FCPA Compliance and Ethics Blog

July 9, 2014

Mid-Year FCPA Report, Part I

Mid Year ReportAs we are now past the halfway mark of 2014, I thought it might be a good time to look at the year in review, so over the next couple of days, I will be reviewing what I believe to be some issues and developments to the Foreign Corrupt Practices (FCPA) world. In this Part I, I will look at an enforcement action which brought a company to No. 5 on the list of highest FCPA settlements, to a company which seemingly came back from the edge of very bad FCPA conduct and finally some individual prosecutions and one interesting settlement in a SEC action against individuals. 

Alcoa

In one of the more long-running international bribery and corruption sagas, Alcoa Inc. settled a FCPA action by having one of its subsidiary’s plead guilty to bribing officials in Bahrain to win contracts to supply the raw materials for aluminum to Aluminum Bahrain BCS or Alba. As reported by the FCPA Professor, “Alcoa entities agreed to pay approximately $384 million to resolve alleged FCPA scrutiny (a criminal fine of $209 million and an administrative forfeiture of $14 million to resolve the DOJ enforcement action and $175 million in disgorgement to resolve the SEC enforcement action – of which $14 million will be satisfied by the payment of the forfeiture in the criminal action).” Alcoa now sits as No 5 on the list of all-time FCPA settlements and has the distinction of paying the largest disgorgement.

Payments were made through shell corporations, agents and distributors. As reported in the Wall Street Journal (WSJ), in an article entitled “Alcoa Snared in Bahrain Bribery Case”, although one of its subsidiaries, Alcoa World Aluminum, pled guilty to violating the FCPA, its parent Alcoa issues a statement that “neither the Department of Justice nor the SEC alleged or found that anyone at Alcoa “knowingly engaged in the conduct at issue.”” According to the WSJ article, the bribery scheme had been in place since at least 1989. Further, at least one in-house counsel had raised concerns in 1997 that the contracts around the bribery scheme when she wrote in an email to Alcoa’s corporate headquarters stating “The contract looks odd. Are these factors OK from an anti-trust and FCPA perspective?” I guess sometimes actual knowledge is really not actual knowledge.

Hewlett-Packard (HP)

In what can only be described as one of the most stunning failures of internal controls to be seen in the annuls of FCPA enforcement actions, HP resolved a matter through a guilty plea, a Deferred Prosecution Agreement (DPA) and a Non-Prosecution Agreement (NPA), for three separate bribery schemes in three countries. For a deal in Russia, HP paid a one-man agent approximately $10MM, which was simply a conduit to pay bribes. In Poland, HP’s Country Manager literally carried bags of cash in the amount of $600K to a Polish government representative for contracts. Finally, in HP’s Mexico subsidiary, according the to the Securities and Exchange Commission (SEC) Press Release, HP “paid a consultant to help the company win a public IT contract worth approximately $6 million. At least $125,000 was funneled to a government official at the state-owned petroleum company with whom the consultant had connections. Although the consultant was not an approved deal partner and had not been subjected to the due diligence required under company policy, HP Mexico sales managers used a pass-through entity to pay inflated commissions to the consultant.”

As noted by Mike Volkov, “In total the three HP entities paid $76 million in criminal penalties and forfeitures. In a related filing, the SEC and HP entered into a civil settlement under which HP agreed to pay $31 million in disgorgement, prejudgment interest, and civil penalties.”

The enforcement action is also notable for two other factors. The first is that HP did not self-disclose the conduct even after German authorities raided the company’s Germany subsidiary’s offices in connection with the Russia transaction. HP seemingly made a dramatic comeback in the eyes of the Department of Justice (DOJ), which leads to the second point of note. That involved the overall penalty assessed against HP. What are we to make of the criminal fines levied against the Russian and Polish subsidiaries of HP? The US Sentencing Guidelines for the Polish subsidiary suggested a fine range of $19MM to $38MM, yet the final fine was $15MM. The US Sentencing Guidelines for HP’s Russian subsidiary suggested a fine range of $87MM to $174MM, yet the final fine was $58MM.

What does it all mean? It would seem that a company could come back from the brink of very bad facts and no self-disclosure. How did HP do it? The resolution documents only reference HP’s ‘extraordinary cooperation’ and installation of a best practices compliance program. My hope is that HP will publicize the steps it took so that the rest of us might learn how they accomplished the results they received.

Individual Indictments, Arrests and Settlements

As reported in the FCPA Blog, there were a number of individuals who fell under FCPA criminal scrutiny in the first half of 2014.

PetroTiger

Joseph Sigelman, the former co-CEO of PetroTiger Ltd., was charged with conspiracy to violate the FCPA and to commit wire fraud, conspiracy to launder money, and substantive FCPA and money laundering offenses. He is accused of bribing an official at Ecopetrol SA, Colombia’s state-controlled oil company, and defrauding PetroTiger by taking kickbacks. As reported by Joel Schectman in the WSJ, two other PetroTiger executives, Sigelman’s co-CEO, Knut Hammarskjold and the company’s former General Counsel (GC), Gregory Weisman, have already pled guilty to the charges.

It is alleged that Sigelman bribed an official in Colombia to help win an oil contract worth $39 million and of seeking kickback payments during the acquisition of another company, in exchange for a better price. Most interestingly, even after the company conducted an internal investigation, which uncovered the conduct and self-disclosed its findings to the DOJ, Sigelman has said he will go to trial and contest the charges.

Firtash and His Associates

In what may be an early preview of the corrupt doings of the old guard in Ukraine, there were a number of individuals arrested or indicted in connection with an alleged scheme to pay $18.5 million in bribes to officials in India to gain titanium mining rights. They include team leader, Dmitry Firtash, a Ukrainian national, who was arrested in Vienna, Austria, March 12, 2014, and the following were indicated with Firtash and charged with conspiracy to violate the FCPA, and who are still at large: Andras Knopp, a Hungarian businessman,; Suren Gevorgyan a Ukrainian national,; Gajendra Lal, an Indian national and permanent resident of the US; Periyasamy Sunderalingam, a Sri Lankan. K.V.P. Ramachandra Rao, a member of parliament in India and former official of the state of Andhra Pradesh, has been charged along with the other five defendants with one count each of a racketeering conspiracy and a money laundering conspiracy, and two counts of interstate travel in aid of racketeering. Although he was not charged under the FCPA, the DOJ has asked India to arrest him.

Direct Access Partners

Continuing the investigation into the first investment bank, Direct Access Partners LLC (DAP), to be charged with FCPA violations, there were two more individuals charged, in addition to the four from 2013 who all pled guilty. Benito Chinea, former CEO of DAP, was charged in federal court in New York for bribery involving Venezuela’s state bank and Joseph Demeneses, a former managing director, was also charged in the 15-count indictment of paying kickbacks to a vice President of the Venezuelan Nation Bank BANDES, in exchange for the bank’s bond-trading business.

Noble Energy Executives

While it is not entirely clear if these cases belong in the first half or second half of the their, the Securities and Exchange Commission (SEC) rather unceremoniously dropped its enforcement action against one former and one current Noble Energy executives. The SEC had claimed that former Noble Corporation CEO Mark A. Jackson along with James J. Ruehlen, had bribed customs officials to process false paperwork purporting to show the export and re-import of oil rigs, when in fact the rigs never moved. These actions led to allegations that Jackson and Ruehlen directly violated the anti-bribery provisions, internal controls and false records provisions relating to the FCPA. For all of these claims the SEC sought injunctive relief and monetary damages.

But as reported in the FCPA Blog, “A docket entry from July 1 for the U.S. federal district court in Houston said all deadlines in the SEC’s civil FCPA enforcement action against two former Noble executives have been vacated “pending final settlement documents.”” Both defendants agreed not to violate or aid and abet any violation of the FCPA going forward. Pretty stout stuff when you consider that all US citizens have that obligation going forward, whether they agree to it in a court filed documents or not.

Tomorrow we continue with Part II.

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

 

 

April 14, 2014

The HP FCPA Settlement

FCPA SettlementLast week the Department of Justice (DOJ) and Securities and Exchange Commission (SEC) jointly announced the conclusion of a Foreign Corrupt Practices Act (FCPA) enforcement action against Hewlett-Packard Company (HP). In the settlement, HP agreed to pay $108MM in fines, penalties and disgorgements for criminal and civil acts. To say that it was one of the more perplexing FCPA settlements would seem to be an understatement. While some will read the settlement documents and see conduct which did not merit such a high total amount of fines and penalties, I am not from that camp.

The tale of this sordid affair of bribery and corruption occurred over 3 continents with multiple countries involved, evidencing an entire breakdown in company internal controls and a complete lack of a culture of compliance. Yet the settlement documents make great pains to emphasize that few employees were actually involved in the nefarious conduct. How bad was the conduct? Think right up there with BizJet because we had bags of cash delivered to a Polish government official. (But unlike BizJet, the Board of Directors did not approve the bribery scheme and it was not taken across the border.) For the Russian deal, it was shopped through several countries with multiple levels of company review, which did not seem to work or care much about anything except getting the deal done. For Mexico, they just seemed to get a free pass where the contract description for the agent who paid the bribe was “influencer fee”.

Finally, as most readers might remember, HP did not self-report this misconduct to the DOJ or SEC. Apparently, the story of HP’s bribery by its German subsidiary to gain a contract in Russia was broken by the Wall Street Journal (WSJ) article in April 15, 2010. The next day, the DOJ and SEC announced they were investigating the allegations of bribery. However, HP was made aware of the allegations by its German subsidiary in December 2009, when German authorities raided HP’s offices in Munich and arrested one HP Germany executive and two former employees. Yet HP never self-reported. Not exactly the poster child for self-disclosure for any company going forward.

Of course HP’s public response at the time indicated its attitude, when a HP spokesperson was quoted in the WSJ article as saying “This is an investigation of alleged conduct that occurred almost seven years ago, largely by employees no longer with HP. We are cooperating fully with the German and Russian authorities and will continue to conduct our own internal investigation.”

More befuddlement comes from the reported facts around HP Germany. As noted by the WSJ report, one, then current, HP executive was arrested and two former employees were arrested in connection with the investigation by German authorities. There is no mention of them in any of the settlement documents. The WSJ article also reported that investigation-related documents submitted to a German court showed that German prosecutors were “looking into whether H-P executives funneled the suspected bribes through a network of shell companies and accounts in places including Britain, Austria, Switzerland, the British Virgin Islands, Belize, New Zealand, the Baltic nations of Latvia and Lithuania, and the states of Delaware and Wyoming”. While some of these countries were mentioned in the settlement documents there was no mentions of DOJ or SEC investigations into Wyoming, Belize, the British Virgin Islands or New Zealand.

What are we to make of the criminal fines levied against the Russian and Polish subsidiaries of HP? The Polish subsidiary pled guilty to a two count Criminal Information consisting of (1) violating the FCPA’s internal control provisions; (2) violating the FCPA’s books and records provisions. The US Sentencing Guidelines suggested a fine range of $19MM to $38MM, the final fine was $15,450,244.

For the Russia deal, the Russian subsidiary pled guilty to a four count Criminal Information consisting of (1) conspiracy to violate the books and records provisions of the FCPA; (2) violating the FCPA’s anti-bribery provisions; (3) violating the FCPA’s internal control provisions; (4) violating the FCPA’s books and records provisions. The US Sentencing Guidelines suggested a fine range of $87MM to $174MM, yet the final fine was $58,772,250.

Finally, in Mexico HP’s subsidiary, according the to the SEC Press Release, “paid a consultant to help the company win a public IT contract worth approximately $6 million. At least $125,000 was funneled to a government official at the state-owned petroleum company with whom the consultant had connections. Although the consultant was not an approved deal partner and had not been subjected to the due diligence required under company policy, HP Mexico sales managers used a pass-through entity to pay inflated commissions to the consultant.” This was internally referred to by HP as an “influencer fee.” Pretty clear evidence of what it was to be used for, wouldn’t you say? Yet the DOJ did not to criminally prosecute the company’s Mexican subsidiary and entered into a Non-Prosecution Agreement (NPA), HP agreed to pay forfeiture in the amount of $2,527,750.

How did HP accomplish all of this? In a Press Release HP Executive Vice President and General Counsel John Schultz said, “The misconduct described in the settlement was limited to a small number of people who are no longer employed by the company. HP fully cooperated with both the Department of Justice and the Securities and Exchange Commission in the investigation of these matters and will continue to provide customers around the world with top quality products and services without interruption.”

As reported by the FCPA Professor, in his blog post entitled “HP And Related Entities Resolve $108 Million FCPA Enforcement Action”, the HP Russian subsidiary Plea Agreement gave the following factors for the reduction in the fine from the Sentencing Guideline range:

“(a) monetary assessments that HP has agreed to pay to the SEC and is expected to pay to law enforcement authorities in Germany relating to the same conduct at issue …; (b) HP Russia’s and HP’s cooperation has been, on the whole, extraordinary, including conducting an extensive internal investigation, voluntarily making U.S. and foreign employees available for interviews, and collecting, analyzing, and organizing voluminous evidence and information for the Department; (c) HP Russia and HP have engaged in extensive remediation, including by taking appropriate disciplinary action against culpable employees of HP and enhancing their internal accounting, reporting, and compliance functions; (d) HP has committed to continue enhancing its compliance program and internal accounting controls … (e) the misconduct identified … was largely undertaken by employees associated with HP Russia, which employed a small fraction of HP global workforce during the relevant period; (f) neither HP nor HP Russia has previously been subject of any criminal enforcement action by the Department or law enforcement authority in Russia or elsewhere; (g) HP Russia and HP have agreed to continue to cooperate with the Department and other U.S. and foreign law enforcement authorities, if requested by the Department …”

In the same blog post, the Professor reported the following reasons were stated for reduction in the final fine by HP’s Polish subsidiary’s:

“(a) HP Poland’s cooperation with the Department’s investigation; (b) HP Poland’s ultimate parent corporation, HP, has committed to maintain and continue enhancing its compliance program and internal accounting controls …; and (c) HP Poland and HP have agreed to continue with the Department and other U.S. and foreign law enforcement authorities in any ongoing investigation …”

We have witnessed companies, which have engaged in ‘extraordinary cooperation’ with the DOJ during the pendency of their FCPA investigations. BizJet is certainly one that comes to mind. Further, there are clear examples of companies, which extensively remediated during the pendancies of their FCPA investigations, from which they clearly benefited. Two prime examples are Parker Drilling, which not only received a financial penalty below the suggested range but also was not required to have a corporate monitor, while they had C-Suite involvement in its bribery scheme. Weatherford seeming came back from the brink during mid-investigation when they hired Billy Jacobson and turned around not only their attitude towards cooperation with the DOJ but also their efforts toward remediation.

Both of these companies are headquartered in Houston and both have been quite active on the conference circuit talking about their compliance programs so most compliance practitioners are aware that these companies are on the forefront of best practices. Perhaps HP is on some circuit doing that, somewhere. If so, kudos to them. If their remediation work led to a best practices compliance program for the company and their extraordinary cooperation led to the astonishing reduction in penalties to their entities, I certainly tip my cap to them. If their lawyers were great negotiators and made great presentations to the DOJ and SEC, all of which led to or contributed to the final results, a tip of the cap to them as well.

So what is the lesson to be learned for the compliance practitioner? Other than befuddlement, I am not sure. Congratulating HP and its counsel is not a lesson it is an action. If HP now has a best practices compliance program, I hope they will provide the compliance community with the lessons that they learned and incorporated into their compliance program, which allowed them to obtain the fines below the minimum suggested range. If they have incorporated some enhanced compliance components into their program I hope they will share those enhancements too.

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, 2013

The HP Acquisition of Autonomy – Lessons Learned for Doing Compliance ‘By the Book’

Doing something ‘by the book’ means more than following a process. It means following that process during high stress times. One of the things that I think gets missed when discussing compliance programs is the need for rigor in the process. By this not only do I mean that your process needs to be robust but that you need to follow that process even in very extraordinary circumstances. Further, if you deviate from your compliance process you should document the reason for doing so. During a compliance emergency is not the time to depart from your well-thought out process that you use at all other times. One of the things that appear to have gotten Wal-Mart into trouble over its Mexican subsidiary’s actions is that when allegations of bribery and corruption bubbled up to its corporate office, the standard investigation protocol was over-ridden and a completely new and different investigation protocol was put into place. A protocol which had the persons accused of bribery and corruption investigating themselves. Can you guess what the result was?

Similarly, the ongoing news about the Hewlett-Packard Co’s (HP) acquisition of Autonomy Corp., (Autonomy) and its attendant fall-out can provide similar lessons for the compliance professional. As reported by Ben Worthen and Justin Scheck in the Wall Street Journal (WSJ) article entitled “Inside H-P’s Missed Chance To Avoid a Disastrous Deal”, HP did not follow its own internal protocol for acquisitions during the time that led up to its purchase of the British company Autonomy. Additionally, HP’s actions and decisions before and after the acquisition probably steered the deal in to, at a minimum, a very difficult path to success.

New Leadership

In 2010, HP made the decision to bring in someone, who was little known in Silicon Valley, to run the company, that person being Leo Apotheker, who had headed the German company, SAP. However, little noted at the time was the change in the Board of Directors, where “H-P simultaneously got a new board chairman, also a software specialist: Ray Lane, a venture capitalist and former president of Oracle Corp. Soon after, four H-P board members didn’t stand for re-election, and five new members arrived.” In other words, a majority of the top leadership positions in the company changed in a very short time.

Apotheker immediately made clear his desire to purchase one or more software companies. However, the Board of Director’s “finance committee scotched one, and negotiations to buy the other fell apart over price. A frustrated Mr. Apotheker told Mr. Lane, “I’m running out of software companies,” said a person familiar with the conversation.” This led HP to take a look at Autonomy.

Board Protocol

Another change for HP in the pre-acquisition process regarding the Autonomy deal related to Board of Director oversight. It came about because Apotheker had two major initiatives early in his tenure. One was to divest the company of its PC-manufacturing business. The second was to purchase Autonomy. These initiatives were considered so large and complex that the Board of Directors split itself into two separate groups to evaluate each proposal. So only half the Board was looking into the details of the Autonomy deal. Further, “H-P’s normal procedures require the board’s finance committee to review and approve deal proposals before they reach the full board. That didn’t happen with the proposal to acquire Autonomy, said people familiar with how the board proceeded.” While the split of the Board of Directors provided some ease of coordinating some logistical issues such as scheduling meetings, it provided Apotheker, with “more opportunities to lobby for a deal, said people familiar with the board’s activities.”

Red Flag Raised (or not)

One of the things that HP’s Board of Directors were surprised about during the due diligence process was “how little detail about the target firm’s finances became available. Autonomy allowed a review of financial statements and about 25 sales contracts. H-P also wanted the “working papers,” or original financial material, underlying Autonomy’s audits. Autonomy declined to provide them, citing U.K. corporate-takeover rules that require companies to disclose the same documents to all potential suitors.” While understanding that it is never the case that an acquiring company gets to review everything that it wants to during due diligence, reviewing only 25 sales contracts for a company that you are about to spend over $8 bn on does seem a bit of an under-representation of financial data to review. Moreover, some of the members of the HP due-diligence team “said they were reassured, to some extent, by Autonomy’s being a public company that had been audited for years.” Autonomy’s UK audit firm was Deloitte.

But even Deloitte raised red flags with HP, however weakly. At one point, people from HP and KPMG, HPs audit team in the acquisition of Autonomy, spoke by telephone with the Deloitte team. Someone at Deloitte “mentioned that about a year earlier, an Autonomy finance executive had alleged improper accounting at Autonomy, according to people familiar with the call. Three of these people  said Deloitte mentioned the issue briefly and added that a review had found the allegation to be baseless. The H-P team didn’t investigate further, one of the people said, and didn’t share the information with either Mr. Apotheker or H-P’s board.” The articles claims that “Neither Mr. Apotheker nor the directors ever heard such an allegation during negotiations, according to several people either close to the CEO or knowledgeable about the board. Said one: “There were zero red flags raised about this company during the whole process.””

Loss of Steam

The WSJ article referred to the lack of enthusiasm that some members of senior management at HP had over the Autonomy transaction. For instance, “Chief Financial Officer Cathie Lesjak said an acquisition would batter H-P’s balance sheet, using up its cash and incurring debt, said people familiar with the conversations.” Pretty profound when you think about it now. But beyond simply the Autonomy debacle, the Board of Directors was becoming equally uneasy with Apotheker’s desire to cut the heart out of the company by getting rid of the PC-manufacturing business. So just after the Autonomy purchase, the Chairman of the Board Mr. Lane “spoke to senior H-P executives and found a near-universal view that their CEO wasn’t right for the job. In late September, 35 days after the agreement to buy Autonomy and 11 months into Mr. Apotheker’s tenure, the board dismissed him.”

This meant that the person who had shepherded the deal through the company was gone. Apotheker had not only pushed for the deal but said he had plans on how to integrate Autonomy into HP and make it work. He was quoted in the WSJ article as saying, “”We had concrete and ambitious plans on how to integrate and leverage the Autonomy acquisition,” Mr. Apotheker said. “But I was gone by the time the deal closed.”” This led to claims by the head of Autonomy, Mike Lynch to claim that the intention for HP to integrate and sell Autonomy software after the transaction never came to pass. “Within weeks, Mr. Lynch told the new H-P CEO, Ms. Whitman, in an email that when he discussed with H-P’s server unit the idea of selling Autonomy software along with H-P hardware, he received a “very negative response.””

The End

Whitman and other HP executives went to the UK to try and figure out what went wrong with the transaction, the integration or both, and two weeks later Lynch was fired by HP. Within weeks of the Lynch firing, HP said that “the company heard an allegation from an Autonomy executive that Autonomy manipulated its numbers. That set in train the process that led to H-P’s November write-down and allegation of improper accounting by the software firm.” Now the US Department of Justice (DOJ), the Securities and Exchange Commission (SEC) and the UK Serious Fraud Office (SFO) are all investigating the allegations that Autonomy manipulated its books and records.

Lessons Learned

I understand that you never have enough time to perform all the pre-acquisition due diligence that you might like to, whether it is financial or compliance. However, several clear lessons standout for the compliance practitioner from this matter. The first, and foremost, is to establish your pre-acquisition protocol, not during the time you are acquiring a company but before so. If you normally require approval from the full Board of Directors keep that requirement in place and do not cut your approval to one-half because you have two large matters to digest. Second, if a red flag is raised, you should clear it, not the person or entity that brings you the information. The third is to have a post-acquisition plan in place and, to the extent you can do so under the circumstances presented, follow it.

All three of the above suggestions would seem to be the perfect description of ‘by the book’. My father was in the US Navy during World War II and Korea. He is also an engineer. Those two backgrounds would seem to make him as strong a candidate for as ‘by the book’ as possible. But he was also a believer in information, analysis and documentation. The reason, he believed that if you did not study it, you could not document it; if you did not document it, you could not analyze it; and if you did not analyze it, you could not improve it. So document, document and then document everything you do from the compliance perspective and use that information to create a better book, but only if the information and your analysis thereof warrants it.

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

September 17, 2012

HP, the Failure to Listen to Employees or the Failure to Raise a Hand

The charging last week of three former Hewlett-Packard (HP) employees in Germany reminded me of some of the interesting underlying facts of the case. The Wall Street Journal (WSJ) has reported that at least one witness has said that the transactions in question were internally approved by HP through its then existing, contract approval process. Mr. Dieter Brunner, a contract employee who was working as an accountant on the group that approved the transaction, said in an interview that he was surprised when, as a temporary employee of HP, he first saw an invoice from an agent in 2004. “It didn’t make sense,” because there was no apparent reason for HP to pay such big sums to accounts controlled by small-businesses, Mr. Brunner said. He then proceeded to say he processed the transactions anyway because he was the most junior employee handling the file, “I assumed the deal was OK, because senior officials also signed off on the paperwork”.

The lesson learned here is not only must there be training to all employees but a company must listen to these employee-raised issues. In almost every circumstance where a significant compliance matter has arisen, if the issue had been reported or at least sent up the chain for consideration, there is a good chance that the incident would not have exploded into a full Foreign Corrupt Practices Act (FCPA) compliance violation. Matthew King, Group Head of Internal Audit at HSBC, calls this concept “escalation” and he believes that one of the more key features of any successful compliance program is to escalate compliance concerns up the chain for consideration and/or resolution.

This means that in almost every circumstance regarding a compliance issue he had been involved with, at some point a situation arose where an employee did not report a situation or event up to an appropriate level for additional review. This failure to escalate leads to the issue not reaching the right people in the company for review/action/resolution and the issue later becomes more difficult and more expensive to deal with in the company. A company needs to have a culture in place to not only allow escalation but to actively encourage elevation. This requires that both a structure and process, for the structure, exist. The company must then train, train and train all of its employees. Lastly, while a whistleblower process or hotlines are necessary these should not be viewed as the only systems which allow an employee to escalate a concern. The key would appear to be both having the systems in place to allow such escalation and to train all employees, including contract employees on how to escalate an issue.

Mike Volkov, on his Blogsite Corruption, Crime and Compliance, released a video last week where he talked about the need for a company to listen to employee complaints. He talked about this concept in terms of a whistleblower but it also holds true if an employee escalates a concern about an anti-corruption issue. In this day of eight substantive complaints coming into the Securities and Exchange Commission (SEC) whistleblower program on a daily basis, companies simply cannot afford to not listen. Think what position HP might be in today if this temporary employee had escalated his concern and the company had listened to him. Initially, HP would not have been under investigation by governmental authorities in Germany and Russian. In the US, both the Department of Justice (DOJ) and SEC are investigating the transaction. More ominously for HP, investigators from these jurisdictions are also now investigating other international operations, including those in Russia and the former CIS states to ascertain if other commissions paid involved similar allegations of bribery and corruption as those in the German subsidiary’s transaction.

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

© Thomas R. Fox, 2012

Blog at WordPress.com.