aggressive trend and a new vigorous AML bill, introduced in Congress by Representative Maxine Waters, entitled “Holding Individuals Accountable and Deterring Money Laundering Act”, were all “a little scary.” He found the trend towards more AML enforcement against individuals “an incredibly disturbing trend.” The reason it is so scary, an un-named top level compliance officer said, is “that compliance officers at the largest Wall Street institutions were feeling especially nervous because the power structures in those institutions sometimes did not give compliance officers enough authority to act.”

But more than compliance officers may rue the day. Jordan’s reported that the Board of Directors at financial institutions are also concerned. In article entitled “Money laundering tops boardroom concerns amid threat of criminal prosecution” it reported “concerns in boardrooms are now at an all-time high” and corporate boardrooms in some of the country’s leading banks are now sitting up and taking notice of money laundering as a concern, after the threat of criminal prosecution became something of a reality. The recently released KPMG Global Anti-Money Laundering Survey noted that 88 per cent of executives have now placed money laundering back at the head of a list of concerns addressed in their boardrooms. Brian Dilley, global head of the AML Practice at KPMG, was quoted as saying “Anti-money laundering has never been higher on senior management’s agenda, with regulatory fines now running into billions, regulatory action becoming genuinely license threatening, and criminal prosecutions of firms and individuals becoming a reality.”

So who do you think had the worse day or even couple of days?

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 29, 2014

The Sussex Vampyre and the ADM FCPA Settlement

Sussex VampyreToday I want to use the story of The Sussex Vampyre as the starting point for an inquiry into the recent Archer-Daniels-Midland Corp (ADM) Foreign Corrupt Practices Act (FCPA) enforcement action. In the story, Holmes receives a letter from Robert Ferguson, who has become convinced that his second wife has been sucking their baby son’s blood and is a vampire. He has a crippled son from his first marriage who is terribly jealous of the new baby in their home. It turns out that this lame son, Jack, has been shooting poisoned darts at his baby brother and his stepmother’s behavior is actually sucking the poison out of the baby’s neck. The baby’s wounds were caused by Jack sending the darts, not by the mother biting her baby. In other words, what might be seen as something very scary is easily explained.

Once again demonstrating that the FCPA Professor and myself look at the same thing and come to different conclusions are reflected by those he states in his article “Why You Should Be Alarmed By the ADM FCPA Enforcement Action”. I see the ADM enforcement action as a continuation of the available case law favoring interpretations of the business nexus requirement to be applied broadly, where it is clear that bribery and corruption have occurred.

When I look at the facts laid out in the ADM settlement documents, I see the following: four separate bribery schemes hidden in the companies books and records clearly designed to influence the decision of a foreign government official. From 2002 to 2010, the company’s Ukrainian subsidiary rolled up VAT receivables of up to $46MM. What I see is a company, which over several years of slow and no response to its application for VAT tax refunds for goods purchased in Ukraine, responded to this problem by engaging in bribery and corruption to help them get the money that they were believed they were owed.

So what were these bribery schemes? There was the Charitable Donation Scheme, which according to the SEC Complaint, “an ADM executive in the tax department sent an e-mail to the head of an international tax organization and stated, “One of our affiliates operates in the Ukraine. In order to recover 100% of their input VAT they have to pay 30% of the amount to local charities.”” Next was the Stevedoring Company Scheme where two ADM subsidiaries made “payments to a stevedoring company in the port of Odessa so that it could pass on nearly all of those payments to Ukrainian officials in order to obtain VAT refunds on behalf of ACTI Ukraine.” Next was the Mischaracterization of Write-offs Scheme where ADM’s German subsidiary reported to the US parent that they had to write off 18% of the tax refund due back to the company. However upon payment of the VAT refund it would be at 100% of the total due. As the German subsidiary had taken a write off of 18% of the total, the corresponding amount of money would be funneled to “third-party vendors so that nearly all of those monies could be provided to Ukrainian government officials.” Finally, and most ingenuously, was the Fake Insurance Premiums Scheme. In this scheme, ADM’s Ukrainian subsidiary, arranged for an insurance company to falsely bill it for crop insurance, which said “Insurance Company never intended to honor, adjusting the premiums to be roughly 20% of the VAT refund.” This inflated amount was then paid to Ukrainian officials.

The FCPA itself says:

(a) Prohibition

It shall be unlawful for any issuer which has a class of securities registered pursuant to section 781 of this title or which is required to file reports under section 780d of this title, or for any officer, director, employee, or agent of such issuer or any stockholder thereof acting on behalf of such issuer, to make use of the mails or any means or instrumentality of interstate commerce corruptly in furtherance of an offer, payment, promise to pay, or authorization of the payment of any money, or offer, gift, promise to give, or authorization of the giving of anything of value to—

(1) any foreign official for purposes of—

(A)

(i) influencing any act or decision of such foreign official in his official capacity,

(ii) inducing such foreign official to do or omit to do any act in violation of the lawful duty of such official, or

(iii) securing any improper advantage; or

(B) inducing such foreign official to use his influence with a foreign government or instrumentality thereof to affect or influence any act or decision of such government or instrumentality,

 in order to assist such issuer in obtaining or retaining business for or with, or directing business to, any person;

In the case of US v. Kay, the Fifth Circuit Court of Appeals exhaustively reviewed the legislative history of the FCPA, from its passage in 1977 through the two amendments in 1988 and 1998. The Kay decision stands for the proposition that the defendant intend the paying of bribes to be a quid pro quo, which would assist (or is meant to assist) the payor in obtaining or retaining business. Further, it specifically stated that the “business nexus is not to be interpreted narrowly.” The facts in Kay were different than those presented in the ADM matter. However, with the admonition that the business nexus requirement is not to be interpreted narrowly, I believe the holding in Kay is such that it is not a stretch to see the conduct engaged in by ADM did assist, or was meant to assist, it in doing business in Ukraine. Indeed, the Kay decision stated, “In addition, the concern of Congress with the immorality, inefficiency, and unethical character of bribery presumably does not vanish simply because the tainted payments are intended to secure a favorable decision less significant than winning a contract bid.” Thus I look at Kay and see the conduct of ADM as falling within the broad outlines of the Kay decision.

How about the facilitation payment exception and that somehow the ADM subsidiaries were making payments exempted out of the FCPA because they were for routine services?

The FCPA itself states:

(b) Exception for routine governmental action

Subsections (a) and (g) of this section shall not apply to any facilitating or expediting payment to a foreign official, political party, or party official the purpose of which is to expedite or to secure the performance of a routine governmental action by a foreign official, political party, or party official.

Further, the term “routine governmental action” is defined as one of the following:

  1.  Obtaining Permits;
  2. Processing visas and work orders;
  3. Providing police protection, mail pick-up and delivery;
  4. Providing phone services and utilities;
  5. Actions of a similar nature.

There is nothing in the statute about processing multi-million dollar tax refunds as a routine governmental action. Once again the Kay decision spoke to the issue of facilitation payments, similar to those made in the context of the ADM settlement, when it said “This observation is not diminished by Congress’s understanding and accepting that relatively small facilitating payments were, at the time, among the accepted costs of doing business in many foreign countries.” One key there is that facilitating payments be “relatively small”. Whatever 18% of $46MM might be, it certainly is not “relatively small”.

All of this leads me to see the ADM settlement as a continuation of the very limited case law interpretation that exists around the FCPA. So just as Holmes looked at the facts in The Sussex Vampyre and did not see something which could not be explained or need be feared; I look at the ADM enforcement action and see a company which engaged in bribery and corruption, knew it was doing so and actively tried to hide the corrupt payments in its books and records.

And once again, I would cite that the easiest response to all of this might be the advice given by Department of Justice (DOJ) representative Greg Anders, in his testimony to the House Judiciary Committee regarding amending the FCPA, that being that companies should not engage in bribery.

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 17, 2014

Naval Theorists and the Measurement of Compliance

7K0A0129If are interested in naval history, strategy and tactics, I have a question for you: Are you a disciple of Alfred Mahan or Julian Corbett? If you are a Mahanian, you probably focus on large naval engagements or the great battle concept. If you are Corbettian, you probably think about a series of smaller engagements, with an offensive-defensive mentality. I pose this as I am currently studying great military strategic thinkers. One thing they both advocate is information collection and analysis as a tool to not only predict potential future outcomes but to remediate defects as they might appear. In other words, measurement.

Why should an organization measure its compliance program? One quick answer is that it is one way to demonstrate that your compliance program is ‘effective’ under the US Sentencing Guidelines for Organizations. But more holistically, such measurements allow a company to know if it is operating within the parameters it has set and in compliance with anti-corruption laws such as the Foreign Corrupt Practices Act (FCPA) and UK Bribery Act. Further, such metrics can provide more and better information for strategic decision making, help employee engagement with compliance and can aid to produce a clearer picture of compliance risks and requirements.

An article in Compliance Week, entitled “Measuring the Integrity of an Organization”, author Michael Rasmussen explored this issue and then facilitated a roundtable discussion on the topic. Rasmussen’s article was paired with another in the series of Open Compliance and Ethics Group (OCEG) GRC Illustrated pieces entitled, “Integrated Compliance & Ethics Metrics”.

In the roundtable, Patrick Quinlan, Chief Executive Officer (CEO) of Convercent, said, “compliance should be looking at objectively measuring how a location, a department, or employee behavior stacks up against the organization’s values and policies. You should measure to compare, monitor, and pursue participation, engagement, and improvements where needed. Regulators may want to see checked boxes of compliance (percentage of policy attestations and training courses completed; controls in place; responses to incidents). Culture and engagement metrics can serve as valuable indicators of issues that may rise to the surface later. Employees respond to how they are evaluated; making ethical behavior a part of performance evaluations is an important part of instilling compliance at every level.”

Jose Tabuena, Global Compliance & Regulatory Counsel for Orion Health, believes that it is important for a compliance practitioner to “Develop a scorecard to give stakeholders information about the compliance program and where there is risk. Metrics should be gathered from both inside (e.g., investigations, compliance committee meetings, subject matter audits, etc.) and outside (e.g., government agency audits and observations, including fines and penalties). These metrics monitor the program over time and identify legal and other minefields that are ripe for corrective action.” Anita Helpert, Director of Internal Audit at Raytheon, specified four areas that organizations should compare. First, “awareness training completions that answer: Have we equipped attendees to understand expected conduct, to recognize issues, and to feel confident in reporting issues?” Second, you should look at tone-at-the-top: “What evidence supports leaders setting examples and nurturing an environment of ethical behavior?” The third is hotline reporting: “Do reports confirm or deny our “ethics checks” and provide insight on how people ask for guidance or report potential issues?” Fourth, and finally, is ethics metrics: “When we respond to a report or question, what do we find? How does this trend over time, by organizational structure, by leader, by location?”

In the GRC Illustrated compendium, it detailed success factors. These included:

  • Top level support – you can gain the endorsement of management and obtain a larger allocation of resources by “demonstrating how strategic decisions making depends on analysis and timely delivery of information.
  • Employee engagement – by engaging employees you not only make them more comfortable with compliance but also more meaningful and beneficial.
  • Knowing your needs – you need to determine what information is required to assist in “strategic decision making, support established values, improve compliance efforts and better manage resources.”
  • Single source of information – there should be one centralized system to consolidate metrics and ensure increased accuracy for better analysis and decisions.
  • Ease of use – the compliance practitioner needs to “enable quick, simple and meaningful management of data and dashboards for viewing and analysis of metrics.”

An interesting glossary in the GRC Illustrated compendium defined the types of metrics and examples that might be used. They were:

  • Number – you should count the number of incidents, policies, surveys, reports, automated controls, and employee conduct – whether good or bad.
  • Frequency – you should determine how often training and surveys take place, incidents occur, issues are reported and the workforce is surveyed.
  • Flagged – you should identify policies requiring review or individuals, locations, and operations with multiple problems, high-level risks or strength in desired conduct.
  • Ranking – here you should assess the severity of incidents, benchmarking outcomes, employee leadership qualities and the risk ranking of third parties.
  • Trends – you should evaluate metrics for specific areas such as training completion or level of employee engagement over time and relate them to program changes.
  • Relationships – you should consider the controls per risk, incident trends to training frequency or survey completion rates to the number of reminders.

Rasmussen ends his article by noting that these types of approaches to ethics and compliance allow not only the demonstrable proof that regulators such are the Department of Justice (DOJ) or Serious Fraud Office (SFO) are looking for but also “shifts the focus of efforts from being reactive and “checking the box” to proactive and forward-looking. This shift enables compliance to monitor integrity by processing and managing metrics across the organization in the context of rapidly changing business, regulatory, legal, and reputational risks to ensure compliance is operationally effective.”

With this integrated compliance architecture a company can create “an optimized infrastructure to report on metrics, benchmark integrity, and understand compliance in the context of business strategy and execution. Measuring integrity requires that the organization have clear insight into metrics supporting the development and communication of clear policies, continual feedback from employees, effectiveness of training programs, incident reporting, and the engagement of employees with these systems. All of these lead to an efficient and effective compliance program responsible for being the champion of organizational integrity.”

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

December 27, 2013

My Favorite Blog Posts from 2013

One of the best things about the Foreign Corrupt Practices Act (FCPA), UK Bribery Act and other anti-corruption practice areas is the top notch quality of commentators. While Mike Volkov regularly derides the FCPA paparazzi for being scare mongers and the FCPA Professor chastises FCPA Inc. for attempts to paint FCPA enforcement in the worst possible light so as to draw clients to their collective resources; there is also a great set of bloggers, writers and pundits who put out solid, useful and well-reasoned pieces on FCPA and Bribery Act issues. In this blog post, I would like to highlight some of my favorite posts from some of my favorite commentators over the past year.

From the Dean

If you do not know who the Dean of FCPA bloggers is you have not been looking too long or too hard. It’s Dick Cassin, who is the Founder, Editor and Publisher of the FCPA Blog, which consistently reports on all things compliance around the globe. But for me, it is when Dick writes from the heart, he is able to articulate what many of us are feeling but cannot seem to put into words. My favorite post from Dick this year was his tribute to President Kennedy on the occasion of the 50th anniversary of the President’s assassination, entitled “And So The Legend of Camelot Was Born”. Dick ended his post with the following quote from Teddy White, “He advanced the cause of America at home and abroad. But he also posed for the first time the great question of the sixties and seventies: What kind of people are we Americans? What do we want to become?” The question still stands.

From the FCPA Professor

If you have never debated the FCPA Professor, live or via email, you should. But be prepared to bring your A-Game and your authority. He posts daily and has become a great resource for guest posts over the years which challenge the status quo on a variety of legal and compliance issues. Each morning I cannot wait to see what the Professor has to say that day. However, what I have really come to appreciate is his Friday Round-Ups. Each Friday, the Professor gives us a round-up of recent FCPA and related news, articles and developments not otherwise covered by him in his Monday – Thursday posts. I should also say he saves some of his best witticism for these posts. My favorite post from the Professor this year was the milestone of his 100th Friday Round Up, appropriately entitled “The 100th Edition of the Friday Round-Up”. Tune in each Friday for another edition of this great resource.

From Jim McGrath

I continually bemoan to Jim McGrath that he needs to post blogs more often than his twice or thrice weekly output. The reason being they are so good and I want to see more of his stuff. As you might guess from the title of his blog, Internal Investigations Blog, he tends to focus on investigations; some criminal, some civil, some internal and some external. McGrath is an ex-prosecutor and tends to view things through that prism and give us a different perspective of law enforcement. He writes about investigations inside and outside the realm of anti-corruption but his insights are certainly applicable to any FCPA or Bribery Act investigation.

My favorite post from McGrath this year was his piece on 7-Eleven, entitled “Human Trafficking Concerns for 7-Eleven in Wake of Payroll Scam”. In this article he detailed the federal investigation into allegations that 7-Eleven franchisees in New York and Virginia had engaged in human trafficking and possible involvement by the franchisor through its payroll system. His piece was a cautionary tale for the compliance practitioner about the need for internal controls, internal monitoring and internal investigations. McGrath ended his post with the following, “Further, its future due diligence efforts as regards suppliers and franchisees should include a review for human rights abuses such as those suggested here. Otherwise, it will have to sell a helluva lot of Slurpees to pay the fines, costs, and disgorgements that a failure to do so will no doubt entail.” In other words, trust but verify.

From Mike Volkov

Mike Volkov has worked at the Department of Justice (DOJ) on Capitol Hill and for Big Law. He now has founded his own firm, the Volkov Law Group and writes the Corruption, Crime & Compliance blog. Mike primarily writes about anti-corruption but he also writes about health care fraud, anti-trust compliance and enforcement and many other topics. While I cannot determine if he set out to have a theme this year, Volkov has written many articles this year which focus on the role and position of the Chief Compliance Officer (CCO), the need for independence and resources required for the position.

My favorite post from Volkov was entitled “The Only Thing [In-House Counsel and CCOs] Have to Fear, Is Fear Itself”. His title is a play-off of what I believe to be the most inspiring FDR speech so that alone is worth the price of admission. He also tells one of the great stories about his days from Big Law. Volkov related that he wrote his views on the UK Bribery Act and the length of time it would take for any meaningful enforcement to take place, “I received a call from the firm’s London partners and was chastised for undermining their entire “marketing” program. (In stark contrast, many clients wrote me and thanked me for my “honesty.)” As my 16 year old daughter might say, ‘Sometimes you just have to keep it real’.

From Across the Pond

If you do not subscribe to thebriberyact.com, you are missing out on the best site for all things UK Bribery. thebriberyact.com guys, Barry Vitou and Richard Kovalevsky QC, consistently give their readers both practical insight and in-depth analysis. Their interviews of the relevant players allow all compliance practitioners to develop insight into what the top UK regulatory officials are thinking about on the Bribery Act. They also write from the very British perspective of understatement and skewering satire, which is more than a ton of fun for us Americans to read.

My favorite post which illustrated all of the above traits was from March and is entitled “Parliament report calls for Bribery Act review: Our opinion – Junk in. Junk Out.” In this post, they took on the call for the urgent scrutiny of the UK Bribery Act by a parliamentary select committee claiming that the Act has met with “confusion and uncertainty.” To this rather inane claim, the guys responded “We cannot think of a piece of legislation which has sparked much more commentary, advisory, much of it on line and completely free, including our own eponymous website.” But my favorite line was their dénouement to the British MP who brought up the need for clarification of the UK Bribery Act, “And, Tony from Alderly PLC, if you’re reading feel free to give us a call.  We can help you.”

My Favorite from 2013 (Think Big)

My favorite blog post of the year was actually posted on December 28, 2012 by Matt Ellis, Founder and Editor of the FCPAméricas blog, which was entitled “Wal-Mart, Go Big on FCPA Compliance”. The reason that it is my favorite of 2013 is because it is the one post that I have thought the most about, talked the most about, read the most about and it even inspired me to write on the issue myself. In his post Ellis challenged Wal-Mart to “go big” on compliance in the wake of its world-wide FCPA investigation and policy implementation. He wrote, “Wal-Mart should instead use the FCPA investigation, and the attention it has generated, as an opportunity. It is an opportunity to go big on compliance.” Ellis went on to detail some specific suggestions that Wal-Mart could implement to help the fight against bribery and corruption that, due to its size and market share, would be in a unique opportunity to put in place.

Within the anti-corruption compliance community there was a noted buzz about Ellis’ piece and his suggestions. I was inspired to write a blog post, entitled “Wal-Mart-Be a Leader in Compliance”, due to the ideas articulated by Ellis. Seemingly inspired by Ellis’ example, Michael Scher, writing in the FCPA Blog, in a piece entitled “Michael Scher talks to the feds”, used the Wal-Mart investigation as a jumping off point to ask the DOJ to resolve several open issues on compliance as he saw them. In others words, Ellis piece (hopefully) got not only Wal-Mart to thinking but several others of us. That is why it is my favorite blog post of 2013.

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 12, 2013

What a Long Strange Trip It’s Been – The Bilfinger FCPA Settlement

Earlier this week the Department of Justice (DOJ) announced it had resolved an ongoing Foreign Corrupt Practices Act (FCPA) with German entity Bilfinger SE (Bilfinger). This case involved the same background facts and events as the Willbros corporate FCPA enforcement action and the related individual enforcement actions with some of its former employees. The facts in this case were bad, bad, bad. The FCPA Professor went into a deep dive on the case in a blog post, entitled “German Company Resolves FCPA Enforcement Action Based On Conduct From “The Distant Past””. In another blog post, entitled “Of Note From The Bilfinger Enforcement Action”, he questioned why this particular enforcement action took so long to resolve.  Whatever the answer to that question might be, there are several interesting aspects to the matter which are of significance to the compliance practitioner, which I will highlight in this post.

I.                    DOJ Fine Calculation

To resolve the criminal aspects of this case, Bilfinger agreed to pay a $32 million criminal penalty as part of a Deferred Prosecution Agreement (DPA) with the DOJ. The thing that I found interesting about the fine calculation, as set out in the DPA, was the large increase in the amount due to the size of the bribery paid which increased the point calculation under the US Sentencing Guidelines by +18 and the increase for the payment of multiple bribes by +2.. The company only received a -2 for its cooperation in the investigation, clearly demonstrating recognition and affirmative acceptance of responsibility for its criminal conduct. The company did not self-disclose so it did not receive any credit under the US Sentencing Guidelines for that affirmative conduct. The calculated fine range was between $28MM to $56MM so the company received a fine at the lower end of the range. But not less than the lower end or event at the end.

II.                Landscaping Account to Pay Bribes

One of the interesting techniques that the company used to physically pay the bribes was through a petty cash account in the Joint Venture’s (JV) office in Nigeria. The DOJ has long cautioned companies about maintaining significant amounts of petty cash in offices or the undocumented use of petty cash accounts as a mechanism to funnel bribes. In this case, Bilfinger ingeniously said the cash was going to the Nigeria operation to pay “landscaping expenses”. With $6MM in bribes paid out, one might think the company was landscaping the Gardens at Versailles but the lesson learned for the compliance practitioner is that accounts which might appear to be legitimate business expenses need to be scrutinized though monitoring and auditing.

III.             Political Parties

Most compliance practitioners are well aware that the FCPA applies to government officials, their family members and similarly situated officers, directors and employees of state owned enterprises. However, in the Bilfinger enforcement action, the company paid bribes to “the dominant political party in Nigeria” which was not named in the Information of the DPA. The Anti-Bribery Provisions of the FCPA states:

§ 78dd-1. Prohibited foreign trade practices by issuers

(a)    Prohibition (b)

It shall be unlawful for any issuer which has a class of securities registered pursuant to section 78l of this title or which is required to file reports under section 78o(d) of this title, or for any officer, director, employee, or agent of such issuer or any stockholder thereof acting on behalf of such issuer, to make use of the mails or any means or instrumentality of interstate commerce corruptly in furtherance of an offer, payment, promise to pay, or authorization of the payment of any money, or offer, gift, promise to give, or authorization of the giving of anything of value to–

(2) any foreign political party or official thereof or any candidate for foreign political office for purposes of–

(A) (i) influencing any act or decision of such party, official, or candidate in its or his official capacity, (ii) inducing such party, official, or candidate to do or omit to do an act in violation of the lawful duty of such party, official, or candidate, or (iii) securing any improper advantage; or

(B) inducing such party, official, or candidate to use its or his influence with a foreign government or instrumentality thereof to affect or influence any act or decision of such government or instrumentality in order to assist such issuer in obtaining or retaining business for or with, or directing business to, any person; or.

IV.              Best in Class Compliance Program

During the pendency of the investigation, Bilfinger moved to create a best practices compliance program. They appear to have done so and agreed in the DPA to continue to maintain such a compliance program. Under Schedule C to the DPA, it set out the compliance program which the company had implemented and continued to keep in place, at least during the length of the DPA. It included the following components.

  1. High level commitment from company officials and senior management to do business in compliance with the FCPA.
  2. A substantive written anti-corruption compliance code of conduct.
  3. Written policies and procedures to implement this code of conduct.
  4. A robust system of internal controls, including accounting and financial controls.
  5. Risk assessments and risk reviews of its ongoing business.
  6. No less than annual assessments of its overall compliance program.
  7. Appropriate oversight and responsibility of a Chief Compliance Officer.
  8. Effective training for all employees and relevant third parties.
  9. An effective compliance function which can provide guidance to company employees.
  10. A robust internal reporting system.
  11. Effective investigations of any reported compliance issue.
  12. Appropriate incentives for employees to do business ethically and in compliance.
  13. Enforced discipline for any employee who violates the company’s compliance program.
  14. Suitable due diligence and management of third parties and business partners.
  15. A correct level of pre-acquisition due diligence for any merger or acquisition candidate, including a risk assessment and reporting to the DOJ if the company uncovers any FCPA-violative conduct during this pre-acquisition phase.
  16. As soon as practicable, Bilfinger will integrate any newly acquired entity into its compliance regime, including training of all relevant new employees, a FCPA forensic audit and reporting of any ongoing violations.
  17. Ongoing monitoring, testing and auditing of the company’s compliance function, taking into account any “relevant developments in the field and the evolving international and industry standards.”

V.                 Monitor

Bilfinger also agreed to an external monitor. However, the term of the monitor is not the entire length of the three-year DPA; the term of the monitor is only 18 months. The monitor’s primary function is to assess the company’s compliance with the terms of the DPA and report the results to the DOJ at least twice during the terms of the monitorship. After this 18 month term the DOJ will allow the company to self-report to the regulators. It should be noted that the term of the external monitor can be extended by the DOJ.

VI.              Who Pays the Cost of Bribery

The final point that I wish to raise is about the insidiousness of bribery and corruption and the true cost. To facilitate its illegal conduct Bilfinger (and Willbros) increased their charges to the various Nigerian entities which were paying for the project in question by 3%. So it was not Bilfinger and Willbros paying the bribes out of their collective corporate pocket but it was the people of Nigeria who were funding the western companies’ bribes. It does not get much worse or arrogant than that in the corporate world.

The Bilfinger enforcement action moves towards the ending of one of the sorriest examples of corporate malfeasance in the FCPA world. While it took a long time, justice has certainly been a long time coming. With the continued flight from justice of former Willbros employee James Tillery who renounce his US citizenship to try and escape prosecution by taking refuge in Nigeria; perhaps things are coming to an end. But with the conclusion of this corporate enforcement action against Bilfinger, perhaps there may be additional individual enforcement actions.

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

November 5, 2013

Where Else? JP Morgan Chase Investigation into Hiring Practices Expands

IMG_3289One of the most dreaded questions in any Foreign Corrupt Practices Act (FCPA) investigation is: Where Else? By this I mean that if you have a systemic failure of internal controls in one geographic area it may well be that there are other failures in other areas. Of course once a company begins any investigation; they may, as co-founder of thebriberyact.com Barry Vitou has famously said, well discover other “imperfections”. British understatement at its finest wouldn’t you say. This past weekend we saw another example of this in the JP Morgan Chase inquiry into its hiring of family members of government officials.

Back in August, the New York Times (NYT) reported that JP Morgan came under FCPA scrutiny in China for its hiring practices. In an article, entitled “Hiring in China By JPMorgan Under Scrutiny”, reporters Jessica Silver-Greenberg, Ben Protess and David Barboza broke the story that the Securities and Exchange Commission (SEC) had initiated an investigation into JP Morgan Chase to determine “whether JPMorgan Chase hired the children of powerful Chinese officials to help the bank win lucrative business in the booming nation.”

Hiring of a family member of a foreign government official is not illegal under the FCPA. The FCPA Professor was quoted in the NYT article as saying “While the hire of a son or daughter itself is not illegal, red flags would be raised if the person hired was not qualified for the position, or, for example, if a firm never received business before and then lo and behold, the hire brought in business.” In later blog post, entitled “JPMorgan’s Hiring Practices In China Under Scrutiny”, the FCPA Professor reviewed some enforcement actions “where the conduct at issue involved the hiring of children or spouses of alleged “foreign officials.”” In each of the FCPA enforcement actions, there was a quid pro quo for the hiring of the family member. In other words, the company received some benefit for the hiring of the government official’s family member; so the Department of Justice (DOJ) interpreted the hiring as ‘something of value’ going to the government official and thereby violating the FCPA.

The NYT article detailed several situations where JPMorgan hired the children of Chinese government officials and sometime thereafter the bank was able to secure work from the business or industry of a parent of a hired employee. The examples included the hiring of a “son of a former Chinese banking regulator who is now the chairman of the China Everbright Group, a state-controlled financial conglomerate, according to the document reviewed by the NYT, as well as public records. After the chairman’s son came on board, JPMorgan Chase secured multiple coveted assignments from the Chinese conglomerate, including advising a subsidiary of the company on a stock offering, records show.” In another instance, the bank hired the daughter of a Chinese railway official. After hiring the daughter, JP Morgan Chase was hired to assist the company to go public.

Things got worse for JP Morgan Chase when Dawn Kopecki, in a Bloomberg article entitled “JPMorgan Bribe Probe Said to Expand in Asia as Spreadsheet Is Found”, reported that there was “an internal spreadsheet that linked appointments to specific deals pursued by the bank”.  She noted that the original investigation, which began in Hong Kong, has now been expanded to other countries in Asia and that JP Morgan Chase “has opened an internal investigation that has flagged more than 200 hires for review, said two people with knowledge of the examination, results of which JPMorgan Chase is sharing with regulators.” Kopecki quoted Dan Hurson, a former US prosecutor and SEC lawyer, who said that the “SEC will hunt for evidence showing “these weren’t real jobs, that they were only there because their father or mother were important public officials””; and “If the public official requested the job for the child, that would be a strong indication to the company that the official was seeking and receiving something of value.” Perhaps more damaging was that the spreadsheet had information which apparently linked “some hiring decisions to specific transactions pursued by the bank.” In a later NYT article, entitled “JPMorgan Hiring Put China’s Elite on an Easy Track”, Jessica Silver-Greenberg and Ben Protess further reported that the JP Morgan Chase hiring program even had its own name, which was ‘Sons & Daughters’.

Now JP Morgan Chase has disclosed in a securities filing that “its business relationships with certain related clients in the Asia Pacific region and its engagement of consultants in the Asia Pacific region.” As reported in another NYT article, entitled “U.S. Inquiry Broadens Into Bank’s Asia Hiring”, “government authorities are examining JPMorgan’s hiring practices throughout Asia, focusing on South Korea, Singapore and India. That scrutiny comes after JPMorgan itself flagged those countries for further review, the people said.” In addition to possible FCPA issues, the NYT article reported that Hong Kong and British authorities “are also investigating the bank’s hiring practices.” In a Wall Street Journal (WSJ) article, entitled “Probe Expands Into J.P. Morgan Hiring”, Dan Fitzpatrick reported that the SEC has issued subpoenas to JP Morgan Chase for not only the ‘Sons & Daughters’ hiring program but also “the use of certain consultants in the Asian-Pacific region.”

All of this compounds the bad news for JP Morgan Chase and the difficult period it is going through with several legal and regulatory investigations. However, this investigation regarding hiring practices has the possibility of expanding into enforcement actions with several different anti-corruption enforcement agencies, such as the DOJ and SEC and the UK Serious Fraud Office (SFO) and perhaps Hong Kong and Chinese regulators as well. So the dreaded “Where Else?” may well lead to the unearthing of further ‘imperfections’. At this point, about all I can say is ‘Stay tuned for further developments’.

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

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