FCPA Compliance and Ethics Blog

September 8, 2010

So…When Does Compliance and Ethics No Longer Matter?

Filed under: compliance programs — tfoxlaw @ 3:03 pm
Tags: , , ,

In a post yesterday on TheAtlantic.com, Daniel Indiviglio posed the question “Does Hurd’s New Oracle Gig Prove Business Ethics Don’t Matter?” Indiviglio noted that while Mark Hurd’s missteps at H-P may have been “incredibly dumb”; the decisions he made which led to his ouster did not relate to his business acumen. Indiviglio quoted Bloomberg to explain the value that Oracle must have seen in hiring Hurd:

At H-P, Hurd more than tripled profit by cutting costs and expanding beyond the company’s core business of computers and printers. He oversaw an acquisition spree of more than $20 billion, letting the company branch out into services, networking equipment and smart phones. Oracle, which also has bulked up through takeovers, would draw on Hurd’s background blending software and hardware as it expands into server sales.

Indiviglio noted that it would appear that Oracle “thinks Hurd’s talent for business-making trumps his poor [ethical] decision-making elsewhere.” While recognizing that in certain professional service businesses, such as auditing, integrity is everything; conversely in other types of businesses where profit motives may not be connected to good ethics, an emphasis on integrity may not jeopardize business as much and as “long as poor decisions don’t compromise profit, they [business ethics] will eventually be forgotten.”

We have previously discussed the importance of “Tone at the Top” and our colleague Lindsay Walker has guest blogged on the subject in “Integrating Ethics and Compliance into the Entire Organization”. We both believe that a Company’s ethics and compliance culture are set by the very top levels of management. The reason is that this is the very ‘tone’ which company employees pick up on and use as the basis of their de facto guidance about what one can and cannot do; instead of following a written Code of Ethics. In most industries there is [almost] always an apocryphal ethics story along the lines of ‘In some unknown country an un-named Regional Manager is alleged to have said the following: “If I violate the Code of Ethics, I may or may not get caught. If I violate the Code of Ethics and get caught, I may or may not be disciplined. But if I miss my numbers for two consecutive quarters I will be terminated.” ‘

In the Foreign Corrupt Practices Act (FCPA) compliance world, we wonder what the Department of Justice (DOJ) or Securities and Exchange Commission (SEC) would think about a company which had such an attitude regarding compliance. Both the DOJ and SEC also appear to believe that a Company’s ethics and compliance culture are set by the very top levels of management as the US Sentencing Guidelines read, in part, “High-level personnel and substantial authority personnel of the organization shall … promote an organizational culture that encourages ethical conduct and a commitment to compliance with the law.” The DOJ has also cited to the Organization for Economic Co-operation and Development (OECD) Good Practice Guidance on Internal Controls, Ethics, and Compliance as a guide to best practices in the compliance arena. The OECD lists 12 specific guidelines for companies to utilize as a basis to construct an effective compliance program. The list includes at least two points that seem to bear weight on this issue. They are:

1. A culture of compliance with the appropriate “tone at the top”.

* * *

3. It must be the duty of every employee to observe a company’s compliance program.

So take some time to think about the message you believe Oracle is sending to its employees by hiring Mark Hurd?

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

© Thomas R. Fox, 2010

August 27, 2010

What Steps Can Lead to a Reduction in a FCPA Fine?

Earlier this month, in the FCPA Blog, Bruce Hinchey discussed his upcoming publication, “Punishing the Penitent: Disproportionate Fines in Recent FCPA Enforcements and Suggested Improvements ” which analyzes differences between bribes paid and penalties levied against companies that do and do not self-disclose under the Foreign Corrupt Practices Act (FCPA). Using a regression analysis, Hinchey concluded that those companies which did voluntarily self-disclose paid higher fines than companies which did not self disclosure their FCPA violations to the DOJ. He concluded his post by noting that this evidence was contrary to the conventional wisdom that a company receives a benefit from self-disclosure and such evidence would ”raise questions about whether current FCPA enforcement is fundamentally fair”.

We were intrigued by this paper, as were many other commentators. However, as Hinchey’s analysis was limited to reviewing the issue of self-disclosure or not and the fine-to-bribe ratio companies pay for FCPA violations, we wondered if there were other factors which the Department of Justice (DOJ) might take into account when assessing a fine and if so, what some of these factors might be?

On Wednesday of this week, the FCPA Professor answered this question, in part, in his post on the FCPA enforcement actions against two US companies – Alliance One International, Inc. and Universal Corporation, discussing the factors the DOJ took into account when calculating the fines and penalties for both companies. We are thankful to the FCPA Professor for not only reading the near 300 pages released by the DOJ and Securities and Exchange Commission (SEC) but synthesizing them down to a manageable and coherent length for his post. As reported by the FCPA Professor, within the documents, were the specific steps taken by both companies during the pendency of their respective investigation. The steps listed helped to yield significant reductions of the fines for the FCPA violations. We will review the steps taken by these two companies and hope to further condense some key lessons learned from these enforcement actions.
I. THE COMPANIES AND THEIR FCPA VIOLATIONS
The companies involved in the investigations were the US companies, Alliance One and Universal Corporation. They are both in the tobacco merchant business. Alliance One’s liability was predicated on successor liability for the FCPA transgressions of an entity it purchased. Both companies made improper cash payments, gifts and bribes in Central Asia and the Far East. The companies signed Non Prosecution Agreements and there were criminal pleas by individuals involved in the criminal activity. It is significant to note that both companies self-reported to the DOJ.
II. CREDIT RECEIVED FOR COOPERATION
Both companies received substantial reductions in fines assessed for their conduct. The penalty box score is as follows:

Company Range Fine Suggested Per US Sentencing Guidelines Final Agreed Fine
Alliance One $4.2 to $8.4MM $5.25MM
Universal Corp $6.3 to $12.6MM $4.4MM

III. WHAT STEPS DID THE COMPANIES TAKE?

1. Alliance

A. With the DOJ
1. The Company’s cooperation was both timely and thorough.
2. During the course of the government’s investigation, Alliance and its outside counsel fully cooperated in good faith with the Department, and produced thousands of pages of documents and financial records.
3. Alliance terminated or sought resignations from all employees who were found to have knowledge of or participated in the improper payments.
4. Alliance voluntarily produced memoranda of employee interviews conducted by counsel. Alliance and their counsel have been available to meet with Department attorneys to brief them on the progress and findings of their internal investigation.

B. Remedial Steps Taken
1. Alliance took remedial actions including enhancement of its corporate compliance program.
2. Replacement of responsible management.
3. Discipline or termination of wrongdoers.

C. Audit Committee
1. Directed management to deliver a “clear and proactive message” that:
a. Illegal acts will not be tolerated.
b. Any potentially illegal act should be brought to the attention of the General Counsel prior to execution of the transaction.
c. Any individual that believes that an illegal act may have occurred should contact the General Counsel immediately.
d. Implemented a new policy requiring Chief Financial Officer or Controller pre-approval of any material payment in cash.

D. Management
1. Issued a directive to regional executives and all accounting personnel that any questionable expenses or payments and expenses without adequate explanation or documentation must be reported to the Corporate Compliance Officer.
2. Issued a direction to employees that no payments to public officials or political parties are to be made in any form without the express advance approval of the Corporate Compliance Officer.
3. Responsible personnel, including senior management in Europe and Kyrgyzstan were terminated or left company voluntarily. Other employees were reprimanded.

E. Chief Compliance Officer
1. Required all personnel to re-take an online training course covering the FCPA provided by Integrity Interactive.

F. Corporate Accounting
1. Required supporting information for all payments made in cash from any entity where such payments exceed $2500 annually.
2. Issued a directive to minimize cash payments for anything other than incidental expenses.
3. Required that all cash accounts must be maintained in the company’s name.
4. Required that all cash transactions be documented by receipts and signed by the recipient and they established a periodic review and approval process for all.
5. Required that all non-incidental types of expenses paid in cash to ensure payments would comply with Company policy and the law.

2. Universal

A. With the DOJ
1. Universal’s cooperation was both timely and thorough.
2. Universal retained outside counsel to conduct an extensive internal investigation.
3. Universal and their counsel were consistently available to meet with Department attorneys to brief them on the progress and findings of their internal investigation.
4. Universal and its outside counsel fully cooperated in good faith with the Department and produced thousands of pages of documents and financial records and made employees available for interviews.
5. The Company terminated or reprimanded employees who were determined to have authorized and facilitated the improper payments.

B. Remedial Steps Taken
1. Universal took remedial actions including enhancement of its corporate compliance program.
2. It strengthened internal controls.
3. It implemented a rigorous compliance program.
4. The Company engaged an independent corporate monitor to conduct a comprehensive review of the Company’s compliance standards and procedures and its internal controls.
5. Independent corporate monitor to prepare an initial report and two follow-up reports of the findings and make recommendations for improvements in the company’s compliance programs over the three-year term.
6. The Company replaced the responsible management.

C. Management
1. Management established a Compliance Committee comprised of the Chief Financial Officer; General Counsel; Head of Internal Audit; Treasurer; Controller and the Principle Sales Director, which meets on a monthly basis to review and evaluate Universal’s compliance programs and training.
2. Management established a Chief Compliance Officer who is responsible for the day-to-day operations of Universal’s compliance program and Chairs the Compliance Committee.
3. Management issued a revised and updated Code of Conduct and translated the Code into fourteen (14) languages.
4. Management required sales, finance, and executive-level personnel to attend a day long in-person training session devoted to FCPA and local anti-bribery laws.
5. Management revised and enhanced its payment approval policy which now requires an ‘approving officer’ to review all supporting documentation for a payment and to understand the purpose of the payment prior to approval. The ‘approving officer’ must certify that he or she has reviewed the existing documentation and obtained an understanding of the legitimate business purpose of the payment. The policy also requires that employees investigate any questionable payments and determine that they are legal, legitimate, and appropriate prior to approving the payment.
6. Management revised and enhanced its due diligence process for agents. Initially, the Company suspended all commission payments to agents worldwide subject to legal department confirmation that each requested payment was adequately supported. Thereafter, it instituted a formal and standardized process for the assessment and approval of existing and proposed sales agents, which is coordinated by the Legal Department. As part of this policy, an officer, known as a ‘Relationship Officer,’ is required to complete a ‘Sales Agent Due Diligence Checklist’ for each prospective sales agent. This detailed checklist includes disclosure of relationships with foreign governments by owners, officers, directors and employees of the third-party agent or their family members, reference checks, and a list of potential red flags.
7. Management conducted, and has pledged to continue to conduct, compliance and/or FCPA training at every global conference held for Company employees.
8. Management terminated and reprimanded certain employees involved in the improper conduct.

D. Pre-Existing Compliance
One additional factor noted by the DOJ was that FCPA violations came to the attention of the Company pursuant to its internal compliance program, The Company was given some unspecified credit for this portion of the Company’s pre-existing compliance program.

IV. KEY TAKE-AWAYS
These two matters provide to companies in the midst of FCPA enforcement actions specific steps that should be implemented during the pendency of an investigation to present to the DOJ. Initially it should be noted that full cooperation with the DOJ at all times during the investigation is absolutely mandatory. Thereafter from the Alliance One matter, the focus was on accounting procedures and control of cash payments. From the Universal case, a key driver appears to be the due diligence on each pending international transaction, and subsequent full due diligence on each international business partner. Next is the management of any international business partner after due diligence is completed and a contract executed. Lastly is the focus on the Chief Compliance Officer position, emphasizing this new position throughout the organization and training, training and more training on FCPA compliance.

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

© Thomas R. Fox, 2010

August 25, 2010

Promotional Expenses Defense under the FCPA

I.       The Problem

So what is the problem with a US company paying for travel, room and board for foreign governmental officials to travel to the United States? The problem is that payment for such travel, lodging and expenses may run afoul of the prohibition against corrupt payments (or promises of them) made to obtain or retain business. The Foreign Corrupt Practices Act (FCPA) allows payments to foreign officials for expenses related directly to “the promotion, demonstration, or explanation of products or services” that are “reasonable and bona fide” 15 U.S.C. §§ 78dd-1(c)(2)(A) and 78dd-2(c)(2)(A). This affirmative defense, however, is notoriously hard to use (and easy to abuse), mainly because no one is quite sure what reasonable and bona fide really mean.

In his recent post on the FCPA Blog, UCLA student Kyle Sheahen, explored this issue in his discussion of his upcoming publication, entitled “I’m Not Going to Disneyland: Illusory Affirmative Defenses Under the Foreign Corrupt Practices Act”. In his paper, he sets forth his proposition that FCPA enforcement actions provide “uneven indicators or what conduct the government considers covered by the defense. Consequently, in the absence of authoritative judicial interpretation or clear regulatory guidance, corporate managers are required to make educated guesses as to whether contemplated payments will qualify as “bona fide” promotional expenses.”;   he cites the following cases:

PROMOTIONAL EXPENSE ENFORCEMENT BOX SCORE

Company Trip Locations Trip Costs & Perks Company Facilities Present
Lucent Technologies Disneyworld, Hawaii, Las Vegas, Grand Canyon, Niagara Falls, Universal Studios, NYC -$10 million in trips for 1000 Chinese governmental officials, including $34,000 for five days of sightseeing None of the travel destinations
Ingersoll-Rand Trip to Florence after trip to company facility in Vignate, Italy $1000 ‘pocket  money’ per attendee Facilities in Vignate but not in Florence
Metcaf & Eddy First trip-Boston, Washington, D.C., Chicago and Orlando. Second trip-travel to Paris, Boston and San Diego. First Class Travel and trip expenses for Egyptian governmental official and his family. Cash payments prior to trips of 150% of estimated daily expenses.  Wakefield Mass not in Washington DC, Chicago, Paris or Disney World (Orlando)
Titan Corporation   Reference in company books and records of $20,000 for promotional travel expenses. Not clear if ever funded (Remember a promise to pay=making a payment under the FCPA)  
Not cited in Sheahen Paper      
UTStarcom Hawaii, Las Vegas and New York City Up to $7 million on gifts and all expense paid trips to US None of the travel destinations

 While the Department of Justice (DOJ) and/or the Securities and Exchange Commission (SEC) brought enforcement actions against the above companies, this author believes that the facts of each enforcement action demonstrate that the expenses incurred by the companies were neither reasonable nor bona fide as required under the FCPA. These cases do not require a FCPA compliance professional to guess, educated or otherwise, as to whether the travel, lodging and expense payments listed above violated the FCPA. The payment amounts noted above in the Box Score are so beyond the pale of reasonableness to be prima facie evidence of corrupt intent. Of course, it really does not help your case with the DOJ if you do not have company facilities in Disney World.

  1. II.    Opinion Releases  

In addition to detailing the above enforcement actions, Mr. Sheahen also discusses guidance that may be gleaned from DOJ Opinion Releases on the Promotional Expenses defense. Here he points to substantive guidance for the FCPA practitioner. In 2007, the DOJ issued two FCPA Opinion Releases which offered guidance to companies considering whether to and, if so how to, incur travel, lodging and expenses for government officials. In Opinion Release 07-01, the Requestor Company desired to cover the domestic expenses for a trip to the United States by a six-person delegation of the government of an Asian country for an educational and promotional tour of one of the requestor’s US operations sites.

Opinion Release 07-01 laid out the specific representations made to the DOJ which led to the DOJ approving the travel to the US by the foreign governmental officials. These facts can provide good guidance to any company which seeks to bring such officials to the US for a legitimate business purpose. In Opinion Release 07-01, the representations made to the DOJ were as follows:

  • A legal opinion from an established US law firm, with offices in the foreign country, stating that the payment of expenses by the US Company for the travel of the foreign governmental representatives did not violate the laws of the country involved;
  • The US Company did not select the foreign governmental officials who would come to the US for the training program.
  • The delegates who came to the US did not have direct authority over the decisions relating to the US Company’s products or services.
  • The US Company would not pay the expenses of anyone other than the selected official.
  • The officials would not receive any entertainment, other than room and board from the US Company.
  • All expenses incurred by the US Company would be accurately reflected in this Company’s books and records.  

For  these representations, the DOJ noted, “Based upon all of the facts and circumstances, as represented by the requestor, the Department does not presently intend to take any enforcement action with respect to the proposal described in this request. This is because, based on the requestor’s representations, consistent with the FCPA’s promotional expenses affirmative defense, the expenses contemplated are reasonable under the circumstances and directly relate to “the promotion, demonstration, or explanation of [the requestor’s] products or services.”

In Opinion Release 07-02 the Requestor Company desired to pay certain domestic expenses for a trip within the United States by approximately six junior to mid-level officials of a foreign government for an educational program at the Requestor’s US headquarters prior to the delegates attendance at an annual six-week long internship program for foreign insurance regulators sponsored by the National Association of Insurance Commissioners (“NAIC”).

In Opinion Release 07-02 the representations made to the DOJ were as follows:

  • The US Company would not pay the travel expenses or fees for participation in the NAIC program.
  • The US Company had no “non-routine” business in front of the foreign governmental agency.
  • The routine business it did have before the foreign governmental agency was guided by administrative rules with identified standards.
  • The US Company would not select the delegates for the training program.
  • The US Company would only host the delegates and not their families.
  • The US Company would pay all costs incurred directly to the US service providers and only a modest daily minimum to the foreign governmental officials based upon a properly presented receipt.
  • Any souvenirs presented would be of modest value, with the US Company’s logo.
  • There would be one four-hour sightseeing trip in the city where the US Company is located.
  • The total expenses of the trip are reasonable for such a trip and the training which would be provided at the home offices of the US Company.  

As with Opinion Release 07-01, the DOJ ended this Opinion Release by stating, “Based upon all of the facts and circumstances, as represented by the Requestor, the Department does not presently intend to take any enforcement action with respect to the planned educational program and proposed payments described in this request. This is because, based on the Requestor’s representations, consistent with the FCPA’s  promotional expenses affirmative defense, the expenses contemplated are reasonable under the circumstances and directly relate to “the promotion, demonstration, or explanation of [the Requestor’s] products or services.” 15 U.S.C. § 78dd-2(c)(2)(A). 

III. Travel, Lodging and Expenses for Governmental Officials 

What can one glean from these two Opinion Releases? In light of the facts it  would seem that a US Company should be able to bring foreign officials into the United States for legitimate business purposes. A key component is that the guidelines are clearly articulated in a Compliance Policy. Based upon Releases Opinions 07-01 and 07-02, the following should be incorporated into a Compliance Policy regarding travel and lodging:

  • Any reimbursement for air fare will be for economy class.
  • Do not select the particular officials who will travel. That decision will be made solely by the foreign government.
  • Only host the designated officials and not their spouses or family members.
  • Pay all costs directly to the service providers; in the event that an expense requires reimbursement, you may do so, up to a modest daily minimum (e.g., $35), upon presentation of a written receipt.
  • Any souvenirs you provide the visiting officials should reflect the business and/or logo and would be of nominal value, e.g., shirts or tote bags.
  • Apart from the expenses identified above, do not compensate the foreign government or the officials for their visit, do not fund, organize, or host any other entertainment, side trips, or leisure activities for the officials, or provide the officials with any stipend or spending money.
  • The training costs and expenses will be only those necessary and reasonable to educate the visiting officials about the operation of your company. 

Incorporation of these concepts into a Compliance Policy is a good first step towards preventing any FCPA violations from arising, but it must be emphasized that they are only a first step. These guidelines must be coupled with active training of all personnel, not only on the Compliance Policy, but also on the corporate and individual consequences that may arise if the FCPA is violated regarding gifts and entertainment. Lastly, it is imperative that all such gifts and entertainment are properly recorded, as required by the books and records component of the FCPA. One of the FCPA violations alleged against UTStarcom was that it falsely recorded these trips as ‘training’ expenses, while the true purpose for providing these trips was to obtain and retain lucrative telecommunications contracts. All business gifts, entertainment and expenses must be properly recorded.

We commend Mr. Sheahen for his upcoming publication, in which he thoroughly discusses the “Local Law” defense under the FCPA in addition to the “Promotional Expenses” defense. His work will add to the discussion of these two affirmative defenses and assist companies in crafting their FCPA compliance program.

This article originally appeared in American Conference Institute Blog Site.

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

© Thomas R. Fox, 2010

August 23, 2010

Board Members and Prudent Discharge of Duties under the FCPA

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

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

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

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

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

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

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

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

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

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

© Thomas R. Fox, 2010

August 5, 2010

HOTLINES AS A FCPA COMPLIANCE TOOL

Employees are a company’s best source of information about what is going on in the company. It is certainly a best practice for a company to listen to its own employees, particularly to help improve its processes and procedures. But more than listening to its employees, a company should provide a safe and secure route for employees to escalate their concerns. This is the underlying rationale behind an anonymous reporting system within any organization. This concept is one key components of a Foreign Corrupt Practices Act (FCPA) compliance and ethics ‘best practices’ program. Both the Principles of Federal Prosecution of Business Organization (US Sentencing Guidelines) and the OECD Good Practice Guidance on Internal Controls, Ethics, and Compliance (“OCED Good Practices”) list, as one of their components, an anonymous reporting mechanism by which employees can report compliance and ethics violations. This concept, in the FCPA world, is usually referred to as a “Hotline”. This article will discuss how the use of a Hotline can assist a company with its overall FCPA compliance and ethics efforts.

The US Sentencing Guidelines state:

(C) to have and publicize a system, which may include mechanisms that allow for anonymity or confidentiality, whereby the organization’s employees and agents may report or seek guidance regarding potential or actual criminal conduct without fear of retaliation.

The OECD Good Practices states:

v) companies to provide channels for communication by, and protection of, persons not willing to violate professional standards or ethics under instructions or pressure from hierarchical superiors, as well as for persons willing to report breaches of the law or professional standards or ethics occurring within the company in good faith and on reasonable grounds, and should encourage companies to take appropriate action based on such reporting;

Confidential reporting is critical to any organization, not only from the legal requirements which specify that such a mechanism be available for employees, but also to allow escalation of compliance and ethics issues in a manner which is safe for employees and can lead the discovery of significant FCPA compliance issues. Two recent examples of employees reporting issues include the Daimler and, the ongoing, Avon matters. A company’s commitment to a hotline provides a means by which employees can elevate compliance and ethics concerns before they become full blown FCPA enforcements actions.

While there is no generally accepted industry standard regarding the implementation and employment of Hotline, Ethicspoint, in a White Paper, entitled “It’s Not Your Father’s Hotline”, suggested the following as the ‘best practices’ for internal Hotlines:

1. Availability-a Hotline should be available 24 hours a day/7 days a week and toll-free. It should be available in the native tongue of the person utilizing it so if your work force uses more than one language for inter-company communications, your Hotline should reflect this as well.
2. Escalation-after a report is received through the Hotline it should be distributed to the appropriate person or department for action and oversight. This would also include resolution of the information presented, if warranted and consistent application of the investigation process throughout the pendency of the matter.
3. Follow-Up-there should be a mechanism for follow-up with the Hotline reporter, even if the report is made anonymously. This allows the appropriate person within your organization to substantiate the report or obtain additional information at an early stage, if appropriate.
4. Oversight-the information communicated through the Hotline should be available to the appropriate Board Committee or Management Committee in the form of statistical summaries and that an audit trail be available to the appropriate oversight group of actions taken and resolution of any information reported through the Hotline.

The Hotline can be a key company tool in an effective FCPA compliance program. Properly advertised and then utilized, it can assist a company to learn about issues and take appropriate actions before these issues erupt into more serious problems. Lastly the proper maintenance of a Hotline can not only allow a company to track compliance issues as they come into the system and document its response but also use this information as an ongoing audit of its FCPA compliance system.

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

© Thomas R. Fox, 2010

July 21, 2010

The FCPA and Tone at the Top

Both the US Sentencing Guidelines and the Organization for Economic Co-operation and Development (OECD) Good Practice Guidance on Internal Controls, Ethics, and Compliance consider one of the key items for a best practices compliance program to be the appropriate “Tone at the Top.” 

The US Sentencing Guidelines reads:

High-level personnel and substantial authority personnel of the organization shall be knowledgeable about the content and operation of the compliance and ethics program … and shall promote an organizational culture that encourages ethical conduct and a commitment to compliance with the law. 

The OECD Good Practices reads 

1. strong, explicit and visible support and commitment from senior management to the company’s internal controls, ethics and compliance programs or measures for preventing and detecting foreign bribery; 

The Foreign Corrupt Practices Act (FCPA) world is riddled with cases where the abject failure of any ethical “Tone at the Top” led to enforcement actions and large monetary settlements. In the two largest monetary settlements of enforcement actions to date, Siemens and Halliburton, for the actions of its former subsidiary KBR, the government specifically noted the companies’ pervasive tolerance for bribery. In the Siemens case, for example, the Securities and Exchange Commission (SEC) noted that the company’s culture “had long been at odds with the FCPA” and was one in which bribery “was tolerated and even rewarded at the highest levels”. Likewise, in the KBR case, the government noted that “tolerance of the offense by substantial authority personnel was pervasive” throughout the organization. 

In addition to the two cases set out above, in a 2003 report, the Commission on Public Trust and Private Enterprise cited a KPMG survey covering selected US industries; found that 37 percent of employees had, in the previous year, observed misconduct that they believed could result in a significant loss of public trust if it were to become known. This same KPMG survey found that employees reported a variety of types of misconduct and that the employees believed this misconduct is caused most often by factors such as indifference and cynicism; pressure to meet schedules; pressure to hit unrealistic earnings goals; a desire to succeed or advance careers; and a lack of knowledge of standards. 

So how can a company overcome these employee attitudes and replace the types of corporate cultures which pervaded at Siemens and KBR and re-set its “Tone at the Top”? In a 2008 speech to the State Bar of Texas Annual Meeting, reprinted in Ethisphere, Larry Thompson, PepsiCo Senior Vice President of Governmental Affairs, General Counsel and Secretary, discussed the work of Professor Lynn Sharp at Harvard. From Professor Sharp’s writings, Mr. Thompson cited five factors which are critical establishing an effective integrity program and to set the right “Tone at the Top”. 

1)      The guiding values of a company must make sense and be clearly communicated.

2)      The company’s leader must be personally committed and willing to take action on the values.

3)      A company’s systems and structures must support its guiding principles.

4)      A company’s values must be integrated into normal channels of management decision making and reflected in the company’s critical decisions.

5)      Managers must be empowered to make ethically sound decisions on a day-to-day basis. 

The subject of management making significant changes in the manner in which a business is run has long been the topic of the business press. Most recently, the current issue of the Harvard Business Review was entitled, “Managing Change: How to do it and When to do it”. In an article entitled, “The Decision-Driven Organization”, it cited the example of Ford Motor Company and its recent business turn around, in explicitly setting out a company’s decision to change a company’s business tone. When Allan Mulally became Chief Executive Officer (CEO) in 2006, he found the company in dire need of a change in business direction. Rather than change the company’s structure and then consider the change which would come thereafter, he made the decision to change the direction of the company and then put the structure in place to facilitate that change. 

In large part the change led by Mulally was based upon the five steps noted above with. Mulally substituting ‘a different way of business’ for ethics, however the message is clear. Just like the change at Ford Motor Company being led by the CEO, the transformation in ethics and compliance must be led by the CEO. Employees take their lead from the very top management of a company. If the CEO takes the opportunity to discuss ethics and compliance at every town hall meeting, in newsletters, posters and other types of communications this message is constantly reinforced.

 It is clear from the Harvard Business Review article that management change can occur. If your company does not have the correct “Tone at the Top” it can make the change. The five points set out by Thompson give a clear path to achieving the right tone to move forward with a FCPA compliance policy. Both the US Sentencing Guidelines and the OECD Good Practices are looking to top management to set a company’s tone for the values of ethics and compliance. But more importantly your employees are too. 

This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at tfox@tfoxlaw.com. © Thomas R. Fox, 2010

June 15, 2010

FCPA Reporting-To Whom Does Your CCO Report?

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

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

I.                   US Sentencing Guidelines 

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

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

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

II.                Opinion Release 04-02

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

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

III.             Industry Debates 

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

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

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

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

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

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

So which approach does your company utilize? 

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

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

© Thomas R. Fox, 2010

May 27, 2010

Lanny Breuer at Compliance Week

Assistant Attorney General for the Criminal Division of the U.S. Department of Justice (DOJ), Lanny Breuer gave the final day’s keynote speech at the Compliance Week 2010 Conference. Many of his remarks were directed at the ethics and compliance professionals who attended the event. He confirmed that the Obama Administration is committed to combating financial fraud, particularly in the area of overseas bribery and corruption as prohibited by the Foreign Corrupt Practices Act (FCPA). He used a quote from Attorney General Holder in emphasizing this point, that bribery “is a scourge on civil society.”

He stated that tools which had been previously used to combat organized crime would now be employed in the fight against white collar crime, including both wiretaps and sting operations as were used against the gun manufacturing industry in the operations which culminated in the arrests of 22 individuals in Las Vegas in January of this year. He also discussed that many foreign governments had entered into collaboration agreements to facilitate cross-border investigations and enforcement actions.

Breuer stated that one of the goals of the DOJ is to “charge individuals” as a strategy to deter corporate conduct. Further, holding individuals accountable is essential and will also deter illegal corporate conduct which results in violations of the FCPA. One of the more startling statistics cited by Breuer was the number of individual prosecutions pursued by the DOJ in the years 2004-2009. Since 2004, 84 individuals have been charged with FCPA violations. However 46 of those individuals were charged in 2009 so over ½ were charged in the last year. Indeed there have been 22 individuals charged already this year in the gun industry sting case so the facts would seem to bear out his statements. (For prior post on gun industry sting case, see here).

After emphasizing that the DOJ will continue to hold individuals accountable under the FCPA, Breuer turned to some of the things that he considered key elements of a compliance program. He began by listing a couple of references as benchmarks and they were the US Sentencing Guidelines and the OECD Good Practice Guidance for Anti-Bribery Compliance Programs. He then delineated the following elements: Tone at the Top; a compliance program which not only punishes compliance violations but also rewards good ethical behavior in a corporation; a strong whistle-blower program (and protection) through a hotline or other appropriate mechanism; and significant and direct reporting by the compliance officer to the Board. He also stated that the DOJ wants to know about not only your company, but also the companies which your may be doing business with; both in the form of third party foreign business partners and customers. He concluded by emphasizing that an effective compliance program is not static but dynamic, adapting to meet new and additional compliance challenges and subject to periodic reviews and appraisals by outside experts.

Breuer stressed the importance of coming to the DOJ rather than the DOJ coming to you, when a potential FCPA violation was discovered. The benefits to a company can be significant if a company comes forward AND fully cooperates with the DOJ. Breuer stated that if a company does so it will receive meaningful credit. He cited two examples where the penalty assessed was significantly less than the range suggested under the US Sentencing Guidelines. Breuer cited two examples. First in the Siemens’ case, the fine which could have been levied, based upon the conduct was between $1.35BN to $2.75BN and final fine levied by the DOJ was $450MM (the total fine paid to the US and German governments was $1.6BN). The second example was the fine paid by Helmerich and Payne, that of $1MM. This was 1/3 of the total fine which could have been levied based upon the US Sentencing Guidelines.

Lastly Breuer noted that it is his position that a company should come to the DOJ when it initially makes the discovery of a potential FCPA violation, rather than doing so after it conducts its investigation. This should be done for a couple of reasons. Initially Breuer remarked that the DOJ can provide guidance on the issues that it wants investigated by the company. This may prevent the company from investigating an issue that the DOJ does not deem necessary. Conversely the DOJ may suggest areas which it wants investigated that the company may not have considered. More importantly, such early notification allows the company involved to have a constructive dialogue with the DOJ and allows the DOJ to become a partner with the company in the investigative and remediation process.

Breuer took several questions from the audience. One of his more interesting responses was regarding facilitation payments and whether the US was moving towards the OECD/UK Bribery Act model of not allowing such payments. He responded that it was a question which needed consideration as compliance standards are evolving on a world wide basis. However as of this date, Breuer was not aware of any proposed change in the FCPA on this issue but that it may be visited in the not too distant future. (For a comparison of the FCPA and Bribery Act, see here).

The talk and Q&A by Breuer was well received by the audience and provided concrete guidance in several areas relating to FCPA compliance policies and issues.

For a copy of the text of Breuer’s remarks, click here.

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

© Thomas R. Fox, 2010

May 14, 2010

The Role of Human Resources in FCPA Compliance-Part II

In our most recent post, we discussed that one sign of a mature Foreign Corrupt Practices Act (FCPA) compliance and ethics program is the extent to which a company’s Human Resources (HR) Department is involved in implementing a compliance solution. In the prior posting we discussed training, employee evaluation, succession planning and hotlines and investigations. In this post, we will discuss background screening, doing ‘more with less’ and, finally, what to do when the government comes calling.

Background Screening

A key role for HR in any company is the background screening of not only employees at the time of hire, but also of employees who may be promoted to senior leadership positions. HR is usually on the front lines of such activities, although it may in conjunction with the Legal Department or Compliance Department. This requirement is discussed in the Federal Sentencing Guidelines for Organizations (FSGO) as follows “The organization shall use reasonable efforts not to include within the substantial authority personnel of the organization any individual whom the organization knew, or should have known through the exercise of due diligence, has engaged in illegal activities or other conduct inconsistent with an effective compliance and ethics program.”

What type of background checks should HR utilize in the FCPA compliance and ethics arena? The consensus seems to be that HR should perform at least routine civil, criminal and credit background checks. Care should be noted in any such request made in countries outside the United States as such information may be protected by privacy laws or where the quality of such information is different in substance from that of the United States. For instance in the United Kingdom, the request of a credit check can negatively impact a prospective employee’s credit score so such a background check may not provide useful information to a prospective employer.

Additionally, although it may be difficult in the United States to do so, a thorough check of references should be made. I say that it may be difficult because many companies will only confirm that the employee worked at the company and only give out the additional information of dates of employment. In this situation, it may be that a prospective employer should utilize a current employee to contact former associates at other companies to get a sense of the prospective employee’s business ethics. However, it should be noted that such contacts should only be made after a thorough briefing by HR of the current employee who might be asked to perform such duty.

A company can also use HR to perform internal background checks on employees who may be targeted for promotions. These types of internal background checks can include a detailed review of employee performance; disciplinary actions, if any; internal and external achievements, while employed by the company and confirmation of both ethics and compliance training and that the employee has completed the required annual compliance certification. An key internal function where HR can be an important lead is to emphasize that an employee, who has been investigated but cleared of any alleged ethics and compliance violations, should not be penalized.

When the Government Comes Calling


While it is true that a company’s Legal and/or Compliance Department will lead the response to a government investigation, HR can fulfill an important support role due to the fact that HR should maintain, as part of its routine function, a hard copy of many of the records which may need to be produced in such an investigation. This would include all pre-employment screening documents, including background investigations, all post-employment documents, including any additional screening documents, compliance training and testing thereon and annual compliance certifications. HR can be critical in identifying and tracking down former employees. HR will work with Legal and/or Compliance to establish protocols for the conduct of investigations and who should be involved.

Lastly, another role for HR can be in the establishment and management of (1) an Amnesty Program or (2) a Leniency Program for both current, and former, employees. Such programs were implemented by Siemens during its internal bribery and corruption investigation. The Amnesty Program allowed appropriate current or former employees, who fully cooperated and provided truthful information, to be relieved from the prospect of civil damage claims or termination. The Leniency Program allowed Siemens employees who had provided untrue information in the investigation to correct this information for certain specific discipline. Whichever of these programs, or any variations that are implemented, HR can perform a valuable support role to Legal and/or Compliance.

Doing More with Less

While many practitioners do not immediately consider HR as a key component of a FCPA compliance solution, it can be one of the lynch-pins in spreading a company’s commitment to compliance throughout the employee base. HR can also be used to ‘connect the dots’ in many divergent elements in a company’s FCPA compliance and ethics program. The roles listed for HR in this series are functions that HR currently performs for almost any US company with international operations. By asking HR to expand their traditional function to include the FCPA compliance and ethics function, a US company can move towards a goal of a more complete compliance program, while not significantly increasing costs. Additionally, by asking HR to include these roles, it will drive home the message of compliance to all levels and functions within a company; from senior to middle management and to those on the shop floor. Just as safety is usually message Number 1, compliance can be message 1A. HR focuses on behaviors, and by asking this department to include a compliance and ethics message, such behavior will become a part of a company’s DNA.

The author will discuss this topic in greater depth in an upcoming webinar on the role of HR in FCPA compliance, Tuesday, May 18th at 2 PM CDT. For information and registration details go to https://secure.confertel.net/tsregister.asp?course=509107.

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

April 21, 2010

Changes Coming:US Sentencing Guidelines, UK Bribery Act and the OECD on Facilitation Payments-Part III

Filed under: OECD,UK Bribery Bill — tfoxlaw @ 7:59 am
Tags: , , ,

At its April 7, 2010 meeting the United States Sentencing Commission approved amendments to its Sentencing Guidelines. The next day on April 8, 2010, the UK Bribery Bill received Royal Assent and became the Bribery Act. These two events follow the December 9, 2009 release by the Organization for Economic Co-Operation and Development’s (OECD) Recommendation for Further Combating Bribery of Foreign Public Officials, when the OECD marked the tenth anniversary of the entry into force of the OECD Anti-Bribery Convention.

These three releases, which comprise of two changes in the legal schemes by two of the world’s largest economic players and the proposal of one of the largest Non-Governmental Organizations (NGO) dedicated to ending corruption across the globe portend significant changes in how companies will be structured and transact business going forward in the new decade. This is the third and final of three postings which have discussed the changes that companies, with any US or UK presence, will be required to implement. In the initial post we considered the changes to the US Sentencing Guidelines; we then discussed the changes required by the UK Bribery Act and in this third and final post in this series, we will end with the recommendations regarding facilitation payments as found in the OECD’s Recommendation for Further Combating Bribery of Foreign Public Officials.

The OECD and Facilitation Payments

In late 2009, to celebrate “International Anti-Corruption Day” recognizing the Tenth Anniversary of the OECD Anti-Bribery Convention, the OECD released “The Recommendation for Further Combating Bribery of Foreign Public Officials”. In this report the OECD recommended changes relating to facilitation payments (aka “grease payments”) such as those which are legal under the FCPA. OECD Secretary-General Angel Gurría described these low-level payments, designed to expedite performance of a “routine government action” such as obtaining mail delivery, phone or power service, as “corrosive . . . particularly on sustainable economic development and the rule of law”.

Facilitation payments, also known as “expediting payments” or “grease payments,” are bribes paid to induce foreign officials to perform routine functions they are otherwise obligated to perform. Examples of such routine functions include issuing licenses or permits and installing telephone lines and other basic services. The only countries that permit facilitation payments are the United States, Canada, Australia, New Zealand and South Korea. Facilitation payments, however, are illegal in every country in which they are paid. They have come under increasing fire under the FCPA as inconsistent with the totality of US policy on anticorruption.

This change by the OECD brings the considerable problems associated with facilitation in the international business arena into sharper focus. Just like large commercial bribes, grease payments abuse the public trust and corrode corporate governance. Treating them as anything other than outright bribery muddies the compliance waters and adds confusion where there should be clarity. This new stance by the OECD, coupled with the increased enforcement under the FCPA, may well bode the end of facilitation payments. There is no monetary threshold for determining when a payment crosses the line between a facilitation payment and a bribe. The accounting provisions of the FCPA require that facilitation payments must be accurately reflected in an issuer’s books and records, even if the payment itself is permissible under the anti-bribery provisions of the law.

Facilitation payments carry legal risks even if they are permitted under the anti-bribery laws of a particular country. In the US enforcement agencies have taken a narrow view of the exception and have successfully prosecuted FCPA violations stemming from payments that could arguably be considered permissible facilitation payments. Violations of the accounting and recordkeeping provisions of the FCPA are also more likely when a company makes facilitation payments. Abroad, countries are increasingly enforcing domestic bribery laws that prohibit such payments. Companies that allow facilitation payments face a slippery slope to educate their employees on the nuances of permissible payments in order to avoid prosecution for prohibited bribes.

The global business environment has changed even as the FCPA has remained static. In the absence of any legislative action to roll back the facilitation payment exception, the DOJ and Securities and Exchange Commission (SEC) plainly have set out to repeal the facilitation payment exception on a case-by-case basis. US companies should recognize the weakening of the argument supporting a facilitation payment exception and should develop compliance policies that do not permit any kind of grease payments. A policy that prohibits all payments (unless there is high level of legal and compliance approval) will relieve businesses of the compliance burden of differentiating between lawful and unlawful payments. From the point of view of the modern global corporation, a compliance regime that attempts to differentiate between “good” corrupt payments and “bad” corrupt payments will do more harm than good.

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 can be reached at tfox@tfoxlaw.com.

© Thomas R. Fox, 2010

« Previous PageNext Page »

Blog at WordPress.com.