FCPA Compliance and Ethics Blog

July 7, 2014

No Sex Please, We’re British: More from GSK in China

No Sex PleaseThe above is the title of a British television show/play/movie which is a farcical romp about a newlywed couple who mistakenly receive an initial shipment of pornographic pictures, then movies and women, all sent from Sweden to England. The plot turns on their attempts to dispose of the ‘offending materials’ while under the noses of their parents/in-laws, employers and friends. In his review of the show, Christopher Heath said, “No Sex Please, We’re British shows how we stuffy Brits tie ourselves in knots when it comes to this subject. The funny thing is how the cast, led by Ronnie Corbett, handle their predicament and it has to be said, they cope with aplomb. As you might expect, the plot is all about mix-ups, keeping a stiff upper lip, maintaining a veneer of social respectability, not getting found out about something someone hasn’t done and failing miserably.”

I thought about that ubiquitous work of British visual and audio entertainment when the revelations from late June that the GlaxoSmithKline (GSK) PLC corruption scandal all started with a sex tape. In an article in the MailOnline, entitled “How a secret sex tape plunged British drugs giant Glaxo in a £90million bribery probe”, Rebecca Evans reported “A covert sex tape involving a senior executive and his Chinese lover was the trigger for a major investigation into corruption at British drugs giant GlaxoSmith-Kline, it was revealed yesterday. The video of married Mark Reilly and his girlfriend was filmed by secret camera and emailed anonymously to board members of the pharmaceutical firm. It led to an investigation that has rocked the £76billion company – which stands accused of bribing doctors and other health officials in China with £320million of gifts, including sexual favours from prostitutes, to persuade them to prescribe its drugs.”

This sex tape, along with allegations of bribery and corruption, were sent to GSK Board members, including Chief Executive Officer (CEO), Andrew Witty in March 2013 by someone with the email address “GSK Whistleblower”. Evans reported that two additional emails “making serious fraud allegations” were sent as well, one in January and one in May. In an article in the Wall Street Journal (WSJ), entitled “Sex Video Sheds Light in Glaxo China Case”, Laurie Burkitt reported that “The British drug maker regarded the video—apparently shot without the executive’s knowledge—as a breach of security, the person said.” Evans reported that in addition to this security breach, GSK believed the sex tape to be a “threat or blackmail attempt”. One of GSK’s responses was to hire the firm ChinaWhys Co., to investigate the matter. The firm’s principals, former journalist Peter Humphrey and Yu Yingzeng, a naturalized US citizen, were not able to determine who placed the video camera in Reilly’s Shanghai apartment, who shot the video or who sent it to GSK executives. However Evans reported “But a few months after starting to investigate Miss Shi, Mr Humphrey was arrested along with his wife Yu Yingzeng, a US citizen and daughter of one of China’s most eminent atomic weapons scientists. According to the Sunday Times, Mr Humphrey’s arrest and detention in July was at around the same time that China began a police probe into GSK’s alleged bribery.” And, unfortunately for Humphrey and his wife, they were arrested last August for allegedly breaking of Chinese laws relating to information privacy.

In addition to the investigation into the provenance of the sex tape and its sender, GSK had also engaged in an internal investigation into the substantive allegations of bribery brought forward by the “GSK Whistleblower” in emails to the GSK Board in January and May, 2013. As reported by Evans, “The emails laid out a series of sales and marketing practices described as ‘pervasive corruption’.” Unfortunately for the company, GSK “found ‘no specific evidence’ to substantiate the claims. However, the accusations are virtually identical to the charges laid by police against Mr Reilly and 45 other suspects. Last month, Britain’s Serious Fraud Office announced it is to investigate the company’s ‘commercial practices’.”

‘Honey-pots’ and ‘Sparrow-nests’ are well known terms for anyone who has read cold war tales of espionage between the former Soviet Union and the US. However, the Reilly sex-tape and the GSK bribery scandal would seem to be an entirely different can of worms. In an article in Time, entitled “What the GSK Sex Tape Says About Surveillance in China, Hannah Beech wrote that in China, “Surveillance – or the threat of surveillance — is a constant in China. As a journalist, I may be more interesting to the powers that be than some other foreigners here. But other expat friends who’ve been followed, hacked or otherwise tracked in China include diplomats, NGO staff and businesspeople. Also, artists and academics.” Such surveillance includes having “email auto-forwarding mysteriously activated or to be tailed by a black Audi while on assignment in the Chinese countryside.”

For the compliance practitioner the lessons of GSK in China continue to resonate, unfortunately for the negative consequences to GSK and its employees. All of the above articles note that the allegations of bribery and corruption presented to GSK by the “GSK Whistleblower” were also made to Chinese officials, who then began to investigate the company. Andrew Ward, reporting in a Financial Times (FT) entitled “Sex tape adds to murk of GSK China scandal”, said “A separate internal investigation was already under way into the bribery allegations that had first been made by a whistleblower in January.” Unfortunately for GSK, its internal investigation failed to turn up any evidence of bribery and corruption. More unfortunately for the company, “Mr. Reilly, a Briton and long-time GSK executive, was among 46 company employees identified by Chinese police in May as suspects when they handed evidence of “massive and systematic bribery” to prosecutors after a 10-month investigation.”

It does seem incredible at this point that any serious internal investigation could fail to turn up any of the evidence that the Chinese government has been able to develop against GSK. This points to the absolute importance of your internal investigations. Although the GSK investigation was focused in China, the same is true in the US, particularly for a US listed company subject to Dodd-Frank. Further, we must invoke that well-known British author George Orwell for reminding you that in some countries Big Brother really is watching you. And finally, you may not be paranoid as people really may be watching you and filming your most intimate acts.

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

May 7, 2013

Do Law Firms Have an In-House Privilege?

There is often a discussion about the retention of outside counsel to lead an investigation of alleged violations of the US Foreign Corrupt Practices Act (FCPA) so that the company may maintain the attorney-client privilege. But is there some other privilege which might be lurking in this relationship? This question was discussed in an article in the May issue of the ABA Journal, entitled “Inside Story”, by Mark Curriden, which details a discovery dispute before the Georgia Supreme Court where a law firm has claimed that it enjoys an attorney-client privilege in a malpractice claim brought by a former client. The case involves allegations that communications between a law firm and its in-house counsel are privileged in favor of the law firm and poses the following query: “whether communications between lawyers and in-house counsel are protected by the attorney-client privilege and the work product doctrine when a dispute arises between the firm and a client.”

The case involves three lawyers from the Savannah, GA law firm of Hunter, Maclean, Exley & Dunn PC (Hunter Mclean). The law firm had prepared certain real estate sales contracts, which were used by the firm’s client, St. Simons Waterfront LLC. After buyers began to opt out of these contracts to purchase certain properties, the law firm suggested that the company negotiate with the purchasers.

The company demanded that the law firm work to enforce the agreements. Curriden wrote that “The lawyers for Hunter Maclean took the scolding as a sign that St. Simons Waterfront was planning a malpractice claim against them and contacted the firm’s in-house counsel immediately after the call.” He quoted the lawyer for St. Simons Waterfront who said that “Within minutes of the conference call, Hunter Maclean lawyers were already taking legal steps to defend themselves for litigation, even though they were still representing the client and would continue to represent the client for another three months.”

The law firm understood that the company was threatening litigation against the law firm and claimed they told the client that it needed new counsel. The company said at no time did it suggest that it was preparing to sue its own lawyers and denies that the law firm told them after the phone call in question that a conflict existed and that the company should retain new counsel.

Indeed later, the client sued the law firm for malpractice in the drafting of the real estate contracts, in a case styled, St. Simons Waterfront v. Hunter, Maclean, Exley & Dunn. The dispute currently before the Georgia Supreme Court is over certain documents that the law firm claims is its internal attorney-client privileged communications , specifically including a 33-page memo from the firm’s own in-house lawyer describing the Feb. 18, 2008, conference call referenced above, that lawyers at the firm wrote the day after the telephone conversation occurred.

Susan W. Cox, counsel representing Hunter Mclean, said that “The documents and communications sought involve efforts by the firm to investigate, evaluate and consider how to respond to the client’s asserted claim.” Curriden further quoted her as stating that “Under the plaintiff’s argument, Cox says, “a law firm would have to immediately withdraw from any further client representation, regardless of the harm to the client and regardless of whether the client consented to the additional temporary and necessary representation, in order to protect its in-house information from disclosure in the malpractice claim. It was impossible for Hunter Maclean to immediately withdraw without causing great harm to the client. Under Georgia and federal law, the attorney-client privilege is interpreted to protect against disclosure of information obtained or shared in a confidential relationship, and that applies equally to communications with in-house and outside counsel.””

However, the trial court disagreed with the law firm’s position and ordered production of the documents “ruling that the privilege didn’t apply because Hunter Maclean failed to inform the client about its conflicts. The judge ordered Hunter Maclean to turn over the internal documents that St. Simons Waterfront was seeking.” Then “The Georgia Court of Appeals reversed, ruling that the firm’s communications with in-house counsel remained privileged because the in-house counsel was completely isolated from the St. Simons Waterfront legal work and thus did not have a conflict. St. Simons Waterfront appealed to the state supreme court. Oral arguments were held in March.”

The article posited the two schools of thought on this question. Attorney John G. Nelson, counsel for the St. Simons Waterfront, was quoted as saying “The appellate court’s reasoning “makes it too easy for law firms to conceal unethical conduct from clients…If the client’s attorneys consult with the in-house attorney—not for the purpose of meeting their ethical obligations to the client but to cover up their own malpractice, and the in-house attorney assists them in doing so—the firm could withhold that information simply because the in-house attorney was ‘segregated’ from directly representing the client.”” Nelson further said that “The reason is simple: When a law firm represents a current client, the entire law firm’s fiduciary and ethical duties are to that client.”

However at least 13 law firms which are not parties to this dispute, signed an amicus brief in support of the law firm in the discovery dispute. Interestingly, the American Bar Association (ABA) filed an amicus brief which stated the ABA “takes no position on whether the privilege and work product claims in this case should be sustained.” After quoting this statement, Curriden goes on to quote from the ABA’s amicus brief that ““the ABA urges that lawyers’ communications when seeking legal advice from their in-house counsel should be broadly protected because of the benefits to their clients and the legal system, and to lawyers and their firms,” states the association’s brief. “Lawyers face an increasing array of legal and ethics duties, and the availability of in-house advice, without the cost or inconvenience of seeking an outside lawyer, encourages lawyers to pursue internal investigations where questions of misconduct or malpractice arise.”” Therefore, the attorney-client ““privilege should not be abrogated or limited except for compelling reasons.” But this analysis changes “if it is concluded that the client may have a malpractice claim against the lawyer,” states the brief. “Whether the privilege as to further in-house consultations is abrogated or limited during a continuing representation might become a question of fact for the trial court as to whether the client were promptly and adequately informed of the potential claim.””

As a former in-house counsel I certainly find it troubling if, at the slightest spat between a law firm and a client, the law firm then ‘lawyers-up’ and girds for a lawsuit. One of the greatest things about the legal profession is that it holds the highest duty possible to its clients. If a law firm is taking a position contrary to its client’s interest, it cannot no longer ethically represent the client. Curriden ends his article with a short discussion on this point when he said, “many corporate GCs privately express concerns about what their law firms may be doing behind their backs.” He quoted Randy Johnston, who focuses his practice at JohnstonTobey PC in Dallas on professional malpractice cases, who said “Corporate general counsel have every right to be concerned that their law firm is secretly plotting against them and their best interests, and are doing so without notifying them,”. Johnston goes on further to say “In the end, I think there’s only one solution: Law firms should have the right to internal defense and to work product, but the law firm must immediately inform the client when there is a conflict. Failure to tell the client eviscerates the privilege. Period.”

This is a case which certainly bears watching as it may go quite a long way towards fundamentally altering the attorney-client relationship.

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

February 16, 2012

Attorney-Client Privilege for In-House Counsel

The question of attorney-client privilege (herein “the privilege”) for in-house counsel can be a vexing one, yet one that has significant implications for investigations and enforcement actions under the Foreign Corrupt Practices Act (FCPA) or other anti-corruption legislation. There is a split decision between the US and countries in the European Union (EU) on whether in-house counsel may engage in privileged communications with corporate employers. In a recent article, entitled “In-House Counsel and Corporate Client Communications: Can EU Law after Akzo Noble and U.S. Law after Gucci be Harmonized? Critiques and a Proposal”; published in Volume 45, Number 3 of the International Lawyer, author John Gergacz explored this dichotomy and proposed a simple, yet clear rule to put in place to foster ease of determination of the privilege and promote the goals behind the existence of the privilege.

This question of whether the privilege exists for communications will certainly increase due to the increase in international enforcement actions in the area of anti-corruption and anti-bribery under laws such as the FCPA and UK Bribery Act. It will also arise in investigations involving any other activities which might be subject to both EU and US laws, such as EU competition law and US anti-trust law.

European Union Countries – Status of counsel test

In EU countries, the primary test involves what is the status of the lawyer making the communication. Following a 1982 decision, styled “AM&S Europe v. Commission of European Communities”, the privilege is limited to communications conducted with independent lawyers. Initially, a determination must be made if an attorney is independent, this being defined as to whether or not an attorney was “bound to his client by reason of employment” for example an employee. However, the court decision did not use the term “in-house” counsel but broader formulation of “independent counsel.” While recognizing that this may have left room for interpretation the practice seems to be to deny the privilege when the advice emanates from in-house counsel. Gergacz says that to apply the privilege in the EU is determined by following a two-step process. If this initial threshold of independence is met the analysis turns to the substance of the communication. That is, whether the “communications concerned legal advice and related to the client’s right of defense.”

United States – Type of communication

In all reported jurisdictions in the United States, both in-house counsel and outside counsel communications are eligible for privilege protection. However, within certain states in the US, the analysis is largely centered on the substance of the communication, whether it involves legal advice or more general business advice. This analysis recognizes that in-house counsel may have several “corporate capacities” all of which do not necessarily involve providing legal advice. Gergacz notes that “in practice, in-house counsel may communicate about a number of activities, even though his formal corporate position is to provide legal advice.” He believes that such sentiment has led to a greater scrutiny of in-house counsel communications than those made by outside counsel to a client. This has led courts to be “wary of inadvertently extending privilege confidentiality too far,” when business advice is provided or there are mixed business-legal services delivered.

EU/US Harmonization

Gergacz concludes his article with a proposal to harmonize these two rules for privilege. He believes that both views have merit, with the US recognizing the “equivalence of in-house and outside counsel” and the EU “the concept of counsel independence is noteworthy.” Gergacz’s proposal is that communications with in-house counsel would be privileged if the attorney involved is (1) admitted to a relevant Bar; and (2) has Bar membership status intact that allows him to practice law at the time of the relevant communication.

Gergacz listed three general reasons for his proposal. First, he believes that the proposal is easy to administer as there should not be either court intervention to determine privilege or court review of the communications involved. Simply put, does the lawyer have a license and is it up to date to allow him or her to practice law? Second, he believes that the privilege should be broad enough to encourage candor in communications between attorney and client in the corporate setting, but not so broad as to expand the cloak of confidentiality to “thwart just decisions from being rendered.” Third, and finally, Gergacz writes that in-house counsel often has two roles to fulfill. One is certainly as a lawyer providing legal services, however, it may be that a person who has graduated from a law school or holds a law degree may not be licensed to practice law and may have other roles inside of a corporation. As a practicing lawyer is held to ethical and disciplinary standards whether they are in-house or in private practice, the requirement for Bar membership should satisfy the AM&S line of cases which speak toward ‘independence’ as the key concept for privilege.

I would commend Gergacz’s article to you for a more complete review of the US case law and other issues related to attorney-client privilege. His proposal is certainly an intriguing one and one which deserves rich consideration to simplify this knotty area. In this era of multi-jurisdictional enforcement of laws such as the FCPA and UK Bribery Act, the certainty of whether a communication is privileged or not is an important point for businesses.

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

© Thomas R. Fox, 2012

October 29, 2010

Fraud Investigation and the UK Bribery Act

Filed under: Bribery Act,FCPA,Tracy Coenen — tfoxlaw @ 9:17 am
Tags: , , ,

We were recently introduced to Fraud Examiner Expert Tracy Coenen, in her book “Expert Fraud Investigation: A Step-By-Step Guide” she details the steps a company should go through in performing a fraud investigation. Coenen provides the ‘nuts and bolts’ on how conducting an investigation can be a powerful tool to help corporations ferret out fraudulent practices within their organization. Her book gives the examiner the specific steps to take when fraud is suspected and how to proceed forward throughout the investigation to conclusion. In addition to the book as a useful tool for the fraud examiner, Coenen also provides the lay person with a general discussion of the types of corruption schemes a company may face and how best to prevent them. Coenen lists bribery; kickbacks; extortion; conflict of interests; and related party transactions as examples of corruption which can involve a payment to obtain an advantage, receive preferential treatment, or force certain preferential actions.

Many compliance and ethics practitioners have long understood that these types of schemes are illegal under the Foreign Corrupt Practices Act (FCPA) in connection with foreign governments and foreign governmental officials, but many FCPA compliance practitioners in the US may not have focused on these types of schemes when they involve private, non-governmental actors, outside the US. However, with the upcoming April 1, 2011 effective date of the UK Bribery Act, such practitioners may well be served to revise their company policies to take into account that the UK Bribery Act prohibitions apply to private actors equally as well as governmental officials. Based upon this difference in the pubic actor v. private actor distinction between the FCPA and UK Bribery Act, this post will review the different types of corruption schemes that Coenen outlines in her book.

Bribery

While most FCPA practitioners understand that a payment to confer a benefit may be enough to be classified as a bribe, such practitioners may not focus on other, more subtle, forms of bribery than simply bags of cash. These can include bid-rigging where inside information is passed to a vendor to allow said vendor to unfairly win an allegedly open bid, or where the bid winner has been secretly pre-determined in what is advertised as an open and fair bidding process. Bid-rigging can extend to the collusion between certain employees of a purchaser-company and vendor, where such employees purchase more goods or services than the company would need. Bid-rigging can also be found where alleged non-winners, in an apparently open bidding process, later appear as subcontractors on a project.

Kickbacks

Kickbacks occur when a company overpays for goods or services and then remits all or part of the overpaid amount back to the perpetrator. This can be affected by the person in charge of the overall bidding process. However it can extend down into any other employees involved in the approval process such as employees in production, engineering or quality control. So, similar to bribery, there can be more subtle forms of kickbacks and such forms can include the substitution of inferior components into an overall product while charging the higher price to the end-user purchaser. Kickbacks can also include irregularities in pricing and quality throughout a project. Even if inferior quality goods are not substituted, an irregular price can inflate the cost of goods paid for by a company.

Extortion

Extortion is in many ways the mirror image of bribery. Whereas with a bribe, something of value is given to obtain a benefit, with extortion, a payment is demanded. While such demand can be made to obtain a benefit, such as to allow a company to go forward in a bidding process; extortion can also be made to prevent injuries to persons and damage to physical facilities. While not nearly as common as bribes, there are cases where extortions have been made and money paid based upon the threats.

Conflict of Interest

Many people do not think of conflicts-of-interest when considering a corruption scheme. Nevertheless if an employee, executive, or owner of a company has an undisclosed interest in an entity with which his company is doing business, the situation can present a conflict of interest. In the conflict of interest scheme, the employee, executive, or owner may be able to influence the company decision making process to send business to the other entity. This conflict of interest may be broader than simply directly involving an employee, executive or owner. It can extend to wives, children or other family members who stand to benefit from any such undisclosed interest.

Related Party Transactions

Coenen points out that many people do not consider transactions with third parties as part of an overall fraud scheme. However if the third party transactions are not conducted in an arms-length manner, this may well be indicia of an overall fraud scheme. Problems can arise when the related parties have a special advantage in doing business with a company and when that special advantage harms the company through increased costs, decreased revenue or other concessions. In addition to the types of schemes listed in the categories above, Coenen lists several different types of such transactions. They include:

• Extending credit to a company which would not otherwise be so entitled;
• Writing off accounts receivables with no legitimate business reason;
• Doing business with a small or one-man shop with no physical assets or simply a post office box for an office;
• Engaging in consulting agreements where no substantive work is done for payments received;
• A consultant who engages in extensive ‘market research’ in foreign countries with little to no tangible work product; and
• Concealing the existence of direct or indirect ownership in entities with which a company is doing business.

Although the focus of Coenen’s book is the investigation of fraud, in all of its forms and permutations, she does give several pointers to assist in the prevention of fraud. These will be familiar to the FCPA practitioner and include ongoing monitoring program of both accounts and transactions, through robust internal controls. Coenen recommends an anonymous reporting hotline through which employees can alert management of such activities without fear of supervisor retaliation. But Coenen ends by noting the most important form is that management set the correct ‘Tone at the Top” that such fraudulent activity within the company will not be tolerated.

Any US company operating internationally will be subject to the UK Bribery Act. Therefore the time has come to consider the changes required to its overall compliance program to meet the UK Bribery’s Act proscription against bribery and corruption of private actors. Tracy Coenen’s book is an excellent starting point for the FCPA practitioner to begin to enlarge a FCPA compliance based program to meet this challenge. We commend it to you for your consideration.

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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