FCPA Compliance and Ethics Blog

July 29, 2015

What Would Dr. Seuss Say about an Allowance?

What Pet Should I Get?Earlier this month we had the release of a second book by Harper Lee, “Go Set a Watchman”, which was miraculously discovered having been written some 50+ years ago. This week, there was another release from a (now deceased) author from a newly discovered source. I of course refer to the release yesterday of the new Dr. Seuss book “What Pet Should I Get?, published Random House, which informs today’s compliance lesson.

The book was discovered by Seuss’ widow, as noted in the Sunday New York Times (NYT) Book Review article, entitled “Dr. Seuss Book: Yes They Found it in a Box, when she decided to “have the rest of his notes and sketches appraised, that they closely examined the contents of that box. They found a set of brightly colored alphabet flash cards, some rough sketches titled “The Horse Museum,” and a manila folder marked “Noble Failures,” with whimsical drawings that he had been unable to find a place for in his stories. But alongside the orphaned sketches was a more complete project labeled “The Pet Shop,” 16 black-and-white illustrations, with text that he had typed on paper and taped to the drawings. The pages were stained and yellowed, but the story was all there, in Dr. Seuss’ unmistakable rollicking rhymes.” This finding became the book, What Pet Should I Get?

Reading this discovery made me ponder about how a child would pay for the pet they wanted and of course my thoughts turned to that age-old parenting quandary – the allowance. It is always a question of great interest for both parents and children. As with many things involving parent/child relationships, my views have evolved. As a teenager, I certainly had the view that an allowance was a God-given right and the more the better. I would only note that my parents did not share those views. As the father of a teenaged daughter, my views reached the much fuller expression of spoiling my daughter as often as possible. Which one is correct? I still do not have a final answer.

I thought about the ongoing debate and dialogue over the allowance when I read the Foreign Corrupt Practices Act (FCPA) enforcement action brought by the Securities and Exchange Commission (SEC) against Mead Johnson Nutrition Company (Mead Johnson). The matter was resolved via SEC Administrative proceeding that concluded with a Cease and Desist Order being agreed to by the parties. Mead Johnson agreed to pay a fine of $12.3MM which consisted of profit disgorgement of $7.7MM, prejudgment interest of $1.26MM and a civil penalty of $3MM. Kara Brockmeyer, Chief of the SEC Enforcement Division’s FCPA Unit, said in a SEC Press Release, “Mead Johnson Nutrition’s lax internal control environment enabled its subsidiary to use off-the-books slush funds to pay doctors and other health care professionals in China to recommend its baby formula and give the company marketing access to mothers.”

The enforcement action turned on violations of the accounting provisions of the FCPA. This is where the ‘allowance’ issue comes into the discussion. According to the Cease and Desist Order, “certain employees of Mead Johnson China improperly compensated HCPs, who were foreign officials under the FCPA, to recommend Mead Johnson’s infant formula to, and to improperly provide contact information for, expectant and new mothers.” One of Mead Johnson’s sales channels in China was through distributors. To facilitate this illegal conduct, funding to the distributors, called the “Distributor Allowance”, was diverted to make illegal payments. The Cease and Desist Order stated, “Although the Distributor Allowance contractually belonged to the distributors, certain members of Mead Johnson China’s workforce exercised some control over how the money was spent, and certain Mead Johnson China employees provided specific guidance to distributors concerning the use of the funds. Mead Johnson China staff also maintained certain records related to Distributor Allowance expenditure by distributors. In addition, Mead Johnson China used some of the funds to reimburse Mead Johnson China’s sales personnel for a portion of their marketing and other expenditures on behalf of Mead Johnson China.”

This tactic was clearly a violation of the company’s books and records obligations under the FCPA. By doing so, Mead Johnson was able to hide its payments to doctors and health care providers (HCPs) from not only regulators but the company’s shareholders as well. As the Cease and Desist Order noted, the company’s “records were incomplete and did not reflect that a portion of Distributor Allowance was being used contrary to Mead Johnson’s policies.” Finally, the Cease and Desist Order concluded, “Up through 2013, certain Mead Johnson China employees made payments to HCPs using funds maintained by third parties. These funds and payments from the funds were not accurately reflected on Mead Johnson China’s books and records. The books and records of Mead Johnson China were consolidated into Mead Johnson’s books and records. As a result of the misconduct of Mead Johnson China, Mead Johnson failed to make and keep books, records, and accounts, which, in reasonable detail, accurately and fairly reflected its transactions as required by Section 13(b)(2)(A) of the Exchange Act.”

However Mead Johnson did not stop with books and records violations. The Distributor Allowance manipulation allowed the China business unit to “improperly compensate HCPs was contrary to management’s authorization and Mead Johnson’s internal policies. Mead Johnson failed to devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that Mead Johnson China’s funding of marketing and sales expenditures through third-party distributors was done in accordance with management’s authorization.” Once again the Cease and Desist Order concluded, “Up through 2013, Mead Johnson failed to devise and maintain an adequate system of internal accounting controls to ensure that Mead Johnson China’s method of funding marketing and sales expenditures through third-party distributors was not used for unauthorized purposes, such as improperly compensating Chinese HCPs to recommend Mead Johnson’s products. As a result of such failure, the improper payments to HCPs occurred contrary to management’s authorizations, in violation of Section 13(b)(2)(B) of the Exchange Act.”

In an interesting twist Mead Johnson, based on an allegation of potential FCPA violations in China, performed an internal investigation on its China unit in 2011 and came up with no evidence. Somewhat dryly the SEC noted that the company did not make any self-disclosure around these allegations and “did not thereafter promptly disclose the existence of this allegation in response to the Commission’s inquiry into this matter.”

Yet after a second internal investigation in 2013 they turned up evidence of FCPA violations, the company “undertook significant remedial measures including: termination of senior staff at Mead Johnson China; updating and enhancing financial accounting controls; significantly revising its compliance program; enhancing Mead Johnson’s compliance division, adding positions including a second senior-level position; establishing new business conduct controls and third party due-diligence procedures and contracts; establishing a unit in China that monitors compliance and controls in China on an on-going basis; and providing employees with a method to have immediate access the company’s policies and requirements.”

While there was no statement regarding self-disclosure, the company did cooperate extensively with the SEC after the company was called to task. The Cease and Desist Order noted, “Mead Johnson subsequently provided extensive and thorough cooperation. Mead Johnson voluntarily provided reports of its investigative findings; shared its analysis of documents and summaries of witness interviews; and responded to the Commission’s requests for documents and information and provided translations of key documents. These actions assisted the Commission staff in efficiently collecting valuable evidence, including information that may not have been otherwise available to the staff.”

There are several lessons to be learned from the Mead Johnson enforcement action. If it was not clear from the GlaxoSmithKline PLC (GSK) imbroglio in China in 2013-14, your internal investigation must be thorough. Performing an investigation, finding no FCPA violations only to have a regulator sitting on your shoulder and later finding such evidence is never good. The SEC also reaffirmed its clear intention to continue to enforce the accounting provisions of the FCPA, with or without a parallel Department of Justice (DOJ) enforcement action. Companies must also take heed on their internal controls. Clearly certain China business unit employees had developed a work-around of the compliance internal controls by requiring the distributors to use their allowances to pay bribes. Internal controls must not only exist but they must be effective. That means you have to test their effectiveness, not simply tick the box that you have put them in place.

Finally, and I think Dr. Seuss’ compliance lesson is that when you give out an allowance, while you may restrict some of its uses, you certainly should not direct where the money is spent. Every kid knows that if you are told where to spend your allowance, it is really not your allowance. Perhaps Mead Johnson would do well to remember that long lost lesson from childhood.

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

© Thomas R. Fox, 2015

May 12, 2011

Lindsey Convictions, Stevens Acquittal: Implications for the FCPA Compliance Officer

It has been quite a week in the white collar criminal defense world. It began with the convictions, on all counts, of all defendants in the Lindsey Manufacturing case involving the Foreign Corrupt Practices Act (FCPA) and yesterday with the conviction of Raj Rajaratnam on all counts in his insider-trading trial. Sandwiched in between these two huge victories for the Department of Justice was the acquittal of former GlaxoSmithKline in-house attorney Lauren Stevens by the presiding Federal District Judge. As reported by the FCPA Blog, Judge Roger Titus granted an acquittal during a hearing and said,

“I conclude on the basis of the record before me,” Judge Titus said, “that only with a jaundiced eye and with an inference of guilt that’s inconsistent with the presumption of innocence could a reasonable jury ever convict this defendant.”

This post will focus on the Stevens case and its implications for the compliance officer. One of the concerns I frequently hear expressed by compliance officers is their risk of personal criminal liability, particularly if they work at a company where a Deferred Prosecution Agreement is in place. I believe that the Stevens case, contrasted with the Lindsey Manufacturing case, demonstrates the parameters of the type of conduct which will result in a criminal sanctions.

Stevens had been indicted on four counts of making false statements, one count of obstruction of justice, and one count of falsifying and concealing documents related to the company’s promotion of the anti-depressant drug for weight loss, which hadn’t been approved by the Food and Drug Administration. The Lindsey defendants were charged with conspiracy to violate the FCPA and individual counts for violating the FCPA as well. One defendant was charged with a count of violation of money laundering laws.

However in the Stevens case, she was providing legal advice to her company and then was dealing with US government regulators in an ongoing investigation. It is this prong which concerns compliance officers. As noted in yesterday’s Wall Street Journal, “The government’s defeat points to the difficulty of prosecuting individuals over alleged wrongdoing at large corporations, where teams of people may be involved in a matter and it is hard to show that executives intended to break the law.” In the Lindsey Manufacturing case, it certainly appears that the government was able to demonstrate to the jury that the Lindsey Manufacturing defendants intended to violate the FCPA by the payment of bribes.

There is another obvious difference between the Lindsey Manufacturing defendants and Stevens. It is that she was an in-house lawyer (she left the company earlier this year) and the Lindsey Manufacturing defendants were from the business side of the company. Indeed as reported in the FCPA Blog, the trial judge said that the time of acquittal, “There is an enormous potential for abuse in allowing prosecution of an attorney for the giving of legal advice. I conclude that the defendant in this case should never have been prosecuted and she should be permitted to resume her career.”

So what does all of this mean for the compliance officer? I have heard my colleague; attorney Mike Volkov say that no one is prosecuted for engaging is something less that best practices, they are prosecuted for engaging in no practices in the compliance arena. In Lindsey, it seems clear that the company had no compliance program to fall back on as some type of defense that the defendants had not engaged in bribery or did not have the intent to engage in bribery. In the Stevens case, she was able to demonstrate that she had relied on the advice of outside counsel in her legal work and she was not a rogue agent going off the reservation. So if your company has a compliance program, you should follow it. While as the compliance officer, you may well have to make some close or difficult calls, do not do so in a vacuum, obtain some legal advice or other assistance. One mechanism I have advocated is a Compliance Oversight Committee, which can review compliance decision from the engagement and management of foreign business partners to all facets of a company’s compliance efforts. This puts more resources in the hands of the compliance officer.

The differences and messages from the outcomes of Lindsey Manufacturing and the Stevens case seem clear. Do not engage in intentional conduct which violates the FCPA.

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

© Thomas R. Fox, 2011

November 4, 2010

FCPA Settlement Day

Filed under: FCPA — tfoxlaw @ 2:50 pm
Tags: , , , ,

Today, in what the FCPA Blog called “making FCPA history”, the Department of Justice (DOJ) and the Securities and Exchange Commission (SEC) announced the agreement by the Global logistics firm Panalpina and the energy companies Shell, Transocean, Tidewater, Noble and Pride International to resolve various outstanding FCPA charges. The total amount of penalties is $156.565 million in criminal fines and about $73.9 million in civil disgorgement, interest and penalties.

  SETTLEMENT BOX SCORE

Entity Criminal Fine Profit

Disgorgement

DPA or NPA Outside

Monitor

Panalpina $70.56MM $11.3MM DPA No
Shell $30MM $18.1MM DPA No
Transocean $13.44MM $7.2MM DPA No
Pride Int’l $32.625MM $23.5MM DPA No
Tidewater $7.35MM $8.3MM DPA No
Noble $2.59MM $5.5MM NPA No
Total $156.565MM $73.9    

In addition to the total amount going to the US Treasury of approximately $229.5, the most interesting item noted is that none of the parties was required to have a corporate monitor as a part of its settlement. In future posts we will review the specific Deferred Prosecution Agreements (or Non-Prosecution Agreement) to see if we might glean some of the DOJ’s concepts of current FCPA compliance best practices.

Download the DPA for Panalpina here, Shell here, Tidewater here, Pride here, Transocean here, and the NPA for Noble here.

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

© Thomas R. Fox, 2010

October 7, 2010

Miranda and the FCPA: Do You Have the Right to Remain Silent?

Filed under: FCPA,Investigations — tfoxlaw @ 7:58 pm
Tags: , , ,

In a recent posting, the FCPA Blog posed the question of whether a company employee was warned “that concealing information from company lawyers conducting an internal FCPA investigation could be a federal crime?” The FCPA Blog raised this question in the context of a company’s internal investigation regarding an alleged violation of the Foreign Corrupt Practices Act (FCPA). Even if the company attorneys handling the investigation provided the now standard corporate attorney Upjohn warnings, how does a company attorney asking questions morph into a de facto federal agent during an internal company investigation regarding alleged FCPA violations and is the attorney thereby required to provide a Miranda warning to employees during a FCPA investigation? 

In a recently released paper entitled “Navigating Potential Pitfalls in Conducting Internal Investigations: Upjohn Warnings, “Corporate Miranda,” and BeyondCraig Margolis and Lindsey Vaala, of the law firm Vinson & Elkins, explored the pitfalls faced by counsel, both in-house and outside investigative, and corporations when an employee admits to wrong doing during an internal investigation, where such conduct is reported to the US Government and the employee is thereafter prosecuted criminally under a law such as the FCPA. Margolis and Vaala also reviewed the case law regarding the Upjohn warnings which should be given to employees during an internal FCPA investigation. 

Employees who are subject to being interviewed or otherwise required to cooperate in an internal investigation may find themselves on the sharp horns of a dilemma requiring either (1) cooperating with the internal investigation or (2) losing their jobs for failure to cooperate by providing documents, testimony or other evidence. Many US businesses mandate full employee cooperation with internal investigations or those handled by outside counsel on behalf of a corporation. These requirements can exert a coercive force, “often inducing employees to act contrary to their personal legal interests in favor of candidly disclosing wrongdoing to corporate counsel.”  Moreover, such a corporate policy may permit a company to claim to the US government a spirit of cooperation in the hopes of avoiding prosecution in “addition to increasing the chances of learning meaningful information.” 

Where the US Government compels such testimony, through the mechanism of inducing a corporation to coerce its employees into cooperating with an internal investigation, by threatening job loss or other economic penalty, the in-house counsel’s actions may raise Fifth Amendment due process and voluntariness concerns because the underlying compulsion was brought on by a state actor, namely the US Government. Margolis and Vaala note that by utilizing corporate counsel and pressuring corporations to cooperate, the US Government is sometimes able to achieve indirectly what it would not be able to achieve on its own – inducing employees to waive their Fifth Amendment right against self-incrimination and minimizing the effectiveness of defense counsel’s assistance. 

So what are the pitfalls if private counsel compels such testimony and it is used against an employee in a criminal proceeding under the FCPA? Margolis and Vaala point out that the investigative counsel, whether corporate or outside counsel, could face state bar disciplinary proceedings. A corporation could face disqualification of its counsel and the disqualified counsel’s investigative results. For all of these reasons, we feel that the FCPA Blog summed it up best when it noted, “the moment a company launches an internal investigation, its key employees — whether they’re scheduled for an interview or not — should be warned about the “federal” consequences of destroying or hiding evidence. With up to 20 years in jail at stake, that seems like a small thing to do for the people in the company.” 

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

 

© Thomas R. Fox, 2010

August 23, 2010

Board Members and Prudent Discharge of Duties under the FCPA

Monday’s FCPA Blog post wrote about what it called a “compliance donnybrook” inside the company China Northeast Petroleum. The facts of this melee are straight-forward, in July, the head of the Board of Director’s Audit Committee Robert Bruce, communicated to his fellow directors that he believed the company needed an investigation to make sure it had not violated the Foreign Corrupt Practices Act’s (FCPA) anti-bribery provisions and did so in a letter detailing his reasons for making this request. As reported by the FCPA Blog, Mr. Bruce stated, in part “I strongly believe that substantial additional investigation is required in order for the Company and/or the members of the board to be confident that . . . the Company has not made payments to government officials as proscribed by the U.S. Foreign Corrupt Practices Act.”

The Chairman of the Board of Directors of China Northeast Petroleum, Mr. Edward Rule, responded declining this request for a FCPA investigation, which Mr. Bruce had suggested be led by an outside law firm with a strong FCPA background. Mr. Rule noted that such an investigation “could last as long as a full year and cost the Company as much as several millions of dollars“ and could even lead to the delisting the company from the NYSE AMEX. Mr. Rule ended his letter by noting “the course of action you recommend that the Board pursue seems at odds with the prudent discharge of duties to the shareholders”.

This final sentence caught the attention of the FCPA Compliance and Ethics Blog. What are the obligations of a Board member regarding the FCPA? Are the obligations of the Audit Committee under the FCPA at odds with a director’s “prudent discharge of duties to shareholders”? Do the words prudent discharge even appear anywhere in the FCPA? My search into answers for the first two questions began with a recent ethics•point webinar, entitled “Reporting to the Board on Your Compliance Program: New Guidance and Good Practices”, where attorneys Rebecca Walker and Jeffery Kaplan, of the law firm of Kaplan and Walker, explored these and other issues.

Ms. Walker pointed to the US Sentencing Guidelines and Department of Justice (DOJ) Prosecution Standards for guidance as to the obligations of a company’s Board regarding FCPA compliance. Under the US Sentencing Guidelines, Ms. Walker said that the Board must exercise reasonable oversight on the effectiveness of a company’s compliance program. Ms. Walker said that the DOJ Prosecution Standards posed the following queries: (1) Do the Directors exercise independent review of a company’s compliance program? and (2) Are Directors provided information sufficient to enable the exercise of independent judgment?

As to the specific role of ‘Best Practices’ in the area of general compliance and ethics, Ms. Walker looked to Delaware corporate law for guidance. She cited to the case of Stone v. Ritter for the proposition that “a duty to attempt in good faith to assure that a corporate information and reporting system, which the board concludes is adequate exists.” From the case of In re Walt Disney Company Derivative Litigation, she drew the principle that directors should follow the best practices in the area of ethics and compliance.

In a recent Compliance Week article, Melissa Aguilar examined the duties of Board members regarding FCPA compliance. The conclusions of several of the FCPA experts that Ms. Aguilar interviewed for the article were that companies which have not yet had any FCPA issues rise up to the Board level are usually the ones which are the most at risk. Albert Vondra, a partner with PricewaterhouseCoopers stated that such companies “don’t have the incentive to spend the resources or take the rigorous approach to their anti-compliance programs. Their attitude is, ‘We’ve got it covered,’ but they don’t”. Richard Cassin, managing partner of Cassin Law, stated that there must be written records demonstrating that the audit committee and that the board members asked questions and received answers regarding FCPA compliance issues. Such documentation demonstrates the Board members have “fulfilled their fiduciary obligations,” Cassin says.

Board failure to head this warning can lead to serious consequences. David Stuart, a senior attorney with Cravath Swaine & Moore, noted that FCPA compliance issues can lead to personal liability for directors, as both the Securities and Exchange Commission (SEC) and DOJ have been “very vocal about their interest in identifying the highest-level individuals within the organization who are responsible for the tone, culture, or weak internal controls that may contribute to, or at least fail to prevent, bribery and corruption”. He added that based upon the SEC’s enforcement action against two senior executives at Nature’s Sunshine, “Under certain circumstances, I could see the SEC invoking the same provisions against audit committee members—for instance, for failing to oversee implementation of a compliance program to mitigate risk of bribery”.

What does all of this mean for Messers Bruce, Rule and the rest of the Board members of China Northeast Petroleum? It should mean quite a bit. The DOJ has made it clear that it expects ‘best practices’ when it comes to FCPA compliance. In the case of China Northeast Petroleum, the head of the Board’s Audit Committee has requested an independent FCPA compliance investigation, to be effected by an outside firm. The Chairman of the Board of Directors has rejected this request because (1) it might take up to a year and (2) it might cost too much money AND fulfilling its FCPA obligation “seems at odds with the prudent discharge of duties to the shareholders”. The head of the Audit Committee resigned over this rejection.

Alas, there is no reference to prudent discharge in the FCPA itself. However, if I were a remaining member of the Board of China Northeast Petroleum, I might well think more than twice about my prudent discharge of duties to the shareholders as both the DOJ and SEC now might well wish to look into this matter under a Board’s prudent discharge of duties under the FCPA.

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

© Thomas R. Fox, 2010

July 8, 2010

And Then There Was One-the Updated Box Score of FCPA Settlements from the Nigerian Bribery Scandal

Yesterday, both the Department of Justice (DOJ) and the Securities and Exchange Commission (SEC) announced the agreement by the Dutch company, Snamprogetti Netherlands BV, (Snamprogetti) to pay a $240 million criminal penalty to the DOJ to resolve charges related to the Foreign Corrupt Practices Act (FCPA) for its participation in a decade-long scheme to bribe Nigerian government. In addition to the DOJ resolution, Snamprogetti and ENI also reached a settlement of a related civil complaint filed by the SEC, which charged Snamprogetti with violating the FCPA’s anti-bribery provisions, falsifying books and records, and circumventing internal controls and charged ENI with violating the FCPA’s books and records and internal controls provisions. As part of that settlement, Snamprogetti and ENI agreed jointly to pay $125 million in disgorgement of profits relating to those violations. Both the DOJ and the SEC resolutions were discussed in both in yesterday’s FCPA Blog and today’s posting by the FCPA Professor.

Snamprogetti and ENI both also agreed to enter into Deferred Prosecution Agreements (DPA) and the filing of Criminal Information against each. Under the terms of each DPA, the DOJ agreed to defer prosecution of Technip for two years. It is noteworthy that neither Snamprogetti nor ENI was required to agree to retain an independent compliance monitor. If both Snamprogetti and ENI abide by the terms of the DPAs, the DOJ will dismiss the criminal charges when the term of the agreements expires. The Snamprogetti and ENI resolution leads to an update to the monetary count for the resolution of the Nigerian Bribery Scandal of the following:

SETTLEMENT BOX SCORE

Entity Fine, Penalty and Disgorgement of Profits
Halliburton +KBR $579 Million
Snamprogetti & ENI $365 Million
Technip $338 Million
JGC None yet reported
Total $1.28 Billion

So for those of you keeping score at home, there have fines, penalties and profit disgorgement of over $1.28 billion. All of this for bribes paid on by or on behalf of the four-company joint venture named TSJK, which totaled up to $180MM. This joint venture won four contracts from the Nigeria government between 1995 and 2004 to build LNG facilities on Bonny Island. The contracts were worth more than $6 billion.

This total settlement figure does not include any potential costs going forward such as reduction of credit ratings, the payment of legal fees and any forensic accounting fees during the pendency of the DPA. The costs listed above do not include the total cost paid by Snamprogetti and ENI for their internal company investigation into this matter. However based upon the reported fees to date paid by Snamprogetti and ENI, these investigation fees will surely be in the tens of millions of $.

As pointed out by the FCPA Professor in his blog today, the $1.28 BN figure amount is quite a pretty penny for the US Treasury. He poses the question as to whether FCPA enforcement has become a “cash cow” for the US Treasury. The FCPA Professor has explored this question more extensively in a prior blog posting. (See here) Additionally for those of you keeping score at home, could this case break the all time fine set by Siemens? All we know for certain at this time is and then there was one–JGC.

For a copy of the DOJ Press Release, click here.

For a copy of the SEC Press Release, click here.

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

© Thomas R. Fox, 2010

July 2, 2010

When a Rose is not a Rose but an FCPA Violation

 We recently wrote about gifts and entertainment under the Foreign Corrupt Practices Act (FCPA). To view the prior article, click here. This week the Securities and Exchange Commission (SEC) announced an enforcement action involving Veraz Networks. The enforcement action generally revolved around what one Veraz employee termed in an email as “the gift scheme”. Initially we would note that here in the US it is never a good idea to label any plan of action as a “scheme” and then to put it in an email as such labeling will always draw someone’s scrutiny. The gift scheme was made with the purpose to “improperly influence” foreign officials who were employees of Chinese and Vietnamese government-controlled telecommunications companies to award or continue to do business with Veraz.

Veraz, or its agents with the approval of Veraz, paid for the following amounts as gifts and entertainment: 

  1. $4,500 for gifts to the officials of the Chinese telecom company.
  2. An unreported amount for gifts and entertainment for the officials of the Vietnamese telecom company.
  3. An unreported amount for flowers to the wife of the CEO of the Vietnamese telecom company.
  4. Finally, Veraz failed to keep accurate books and records of all of the above.  

The penalty reportedly paid by Veraz was relatively small for current FCPA standards. The FCPA Blog reported that Veraz paid a penalty of only $300,000. The FCPA Professor noted in his posting on Veraz that in its Form 10Q filing for the period ending March 31, 2010, Veraz reported that it had shelled out $3.0 million to investigate and handle the FCPA compliance issues. So once again, the costs to investigate a matter are much larger than the final penalty. However, Veraz may still consider itself well off as there has been no report that Veraz agreed to a monitor or that a Department of Justice criminal action is in the offing. 

This enforcement action provides some additional guidance for what types of gifts and entertainment can be provided without one running afoul of the FCPA as this area is open to vagueness, and there are no clear guidelines in either the FCPA or its legislative history. While prohibiting payment of any money, or thing of value, to foreign officials to obtain or retain business, the FCPA arguably permits incurring certain expenses on behalf of these same officials. There is no de minimis provision set forth in the statute.

The presentation of a gift or business entertainment expense can constitute a violation of the FCPA if this is coupled with the corrupt intent to obtain or retain business. Under the FCPA, the following affirmative defense regarding the payment of gifts exists:

[it] shall be an affirmative defense [that] the payment, gift, offer or promise of anything of value that was made, was a reasonable and bona fide expenditure … and was directly related to…the promotion, demonstration, or explanation of products or services; or…the execution or performance of a contract with a foreign government or agency thereof. 15 U.S.C. § 78dd-1(c)(2)(A)-(B).

However, the Veraz case does provide direct and clear guidance in one area which has not been previously explored. It appears that a company should absolutely refrain from giving flowers to the wife of a company’s CEO. In other words, do not make the call to the florist and remember sometimes a rose is not just a rose especially when it comes to FCPA enforcement. 

For a copy of the SEC Complaint, click here

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

 

© Thomas R. Fox, 2010

June 15, 2010

FCPA Reporting-To Whom Does Your CCO Report?

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

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

I.                   US Sentencing Guidelines 

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

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

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

II.                Opinion Release 04-02

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

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

III.             Industry Debates 

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

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

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

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

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

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

So which approach does your company utilize? 

A shorter version of this post appeared in the FCPA Blog, to read click here.

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

© Thomas R. Fox, 2010

March 26, 2010

Nigerian Bribery Box Score

Filed under: FCPA,FCPABlog — tfoxlaw @ 2:47 pm
Tags: , , , ,

Opening Day of the Baseball season is fast approaching and perhaps it is time to give a baseball statistician’s view to the Nigerian bribery case. Yesterday, Rob Evans in The Guardian reported that a UK court ruled that UK citizen Jeffery Tesler should be extradited to the US to stand trial. District Judge Caroline Tubbs, sitting at Westminster magistrates’ court in London, rejected Tesler’s arguments to fight off the extradition attempt. Judge Tubbs found that American prosecutors had alleged the crimes had a “substantial connection” with the US. She said that the Americans had already convicted one of the companies in the consortium for its part in the decade-long bribery scheme and one of the key executives who organized the corrupt payments. The Guardian, furthermore, reported that Judge Tubbs also rejected Tesler’s argument that it would be “unjust and oppressive” to send him to America as prosecutors had taken a long time to charge him. Tesler had argued that he would no longer be able to get a fair trial in the US. However, the judge rejected this argument, pointing out that he was responsible for part of this delay, as he had hired lawyers to block prosecutors obtaining evidence from Switzerland.

One individual, former KBR CEO Jack Stanley has pleaded guilty to violation of the Foreign Corrupt Practices Act (FCPA) in connection with the matter. He was sentenced to 7 years in prison and is subject to ongoing cooperation with authorities on this issue.

KBR admitted that a consortium of which it was a member paid Nigerian officials at least $132 million in bribes for engineering, procurement and construction contracts awarded between 1995 and 2004 to build liquefied natural gas facilities on Bonny Island, Nigeria. The consortium was named TSJK and consisted of subsidiaries of the following entities: KBR (then owned by Halliburton); Technip, French company; ENI, an Italian company; and JGC, a Japanese company.

SETTLEMENT (or RESERVED FOR SETTLEMENT) BOX SCORE

Entity Fine, Penalty and Disgorgement of Profits (in $ millions) Amount Reserved for Resolution (app. in $ millions)
Halliburton (KBR) $579  
ENI                              $340
Technip                              $330
JGC                     None reported
Total $579                            $670

 So for those of you keeping score at home, there has been and could be fines, penalties and profit disgorgement of over $1.2 billion. This figure does not include the amount paid out by these corporations for attorneys’ fees, forensic investigative costs and other professional fees which can be only speculated as priceless.

This amount will most probably be paid to the US government but not to the Nigerian government, the country which is alleged to be the focus of the bribery. The FCPABlog has posed the question that “Some in Nigeria will no doubt ask why the penalty money should end up in the U.S. Treasury and not their country?”. One reason could be that there is no current Nigerian investigation into the matter. In February, MainJustice reported that the Nigerian Senate subcommittee tasked with conducting the inquiry into the bribery scandal announced it was shutting itself down, saying that under the US-Nigeria Mutual Legal Assistance treaty, it could not obtain records from American investigators relevant to the investigation. While it does seem odd to this commentator that Nigeria would end its investigation of so public a scandal, we would only conclude that Nigeria must have its own reasons for doing so.

All of this and Opening Day is less than 10 days away. We can hardly wait.

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

© Thomas R. Fox, 2010

March 14, 2010

The Only Defense: Adequate Procedures under the UK Bribery Bill

With wide cross-party support it is anticipated that the Bribery Bill will pass the House of Commons and become law by May, 2010. The Bribery Bill amends and repeals existing anti-bribery offences under the Public Bodies Corrupt Practices Act 1889, the Prevention of Corruption Act 1906 and the Prevention of Corruption Act 1916 and abolishes the UK common law offenses of bribery and embracery (bribery of jurors). This proposed legislation represents a long awaited simplification of the law on corruption and makes the UK compliant with its international obligations under the OECD. It will have a major impact on the way businesses connected to the UK manage their international business.

There is one affirmative defense listed in the Bribery Bill. The is the ‘adequate procedures’ defense. The Explanatory Notes to the Bribery Bill indicate that this narrow defense would allow a corporation to put forward credible evidence that it had adequate procedures in place to prevent persons associated from committing bribery offences. Although not explicit on the face of the Bill, in accordance with established case law, the standard of proof the defendant would need to discharge is the balance of probabilities. The legislation requires Secretary of State to publish guidance on procedures that relevant commercial organizations can put in place to prevent bribery by persons associated with their entity.

Other than this commentary, the Bill provides no further information on what might constitute ‘adequate procedures’ as a defense but the Government has signaled that it will work with the UK business community to provide appropriate guidance to this critical component of the Bribery Bill. The UK law firm KattenMuchin has indicated that they expect the Government will apply a test regarding the ‘adequate procedures’ defense “with regard to the size of the company, its business sector and the degree to which it operates in high risk markets.”

While it might only give general guidance, the United States Department of Justice has published its Sentencing Guidelines which provide a framework to construct an ethics and compliance program which will meet the strictures of the FCPA. Using the Sentencing Guidelines, Richard Cassin has written about an effective compliance program, in his excellent FCPABlog. He notes that the purpose of an “effective compliance program” is to prevent and detect criminal conduct. In his listing his suggestions for what constitutes an “effective compliance program” He suggested the following:

1. A Written Program. A company must have standards and procedures in place to prevent and detect criminal conduct.
2. Board Oversight. A public company’s Board of Directors must be knowledgeable about the content and operation of the compliance program and must exercise reasonable oversight of its implementation and effectiveness.
3. Responsible Persons. One or more individuals among a company’s high-level personnel must be assigned overall responsibility for the compliance program.
4. Operating and Reporting. One or more individuals must be delegated day-to-day operational responsibility for the compliance program. They must report periodically to high-level personnel on the effectiveness of the compliance program. The individuals must have adequate resources, appropriate authority, and direct access to the Board or Audit Committee.
5. Management’s Record of Compliance. A company must use reasonable efforts not to hire or retain personnel who have substantial authority and whom a company knows or should know through the exercise of due diligence have engaged in illegal activities or other conduct inconsistent with an effective compliance program.
6. Communicating and Training. A company must take reasonable steps to communicate periodically and in a practical manner its standards and procedures, and other aspects of the compliance program, to directors, officers, executives, managers, employees and agents — by conducting effective training programs and otherwise disseminating information appropriate to the individuals’ respective roles and responsibilities.
7. Monitoring and Evaluating; Anonymous Reporting. A company must take reasonable steps (a) to ensure that its compliance program is followed, including monitoring and auditing to detect criminal conduct, (b) to evaluate periodically the effectiveness of the compliance program and (c) to have and publicize a system, which may include mechanisms that allow for anonymity or confidentiality, whereby a company’s employees and agents may report or seek guidance regarding potential or actual criminal conduct without fear of retaliation.
8. Consistent Enforcement — Incentives and Discipline. A company’s compliance program must be promoted and enforced consistently throughout a company through appropriate (a) incentives to perform in accordance with the compliance program and (b) disciplinary measures for engaging in criminal conduct and for failing to take reasonable steps to prevent or detect criminal conduct.
9. The Right Response. After criminal conduct has been detected, a company must take reasonable steps to respond appropriately and to prevent further similar criminal conduct, including making any necessary modifications to a company’s compliance program.
10. Assessing the Risk. A company must periodically assess the risk of criminal conduct and take appropriate steps to design, implement, or modify its compliance program to reduce the risk of criminal conduct identified through this process.

Once again the British Government has not provided any guidance was to what might constitute “adequate procedures” under the Bribery Bill. However procedures based upon some of all of the elements above would certainly be a good starting point for any UK corporation to put in place.

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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, 2010

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