Cymbeline – Doing Virtue and FCPA Compliance

Commentators still level the hue and cry that it is somehow the fault of the Department of Justice (DOJ) and Securities and Exchange Commission (SEC) that companies continue to violate the Foreign Corrupt Practices Act (FCPA). Things would improve if only the DOJ and SEC would (1) prosecute companies more aggressively; (2) prosecute companies less aggressively; (3) make an example of ‘rogue’ employees who violate their corporate overseers pronouncements not to violate the law; (4) prosecute more corporate executives to ‘send a message’; (5) amend and clarify the FCPA because the concept of do not pay bribes is somehow too complicated for mere mortals to understand; (6) implement a compliance defense because apparently the DOJ does not consider that enough in any decision to prosecute; and/or (7) as The Donald desires, simply do away with the FCPA to restore the ability to pay a fair price for fair corruption.

I thought about all of these varied and contradictory reasons when considering one of Shakespeare’s most enigmatic plays, Cymbeline. In an article in the Wall Street Journal (WSJ) entitled “The Long, Painful Drama of Self-Knowledge”, Stephen Smith considered the character Posthumus who was thought of as virtuous yet, through the crush of the plot, has his virtuous image shattered. Smith poses the question of “Why is Posthumus such a poor leader of himself, and a danger to others?” He answers his own question by saying, “The play suggests that his lack of self-knowledge, along with the flattery of his culture, make him overconfident.” In other words, he was human.

I thought about this analysis in the context of the recent accounting and financial scandal that engulfed the Toshiba Corporation in Japan. For those who did not follow the news, Toshiba announced last month that it had overstated its profits from 2008-2014 by over $1 billion dollars. This was in the face of the company having been publicly recognized for its good governance standards and practices. In an article in the Financial Times (FT), entitled “Japan Inc left shaken by Toshiba scandal”, Kana Inagaki reported, “On paper, it had a structure that gave its external directors the authority to many top executives and an auditing committee to monitor the behaviour of the company’s leaders. It was lauded for its efforts. In 2013, the group was ranked ninth out of 120 publicly traded Japanese companies with good governance practices in a list compiled by the “Japan Corporate Governance Network.””

But it was all a sham as it turned out that chairman of the audit committee was in on the fraud in addition to a plethora of top executives. Kota Ezawa, an analyst at Citigroup was quoted in the piece that “Toshiba was lauded as the frontrunner in governance efforts but that was a misunderstanding. Its governance structure looked good but the execution was not.” Ezawa further stated, “We need to make sure that companies understand that having structures is not enough.” So even a company with $52bn in annual sales must have more than a paper program.

For those who want to point to some defect in the Japanese corporate character, reminding us of the Olympus scandal from 2011, where successive corporate executives covered up long running accounting fraud, Andrew Hill, also writing for the FT in an article entitled “The universal dangers shown by Toshiba’s failings”, says not to point that self-righteous finger quite so quickly. He reminds readers of WorldCom from earlier this century. Being from Houston, I would remind readers of Enron and its accounting fraud as well. Hill cites to the work of Professor Michael Jones to identify four main types of accounting fraud, (1) increasing income, (2) decreasing expenses, (3) increasing assets, and (4) decreasing liabilities. Hill further notes that one common failing in all of these examples is the failure of internal controls. A second key failing is the “Unwillingness to challenge authority, a trait attributed to employees at Toshiba and Olympus — and often given an “only in Japan” spin — is a recurring problem everywhere, from Royal Bank of Scotland under Fred Goodwin to Fifa under Sepp Blatter.”

Hill’s explanation of the how and why of these accounting scandals is as age old as the time of Cymbaline. He wrote, “The most important lesson from Toshiba is about the malign impact of top-down pressure to meet unrealistic targets. Toshiba’s ex-chief executive denies having given direct instructions to staff to inflate profits. But the investigating panel said he told executives to “use every possible measure to achieve profitability” and added that Toshiba’s corporate culture did “not allow employees to go against the will of their superiors”.”

The lessons that Hill finds in the Toshiba accounting scandal are equally applicable to FCPA compliance and enforcement. It is not the DOJ or SEC’s “fault” when companies do not comply with the FCPA. It is up to the companies to which the law applies to comply with it. Make no mistake; it is quite simple not to pay bribes. One only has to wake up and say “I am not paying a bribe today, no matter what the economic benefit is to me”. Yet for a company, it is not easy because you have to not only put the appropriate controls in place, but you have to do compliance by ensuring these controls are executed upon. That was the failing of Toshiba, it had the controls in place but it did not execute on them.

I think this speaks directly as to why FCPA violations continue to occur and be prosecuted. Hill ended his piece by noting, “When aggressive targets, irresistible management pressure and weak controls coincide, misconduct can spread quickly. Rival companies see the inflated numbers and strain to match them. To suggest such weaknesses are confined to one corporate or national culture is a first step into dangerous complacency.” As long as humans are involved with corporations and there are incentives in place for more and greater sales, you will always have the motivation to cut corners and pay bribes. That impulse can be brought on by a bump in salary, a nice bonus, a promotion or sometimes simply keeping your job. That is why a compliance program must be put in place and those controls must be effective.

In Cymbeline the protagonist Posthumus learns that one key component of virtue is prudence. Near the end of his article on Shakespeare’s play Smith writes, “In his story, we glimpse one goal of Shakespearean drama: to help forge just such a character – an integrated human person capable of leading himself and others to peace, with the help of virtue.” For FCPA compliance, as long as there are incentives in place to make money, there will be people who cut corners by paying bribes. Yet companies can temper this by putting an effective compliance program in place and actually doing compliance. Much like Posthumus learns in Cymbeline it is one’s actions which lead to being virtuous; for a company, it is doing compliance that leads to it being called ethical.

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, 2015

Bristol Palin, Abstinence and the Compliance Defense

Today Bristol Palin informs the debate on the efficacy of a compliance defense to the Foreign Corrupt Practices Act (FCPA). A noted expert on many areas around ethical behavior and family values, Ms. Palin was credited by Mary Elizabeth Williams in a Salon article, entitled “Bristol Palin’s pregnancy announcement is her coming out”, as being the “world’s least successful spokesperson for abstinence” when she announced last week, that, for the second time, she was pregnant out of wedlock. Ms. Palin had previously been a spokesperson for the Candie’s Foundation on, you guessed it, prevention of unwanted pregnancy through abstinence. How does Ms. Palin’s announcement inform the debate on a compliance defense to the FCPA? Quite simply, much like abstinence, the compliance defense is not effective if you say you have one but only if you are doing compliance.

This rather sad fact that although both abstinence and a compliance defense are simple in concept but perhaps not easy to accomplish in the real world was further driven home last week in a Wall Street Journal (WSJ) article by Joel Schectman, entitled “Russian Uranium Probe Reaches Into Small-Town Ohio”, where he reported that “A widening U.S. bribery probe involving Russian uranium has reached from Moscow to a company in the heart of America’s Rust Belt. U.S. authorities are investigating whether an executive in Bremen, Ohio—a rural community with about 1,500 residents roughly 40 miles southeast of Columbus—bribed Russian energy officials to win his company millions of dollars in contracts to supply shipping containers for uranium, according to people familiar with the matter.”

The rather amazing thing about this report is not that bribery and corruption had occurred in the past century or even the past decade but that bribery is reported to have begun in 2011 by Westerman Company and continued at least through 2013 after the entity was acquired by Worthington Industries Inc. Indeed the article identifies the company executive “Barry Keller, a Bremen native who has spent more than three decades at Westerman, working his way up from the shop floor to senior management” as the person involved in paying the bribes. Further, it does not even appear that the bribery scheme itself was too sophisticated or unique. According to Schectman, it involved paying a Russian middleman who “arranged for the bribe payments to be channeled through a maze of secret accounts in Cyprus, Latvia and Switzerland, where they were collected by higher-ranking officials at Rosatom, Tenex’s parent.” The bribes were funded via “5% of a Westerman contract, and would be paid through a consulting invoice”.

Keller’s involvement brings up a key reason why I think having a compliance defense will not increase the doing of compliance. He was the head of the company and then head of the business unit. Is it really possible that a company that did business internationally, with a foreign state owned enterprise and was a US public company did not understand that it needed to have a FCPA compliance program in 2011? Even aside from the fact that the bribery is alleged to have begun when Westerman was an independent entity, did Worthington bother to perform any pre-acquisition due diligence in the FCPA arena when they purchased Westerman in 2012? If Worthington did bother to engage in any pre-acquisition due diligence prior to buying Westerman, how about when it integrated the newly acquired entity into its ongoing compliance program, trained Westerman employees and performed a full FCPA forensic audit of Westerman as surely it identified Westerman’s sales to “Tenex, part of state-owned Russian nuclear company Rosatom” as potentially high risk?

From Schectman’s article it does not appear that Worthington determined internally that there was any FCPA violation in its operations as he quotes the company’s General Counsel (GC), Dale Brinkman, for the following statement “We first learned of [the investigation] in November, and we are fully cooperating with the Justice Department.” That does not sound much like a company that has appropriate internal controls or keeps books and records in accordance with public accounting requirements under the FCPA. But as with abstinence, saying you engage in it is easy.

I think the lesson to be learned from the Worthington matter, and the clarion call for a compliance defense appended to the FCPA, is that adding a compliance defense to the FCPA will not increase compliance with the FCPA. Corporations take their lead from the top on their priorities. If there is not senior management desire to do business in compliance, it does not matter what the benefits of having a compliance defense bring. In 2015, if a company is doing business outside the US with foreign government officials or officials of state owned enterprises, someone in the business, i.e. their lawyers, their auditors or their Board of Directors, knows that they must do business in compliance with the FCPA. I would argue that it was just as well known in 2011 when Westerman Companies is alleged to have begun its bribery scheme. Having a compliance defense will not help drive compliance if the business owner, business leader or senior management is not committed to doing business in compliance with the FCPA.

For even if such a company does institute a compliance defense, it is the doing of compliance which makes a compliance program effective, not having a written program. A key is how a company incentivizes conduct. For doing compliance in any effective way, a company must commit time and resources to the effort. No ‘out of the box’ solution will allow a company to do compliance because the doing of compliance means dealing with an intersecting matrix of employees, technology and third parties. This means that there must be money spent on compliance. In addition to the resource issues, if the company bases its salary, compensation and benefits to employees solely or even largely on sales only; that is what will be emphasized in a company. If, however, there are incentives built into the compensation structure, it will emphasize the importance of the doing of compliance in the day-to-day work of a company.

Bristol Palin has announced she does not want to be ‘lectured’ about her current pregnancy. Maybe her unique intellect has allowed her some insight into the irony of her situation (or then again perhaps not). However she was right about one thing. If you want to ensure that you do not get pregnant, abstinence is about the best way to do so. But abstinence only works if you are doing abstinence, not simply saying you are abstinent. The same is true for adding a compliance defense to the FCPA. A compliance defense only works if you are doing 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, 2015

George Carlin and Erga Omnes: the Petrobras Bribery Scandal Expands

On this date in 2008 George Carlin died. If you grew up in the late 1960s or early 1970s and you had anti-parental or anti-establishment inklings, which of course all teenagers do, you knew about George Carlin. In the early 1960s, Carlin was a relatively clean-cut, conventional comic. But around 1970, he reinvented himself as an eccentric, biting social critic and commentator. In this new incarnation, Carlin began appealing to a younger, hipper audience. He grew out his hair and added a beard together with a wardrobe in the stereotypically hippie style.

Carlin’s comedy also became counter-culture, not Cheech and Chong, hippy-dippy dopers, but with pointed jokes about religion, politics yet with frequent references to drugs. His second album with his new routine, FM/AM, won a Grammy Award for Best Comedy Recording. My favorite cut was the 11 O’Clock News. But it was his third album Class Clown that had, what I believe, to be the greatest comedy monologue ever, the profanity-laced routine “Seven Words You Can Never Say on Television.” When it was first broadcast on New York radio, a complaint led the Federal Communications Commission (FCC) to ban the broadcast as “indecent.” The US Supreme Court later upheld the order, which remains in effect today. The routine made Carlin a hero to his fans and got him in trouble with radio brass as well as with law enforcement; he was even arrested several times, once during an appearance in Milwaukee, for violating obscenity laws.

Interestingly I thought about Carlin and his pokings of the Establishment (AKA The Man) when I read several articles over the weekend about the recent spate of arrests around the Petrobras bribery and corruption scandal. In article in the Wall Street Journal (WSJ), entitled “Brazil Probe Sweeps Up Corporate Magnates” Will Connors, Rogerio Jelmayer and Paul Kiernan reported that “Brazilian officials arrested the heads of two Latin American construction giants, alleging they helped to mastermind a cartel that stole billions of dollars from state-run oil company Petrobras with the help of corrupt politicians to whom they paid kickbacks.” Also arrested with the heads of the two companies, Marcelo Odebrecht, head of Odebrecht SA and Chief Executive Officer (CEO) of Andrade Gutierrez, Otávio Azevedo.

The WSJ article reported that “Odebrecht is Latin America’s largest construction conglomerate, with business in the U.S., Europe and Africa, and whose head, Marcelo Odebrecht, is a household name in Brazil. Andrade Gutierrez has business in 40 countries. The privately owned companies are deeply involved in the development of stadiums and infrastructure for the 2016 Summer Olympics in Rio de Janeiro.” Moreover, Odebrecht is reported to have “a presence in 21 countries”. Obviously a question is if the company had engaged in bribery and corruption in Brazil, did they do so in any of the other countries in which they are doing business?

Interestingly, these arrests “come months after the heads of other construction companies were detained by Brazilian authorities.” Indeed in a BBC article in , entitled “Petrobras scandal: Top construction bosses arrested in Brazil”, David Gallas said, “Odebrecht had been named by former Petrobras executives as one of the companies that allegedly paid bribes in exchange for contracts with the oil firm, but until now the firm had not been targeted by investigators.” The WSJ article quoted Brazilian prosecutor Carlos Fernando dos Santos Lima who said at a news conference that the executives from the two companies had not been arrested earlier as the entities, “had a more sophisticated system for making the alleged bribe payments, using foreign bank accounts in Switzerland, Monaco and Panama, so it took longer to prove their case.” David Fleischer, a Brasilia based political analyst, quoted in the WSJ article was even more circumspect. He said, “The prosecutors are very careful. If you’re going after big fish you want to make sure you can take them down.”

Brazilian police said the arrests were “Erga omnes” which the WSJ translated from Latin as “towards all”. I thought about that statement in light of the ongoing debate about enforcement of the Foreign Corrupt Practices Act (FCPA) here in the US. On one side is the Chamber of Commerce and their allies who raise the ever-burgeoning cry that the Department of Justice (DOJ) needs to prosecute the invidious ‘Rogue employees’ who violate the FCPA. You will notice they never want the DOJ to look at the executives who might facilitate payment of bribes in the first place; whether through faux commitment to doing business in compliance, failing to properly allocate resources to compliance and ethics, simply rewarding those employees who git ‘er done no matter what the circumstances or (my favorite) putting a paper program in place and calling it a best practices compliance program.

Indeed those progenitors of relaxed enforcement want the DOJ to back off and let them do business the old fashioned way. However, if the bribery and corruption news from the first half of this year has told the world anything, it is about the dire effects of allowing such illegal conduct to take place and warning against slacking off laws which mandate doing business without bribery and corruption. In another WSJ article, entitled “Roots of a Brazilian Scandal That Weighs Heavily on the Nation’s Economy, Politics”, Marla Dickerson noted, “The scandal has crippled Petrobras, Brazil’s largest and most important company. In late April, the company wrote off more than $16 billion related to losses from graft and overvalued assets. The company’s woes have all but paralyzed the nation’s oil and gas sector. Hurt by slumping oil prices and strapped for cash, Petrobras has slashed investments, sparking a wave of credit downgrades, bankruptcies and layoffs among its suppliers that the weighed on Brazil’s economy.”

I wonder what George Carlin might have thought about all of this. He might have said that what else would you expect but I am relatively certain he would have done so while also sticking his thumb in the eye of The Man. 

For a YouTube version of the 11 O’Clock News, click here.

For a YouTube version of the 7 words you can never say on television, 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, 2015

 

Why Should Americans Care About the FIFA Indictments? Part III – Corruption and US Companies

Today, I continue my four-part series on the above question posed to me recently by a colleague. In Part I, I wrote that only the US government had the wherewithal, tools and will to do so. Yesterday, I focused on corruption on the pitch and how bribery and corruption ‘changes the game’ of soccer (AKA Football). Today is the third of my of my four reasons on why Americans should care about the Department of Justice (DOJ) bringing their indictments against the 14 named defendants who were all associated with the governing body of international soccer, the Fédération Internationale de Football Association (FIFA). Up today is the corruption and US companies.

While there were no US companies specifically identified in the indictments, there were allegations that bribes were paid and pocketed in connection with the sponsorship of the Brazilian national soccer team by “a major U.S. sportswear company.” This company was later determined to be Nike. In an initial statement Nike denied any involvement in the payment of bribes and said they were cooperating with the relevant authorities. However, they later changed this original statement to say, “Like fans everywhere we care passionately about the game and are concerned by the very serious allegations. Nike believes in ethical and fair play in both business and sport and strongly opposes any form of manipulation or bribery. We have been cooperating, and will continue to cooperate, with the authorities.”

Nike is not alone in its World Cup sponsorship as there are numerous other American companies involved, both sportswear manufacturers and other retailers, such as those from the beverage industry. The involvement of US companies and companies subject to the Foreign Corrupt Practices Act (FCPA) brings up the specter of the FCPA for companies involved in FIFA sponsorship and marketing partnerships. I do not see this as an issue so much about level playing fields for business or even the greater benefits that US companies can bring even when they are required to pay bribes. (The latter argument was used by Wal-Mart apologists around the company’s payments of bribes to do business in Mexico as benefiting the people of Mexico. Let us be quite clear-the bribes paid by Wal-Mart benefitted Wal-Mart and its income from its Mexican operations.)

Information in the indictments was quite damning about the involvement of a company identified as ‘sportswear company A or E’. In a Financial Times (FT) article, entitled “Fifa corruption scandal threatens to engulf Nike as sponsors raise pressure”, Joe Leahy and Mark Odell reported one of the cooperating defendants Jose Hawilla, owner of Traffic Group and who has pled guilty, acted as a third party agent for Nike’s landmark 1996 agreement to allow Nike to fit out the Brazilian national soccer team. Moreover, the article noted, “The prosecutors said that additional financial terms between Traffic and the unnamed sportswear company were not reflected in the CBF agreement. Under these terms, the company agreed to pay a Traffic affiliate with a Swiss bank account an additional $30m in ‘base compensation’ on top of the $160m it paid to the CBF. Three days later, the company and Traffic signed a one-page contract saying the CBF had authorized Traffic to invoice Nike directly “for marketing fees earned upon successful negotiation and performance of the agreement”. Anyone see any Red Flags in that scenario?

Beyond the criminal side of the FCPA, there is the civil side enforced by the Securities and Exchange Commission (SEC) through the Accounting Provisions, which consist of the books and records provisions and the internal controls provisions. According to the FCPA Guidance, “The FCPA’s accounting provisions operate in tandem with the anti-bribery provisions and prohibit off-the-books accounting. Company management and investors rely on a company’s financial statements and internal accounting controls to ensure transparency in the financial health of the business, the risks undertaken, and the transactions between the company and its customers and business partners. The accounting provisions are designed to “strengthen the accuracy of the corporate books and records and the reliability of the audit process which constitute the foundations of our system of corporate disclosure.””

As was made clear with the recent BHP Billiton FCPA enforcement action, violations of the accounting provisions do not apply only to brib­ery-related violations of the FCPA. The FCPA Guidance states these provisions “stand alone to help investors have assurance that all public companies account for all of their assets and liabilities accurately and in reasonable detail.” For the books and records provisions this means that US public companies must “make and keep books, records, and accounts, which, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the issuer.” For the internal controls provisions, US public companies must provide a system of internal controls that “provide reasonable assurances regarding the reliability of financial reporting and the preparation of financial statements.” In other words, the accounting provisions are designed to protect investors in addition to working towards preventing, detecting and remediating bribery and corruption.

In addition to these basic legal requirements, which are all set out in the FCPA and violation thereof could lead to criminal or civil exposure; there will be the costs. The FCPA Professor has identified “three buckets” of costs relating to an alleged FCPA violation. The first is the pre-resolution investigative and remediation costs, the second is the fine and penalty assessment and the third is the post-resolution implementation costs. It is generally recognized that buckets one and three can be up to two to six times the amount of the fine and penalty.

But with the FIFA scandal, there will be another huge factor for companies to consider and that is the negative publicity. This scandal is the largest worldwide corruption case ever brought. It is also the highest profile corruption case ever brought. It will command attention for years to come. If any US companies are linked to bribery and corruption at FIFA, their name will be dragged through the international press ad nauseum. If there are leaks about information on companies before they investigate or get out ahead of any allegations, which may spill into the press, it will certainly not look good.

For a taste of this you can look to the accounting firm KPMG, who is the auditor for FIFA. In a story originally reported by Francine McKenna at the Wall Street Journal (WSJ) and later reported by the New York Times (NYT), KPMG has blessed FIFA’s books since at least 1999. In the NYT piece, entitled “As FIFA case grows, focus turns to its auditors”, Lynnley Browning wrote that the KPMG audits “only heightens the puzzling disconnect between the different pictures that are emerging of FIFA as an organization: riddled with bribes and kickbacks in the view of prosecutors yet spotless according to the outsider most privy to its internal financial dealings.” How well do you think KPMG will come out of this?

The bottom line is that any US company or any other entity subject to the FCPA had better take a close look at its dealings with FIFA, regional soccer federations such as CONCACAF and national soccer federations. A full review is in order starting with who you did business with and how you did business with them. As Mike Brown would say, “follow the money” and see where it went, if you can account for it and if it was properly recorded on your company’s books and records. Finally, now would be a very propitious time to review your internal controls; for even if you had a robust paper system of internal controls like BHP Billiton did, if it is simply a check-the-box exercise or even worse you do not follow the internal compliance controls you have in place, you should begin remediation now.

As to why Americans should care about US companies engaging in corruption, that answer would seem to be straightforward. Companies which engage in bribery and corruption mislead investors and diminish the marketplace of information to base investments upon. If a company is engaging in bribery and corruption, they never report it in their books and records; they always try to hide it so that it cannot be detected. Usually poor internal controls exist, which can allow bribery and corruption to exist or even the possibility of it, once again demeaning the value of a company if that company cannot assure its investors that funds will be paid out with the approval of management. Further, contracts or other business obtained through bribery and corruption presents a false picture of the true financial health of a company as it allows profits obtained through illegal means to be booked as legitimate. Finally, if a company is engaging in bribery and corruption, the financial cost to the company can be astronomic. There is only one Wal-Mart that can sustain hundreds of millions dollars spent to investigate allegations of bribery and corruption and remediate any issues. Avon spent north of $500MM on its pre-resolution investigation and remediation. All of this does not even get to the issue of inflated stock values and the inevitable shareholder derivative litigation. Lastly, there is reputational damage. If a company is willing to engage in bribery and corruption as a part of a business strategy do you want to invest in the organization?

As an American should I care about US companies involved in the FIFA corruption scandal? If the facts reported in the FT are close to correct, I would certainly think so. If monies were paid by a ‘sportswear’ company in the form of marketing fees to Traffic or even a flat $40MM payment to a Traffic affiliates Swiss bank account, this is something which should not be tolerated.

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, 2015

 

 

 

 

King Arthur Week – The Green Knight and the Protection of Whistleblowers – Part IV

We continue our King Arthur themed week with an exploration of one of the most interesting characters in the Arthur canon, The Green Knight, so called because his skin and clothes are green. The meaning of his greenness has puzzled scholars since the discovery of the poem, that identifies him as the Green Man, a vegetation being in medieval art; a recollection of a figure from Celtic mythology; a Christian symbol or the Devil himself. According to Wikipedia, C. S. Lewis suggested the character was “as vivid and concrete as any image in literature” and J. R. R. Tolkien called him the “most difficult character” to interpret in the introduction to his edition of Sir Gawain and the Green Knight. His major role in Arthurian literature includes being a judge and tester of knights, and as such the other characters see him as friendly but terrifying and somewhat mysterious.

In his primary story with Sir Gawain, the Green Knight arrives at Camelot during a Christmas feast, holding a bough of holly in one hand and a battle-axe in the other. Despite disclaim of war, the knight issues a challenge: he will allow one man to strike him once with his axe, under the condition that he return the blow the following year. At first, Arthur takes up the challenge, but Gawain takes his place and decapitates the Green Knight, who retrieves his head and tells Gawain to meet him at the Green Chapel at the stipulated time. One year later, while Gawain is traveling to meet the Green Knight, he stays at the castle of Bercilak de Hautedesert. At Bercilak’s castle, Gawain’s loyalty and chastity is tested, Bercilak sends his wife to seduce Gawain and arranges that they shall exchange their gains for the other’s. On New Year’s Day, Gawain meets the Green Knight and prepares to meet his fate, where upon the Green Knight feints two blows and barely nicks him on the third. He then reveals that he is Bercilak, and that Morgan le Fay had given him the double identity to test Gawain and Arthur.

I thought about this story of testing when I read an article in the Wall Street Journal (WSJ), entitled “SEC Gives More Than $600,000 to Whistleblower in Retaliation Case” by Rachel Louise Ensign. She reported on the Paradigm securities matter where an award was made to the whistleblower, which was settled by the firm late last year. The settlement was for $2.2MM and $600, 000 of that amount was paid to the whistleblower for the firm’s retaliation against him. This was the first award to a whistleblower for retaliation from the act of whistleblowing. The award is 30% of $2.2MM, which is the maximum amount a tipster can get under the program. The agency said the “unique hardships” he faced were a factor in the size of his award. Securities and Exchange Commission (SEC) Enforcement Director, Andrew Ceresney, was quoted in the article as saying ““We appreciate and recognize the sacrifice this whistleblower made and the important role the whistleblower played in the success of the SEC’s first anti-retaliation enforcement action.””

This award to a whistleblower caps a stunning couple of weeks for whistleblowers who have brought information forward under the Dodd-Frank whistleblowing provisions. First there was the KBR pre-taliation fine and Cease and Desist Order.  In this matter, KBR was fined for having language in its internal employee Confidentiality Agreement (CA) that required employees to go to the company’s legal department before releasing certain confidential information to outside parties such as the SEC. The SEC held that such restrictions violated the “whistleblower protection Rule 21F-17 enacted under the Dodd-Frank Act. KBR required witnesses in certain internal investigations interviews to sign confidentiality statements with language warning that they could face discipline and even be fired if they discussed the matters with outside parties without the prior approval of KBR’s legal department. Since these investigations included allegations of possible securities law violations, the SEC found that these terms violated Rule 21F-17, which prohibits companies from taking any action to impede whistleblowers from reporting possible securities violations to the SEC.” This was in the face of zero findings that KBR had actually used such language or restrictions to prevent any employees from whistleblowing to the SEC.

In another part if its Press Release regarding the KBR case Director Ceresney said, “By requiring its employees and former employees to sign confidentiality agreements imposing pre-notification requirements before contacting the SEC, KBR potentially discouraged employees from reporting securities violations to us. SEC rules prohibit employers from taking measures through confidentiality, employment, severance, or other type of agreements that may silence potential whistleblowers before they can reach out to the SEC.  We will vigorously enforce this provision.”

Then we have the case of Tony Menendez, who was profiled by Jessie Eisinger in an article entitled “The Whistleblower’s Tale: How An Accountant Took on Halliburton”. The article told the story of a whistleblower, who took his concerns to government regulators and was then outed by the company as the SEC whistleblower and retaliated against. Interestingly, the SEC took no action on the whistleblower claims and the company argued on appeal that “since the SEC hadn’t brought any enforcement action, his complaint about the accounting was unfounded.” The company also claimed that simply because the whistleblower was identified by name, this alone was not the basis for a “material adverse action” against him. While Halliburton won at the administrative hearing level, it lost at the Fifth Circuit Court of Appeals.

So now there is a Court of Appeals opinion holding that if whistleblowing was a “contributing factor” only to the retaliation. Further, the employee is not required to prove motive. Well-known whistleblower expert Jordan Thomas also explained in the Eisinger article, “Whistleblowers can be victims of retaliation even if they are ultimately proved wrong as long as they have a “reasonable” belief that the company was doing something wrong.”

It appears that the SEC will be more like the Green Knight going forward. It will be a tester to determine if retaliation against whistleblowers occurs. From preventing companies from trying to stop whistleblowing via CA’s, to monetary awards for retaliation even where there is no SEC or government action taken, to the award to whistleblowers as a part of an SEC settlement for retaliation by their former employers; the SEC is making very clear that they will test how your company treats whistleblowers. If the SEC finds your company’s conduct lacking, you may well be facing something like the Green Knight going forward.

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, 2015

The Petrobras Scandal and Corruption of Political Parties Under the FCPA

When does bribery and corruption move from a business issue to a political issue to a national issue? Why should US companies be held to the gold standard of anti-corruption laws? Should the US government even care if US companies engage in bribery of politicians and political parties outside the US? I pose these questions as we see some of these issues now being played out in real time in Brazil.

Earlier this month, a Wall Street Journal (WSJ) article by Rogerio Jelmayer and Jeffrey T. Lewis, entitled “Brazil Graft Probe Reaches Higher Up” said that “A widening investigation into alleged corruption at Brazil’s state-controlled oil company edged closer to President Dilma Rousseff on Wednesday when police arrested her ruling political party’s treasurer. The official, João Vaccari Neto, was charged with receiving “irregular donations” for the Workers’ Party from some suppliers to the oil company” [Petrobras]. Moreover, one cooperating witness, Pedro Barusco, “told a congressional hearing in March that he amassed nearly $100 million in bribes as a part of the alleged bribery schemes and the Workers’ Party may have received twice as much.”

But the corruption scandal appears to be much broader than simply one politician. Another WSJ article, by reporters Paulo Trevisani and Paul Kiernan, entitled “Brazil Attorney General Seeks Corruption Probe Approval”, said that the Brazilian Attorney General “has asked the Supreme Court for permission to proceed with investigations against an undisclosed number of politicians”. He asked for “28 probes involving 54 persons”. Interestingly, this part of the Brazilian corruption probe is separate and apart from the “team of prosecutors who have been working on the case from the southern Brazilian city of Curitba”. The reason is that under Brazilian law “special treatment is afforded to high-ranking authorities, whose cases my be heard by the Supreme Court.” This anomaly required “any evidence pointing to government officials or lawmakers had to be sent to” the Brazilian Attorney General.

As the corruption scandal continues to morph, allegations have reached the level of last year’s Brazilian Presidential election. Mary Anastasia O’Grady, also writing in the WSJ, in an article entitled “An Escalating Corruption Scandal Rocks Brazil”, said that interviewed defeated Presidential candidate Aécio Neves, head of the Social Democracy Party of Brazil, told her that he lost the election because of “organized crime”. This was not some dark mafia plot but came about from “alleged skimming operations at the government-owned oil company.” She went on to note, “Prosecutors allege that Petrobras contractors were permitted to pad their contracts and remit the excess as kickbacks to the oil company, which passed hundreds of millions of dollars to politician and, more importantly the PT.” The PT is the ruling party currently led by Brazilian President Rousseff.

It has not yet been reported that any US companies are under investigation by the Brazilian Attorney General for the bribing of politicians or a political party such as the President’s Workers’ Party. However, for any US companies that have been engaged in trying to influence elections in Brazil through campaign contributions, the Foreign Corrupt Practices Act (FCPA) specifically incorporates politicians, political parties and candidates for political offices as foreign government officials for purposes of the Act. In the 2012 FCPA Guidance it states, “The FCPA’s anti-bribery provisions apply to corrupt payments made to (1) “any foreign official”; (2) “any foreign political party or official thereof ”; (3) “any candidate for foreign political office”; or (4) any person, while knowing that all or a portion of the payment will be offered, given, or promised to an individual falling within one of these three categories. Although the statute distinguishes between a “foreign official,” “foreign political party or official thereof,” and “candidate for foreign political office,” the term “foreign official” in this guide generally refers to an individual falling within any of these three categories.”

Additionally, politicians and political parties are incorporated into the FCPA through the accounting provisions of the FCPA. As further stated in the FCPA Guidance, “Additionally, individuals and entities can be held directly civilly liable for falsifying an issuer’s books and records or for circumventing internal controls. Exchange Act Rule 13b2-1 provides: “No person shall, directly or indirectly, falsify or cause to be falsified, any book, record or account subject to [the books and records provision] of the Securities Exchange Act.” And Section 13(b)(5) of the Exchange Act (15 U.S.C. § 78m(b)(5)) provides that “[n]o person shall knowingly circumvent or knowingly fail to implement a system of internal accounting controls or knowingly falsify any book, record, or account ….”. The Exchange Act defines “person” to include a “natural person, company, government, or political subdivision, agency, or instrumentality of a government.”

The most well known FCPA enforcement action involving bribes paid to politicians was the Halliburton/KBR enforcement action. For those of you who may have forgotten this case, which has the third highest FCPA fine of all-time, Halliburton subsidiary KBR admitted that a consortium which it led paid Nigerian officials at least $132 million in bribes for engineering, procurement and construction contracts awarded between 1995 and 2004 to build liquefied natural gas facilities on Bonny Island, Nigeria. The consortium was named TSKJ and consisted of subsidiaries of the following entities: KBR; Technip, a French company; ENI, an Italian company; and JGC, a Japanese company. There was also a corrupt agent involved in paying the bribes, Jeffrey Tesler and another Japanese company Marubeni Corporation.

BONNEY ISLAND SETTLEMENT BOX SCORE

Entity	Fine, Penalty and Disgorgement of Profits (in $ millions)
Halliburton (KBR)	$579
ENI	$365
Technip	$338
JGC	$218
Marubeni Corp	$50
Jeffery Tesler (the Bag Man)	$149
Total	$1,699

 

So for those of you keeping score at home, there has been, and could be fines, penalties and profit disgorgement of over $1.699 billion. This figure does not include the amount paid out by these corporations for attorneys’ fees, forensic costs and other professional fees, which can be only speculated about.

 The Petrobras scandal continues to morph and to grow way beyond the bounds of simple commercial bribery. One of the goals in the passage of the Act was to prevent US companies from illegally influencing foreign officials and foreign elections through the payments of bribes. The Petrobras scandal may well demonstrate to the world community how important it is to remember that now is certainly not the time to try and weaken either the FCPA or its enforcement going forward. If there is ever to be a truly level playing field in commerce across the globe, it will be by enforcement of anti-corruption laws such as the FCPA that makes it safe for US businesses to compete on the global stage and compete on the basis of quality, not bribe paid.

But the morphing of the Petrobras bribery scandal into the Brazilian political scene may also demonstrate how commercial bribery can work to corrupt a democratic political system. If the money paid from bribes for commercial contracts worked its way into the Brazilian election, this would be perversion of the democratic process. It is this commercial issue that demonstrates why businesses, particularly US businesses, have a role in the international fight against bribery and corruption. It also seems to me to be a straight line from commercial bribery to political corruption to the explosion of terrorism against such corruption. While the FCPA may not have been passed with this connection to terrorism in mind, it is certainly an important US government tool in that fight as well.

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, 2015

Bone-headed Moves on the Football Field and Idiotic Statements About Corruption

“Three things can happen when you throw the football, and two of them are bad.”

That football truism (allegedly) came from former Texas Longhorn head coach Darrell Royal. While he intoned it in a different era, Pete Carroll and his Seattle Seahawks proved it still to be valid in the most recent Super Bowl, Carroll called for a pass play on the one-yard line in the last minute of the game and his quarterback threw an interception. Was it the most idiotic call in Super Bowl history? I will leave that answer to the pundits but I will say that Carroll now has the ignominy of making two of the most bone-headed decisions of all-time in football, one in the Super Bowl and the second in College Football’s 2005 National Championship Game, which cost his team the game. Perhaps not what you might want as your epitaph.

For those of you who may have forgotten Carroll’s NCAA National Championship Game FUBAR, his team, the University of Southern California, needing to make one yard at the University of Texas (UT) 43 yard line to achieve a first down and ice the game, Carroll called a running play after pulling off the field that year’s Heisman Trophy winner Reggie Bush. That left one running back on the field and everyone on the field, everyone in the stands and watching the game knew the remaining running back, Lendale White, would get the ball. He did and was promptly stuffed by the UT defense. Vince Young then led UT down the field, scored and Texas won the National Championship. As a UT alum all I can say is, thanks Pete.

I thought about Carroll and his making not one but two idiotic calls for the ages as I have been studying the ongoing Petrobras bribery scandal. While the GlaxoSmithKline PLC (GSK) corruption enforcement action in China may well presage a new era of countries enforcing their local anti-bribery and anti-corruption laws, the Petrobras case may herald this too. The scandal came to the attention of many American’s in the fall of 2014 during Brazil’s Presidential election in a New York Times (NYT) article, entitled “Scandal Over Brazilian Oil Company Adds Turmoil to the Presidential Race”, where Simon Romero detailed the bribery scandal involving a former official of Petrobras, the Brazilian national oil company, named Paulo Roberto Costa. Mr. Costa was the person who oversaw the company’s refining operations. He has admitted to having engaged in the receipt of bribes for at least a 10 year period “equivalent to 3 percent of the value of the deals from the Brazilian construction companies that obtained the contracts” to build refineries. This amounted to literally millions being “stashed in bank accounts in Switzerland and the Cayman Islands.”

Costa who “was first arrested in March as part of a money laundering investigation by the federal police, has already agreed to surrender the $25 million fortune he hid in offshore accounts, his yacht and his luxury car, in addition to paying a fine of more than $2 million.” He “inflated budgets for new projects” by 3% and then had that amount kicked back to him as bribes. The allegations were verified “through an associate, Alberto Youssef, a black-market money dealer who testified that he helped launder funds in the scheme. Mr. Youssef, who has also accepted a plea deal, testified that more than a dozen of Brazil’s largest construction companies had paid hefty bribes to obtain lucrative Petrobras contracts.”

Further “He testified that a portion of the money was then handed to João Vaccari Neto, the treasurer of the Workers Party. Mr. Costa said that other top political allies of President Rousseff, including the leaders of both houses of Congress, Henrique Eduardo Alves and Renan Calheiros, also benefited from the kickbacks, according to a report by Veja, a Brazilian magazine.” Interestingly, President Rousseff “has also effectively acknowledged the prevalence of corruption inside the executive suites of Petrobras, while denying that she had known about the kickbacks when they were taking place.”

To say things have mushroomed would be almost likely citing Darrell Royal on passing the football to Carroll. Petrobras is in many ways the engine that drives the Brazilian economy. Not only is it directly responsible for the employ of upwards of 80,000 employees. It is also the continent’s largest company by market capitalization so the amount of work that it generates for the Brazilian economy is staggering.

Just as staggering is this bribery scheme in which it finds itself now engulfed. According to an article by Luciana Maglahaes and Rogerio Jelmayer in the Wall Street Journal (WSJ), entitled “Petrobras Ex-CEO Weighs In”, the company has “lost $80 billion, or 65% of its market share over the past five months.” The company has publicly said that it cannot estimate the amount of money it lost or was overcharged by. The WSJ article noted, “Prosecutors estimate that around $732 million may have been skimmed. But former Petrobras Chief Executive Maria das Graças Silva Foster, who resigned under pressure last week, said projects tied to the alleged scheme may be overvalued by as much as $31 billion.” Think about that number $31 billion in overcharges to the company.

So, how does Carroll and his bone-headed passing call work into this story? First of all it was not Carroll who made the call but the team’s Offensive Coordinator. Yet he did so because Carroll told him to call a passing play. In other words, idiotic tone at the top reigned and the employee base simply followed the boss’s wishes.

In the Petrobras corruption scandal, we were treated to remarks by José Sergio Gabrielli, the former Chief Executive Officer (CEO) of the company from 2005 to 2012. This was also one of the company’s most successful periods of financial growth. The former CEO has claimed not to know anything about any corruption issues that may have arisen during his tenure. Moreover, “Mr. Gabrielli said the alleged fraud was the work of a few bad apples inside the company, and not an indication of broader problems with corporate governance or internal controls at Petrobras.” He then added that the business generated by the company surely outweighed any nefarious effects by stating “Even if the numbers are huge…how much has Petrobras invested from 2003 to 2014? Probably it invested an average of $30 billion a year.” He also added it was really all much ado about nothing by noting that the press had blown the “scandal out of proportion”.

So there you have it encapsulated in three lines; the clearest articulation of a defense of bribery and corruption that I have recently seen. First it was the oldie but goodie rogue employee defense. (I mean there were 80,000 plus employees, how could you stop all of them from engaging in illegal conduct.) Second, look at all the money we made, so even if the corruption cost us $31bn we averaged that much per year while he was at the helm. Finally, it is really no big deal anyway and is all “blown out of proportion.”

Is it really any wonder Petrobras now finds itself in one of the world’s largest corruption scandals? If that is the attitude of the former CEO, do you think he communicated this laissez-faire attitude to his direct reports and that perhaps it cascaded down the organization? As to Carroll, if he gets back to a championship game, either in professional or college football, he might want to consider his play calling. As for the former CEO of Petrobras, Brazilian prosecutors are fighting to freeze his assets and his major complaint is that he has to deal with too many lawyers. Enough said.

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, 2015

The Darwin Awards, Nepotism and Compliance

I am a podcast aficionado. One of my favorites is Slate’s Hang Up and Listen, which is a weekly discussion of sports events and issues. One of its segments details each participant relating a whimsical event from the previous week. I thought about whimsy when I was studying Christopher Columbus and his travels to the New World recently. Everyone knows that In 1492, Columbus sailed the ocean blue but you may not know that on this day in 1493, sailing near the Dominican Republic, he believed that he saw three mermaids which he reportedly described them as “not half as beautiful as they are painted.” However, it turned out that he only saw manatees for the first time.

Mermaids, mythical half-female, half-fish creatures, have existed in seafaring cultures at least since the time of the ancient Greeks. Typically depicted as having a woman’s head and torso, a fishtail instead of legs and holding a mirror and comb, mermaids live in the ocean and, according to some legends, can take on a human shape and marry mortal men. Mermaids are closely linked to sirens, another folkloric figure, part-woman, part-bird, who live on islands and sing seductive songs to lure sailors to their deaths. Mermaid sightings by sailors were most likely manatees, which are slow moving aquatic mammals with human-like eyes, bulbous faces and paddle-like tails.

I thought about Columbus and his initial belief that he saw mermaids and decided to cut him a bit of slack, even if only to chalk it up to whimsy. But sometimes you simply cannot believe that corporations and their senior management are so stupid as I continue to I read about the ongoing Korean Airlines scandal, which has been dubbed Nut-Rage. As readers will recall it involved the (now former) Korean Air executive Cho Hyun-ah (Heather Cho), who threw one of the greatest diva-worthy (or perhaps five year-old worthy) public temper tantrums of all-time. An article in the BBC Online, entitled “Former Korean Air executive apologises for ‘nut rage’“, reported that “Ms Cho was onboard a Korean Airlines plane departing from New York for Incheon last week when she demanded a crew member to be removed, after she was served nuts in a bag, instead of on a plate.” Also, according an article in Slate entitled “Flight Attendant Forced to Kneel for Serving Nuts in a Bag (Instead of a Dish) to Korean Air Executive” by Daniel Politi, Ms. Cho was not simply content to disrupt the plane’s service, air traffic control and airport scheduling, he wrote “Just when you thought the whole story about the Korean Air executive who went nuts over some nuts couldn’t get more ridiculous, the head of the cabin crew said he was forced to kneel to apologize about how a flight attendant served some macadamia nuts. Just in case you haven’t been following the case, Heather Cho, the daughter of the airline’s chairman and the executive in charge of in-flight service, forced a plane to return back to the gate at New York’s JFK airport last week after a flight attendant dared to bring her macadamia nuts in a bag and not a dish. Cho forced the head of the cabin crew to get off the plane.”

But the story did not end there. In another BBC article, entitled “Korean Air executive ‘made steward kneel over nut rage’”, the head of the cabin crew also reported that “Once home, officials from the airline came to his home to ask him to say that Ms Cho did not use abusive language and that he had voluntarily got off the plane.” Not to be outdone in this attempt to obstruct the truth and intimidate the witness, the BBC article also reported “Korean Air initially defended Ms Cho, noting that she was responsible for overseeing flight service in her role as vice-president, but the company later apologised.”

Late last year, Ms. Cho was determined to be a flight risk and was detained by Korean police. Song Jung-A reporting in the Financial Times (FT), in an article entitled “Korean Air ‘nut rage’ heiress held as flight risk”, said that Ms. Cho was detained by the Seoul western district court, which was quoted as saying ““There is a risk of flight or evidence tampering…while investigations are under way.””

However, now this piece of privileged child blowhardedness and outright corporate stupidity has taken an even more serious turn. In a Wall Street Journal (WSJ) article, entitled “Rancor Builds of Korean Air Affair”, Alastair Gale reported, “that behavior led to Ms. Cho’s indictment on charges of assault and changing flight plans, both violations of aviation-safety laws. Ms. Cho was also charged with coercion and obstruction of justice after she allegedly ordered company officials to intervene in the government probe into the incident. If convicted, Ms. Cho faces a maximum penalty of 15 years in prison, according to a spokesman for the Korea Bar Association.”

Where is the corporate stupidity here? Gale noted that “Immediately following the incident, Korean Air released a statement saying Ms. Cho had pointed out the service problem as part of her duties and that the captain decided to offload the head of cabin crew. Jung-A also reported “The court added that there were “systematic attempts to cover up” Ms. Cho’s actions since the nut rage incident this month.” This led to the arrest of another Korean Air executive who was accused of “putting pressure on employees to lie to government investigators” about the incident. Unfortunately when the gene pool is limited, not only do you get inbreeding but you also get the results of inbreeding. In Korea, they even have a name for it – Chaebol. 

As noted in the Gale piece, Chaebol began after the Korean War “when South Korea’s government selected companies to take the lead in industries it thought could thrive internationally. Those companies were guaranteed financing and protected from local competition to help them grow and dri ve the nation out of poverty.” Gale also reported, “Ms. Cho’s tantrum is being held up as an example of the problems that arise when corporate power is passed down family lines. “It is foolish of the owners of big corporations to give their children any role in management unless they show at least a modicum of ability,” conservative South Korean newspaper Chosun Ilbo said in a recent editorial. “The only way to shed the image of rampant nepotism is to place ability before family ties.””

So should Ms. Cho, the Korean practice of Chaebol and the Nut-Rage Affair be chalked up as a whimsy or should this story be featured in the annual Darwin Awards which states, “We watch the watchman watch the watchmen”? Natural selection deems that some individuals 
serve as a warning to others. Who are we to disagree?

The next generation, ever and anon, is descended from the survivors. Nepotism rules exist in well-run corporations for a valid business reason. For if you hire the CEO’s daughter, make her a senior executive with no accountability except to Daddy and she throws uber temper tantrums, you may really have a compliance problem because your corporate culture is obviously sadly lacking.

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, 2015

The Nobel Prize and FCPA Enforcement Going Forward

One hundred and 13 years ago on this date, the first Nobel Prizes were awarded in Stockholm, Sweden, in the fields of physics, chemistry, medicine, literature, and peace. The ceremony came on the fifth anniversary of the death of Alfred Nobel, the Swedish inventor of dynamite and other high explosives. In his will, Nobel directed that the bulk of his vast fortune be placed in a fund in which the interest would be “annually distributed in the form of prizes to those who, during the preceding year, shall have conferred the greatest benefit on mankind.” Although Nobel offered no public reason for his creation of the prizes, it is widely believed that he did so out of moral regret over the increasingly lethal uses of his inventions in war. The Royal Swedish Academy of Sciences decides the prizes in physics, chemistry, and economic science; the Swedish Royal Caroline Medico-Surgical Institute determines the physiology or medicine award; the Swedish Academy chooses literature; and a committee elected by the Norwegian parliament awards the peace prize. The Nobel Prizes are still presented annually on December 10, the anniversary of Nobel’s death. Each Nobel Prize carries a cash prize of nearly $1,400,000 and recipients also received a gold medal, as is the tradition.

Just as important in the area of anti-corruption and anti-bribery is the Organization for Economic Development and Cooperation (OECD). Earlier this month the OECD issued a report entitled “Foreign Bribery Report-An Analysis of the Crime of Bribery of Foreign Public Officials”. To say the findings were eye opening, if not disheartening, would be to put it mildly. As reported by Shawn Donnan in the Financial Times (FT), in an article entitled “Big companies blamed for most of the world’s bribery cases”, he said that “Large companies and their senior managers are responsible for the vast majority of the world’s bribery cases and are giving up a third of their profits from related projects to corrupt officials”. Donnan summarized the reports key findings as follows:

• Companies with more than 250 employees accounted for 60 per cent of the cases of corruption studied. In 31 per cent of the cases the companies brought the bribes to the attention of authorities themselves. In just 2 per cent of the cases were whistleblowers involved.
• The cost of bribes averaged 10.9 per cent of the value of the related transaction and 34.5 per cent of the profits. The largest bribes paid in a single case were worth $1.4bn. The smallest were valued at just $13.17.
• A majority of the bribery cases involved company executives. Managers were involved in 41 per cent of the cases. A further 12 per cent involved the president or chief executive officer of a company.
• Corruption is not just a poor world phenomenon. Almost half the cases studied involved bribery of public officials from countries with “high” or “very high” levels of human development.
• The number of bribery cases brought around the world has grown substantially since 1999 but has fallen in the past two years after reaching a peak of 68 annually in 2010. Moreover, the time needed to prosecute cases has risen substantially from an average of 2 years in 2003 to 7.3 years in 2013.
• Executives at state-owned companies accounted were the target of almost three in 10 bribes while customs officials accounted for just 11 per cent. Almost 60 per cent of the bribes were paid in order to obtain government contracts.
• More than two-thirds of all sanctions levied were the result of legal settlements rather than convictions. In almost half the cases studied the fines levied were worth less than 50 per cent of the profits made by defendants as a result of the bribe.
• Oil and mining companies on average paid bribes worth 21 per cent of the value of projects whereas those involved in the education sector or in water supply paid just 2 per cent.

I thought about the implications of these key findings in the context of Foreign Corrupt Practices Act (FCPA) enforcement going forward. At the 2014 Securities Enforcement Forum, held in October of this year, Jesse Eisenger reporting in the New York Times (NYT) DealB%k column, in an article entitled “In Turnabout, Former Top Regulators Assail Wall Street Watchdogs”, noted that white-collar defense lawyer Brad S. Karp, the chairman of Paul, Weiss, discussed some of the defense tactics that he uses when the government comes knocking against banks. “First, he pushes to move the charges to a subsidiary. Second, he tries to lower the charge. Third, he said, he focuses “on the powerful individuals in an organization” meaning that lawyers need to put top management first as they prepare a defense.”

Now consider those tactics in the context of the OECD report. Where do you think that the Department of Justice (DOJ) or Securities and Exchange Commission (SEC) might look if they wanted to beef up enforcement? I ask this question because of a second article, which got my attention this week. In the Wall Street Journal (WSJ), Joel Schectman wrote a piece based upon in interview with University of Virginia School of Law professor Brandon Garrett, entitled “Professor Says Corporate Penalties Aren’t Working”. Schectman wrote, “many critics have said the government is still fighting companies with kid gloves.” Garrett delivered some direct criticisms when he was quoted as follows:

Of course, companies, like children, can’t go to jail. You can fine them, but the fines might not affect the right person. There is much more focus on rehabilitation compared with other areas of the criminal justice system. 

What you can do with companies is supervise them strictly, not through the lenient means they are using. People would be really troubled if the most serious individual offenders were let out and told to just behave for a couple years without supervision. And that is what’s happening with companies. In cases that are not plea bargains, there is no probation, there is no court supervision of probation, and with these deferred and non-prosecution agreements, most of them are not even supervised by an independent monitor. Only a quarter get monitorships. 

Most companies don’t have to audit their compliance to validate whether it’s working or not. Obviously a prosecutor is not in any position to obtain a sense of whether a big multinational company is complying with anything. Even a monitor needs a big international team working for them onsite to look at documents and interview employees.

Garrett does not seem to favor the DOJ going to trial but does believe that by getting a criminal plea in front of a court, the DOJ could use the resources and power of a federal court to deal with recidivists. Moreover, he believes that rehabilitation should be more rigorous and stated, “And if prosecutors aren’t getting anything more than the company’s assurance that it will do a systemic fix, that should leave us uneasy. We are starting to see recidivist banks and it’s looking like this compliance stuff isn’t working. A monitor isn’t a cure-all either. There are concerns about how a monitor is appointed. Do some of them go over budget without doing good work? But having someone independent seems a much better way to supervise compliance than rely on the company’s own assurance.”

What does all this mean for FCPA enforcement going forward? On the one hand you have the OECD saying the myth of the rogue employee is simply that, a myth. Corporations are intentionally violating anti-corruption laws such as the FCPA or certainly are aware of the conduct. Couple that with Garrett’s concerns that companies are getting off too easily and you may have a storm of more severe and stringent FCPA enforcement coming out of the DOJ and SEC. It may mean more and greater fines and penalties. It may mean greater use of external monitors who have unlimited budgets. It may mean more court supervision and interpretation of what compliance programs a company may implement going forward. It may mean longer and more thorough investigations as the DOJ and SEC strive to ascertain as much as they can that companies are remediating not only during the pendency of their investigations and enforcement actions but continue to do so while they are under resolution agreements such as Deferred Prosecution Agreements (DPAs) and Non-Prosecution Agreements (NPAs).

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

© Thomas R. Fox, 2014

Right to Retire Or Termination: Remediation of Leadership To Foster Compliance

Many historians have long given 476 AD as the date of the fall of the Roman Empire. Further, it was from this date forward that Europe began its long slide into the abyss, which came to be known as the Dark Age. However, this view was challenged in 1971 by Peter Brown, with the publication of his seminal work “The World of Late Antiquity”. One of the precepts of Brown’s work was to reinterpret the 3rd to 8^th centuries not as simply a decline of the greatness that had been achieved in the heydays of the Roman Empire, but more on their own terms. It was in the year of 476 AD that the last Roman Emperor, Romulus Augustulus, left the capital of Rome in disgrace. However as Brown noted, he was not murdered or even thrown out but allowed to retire to his country estates, sent there by the conquers of the western half of the Roman Empire, the Goths. Not much conquering going on if a ruler is allowed to ‘retire’, it was certainly a replacement but not quite the picture of marauding barbarians at the gate.

I thought about this anomaly of retirement by a leader in the context where a company or other entity might be going through investigations for corruption and non-compliance with such laws as the Foreign Corrupt Practices Act (FCPA) or UK Bribery Act. Yesterday I wrote about three recent articles and what they showed about a company’s oversight of its foreign subsidiaries. Today I want to use these same articles to explore what a company’s response and even responsibility should be to remediate leadership under which the corruption occurs. The first was an article in the New York Times (NYT), entitled, “Another Scandal Hits Citigroup’s Moneymaking Mexican Division” by Michael Corkery and Jessica Silver-Greenberg. Their article spoke about the continuing travails of Citigroup’s Mexican subsidiary Banamex. Back in February, the company reported “a $400 million fraud involving the politically connected, but financially troubled, oil services firm Oceanografía.”

This has led Citigroup to ever so delicately try to oust the leader of its Mexico operations, Mr. Medina-Mora, by encouraging him to retire. While Citigroup did terminate 12 individuals around the Oceanografía scandal earlier in the year, it has not changed the employment status of the head of the Mexico business unit. This may be changing as the article said, “In a delicate dance, Citigroup is encouraging its Mexico chairman, Manuel Medina-Mora, 64, to retire, according to four people briefed on the matter. The bank has been quietly laying the groundwork for his departure, which could come by early next year, the people said. Still, Mr. Medina-Mora’s business acumen and connections to the country’s ruling elite have made him critical to the bank’s success in Mexico. Citigroup and its chairman, Michael E. O’Neill, cannot afford to alienate Mr. Medina-Mora and risk jeopardizing those relationships, these people said.”

Should Mr. Medina-Mora be allowed to retire? Should he even be required to retire? What about the ‘mints money’ aspect of the Mexican operations for Citigroup? Was any of that money minted through violations of the FCPA or other laws? What will the Department of Justice (DOJ) think of Citigroup’s response or perhaps even its attitude towards this very profitable business unit and Citigroup’s oversight, lax or other?

Does a company have to terminate employees who engage in corruption? Or can it allow senior executives to gracefully retire into the night with full pension and other golden parachute benefits intact? What if a company official “purposely manipulated appointment data, covered up problems, retaliated against whistle-blowers or who was involved in malfeasance that harmed veterans must be fired, rather than allowed to slip out the back door with a pension.” Or engaged in the following conduct, “had steered business toward her lover and to a favored contractor, then tried to “assassinate” the character of a colleague who attempted to stop the practice.” Finally, what if yet another company official directed company employees to “delete hundreds of appointments from records” during the pendency of an investigation?

All of the above quotes came from a second NYT article about a very different subject. In the piece, entitled “After Hospital Scandal, V.A. Official Jump Ship”, Dave Phillips reported that two of the four VA Administration executives who engaged in the above conduct and were selected for termination, had resigned before they could be formally terminated. The article reported that the VA “had no legal authority to stop” the employees from resigning. Current VA Secretary Robert McDonald was quoted in the article as saying, “It’s also very common in the private sector. When I was head of Procter & Gamble, it happened all the time, and it’s not a bad thing — it saves us time and rules out the possibility that these people could win an appeal and stick around.” Plus, he said, their records reflect that they were targeted for termination. “They can’t just go get a job at another agency,” Mr. McDonald said. “There will be nowhere to hide.”

The third article was in the Wall Street Journal (WSJ) and entitled, “GM Says Top Lawyer to Step Down”. In this piece, reporters John D. Stroll and Joseph B. White, with contributions from Chris Matthews and Joann Lublin, reported that General Motors (GM) General Counsel (GC) Michael Millikin will retire early next year. Milliken is famously the GC who claimed not to know what was going on in his own legal department around the group’s settlements of product liability claims of faulty ignition switches. Milliken claimed he was kept “in the dark” by his own lieutenants about the safety issues involved with this group of litigation. Does Milliken have any responsibility for the failures of GM around this safety issue? What does his apparent graceful retirement say about the corporate culture of GM and its desire to actually change anything in the light of its ongoing travails? Of course one might cynically point to GM’s failure to even have a Chief Ethics and Compliance Officer as evidence of the company’s attitude towards compliance and ethics. (I wonder how that might look to the DOJ/Securities and Exchange Commission (SEC) if GM goes under any FCPA scrutiny?)

With Citigroup, the Department of Veterans Affairs and GM, we have three separate excuses for companies (and a Cabinet level department) not disciplining top employees for ethical and/or compliance failures. At Citigroup, the excuse is apparently that it does not want to rock the boat from a top producing foreign subsidiary by terminating the head of the subsidiary under investigation. At the Department of Veterans Affairs, the excuse seems to be they can go ahead and resign because we prefer to get rid of them that way. At GM, it is not clear why the GC who claimed not to know what was going on in even his own law department can ride off into the sunset with nary a contrary word in sight. Millikin’s conduct would seem to be the product of a larger cultural issue at GM.

I thought about how the DOJ might look at these situations for companies if a FCPA claim were involved. Even with McDonald’s observations about what happened when he was with Procter & Gamble; does a company show something less than commitment to having a culture of compliance if it allows an employee to retire? What does it say about Citigroup and its culture given the current dance it is having with its head of the Mexico unit? What about GM and its Sgt. Schultz of a GC and his ‘I was in the dark posture’? As stated by Mike Volkov, in his post entitled “Goodbye Mr. Millikin: GM’s Continuing Culture Challenges”, GM does under appear to understand the situation it finds itself in currently over its failures. He wrote, “GM still does not understand the significance of its governance failure…GM should have taken dramatic and affirmative steps to create a new culture – resources and new initiatives should be launched to rid GM of its current culture and replace it with a new speak up culture. It is a daunting task in such a large company but it has to be done. Until GM wakes up, missteps and failures will continue.” One might say the same for Citigroup and the Department of Veterans Affairs as well.

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

© Thomas R. Fox, 2014