FCPA Compliance and Ethics Blog

April 23, 2013

PED Cheats and FCPA Violators – Kissing Cousins?

I never failed a drug test” has become one of the iconic lines of performance enhancing drug (PED) cheats from Lance Armstrong to A-Rod. This denial has a kissing cousin in the Foreign Corrupt Practices Act (FCPA) world in the phrase, “He (or she) is not our employee”. How do these two kissing cousins relate to each other? Both phrases are absolutely meaningless when it comes to the underlying conduct. Why? Because we all know (or should know); violations of the FCPA can occur for direct, i.e. your employee, or indirect, i.e. not your employee, conduct.

In the FCPA world, there was a stark example of this reported in two articles in the Weekend Edition of the Financial Times (FT) about the arrest of Frederic Cilins, a French citizen for seeking to obstruct a federal grand jury investigation about alleged FCPA violations. The two articles were “Contracts link BSGR to alleged bribes” (mine rights article) and “FBI sting says that ‘agent’ sought to have mining contracts destroyed” (FBI sting article). Both articles were by the same triumvirate of FT reporters, Tom Burgis, Misha Glenny and Cynthia O’Murchu.

The mine rights article reports that underlying matter revolved around allegations that “The resources arm of Beny Steinmetz Group agreed to pay $2m to the wife of an African president to help it secure rights to one of the world’s richest untapped mineral deposits, according to documents seen by the Financial Times”. These payments were allegedly memorialized in “Copies of two contracts from 2007 and 2008, apparently signed by BSGR’s representatives in the mineral-rich west African nation of Guinea, set out agreements for the company to make payments and transfer shares to Mamadie Touré, wife of the then president Lansana Conté.” As the quid pro quo for these commission payments, “Ms Touré would take “all necessary steps” to advance its efforts to win rights to the Simandou deposit, a February 2008 contract says. A further $2m would be dispersed among other people to facilitate the acquisition of the rights.”     While Mr. Cilins has been described by the Guinean government as “an agent of BSGR” the company was quoted in the article as saying, “Mr Cilins was not one of its employees”.

The mining rights dispute centers around a contract that the company received days before the death of the President of Guinea. The mining rights article also reported that “the Guinean government granted BSGR rights to half the Simandou deposit, having earlier stripped them from rival mining house Rio Tinto. After spending $160m developing its assets in Guinea, 18 months later in April 2010 BSGR sold a 51 per cent stake of its Guinean venture to Vale of Brazil for $2.5bn. One African mining veteran described BSGR’s sale as the “best private mining deal of our generation”.”

As interesting as all of the above is, it was the FBI sting article that had some very interesting details. Before I get to the issues involved I have to cite to yesterday’s blog post by Mike Volkov, entitled “The Danger of FCPA “Proactive” Investigations”, where he stated “At the recent Dow Jones Compliance Symposium in Washington, D.C., an FBI official warned the attendees that the Shot Show debacle would not deter law enforcement from using proactive investigations techniques. It was a stark warning because it was realized in less than thirty days.” Spot on Mike.

The FBI sting article reported that on Sunday April 14, 2013, “Frederic Cilins held the last of a series of meetings with the widow of an African dictator to discuss what she was going to do with some sensitive documents.” Unfortunately for Cilins he “did not realise that the woman he was talking to was wearing a wire and that FBI agents were watching. As he left the meeting, the agents arrested him carrying envelopes filled with $20,000 in cash, the indictment says. That was a pittance compared with the $5m he was taped offering the dictator’s widow during what US authorities say was a two-month campaign to tamper with a witness and destroy records.”

What were these documents that “Cilins was allegedly so keen to destroy”? The FT reported that it had seen “some of the documents” and “According to one copy of a contract seen by the FT, dated February 27 2008 and which appears to be signed by Asher Avidan, BSG Resources’ head in Guinea, the company agreed to pay $4m to secure rights to Simandou. That would be split into $2m to be distributed among “people of goodwill who contribute to facilitating the assignment” of the rights and $2m for a company called Matinda. Ms Touré’s name is listed on the contract and her signature appears on it. She is named in US corporate records as the registered agent of a company also called Matinda, based at a Jacksonville address.”

The FBI sting article also revealed a bit more of the history of the underlying mining rights at issue. The Australian company Rio Tinto “held the rights to the whole of Simandou, a mountain range groaning with iron ore in Guinea’s remote interior, for a decade. But in August that year, the Conté government withdrew the mining group’s concession, saying it had taken too long to develop a mine. In December, just days before the dictator’s death, the government signed over half the rights to Simandou to BSGR. Vale of Brazil, the world’s biggest iron ore miner, bought a 51 per cent in BSGR’s Guinea assets in April 2010. Late last year, as a Guinean government committee levelled corruption allegations against BSGR, Vale put the Simandou project on hold. Earlier this month, it suspended payments on the $2.5bn it agreed to pay for its stake.”

The FBI sting article also reports that BSGR said that “Mr. Cilins was not one of its employees.” However, the FT article reported that the indictment which led to the arrest of Cilins describes “a company that in 2008 acquired rights to half of Guinea’s Simandou iron-ore deposit after it had been stripped from another miner points in one direction: the resources arm of Beny Steinmetz Group, the conglomerate managed on behalf of the family of Israeli diamond tycoon, Beny Steinmetz. Mr Cilins has been described by the Guinean government as an agent of BSGR. The company said Mr Cilins was not one of its employees.” And while “Neither does the indictment identify the woman who has sought immunity from prosecution in exchange for co-operating with the FBI investigation and helping to deliver Mr Cilins. It refers only to a “former wife of a now deceased high-ranking official in the government of Guinea” who was approached by Mr Cilins at the inception of the alleged bribery scheme.”

As the mining rights article noted, “BSGR said in a statement to the FT on Friday: “Allegations of fraud in obtaining our mining rights in Guinea are entirely baseless. We are confident that BSGR’s position in Guinea will be fully vindicated.”” And, of course, there is that ubiquitous “not our employee”. Whatever the real answer is it will be very interesting to see how all this plays out.

What about the obstruction of justice charge? First, it should be noted that this charge is nothing like the charge brought and later dropped against Rose Carson in the Control Components Inc. matter, where it was alleged she destroyed documents before meeting with company investigators. Here the allegations are attempts to destroy documents in the face of a federal investigation. What about the FBI sting part of all this? It looks like what the agent said, as quoted by Mike Volkov in his piece, was very prescient. Maybe the lesson is simply don’t destroy documents or even don’t engage in bribery.

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

© Thomas R. Fox, 2013

February 8, 2013

How Does Your Organization Treat Whistleblowers?

As almost everyone knows, Lance Armstrong spoke for the first time about his performance enhancing drug (PED) use recently on Oprah. On the first night he admitted for the first time that he used PEDs during his seven wins at the Tour De France. The title of my colleague Doug Cornelius’ piece in Compliance Building really said it all in his article “Lance Armstrong – A Lying Liar Just Like Madoff”. Cornelius said “What caught my attention about the Armstrong interview was the window into the mind of a pathological liar. Armstrong had been telling the lie over and over and over. He lied to the public. He lied to the press. He lied to cancer survivors. He lied under oath.”

One of the areas which came up for me was how the people who blew the whistle on Armstrong’s use of PEDs before his admission were treated and how Armstrong subsequently treated them. Armstrong admitted that he was a ‘bully’ to those who said, hinted, or even implied that he had taken PEDs. He attacked ex-teammates; wives of ex-teammates and even a masseur who saw him take such substances. He put on an aggressive PR campaign for the better part of the past decade, to which the wife of ex-Tour De France winner Greg LeMond said “I can’t describe to you the level of fear that he brings to a family.”

While I would hope that most American and European companies have moved past the situation where whistleblowers are ostracized or worse threatened, one can certainly remember the GlaxoSmithKline (GSK) whistleblower Cheryl Eckard. A 2010 article in the Guardian by Graeme Wearden, entitled “GlaxoSmithKline whistleblower awarded $96m payout”, he reported that Eckard was fired by the company “after repeatedly complaining to GSK’s management that some drugs made at Cidra were being produced in a non-sterile environment, that the factory’s water system was contaminated with micro-organisms, and that other medicines were being made in the wrong doses.” She later was awarded $96MM as her share of the settlement of a Federal Claims Act whistleblower lawsuit. Eckard was quoted as saying, “It’s difficult to survive this financially, emotionally, you lose all your friends, because all your friends are people you have at work. You really do have to understand that it’s a very difficult process but very well worth it.”

More recently there was the example of NCR Corp., as reported in the Wall Street Journal (WSJ) by Christopher M. Matthews and Samuel Rubenfeld, in an article entitled “NCR Investigates Alleged FCPA Violations”, who stated that NCR spokesperson Lou Casale said “While NCR has certain concerns about the veracity and accuracy of the allegations, NCR takes allegations of this sort very seriously and promptly began an internal investigation that is ongoing,” regarding whistleblowers claims of Foreign Corrupt Practices Act (FCPA) violations. In a later WSJ article by Matthews, entitled “NCR Discloses SEC Subpoena Related to Whistleblower, he reported that NCR also said “NCR has certain concerns about the motivation of the purported whistleblower and the accuracy of the allegations it received, some of which appear to be untrue.”

Lastly, is the situation of two whistleblowers from the British company EADS. As reported by Carola Hoyos in a Financial Times (FT) article, entitled “Emails tell of fears over EADS payments”, Hoyos told the story of two men who notified company officials of allegations of bribery and corruption at the company and who suffered for their actions. The first, Mike Paterson, the then financial controller for an EADS subsidiary GPT, internally reported “unexplained payments to the Cayman Island bank accounts for Simec International and Duranton International, which totaled £11.5M between 2007 and 2009.” Hoyos reported that Paterson was so marginalized in his job that he was basically twiddling his thumbs all day at work.

The second whistleblower was Ian Foxley, a retired British lieutenant-colonel, who had joined the company in the spring of 2010 stationed in Saudi Arabia, to oversee a £2M contract between the British Ministry of Defence (MOD) and the Saudi Arabian National Guard. In December 2010, Foxley discovered some of the concerns which Mike Paterson had raised. According to Hoyos, “The morning after he discovered Mr. Paterson’s concerns he assessed the emails that Mr. Paterson had told him he had written over the previous three years.” This led Foxley to flee Saudi Arabia with documents of these suspicious payments, which he has turned over to the Institute of Chartered Accountants and the UK Serious Fraud Office (SFO).

What does the response of any of these three companies say about the way that it treats whistleblowers? Is it significantly different from the bullying Armstrong admitted he engaged in during his campaign to stop anyone who claimed that he was doping? While I doubt that companies will ever come to embrace whistleblowers, the US Department of Justice’s (DOJ’s) recent FCPA Guidance stated that “An effective compliance program should include a mechanism for an organization’s employees and others to report suspected or actual misconduct or violations of the company’s policies on a confidential basis and without fear of retaliation.” However, by marginalizing, attacking or even making a whistleblower fear for their life, such actions can drive a whistleblower to go the DOJ, Securities and Exchange Commission (SEC) or SFO. The Guidance recognized that “Assistance and information from a whistleblower who knows of possible securities law violations can be among the most powerful weapons in the law enforcement arsenal.”

So what is the compliance professional to make of the Armstrong confession and how can it be used for a compliance program? A recent White Paper, entitled “Blowing the Whistle on Workplace Misconduct”, released by the Ethics Resource Center (ERC) detailed several findings that the ERC had determined through surveys, interviews and dialogues. One of the key findings in this White Paper was that that a culture of ethics within a company does matter. Such a culture should start with a strong commitment to ethics at the top, however it is also clear that this message must be reinforced throughout all levels of management, and that employees must understand that their company has the expectation that ethical standards are vital in the business’ day-to-day operations. If employees have this understanding, they are more likely to conduct themselves with integrity and report misconduct by others when they believe senior management has a genuine and long-term commitment to ethical behavior. Additionally, those employees who report misconduct are often motivated by the belief that their reports will be properly investigated. Conversely, most employees are less concerned with the particular outcome than in knowing that their report was seriously considered.

This is the ‘Fair Process Doctrine’. This Doctrine generally recognizes that there are fair procedures, not arbitrary ones, in a process involving rights. Considerable research has shown that people are more willing to accept negative, unfavorable, and non-preferred outcomes when they are arrived at by processes and procedures that are perceived as fair. Adhering to the Fair Process Doctrine in two areas of your Compliance Program is critical for you, as a compliance specialist or for your Compliance Department, to have credibility with the rest of the workforce.

In this area is that of internal company investigations, if your employees do not believe that the investigation is fair and impartial, then it is not fair and impartial. Furthermore, those involved must have confidence that any internal investigation is treated seriously and objectively. One of the key reasons that employees will go outside of a company’s internal hotline process is because they do not believe that the process will be fair.

This fairness has several components. One would be the use of outside counsel, rather than in-house counsel, to handle the investigation. Moreover, if company uses a regular firm, it may be that other outside counsel should be brought in, particularly if regular outside counsel has created or implemented key components which are being investigated. Further, if the company’s regular outside counsel has a large amount of business with the company, then that law firm may have a very vested interest in maintaining the status quo. Lastly, the investigation may require a level of specialization which in-house or regular outside counsel does not possess.

Phrasing it in another way, Mike Volkov, writing in his blog Corruption, Crime and Compliance, in an article entitled “How to Prevent Whistleblower Complaints”, had these suggestions: (1) Listen to the Whistleblower – In dealing with a whistleblower, it is critical to listen to the whistleblowers concerns. (2) Do Not Overpromise – At the conclusion of an initial meeting with a whistleblower, the company representative should inform the whistleblower that the company will review the allegations, conduct a “preliminary” investigation and report back to the whistleblower during, or at the conclusion of, any investigation. (3) Conduct a Fair Investigation – Depending on the nature of the allegations, a follow up inquiry should be conducted. The steps taken in the investigation should be documented.

I would add that after your investigation is complete, the Fair Process Doctrine demands that any discipline must not only be administered fairly but it must be administered uniformly across the company for the violation of any compliance policy. Simply put if you are going to fire employees in South America for lying on their expense reports, you have to fire them in North America for the same offense. It cannot matter that the North American employee is a friend of yours or worse yet a ‘high producer’. Failure to administer discipline uniformly will destroy any vestige of credibility that you may have developed.

Lance Armstrong has and will continue to provide the ethics and compliance practitioner with many lessons. You can use his treatment of whistleblowers as an opportunity to review how your company treats such persons who make notifications of unethical or illegal conduct. With the increasing number of financial incentives available to persons to blow the whistle to government agencies, such as the SEC under the Dodd-Frank Act, it also makes very good business sense to do so.

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

October 24, 2012

Global Innovation for Your Compliance Program

One of the areas where the best practices for Foreign Corrupt Practices Act (FCPA) compliance programs is evolving is in the area a less US centric approach and incorporating the diversity across the globe. Many companies are now realizing that there should not be a one size fits all compliance program and that there is a treasure trove of ideas and capabilities in the compliance arena around the globe. This is also true regarding compliance talent as there is much talent outside the US which can and should be utilized by a company in constructing and developing their compliance group. Once found this diversity and talent must be groomed and integrated into an overall compliance structure for success.

A recent article in the Harvard Business Review, entitled “10 Rules for Managing Global Innovation” by Keeley Wilson and Yves L. Doz, explored some of these challenges and provided insight into how to tackle this issue from the corporate innovation angle. I found their article a good road map for the Chief Compliance Officer (CCO) to tap into and develop compliance talent. Wilson and Doz believe that many enablers of innovation occur naturally in a single location because “single location projects draw on large reservoirs of shared tacit knowledge and trust” but when these “projects span multiple locations, many of those natural benefits – often taken for granted –  are lost.” The authors formulated ten principals for successfully managing such global innovation projects across multiple locations which I believe translates into actions that a CCO or compliance group should institute when implementing or enhancing FCPA or Bribery Act compliance regimes.

  1. Start Small. The authors believe that to be effective, dispersed teams have to develop a “new set of collaboration competencies and establish a collaboration mind-set.” This can be done by running one or more small projects before the entire system rollout. In this way, a consensus can be developed on working practices and protocols. Additionally systems bugs can be worked out.
  2. Provide a Stable Organizational Context. Periods of major change in an organization present their own set of problems, so the authors advise, to the extent possible, a global innovation program should be initiated during times of relative stability.
  3. Assign Oversight and Support Responsibility to a Senior Manager. In addition to the usual key of having strong senior executive support as a factor for success, the authors believe that given disparate locations and teams, a strong senior leader will be needed to arbitrate disputes and generally be the ultimate decision maker.
  4. Use Rigorous Project Management and Seasoned Project Leaders. The authors believe that for global innovation to succeed there must be “a strong project management team to drive the project on a day-to-day basis and strong team leaders supported by robust tools and processes.” Often times, there are no off-the-shelf tools available so that they must be created to fulfill this role.
  5. Appoint a Lead Site. It is important that there be one person at each implementation site who can focus on the bigger picture, the overall integration of the solution. The authors believe that a key to overcoming localized support for their own initiatives is to task one lead to liaise so that he/she can have an understanding of the bigger picture and work towards appropriate resource allocation.
  6. Invest Time Defining the Innovation. When an implementation or innovation project is split over several time zones, the authors believe that there “is little latitude for iterative learning.” This means that the goals must be clearly defined and specified from the outset of the project. This definition process also helps but up trust and overall relationships between multiple locations.
  7. Allocate Resources on the Basis of Capability, Not Availability. The authors believe that the staffing of a global innovation or implementation project “requires a great deal of attention in order to select and integrate the best possible knowledge and capabilities.” Companies usually staff projects with the resources on the ground that are available. The authors believe that this is a mistake and companies should rather “bring together distinctive and differentiated knowledge and capabilities from around the world to create unique innovations.”
  8. Build Enough Knowledge Overlap for Collaboration. Without some overlap, the authors believe that “critical interdependencies between modules may not be apparent until the integration phase” when the cost is too great to change something. The authors cite to the Siemens example where one team member was tasked with liaising with other teams to ensure some overlap.
  9. Limit the Number of Subcontractors and Partners. The authors believe that in such global innovation initiatives, the lead should be driven by the company’s own workforce and not led by professional consultants or other third parties. Clearly for employee buy-in it is important for there to be employee involvement, additionally the authors believe that the coordination of third parties may be more time consuming and at the end of the day, more trouble than it is worth.
  10. Don’t Rely Solely on Technology for Communication. After the project is completed, it is critical that it be communicated effectively throughout the workforce. The authors believe that many managers “tend to underestimate the challenge of scaling communications globally.” Without robust communications, all of the good work to-date may not be fully disseminated throughout the company. So the human element is important and the authors advise as many communications as possible where there is an opportunity for employee interaction with the project sponsors publicizing the initiative.

The authors focus has been on global innovation initiatives. However I think these ten points are an excellent resource for the compliance practitioner to utilize when developing or rolling out a major compliance initiative. Even Mike Volkov recently saw the light and advocated the decentralization of the compliance function throughout an organization. This decentralization may well bring compliance initiatives from areas or regions not traditionally seen as a hotbed for such ideas. This article establishes a framework for the compliance practitioner to use for such compliance innovation.

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 5, 2012

James Bond at 50 – A Compliance Conversation in English and American

Today is the 50th anniversary of the premier of one of the great movie franchises of all-time: James Bond. 007 made his initial screen appearance in Dr. No. In connection with this august event, MGM released the full Bond oeuvre in a Blu-ray box set, which of course I had to purchase, supplanting the full Bond box set I had in regular DVD; which supplanted the individual movie titles I had collected over the years, which supplanted all the VCR tapes of Bond movies I had collected when that format was king. I also own the full set of Ian Fleming novels in hardback. So are you beginning to sense that I am not just a fan but a true aficionado? Well, I am.

NPR had a great series this week focusing on all things Bond in their Morning Edition show. The series looked at Bond’s gadgets, the sound of the Bond theme and movie soundtracks, Bond movie posters, the Bond franchise and which actor is the greatest Bond. While listening to these episodes I wondered if Bond had been American rather than English, would it have still worked. I came to the conclusion that no, the franchise works because Bond is English, not in spite of that fact.

I pondered that question as I have been reading about the various banking and financial scandals over the summer, largely involving British banks. One of the more interesting side notes has been the press commentary on the British banks and the ongoing national debate it seems to have sparked in Britain about how and why the entire industry is so corrupt and how it lost its collective moral compass. The focus is on fixing the system, not softening the laws, which, it appears, most of the major banks violated in either the Libor or anti-money laundering (AML) enforcement actions.

Contrast that approach with that of the US Chamber of Commerce or any of the various commentators who say that compliance with the US Foreign Corrupt Practices Act (FCPA) is simply too difficult and all Congress needs to do is soften the law with one or more of the following: a compliance defense, doing away with successor liability, adding a willfulness requirement, changing the definition of who is a government official or limiting a corporate parent’s liability for the acts of its subsidiaries and if one or all of the above is enacted, companies will be able to do business in compliance with the law.

Maybe it’s just the difference in the two cultures; in the UK, they are trying figure out how and why compliance failures occurred and change the compliance culture so they can obey the law. In the US, businesses want to change the law so the conduct companies engage in will no longer violate the law.

But what should you do if you and your company are committed to following the FCPA as it currently exists? If you are in or near Houston, TX, next Wednesday morning and you are interested in hearing the most up to date information on what you can do to comply with the FCPA; I would like to suggest that you come to the Kreller sponsored FCPA event where Mike Volkov, Dan Chapman and myself will be speaking on the lessons learned from the most recent enforcement actions of 2012. We will collectively review the Morgan Stanley declination and how a robust compliance program receives credit in a FCPA enforcement action; Smith and Nephew’s use of distributors, who were confirmed as the same as agents and other representatives in a FCPA enforcement action; BizJet will help us to show just exactly what is extraordinary cooperation in the context of a FCPA enforcement action; Biomet, a prime example of the role of internal audit for detection and prevention of a FCPA compliance program; and finally, the recent Tyco enforcement action for the continued evolution of FCPA compliance programs through enhanced compliance obligations. We will also review some of the key allegations in the Wal-Mart matter and use it to explore certain lessons for your compliance program.

I hope you can attend as Mike and Dan are two of the most knowledgeable FCPA practitioners I know of and to have them both on the same panel is a treat that I would pay money to see. But even better than paying to see two of the best, the event is complimentary, breakfast will be served and CLE is available. It doesn’t get much better than that so I hope that you can join us on Wednesday morning at the Houstonian.

For registration and details, click here. For a You Tube video of the iconic James Bond theme, 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, 2012

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

January 3, 2012

Ten Compliance Issues from 2011

I have seen several lists of the Top Foreign Corrupt Practices Act (FCPA) issues of 2011. Sam Rubenfeld and Chris Matthews at the Wall Street Journal’s Corruption Currents have been interviewing several of the top legal practitioners on their thoughts. The ever-present Mike Volkov has weighed in with his list and his “Person of the Year”, the Chief Compliance Officer. Howard Sklar and I even got into the video act by discussing our most significant issues in “This Week in FCPA”. So as part of the compliance commentariati, I submit, for your consideration, my Top Ten anti-corruption and anti-bribery issues over the past 12 months.

1.         Amendments to the FCPA? The Senate ended 2010 with hearings focusing on why there were not more individual prosecutions under the FCPA. In June, the House Judiciary Committee focused on ways to ease up on or gut the anti-corruption provisions of the FCPA in the name of US “competitiveness” overseas. Then in a stunning turnaround, the House Judiciary Chair asked the Department of Justice (DOJ) representative if the DOJ would support a ban on all commercial bribery, not just a ban on bribing foreign governmental officials. Then again he did say was drafting amendments to the FCPA which we haven’t heard about since the great theater in June.

2.         UK Bribery Act goes live. For many in the anglophile world, the event of the year was the marriage of Prince William to Kate Middleton. However, for us in the anti-corruption and anti-bribery world, it was effective date of the UK Bribery Act, July 1. While some had opined that the Bribery Act was “the FCPA on steroids” the initial prosecution under the Bribery Act was for a £500 bribe paid to a UK court clerk. Perhaps it just takes awhile for UK steroids to kick in.

 3.         Crystal Ball Reading. One does not have to read a crystal ball or tea leaves to know what should constitute a best practices compliance program. The DOJ continues to respond to calls for information by practitioners and the commentarati by providing solid information through which you can implement or enhance your compliance program. In addition to continuing to list the 12 points in a minimum best practices compliance program in each Deferred Prosecution Agreement (DPA)/Non-Prosecution Agreement (NPA) released; the DOJ has provided ‘enhanced compliance obligations’ in DPAs which provide information on evolving standards. Back in January, the DOJ provided information on areas of risk which should be assessed to inform your compliance program.

4.         Chief Compliance Officer Upgrade. With the effective changes in the federal sentencing guidelines from November, 2010 and the DOJ comments this year, it has become clear that companies must give a more prominent role to the Chief Compliance Officer and separate that function from that of the General Counsel.

5.         Investigating Private Equity. Both the DOJ and Serious Fraud Office (SFO) announced that they would be looking at private equity, in conjunction with anti-bribery and anti-corruption. Well known for cost reductions through cutting corporate budgets, they may become a prime and profitable set of targets for enforcement agencies.  Additionally, their unique structure of separately operating portfolio companies may greatly increase ownerships control and person risks. If you are in private equity and are reading this and have no clue what I am talking about, get on the phone to one of Howard Sklar’s recommended FCPA counsel ASAP.

6.         It Just Can’t Get any Weirder. Just when you think you have seen it all in the FCPA world, News Corp., is accused of bribing Scotland Yard to further its newspaper business and it is also alleged that a lawyer representing a US company in Mexican litigation attempts to bribe a court official to obtain a favorable ruling. Then, of course there is Olympus, which not only fires its whistle-blowing Chief Executive Officer (CEO) for questioning Red Flag payments to agents, which reveals that it has been engaged in a decade long corporate fraud. But here’s the topper in my book, someone posted a comment to my blog post about Tyson’s Foods paying bribes to the wives of Mexican food inspectors to obtain ‘favorable treatment’. She said the following “The meat being TIF-certified for export was not meat distributed to U.S. The meat was being exported to countries such as Japan and other Asian destinations.” I am sure that is of great comfort to the folks in “Japan and other Asian destinations”. Memo to Tyson: Call Gini Dietrich at Spin Sucks for some serious PR help.

7.         Plaintiff’s Bar gets that old time (FCPA) religion. The FCPA was used, in a somewhat novel manner, in three civil actions which may portend an entire new wave of private and civil FCPA litigations. In SciClone a shareholder derivative action was filed after the announcement of a FCPA investigation. During the pendency of a FCPA investigation, this civil action was settled with the company agreeing to implement a best practices compliance program. In Alba v. Alcoa a company whose employees were allegedly paid bribes (Alba) sued the alleged bribe-payor (Alcoa) for damages in driving up the costs for products sold because of the corrupt acts of Alcoa. In ICE, the Costa Rican telecom company sought to use the victim restitution component to allow it to participate in the DOJ’s FCPA settlement with Alcatel-Lucent.

8.         Rule of Law. Several DOJ prosecutions of individuals under the FCPA have brought a plethora of legal rulings to flesh out legal standards under the FCPA. In the spring, there were district court rulings on whether a state owned enterprise is covered by the FCPA and an analysis of what constitutes a state owned enterprise. These cases will probably be appealed so we may have the first US court of appeals’ interpretation of the FCPA in quite some time.

9.         Wide World of Enforcement. More countries are implementing new anti-corruption laws and more resources are being dedicated to enforcement. The US has had significant cooperation with the UK SFO and Financial Services Association (FSA) and this will increase with the go live date of the Bribery Act. However, the BRIC countries have passed, or are considering, significant anti-corruption laws. The US is starting to coordinate and share more information with these countries — China being the most significant.  For global companies, this increase will portend greater numbers of fines and penalties and will complicate international settlement efforts.

10.       Year of the FCPA Trial. This was the year that the DOJ brought out the big trial guns for three very high profile FCPA trials: the Gun Sting cases; Lindsey Manufacturing; and Haitian Telecom. The resolution results have been mixed, with convictions in Lindsey and Haitian Telecom; mistrial in the first of four Gun Sting trials and some dismissals in the second Gun Sting trial. However, the government has taken a black eye for some procedural missteps, particularly the judge throwing out the entire guilty verdict for prosecutorial misconduct in the Lindsey Mfg. case.

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

© Thomas R. Fox, 2012

December 20, 2011

The Saga of MF Global – Don’t Shoot the Messenger, Fire the Chief Compliance Officer

In a post last week on his site, Corruption, Crime and Compliance, Mike Volkov named the Chief Compliance Officer (CCO) his “Person of the Year”. He did so because “There is no other position in a company which has taken on more significance.” This significance was foretold, in part, by the Department of Justice’s (DOJ) minimum best practices compliance program, where they have listed in each Deferred Prosecution Agreement (DPA) and Non-Prosecution Agreement (NPA) released beginning in 2010 and continuing into 2011,  the following:

Senior Management Oversight and Reporting. A Company should assign responsibility to one or more senior corporate executives of the Company for the implementation and oversight of the Company’s anti-corruption policies, standards, and procedures. Such corporate official(s) shall have direct reporting obligations to the Company’s Legal Counsel or Legal Director as well as the Company’s independent monitoring bodies, including internal audit, the Board of Directors, or any appropriate committee of the Board of Directors, and shall have an adequate level of autonomy from management as well as sufficient resources and authority to maintain such autonomy.”

In November 2010, the US Sentencing Guidelines were also amended to make the role of the CCO more robust and allow direct reporting to a Board of Directors or subcommittee of the Board. The amendment read “the individual…with operational responsibility for the compliance and ethics program…have direct reporting obligations to the governing authority or any appropriate subgroup… (e.g. an audit committee or the board of directors)”. If a company has the CCO reporting to the General Counsel (GC) who then reports to the Board? Such structure may not qualify as an effective compliance and ethics program under the amended Sentencing Guidelines.

These two bits of guidance came to mind when reading about MF Global over the past few weeks, regarding its Chief Risk Officer, the financial services equivalent of a CCO. As reported on December 15, in a New York Times (NYT) article entitled “MF Global’s Risk Officer Said to Lack Authority” Ben Protess and Azam Ahmed reported that the company replaced its Chief Risk Officer, Michael Roseman, earlier in 2011, after he “repeatedly clashed with Mr. Corzine [the CEO] over the firm’s purchase of European sovereign debt.” He was given a large severance package and left the company. When he left, there was no public reason given. His replacement was brought into the position with reduced authority.

Writing in the December 16, edition of the NYT’s DealB%K, in an article entitled “Another View: MF Global’s Corporate Governance Lesson” Michael Peregrine stated that “compliance officer is the equivalent of a “protected class” for governance purposes, and the sooner leadership gets that, the better.” Particularly in the post Sarbanes-Oxley world, a company’s CCO is a “linchpin in organizational efforts to comply with applicable law.” When a company fires (or asks him to resign), it is a significance decision for all involved in corporate governance and should not be solely done at the discretion of the Chief Executive Officer (CEO) alone.

Both the DOJ minimum best practices and the amendment to the US Sentencing Guidelines, giving the CCO direct access to a company’s Board of Directors, would seem to provide the profile that would mandate that a Board wants to know the reason why a CCO (or Chief Risk Officer) would suddenly resign, particularly after he “repeated clashed” with a CEO over compliance issues. The universal corporate blanket “resigned to pursue other opportunities” is a white-wash that a Board should look beyond, if indeed that reason was given to the MF Board. The bottom line is that when a CCO leaves, particularly if it was due to a clash with the CEO, the Board had better take a close look into the reasons as it may be that the CEO wants to take risks which could put the company at grave risk.

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 9, 2011

Louis XIV, the Old Pretender and Splitting the GC/CCO Roles

Most people think that England went to war against France in the War of the Spanish Succession to prevent French King Louis XIV’s attempt to place his son on the Spanish throne after the death of the final Spanish Habsburg, Carlos II. Clearly the uniting of the crowns of France and Spain at that time would have dramatically shifted the balance of power in Europe in favor of the French ruling family, the Bourbons. However, this was not the reason that England went to war against France. Louis XIV also recognized ‘The Old Pretender’ James III, as the King of England and had France been successful in this war, all of the rights gained in England from the Glorious Revolution of 1688 forward would have been lost.

So how does this relate Foreign Corrupt Practices Act (FCPA) compliance? It is the lesson that that all is not as it may appear at first blush. In an article in the November issue of the ACC Docket, entitled “Wearing Two Hats-In-House Counsel and Compliance Officer”, author Amy Hutchins joins the continuing debate of whether a General Counsel (GC) should also be a company’s Chief Compliance Office (CCO). She reviews certain cases involving the health care industry and touches upon the Federal Sentencing Guidelines which require that “High-level personnel shall ensure that the organization has an effective compliance and ethics program.”

Going beyond all of the legal requirements, Hutchins focuses on some of the practical realities of a GC also acting as a CCO. She believes that while the skills needed to be a good GC are widely understood, the compliance function is not as well understood. She likens it to a “program that needs management.” This is because compliance may be more closely akin to program management, with coordination needed across multiple functions or divisions. The implementation of major initiatives requires skills that are not necessarily essential to an in-house counsel, but are mandatory for an effective compliance officer. Hutchins adds that some of the skills necessary for a CCO include strong interpersonal skills, the ability to listen and discretion but, most importantly, the compliance practitioner must be more proactive than reactive. They must stay away from what Mike Volkov calls the “Dr. No perception” which he characterizes as taking “refuge in mechanical, non-creative thinking.”

Hutchins recognizes that in smaller companies the roles of GC and CCO may be united out of necessity. However, this joining of the two roles may not allow said person to perform the full panoply of services required by a CCO; drafting policies and procedures and a Code of Conduct; performing Risk Assessments; handling investigations; developing and conducting training; all while fulfilling the role of GC. I would argue that the same is true in a larger company as well. The GC already has a day job. If you give the GC another day job you run the risk of neither being done as well as is needed.

Yet Hutchins raises another issue that may not be as well recognized or as well thought through. Hence the War of the Spanish Succession and all may not be as it appears at first blush. This is because a GC often prefers to keep issues in-house and “not take on the responsibility of reporting to an enforcement agency.” Recognizing that such a decision is not made lightly or without thorough discussions, if the GC is also the CCO, “In difficult situations, a CCO’s perspective about a controversial transaction or event would obviously go unnoticed, if that person was also serving as the GC who happened to agree with executive management.” Hutchins concludes by noting, even the attorney who balances the two roles “will face the challenges of conflicts and the consequences of the silent compliance voice when defaulting to the professional responsibility obligations of the legal profession.”

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

October 10, 2011

Benefits to Voluntary Disclosure: DOJ does not act as a Star Chamber

From time-to-time, I am fortunate to have a guest post on my blog by Mike Volkov which are always informative and provocative. Last Friday, Mike continued this tradition of both as he posed the question of whether the Department of Justice (DOJ) voluntary disclosure process operates as a “Star Chamber” for companies which self-disclose an actual or potential Foreign Corrupt Practices Act (FCPA) violation to the DOJ and Securities and Exchange Commission (SEC). He answered this question by noting that the DOJ “operates as a Star Chamber, defining and enforcing [the FCPA] without any meaningful judicial review.” He ends by stating “The absence of any such standards is unfair, breeds disparate treatment of similarly situated companies, and undermines the fair administration of justice.”

So once again I am inspired, by my “This Week in FCPA” colleague Howard Sklar, to the take the contrarian approach. I will attempt to respond to one of Mike’s comments and demonstrate that voluntary disclosure has significant benefits to a company which avails itself of this procedure. Further, I will conclude by arguing that neither the DOJ or SEC operates the voluntary disclosure process as a “Star Chamber.”

What was the “Star Chamber”?

So what was the “Star Chamber”? Although English legal scholars are not certain when it was initially established, the Star Chamber was made up of Privy Counselors, as well as common-law judges, and common-law and equity courts. It began as a supervisory body, overseeing the operations of lower courts, though its members could hear cases by direct appeal as well. The court was set up to ensure the fair enforcement of laws against prominent people, those so powerful that ordinary courts could never convict them of their crimes.

A second function of the Star Chamber was to act like a court of equity, which could impose punishment for actions which were deemed to be morally reprehensible, but not in violation of the letter of the law. This second function gave the Star Chamber great flexibility as it could punish offenders for any action which the court felt should be illegal even when in fact it was technically legal; however, it also meant that the justice imposed by the Star Chamber could be very arbitrary and subjective, and allowed the court to be used later on in its history as an instrument of oppression rather than for the purpose of for which it was intended.

However, these ancient precedents were later set aside by the Tudor and particularly Stuart kings. This created the modern usage of the term “Star Chamber” which is generally associated with strict, arbitrary rulings and secretive proceedings. I believe that this is what Mike referred to in his post.

Benefits of Voluntary Disclosure

1. Monetary Benefits

I believe that there are clear, substantive and discrete benefits to voluntary disclosure which a company can receive from the DOJ and SEC. If there was any doubt to the financial benefits to this question, I believe that they were answered in the Johnson and Johnson (J&J) Deferred Prosecution Agreement (DPA). Listed under the section “Relevant Considerations” one of the reasons the DOJ entered into the DPA is the following:

  1. J&J voluntarily and timely disclosed the majority of the misconduct described in the [Criminal] Information and Statement of Facts;

So the self-disclosure was one of the reasons that the DOJ entered into the DPA, however, and perhaps more importantly, the self-disclosure brought to J&J a monetary benefit with a tangible reduction in its overall fine and penalty. The DPA reported a reduction by 5 points of the company’s overall Culpability Score with the following:

(g)(1) The organization, prior to an imminent threat of disclosure or government investigation, within a reasonably prompt time after becoming aware of the offense, reported the offense, fully cooperated, and clearly demonstrated recognition and affirmative acceptance of responsibility for its criminal conduct;  -5

It is not possible to determine from the DPA how much of the reduction was attributable to the self-disclosure and how much was attributed to the conduct thereafter. However, this precise language makes clear that the DOJ places a real value on such self-disclosures and companies should take this as a clear sign that, at the end of the day, it will be better for them to self-disclose.

2. Credibility Benefits – Creation of Leverage

One of the points that Mike makes is that “Clients lost all leverage when they enter the voluntary disclosure process.” I believe that there are significant “leverage” benefits gained by self-disclosure. Stephen Martin, my partner on the World-Check sponsored FCPA speaking tour, is a former federal prosecutor. He speaks about the FCPA from that perspective, while I speak about it form a civil side perspective. Stephen says the most important thing that a company can bring to the table when negotiating with the government is credibility. Credibility benefits can start with self-disclosure but it should continue throughout the entire process. If a company self-discloses and then cooperates with the government during the investigative process, it can lead to both a monetary reduction in the overall fine and penalty. But more than monetary benefits it creates the “leverage” that the company wants to do the right thing even if a FCPA violation has occurred within the company.

My colleague Mary Jones, former Assistant General Counsel and Director of Compliance for Global Industries (GI), speaks about her experiences with a multi-year FCPA process which had its genesis from the Panalpina matter.While many companies caught up in the Panalpina matter were assessed fines and penalties, after a thorough internal investigation, neither the SEC nor the DOJ chose to take any action against Global Industries. Mary speaks about going through negotiations with the DOJ and how she personally made presentations to the DOJ about robust nature of the GI compliance program and how she and the company’s General Counsel led a world-wide investigation team to determine if there were any additional problems after the Panalpina matter came to light. One of the things that Mary emphasizes was the complete cooperation by GI and “leveraging” the vigorous nature of its compliance program to the SEC and DOJ.

Indeed, the best example of this leveraging I can bring forward is the result achieved by RAE Systems, Inc. (RAE) last year when it received a NPA, after having actual knowledge of FCPA violations in two majority owned joint ventures in China. Even though RAE failed to follow the 2004 FCPA compliance best practices when it failed to engage in due diligence on one joint venture acquisition and even though RAE failed to take effective remedial measures with a second joint venture, after it became a corporate subsidiary, and after RAE had actual knowledge of FCPA violations; RAE did not receive a criminal charge against it. In its Letter Agreement to the NPA, the DOJ noted “…non-prosecution agreement based, in part, on the following factors: (a) RAE Systems’ timely, voluntary, and complete disclosure of the facts described in Appendix A; (b) RAE Systems’ thorough, real-time cooperation with the Department and the U.S. Securities and Exchange Commission (“SEC”); (c) the extensive remedial efforts already undertaken and to be undertaken by RAE Systems; and (d) RAE Systems’ commitment to submit periodic monitoring reports to the Department.”

I believe that this is “leveraging” that a company can bring to negotiations when it self-discloses a FCPA violation to the DOJ and that the RAE matter would appear to provide specific evidence of the benefits of such corporate conduct. The NPA reports that RAE had actual knowledge of FCPA violations yet no criminal charges were filed. Further, no ongoing external Corporate Monitor was required. Clearly RAE engaged in actions during the pendency of the investigation which persuaded the DOJ not to bring criminal charges.

Other Points

Mike also raises other points, one being that the DOJ acts as “prosecutor, judge and jury” and “that no company can challenge the DOJ’s interpretation and enforcement positions regarding the meaning of the FCPA.” As to the latter I would only observe that no company is willing to challenge the DOJ’s interpretation and enforcement position but there are others who have fleshed this critique more fully, such as the FCPA Professor. As to the former point, in any negotiation with the DOJ, it is by its nature an adversarial proceeding. While certainly we in the compliance world would expect an element of justice to be taken into account in any negotiation with the DOJ, it is incumbent to remember that the DOJ represents the People of the United States and counsel for any company which self-discloses represents the company. To have the DOJ aggressively negotiate should not be a surprise.

Lastly, Mike states that “federal judges have been unwilling to question the Justice Department’s interpretation of the law.” I believe that this statement is correct and this is one area that I could only propose be expanded. All plea agreements are subject to court review. If the courts began to test some of these or require the DOJ to disclose its decision making calculus behind some of its legal interpretations, this would be something that companies could utilize to determine the parameters of potential FCPA exposure. So I would agree with Mike that there is no “meaning judicial review” of FCPA settlement agreements, but I do not believe this factor results in any “Star Chamber” proceedings by the DOJ.

Conclusion

I do not believe that voluntary self-disclosure throws a company into a “Star Chamber” with the DOJ or SEC. I believe that there are monetary and credibility reasons for self-disclosure which can bring tangible benefits. I believe that Mike correctly notes near the end of his post, “there are significant risks that a disgruntled employee, a whistleblower or a competitor may raise complaints that a company is engaging in illegal bribery activity. Most of the significant FCPA cases have been started through a whistleblower or disgruntled employee. That risk will be even greater in response to the SEC’s whistleblower bounty program.” Voluntary self-disclosure can reduce overall exposure before any of the above occurs. And finally, if you do get into FCPA hot water, you need to hire Mike to self-disclose to the DOJ and SEC.

Mike and I will continue setting out our respective positions on other issues. I hope you enjoy reading them as much as we enjoy writing them and that you will find them useful and informative.

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I have been honored to be nominated as one of the Top 25 Business Blogs of 2011 by LexisNexis. If you would like to support my nomination, please comment on the announcement post on our Corporate & Securities Community

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

July 1, 2011

Head ‘Em Up and Move ‘Em Out-the Bribery Act Becomes Effective

Well it’s been a long ride but it’s here. The UK Bribery Act is effective as of today. It seems like it has been more like herding cats than herding cattle. Just where is Rowdy Yates when you needed him? The Bribery Act has been the subject of a veritable multitude of commentary and, as with all commentary, some is of value and some is, well, just commentary. For what it’s worth, on this day of effectiveness, I add my thruppence worth of commentary.

Who’s On First?

As written in the FCPA Blog, in a post entitled, “The Coming Chaos in Global Enforcement”, there will certainly be a world-wide focus on anti-bribery and anti-corruption. Even if the Bribery Act is not “the FCAP on steroids” it does portent a growing trend towards multiple jurisdictions prosecuting bribery and corruption. There will certainly be cooperation between jurisdictions. The FCPA Blog quoted Serious Fraud Office (SFO) Chief  Richard Alderman who said the following:

It is important that the enforcement authorities liaise closely together so that there can be an overall resolution subject to the decisions of the courts in each jurisdiction. These issues are best left to the authorities in each jurisdiction and the courts.

Don’t Get Picked Off First

While we may not know what the future may portend, I can say with some degree of certainty that you do not want to be the first company which the SFO brings bribery or corruption charges against. If this happens, your company will probably face a very difficult time as the SFO will want to make a name for itself with a highly public and highly publicized enforcement proceeding. And remember, if your company thinks it may have reached a settlement or even the British equivalent of a Deferred Prosecution Agreement (DPA) with the SFO, it still must be accepted by the UK Courts, which hold the sentencing prerogative near and dear to their hearts. You certainly do not want to the first to test the boundaries of what the British judiciary will accept.

Watch for High Heater-it might be aimed at your head

Writing in thebriberyact.com, in a post entitled “BREAKING: We forecast it in March – SFO confirms involved in US sovereign wealth fund probe” our colleagues Barry Vitou and Richard Kovalevsky QC, discussed the announcement that the SFO would be joining the US Securities and Exchange Commission (SEC) in investigating those companies which do or did business with Sovereign Wealth Funds (SWF) or are private equity companies. I would put my money on a “high hard one” towards private equity because what may look like reorganization of companies, by taking majority ownership and eliminating managerial inefficiencies to private equity, may look like cutting back or not taking compliance seriously to a regulator.

Adequate Procedures-Rollin’ Rollin’ Rolling; Keep Those Doggies Rollin’

As was pointed out in the US House Judiciary hearing last month, the Bribery Act has an affirmative defense called ‘Adequate Procedures’ which the Foreign Corrupt Practices Act (FCPA) does not. However, there are many unanswered questions about ‘Adequate Procedures’. Mike Volkov, in a post entitled, “T-Minus 32 hours and Counting — The UK Bribery Act Becomes Effective” detailed some of these unanswered questions

How will the defense to a corporate charge for failing to prevent a foreign bribery offense actually operate? What kinds of evidence will companies be allowed to offer? Will acts of compliance, actual law-abiding conduct, be allowed or an overall presentation of the anti-corruption program and the compliance successes?

What I believe is that a company should following the Six Principles of an ‘Adequate Procedures’ program; or the OECD Good Practices; or the Department of Justice best practices as it has set out in every DPA since last summer. The point is to begin moving forward with a written compliance program and then implementation. I believe that the SFO wants to see concrete steps made in good faith to set up a “proportionate” compliance program tailored to your company’s risk profile based upon the risk assessment you have performed.

If you have not panicked as yet – don’t. But if you have not started to implement a compliance solution that will put your company in compliance with the Bribery Act – the effective date of July 1 would seem like a good time to begin.

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

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