FCPA Compliance and Ethics Blog

April 9, 2013

Why Eat Your Words When You Can Eat a Peach?

Taken to the woodshed or when should a company have to eat its own words? Remember when President Reagan’s Director of the Office of Management and Budget, David Stockman, was ‘taken to the woodshed’ by White House Chief of Staff James Baker after public comments that Stockman made for an Atlantic Monthly article that questioned the monetary policy which underpinned the entire Reagan Revolution? Stockman was most contrite thereafter.

We had a recent example of this in the context of US federal enforcement actions in the Standard Chartered (StanChart) matter. For those who might not remember, our friends at StanChart agreed to pay approximately $667MM in fines to several US regulators for the bank’s conduct around its breach of US sanctions on Iran. The bank agreed to voluntarily enter into a Deferred Prosecution Agreement (DPA) and as part of that DPA it agreed not to publicly contest the agreement or generally make any public statements contradicting the acceptance of responsibility. There are usually similar clauses in Foreign Corrupt Practices Act (FCPA) DPAs as well.

In an article in the Financial Times (FT), entitled “StanChart trio are called before US regulators”, by Kara Scannell, Patrick Jenkins and Lina Saigol, they reported that Sir John Peace, StanChart chairman said at a March 5 Press Conference that the Bank had engaged in “no wilful act to avoid sanctions; you know, mistakes are made – clerical errors” related to its myriad of conduct in doing business with Iran, in violation of US trade sanctions. This language directly contradicted the terms of the StanChart’s various settlement agreements with US regulators. On March 21, he was required to eat those words when he “said those comments were “both legally and factually incorrect”” and retracted them. “Standard Chartered Bank unequivocally acknowledges and accepts responsibility . . . for past knowing and wilful criminal conduct in violating US economic sanctions laws and regulations”.

According to the article this retraction was the result of a meeting he, Chief Executive Peter Sands and Finance Director Richard Meddings were called to with the Department of Justice (DOJ) and New York district attorney Cy Vance, “Standard Chartered was required to retract the statement or be subject to prosecution,” the DOJ said. The article also reported that “US officials at the meeting emphasised the importance of the terms of a settlement over sanction violations, including the bank’s ongoing co-operation. DoJ officials were concerned because the comments came from the top of the bank and had pushed for a public retraction and email to the entire staff. Sir John told them it was a humiliating day for him personally and for the bank, the person said.” This is the ‘going to the woodshed part’.

But what about these clauses prohibiting such contradictions? The FCPA Professor lets you know where he stands on the issue with his post on StanChart, entitled “The “Muzzle” Clause”, where he poses the question, “Is this an effective system of justice?” when the following exists:

First, the DOJ can use its leverage and its ability to bring criminal charges against a company. Second, the DOJ will can then use an NPA or DPA to insulate its version of the facts and enforcement theories from judicial scrutiny which the risk averse company will more often that not accept. Third, in the resolution agreement, the DOJ can include a “muzzle” clause prohibiting anyone associated with the company from making any statement inconsistent with the DOJ’s version of the facts or its enforcement theories.  Fourth, if the DOJ believes, in its sole discretion, that a public statement has been made contradicting its version of the facts or its enforcement theories, the DOJ can “pounce” and threaten to bring criminal charges.

As to the first point, I think that the DOJ would respond that it brings enforcement actions that are appropriate under the facts and circumstances of the case. But as to the second point, I believe that DPAs and Non-Prosecution Agreements (NPAs) are equally preferred, if not more so by companies. The reason is that they bring closure with certainty, which is what company’s desire in any legal proceeding. If there are company’s which want to go to trial and test the Arthur Anderson result, they should go ahead and do so but I certainly do not want to be the first General Counsel (GC) or Chief Compliance Officer (CCO) who makes the wrong call and have my company go poof because I turned down an offer to settle.

As to point three, I am somewhat more concerned with this issue in the context of the First Amendment. Here the Professor cites to Professor Ellen Podgor who asked “whether the government can include such clauses in resolution agreements without infringing on First Amendment rights.” Clearly if a person or company is convicted of a crime they have the right to contest that finding, vocally or otherwise. However, in the DPA context, a company has admitted to conduct and findings so perhaps there is a difference than a person convicted at trial who wants to scream from the highest mountaintop “I didn’t do it”.

On point four, I have to disagree with the Professor. In another FT article, entitled “StanChart chairman forced to eat his words over Iran”, the reports quoted Simon Maughan, an analyst at Olivetree Securities, who with perhaps less delicacy and also with greater English irony, said “StanChart had tried to play hardball with the US regulators and lost.”

I have worked in a company under a DPA for its FCPA violations. I did not find it hard to not contradict the facts and findings in the DPA. In fact, the company used those facts and findings to make itself into a stronger and more financially viable entity. It seems to me, if one cannot even accept the fact that it was your company which engaged in legal violations and not simply some ‘clerical errors’ which caused your company to pay $667MM in fines, you really have not learned very much. Perhaps that is what the DOJ really wants companies to understand.

Eat A Peach is the final studio Allman Brothers album on which both Duane and Greg Allman played before the untimely death of Duane.

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

August 17, 2012

Settling with Multiple International Regulators: What Has Standard Chartered Wrought?

“Tell me what can a poor boy do; ‘Cept for sing for a rock ‘n’ roll band?”

As a teenager I often pondered those lyrics and wondered if Mick Jagger was really a closet radical who was ready to “let his freak flag fly” (to cross-mix musical metaphors) and take to the streets to protest as was so often done in the 1960s. That Stones lyric popped into my head more than once over the past week when I was trying to sort out the story of Standard Chartered Bank (SBC) and the New York state Department of Financial Services (DFS) in the context of an international company subject to many different international regulators. Quite simply, what is a poor company to do when it is being investigated by multiple regulatory agencies or government departments in many different countries and with even further differentiated jurisdictions within the same country, such as the role of the (DFS) and the US Department of Treasury or Federal Reserve?

Companies and Regulators-waiver of privilege and negotiations

This question clearly came up in the context of the SBC anti-money laundering (AML) fine announced earlier this week. In addition to the UK Financial Services Authority (FSA), SBC was under investigation by several US federal authorities including the Department of Treasury, Department of Justice (DOJ), Federal Reserve and Federal Bureau of Investigation (FBI). Who and how does an entity under investigation communicate? In an article in the Huffington Post, entitled (appropriately enough) “Standard Chartered May Have Burned Itself By Waiving Attorney-Client Privilege In Probe”, reporters Aruna Viswanatha and Andrew Longstreth wrote that SBC “appears to have been burned by a decision to waive attorney-client privilege, a move that usually helps appease U.S. authorities.”

In addition to the waiver issue, how does an institution negotiate with several over-lapping jurisdictions or multiple regulators within one jurisdiction? The Financial Times (FT), in an op-ed piece entitled “StanChart rushes to unsettling deal”, said that “If banks are to be clear about their responsibilities and obligations, regulators have to establish coherent norms and processes.” The piece went on to opine that it would “be perverse” if the DFS is applauded for “going it alone” even though the FT acknowledged that the DFS was “right to raise questions over the legality of wire-stripping”.

Regulators and Regulators-who’s on first?(International Division)

What about the relationship between international regulators, is it now damaged? In a Wall Street Journal (WSJ) article, entitled “Trans-Atlantic Tensions Increase”, Dana Cimilluca and Victoria McGrane reported that “the special relationship between the financial authorities in the U.S. and U.K. is going through a rough patch.” To underscore this point, they noted that after the DFS went public, the Governor of the Bank of England “chastised” US regulators. However, this chastisement did not sit well with all on this side of the pond. In another WSJ article entitled “Bank Deal Rankles Regulators” Liz Rappaport quoted Neil Barofsky, former special inspector general in the US Treasury Department, who believes, “The FSA should stop griping about other regulators and focus on overseeing London’s banks”.

Regulators and Regulators-who’s on first?(US Division)

What about the relationships between US federal and state regulators? Rappaport reported that the DFS met with all other US regulatory agencies investigating SBC conduct in April. The DFS seems to believe that it communicated that it was ready to move while the federal regulators “didn’t feel that they had got any indication from Mr. Lawsky’s office that he was going to pursue a case on his own. Rappaport quoted Mark Williams, a former Federal Reserve Bank examiner, who said that it was “unprecedented, from a regulatory perspective” for a state regulator to move without waiting for federal regulators to move fist. However, he was also quoted as saying “It will likely embolden other state banking commissioners”. But the final word, at least from the US side, may have come from Senator Carl Levin (D-Mi.) who was quoted as saying, “Holding a bank accountable for past misconduct doesn’t need to take years of negotiation over the size of the penalty. It simply takes a regulator with the backbone to act.”

What Should Wal-Mart Do?

So what does all of this mean? Certainly in the financial services sector, counsel needs to tread carefully and have a clear understanding about turning over evidence and how that evidence may be presented. Companies also need to have clear understanding of who they are negotiating with and under what conditions. For those Foreign Corrupt Practices Act (FCPA) compliance practitioners, witness the release of the letter this week by two House members, Oversight and Government Reform Committee Ranking Member Elijah E. Cummings and Energy and Commerce Committee Ranking Member Henry A. Waxman, who sent a letter to Wal-Mart Chief Executive Officer (CEO) Michael Duke regarding the company’s failure to provide Congress with information relating to the Wal-Mart bribery allegations. In the letter, they claim to have found evidence “of “questionable financial behavior” including tax evasion and money laundering in Mexico.” Further, they threaten to make “public any documents we have obtained as part of the investigation.” I probably do not need to remind the readers of this blog that Wal-Mart has announced it is conducting an internal investigation for allegations of FCPA violations in Mexico. So tell me “What can a poor boy [bank, company, fill in the blank] do?”

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

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