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All About Monitors

If you ever have had a question about monitors in the FCPA enforcement context, chances are it is addressed in “Somebody’s Watching Me: FCPA Monitorships and How They Can Work Better.” (See here).

Authored by Gibson Dunn & Crutcher attorneys Joseph Warin (here), Michael Diamant (here), and Veronica Root (here), the article was recently published in the University of Pennsylvania Journal of Business.

Below is an abstract.

“This article explores the rise of the corporate compliance monitor as a condition for settling violations of the U.S. Foreign Corrupt Practices Act (“FCPA”)—a setting in which federal prosecutors routinely impose monitors. From 2004 to 2010, more than 40 percent of all companies that resolved an FCPA investigation with the U.S. Department of Justice (“DOJ”) or Securities and Exchange Commission (“SEC”) through a settlement or plea agreement retained an independent compliance monitor as a condition of that agreement.”

“If U.S. enforcement authorities maintain their current approach, the reality is that companies facing liability for violating the FCPA are likely to have a monitor imposed on them as part of a settlement agreement. From the U.S. government’s perspective, monitorships make sense for companies that violate anti-bribery laws, making it important for offending corporations to learn how to deal with monitors. Pulling from the authors’ extensive experience with three major FCPA compliance monitorships, as well as their work assisting clients operating under an FCPA monitorship, this article aids in that process. It also hopes to help monitors themselves, as well as the prosecutors who appoint them, in making the monitorship a more constructive feature of an FCPA settlement.”

“Part I provides some basic background on the FCPA and discusses the use of compliance monitors as a term in settlement agreements with federal regulators. Part II examines why some companies receive a monitor as a term of an FCPA settlement, while others do not. Part III discusses what FCPA monitorships most commonly entail. Part IV identifies best practices for FCPA compliance monitors: what they should and should not do in their quest to help mold an ethical organization. Finally, Part V advises how companies can utilize their role in the selection, retention, and management of the monitor to help make the process anodyne and the results valuable for the organization.”

For more on monitors, see here, here, and here (discussing a November 2009 GAO report) for certain prior posts.

Recent DOJ Statements At Issue In Carson “Foreign Official” Challenge

On Tuesday, Nathaniel Edmonds (Assistant Chief, DOJ Fraud Section who is specifically involved in the Carson “foreign official” challenge) participated in a webcast sponsored by the Conference Board titled “Enforcement of The Foreign Corrupt Practices Act: A Dialogue with Regulators” (see here).

According to a May 4th article authored by Christopher Matthews and published on the Just Anti-Corruption page of the website Main Justice, during the webcast Edmonds “warned defendants facing charges under the foreign bribery law against contesting that definition.”

The article states as follows.

[“It’s not necessarily the wisest move for a company,” Assistant Chief Nathaniel Edmonds said Tuesday during a webcast on the FCPA sponsored by The Conference Board. Edmonds reiterated the Justice Department’s belief that employees of state-owned or controlled companies can be considered foreign officials under the FCPA, which prohibits bribes to foreign officials to obtain or retain business. “Quibbling over the percentage ownership or control of a company is not going to be particularly helpful as a defense,” Edmonds said.]

Yesterday, in a supplement to its reply brief (here) the Carson defendants brought the article to the attention of the court and stated as follows.

“Defendants respectfully submit that Mr. Edmonds’ comments supplement at
least two important points made in Defendants’ Motion and Reply. First, there is a reason the Government’s maximalist position on the definition of “foreign official” has avoided serious judicial scrutiny for so long, and the reason is that individuals and companies are reluctant to challenge the Government’s interpretation for fear of the consequences. Second, the Government does not have a definition of “instrumentality” that can withstand judicial scrutiny because, among other things, it is unable to say what would make one state-owned enterprise, but not another, an “instrumentality” under the FCPA.”

Johnson & Johnson’s “Enhanced Compliance Obligations”

Last month, Johnson & Johnson (J&J) settled an FCPA enforcement action focused on voluntary disclosed conduct in Greece, Poland, Romania involving various health care providers. See here for the prior post. [The enforcement action also involved conduct in connection with the U.N. Oil for Food Program in Iraq – conduct that was not voluntarily disclosed].

The enforcement action was resolved via a deferred prosecution agreement (DPA) and in the DPA (here) the DOJ specifically states as follows: “J&J had a pre-existing compliance and ethics program that was effective and the majority of problematic operations globally resulted from insufficient implementation of the J&J compliance and ethics program in acquired companies.” (emphasis added).

The J&J enforcement action is thus a rare instance of the DOJ finding a company’s pre-existing compliance and ethics program “effective” notwithstanding the fact that conduct allegedly violating the FCPA took place within the overall organization.

The J&J DPA contains the standard compliance metrics found in typical DPAs and non-prosecution agreements (Attachment C of the J&J DPA) that the company must abide by during the three year term of the DPA.

However, the DPA also contains (see Attachment D) “Enhanced Compliance Obligations” that J&J must abide by during the term of the DPA. These “enhanced compliance obligations” are unusual and surprising given the DOJ’s conclusion that J&J already generally had “effective” policies and procedures.

Even though the DPA states that J&J, as part of the voluntary disclosure and cooperation process, “conducted an extensive, global review of all of its operations to determine if there were problems elsewhere and […] reported on any area of concerns to the Department and the SEC,” the “enhanced compliance obligations” nevertheless require J&J to “conduct risk assessments of markets where J&J has government customers and/or other anticorruption compliance risks on a staggered, periodic basis.”

In what seems like a “full employment act” for some, the DPA requires J&J to “identify no less than five operating companies that are high risk for corruption because of their sector and location and […] conduct FCPA Audits of those operating companies at least once every three years.” According to the DPA, “FCPA Audits of other operating companies that pose corruption risk shall occur no less than once every five years.”

Pursuant to the DPA, “each FCPA Audit shall include” the following.

“a. On-site visits by an audit team comprised of qualified auditors who have received FCPA and anticorruption training;

b. Where appropriate, participation in the on-site visits by personnel from the compliance and legal functions;

c. Review of a statistically representative sample appropriately adjusted for the risks of the market, of contracts with and payments to individual health care providers;

d. Creation of action plans resulting from issues identified during audits; these action plans will be shared with appropriate senior management, including the Chief Compliance Officer, and will contain mandatory undertakings designed to enhance anticorruption compliance, repair process weaknesses, and deter violations; and

e. Where appropriate, feasible, and permissible under local law, review of the books and records of distributors which, in the view of the audit team, may present corruption risk.”

Such “enhanced compliance obligations” seem wholly inappropriate given the DOJ’s conclusion that J&J already had “effective” compliance policies and procedures and given that J&J, prior to resolving the enforcement action, already “conducted an extensive, global review of all of its operations to determine if there were problems elsewhere…”.

Remediation and effective compliance policies and procedures are good.

But if the “enhanced compliance obligations” found in the J&J DPA are a new norm, how long will corporate defendants tolerate being required by the government (under the risk of prosecution for failure to do so) to engage in fishing expeditions (when the company already went fishing) just for the sake of going fishing again?

Rockwell Automation Resolves SEC Action

[Note – because of my involvement in the below Rockwell matter while in private practice, this post is devoid of my customary commentary and analysis as to the enforcement action]

Yesterday, the SEC announced (here) a cease and desist proceeding and imposition of a cease and desist order as to Rockwell Automation, Inc.

As stated in the SEC’s order, the matter involved “violations of the books and records and internal controls provisions of the Foreign Corrupt Practices Act (“FCPA”) by Rockwell, through one of its former subsidiaries in China, Rockwell Automation Power Systems (Shanghai) Ltd. (“RAPS-China”), which was divested by Rockwell in January, 2007.”

In summary fashion, the SEC found as follows.

“From 2003 to 2006, certain employees of RAPS-China paid approximately $615,000 to Design Institutes, which were typically state-owned enterprises that provided design engineering and technical integration services that can influence contract awards by end-user state-owned customers. The payments were made through third-party intermediaries at the request of Design Institute employees and at the direction of RAPS-China’s Marketing and Sales Director. RAPS-China’s Marketing and Sales Director intended that these funds be paid directly to the Design Institute employees, with the expectation that they would influence the ultimate state-owned customers to purchase RAPS products. While the Design Institutes did provide some bona fide engineering and other services in connection with RAPS-China’s end-user contracts, RAPS-China could not substantiate the specific services rendered or the value of those services. Also during the same period, employees of RAPS-China paid approximately $450,000 to fund sightseeing and other non-business trips for employees of Design Institutes and other state-owned companies.”

“Rockwell realized approximately $1.7 million in net profits on sales contracts with end-user Chinese government-owned companies that were associated with payments to the Design Institutes.”

“Rockwell failed to accurately record the payments in its books and records, and failed to implement or maintain a system of internal accounting controls sufficient to prevent and detect the payments.”

Under the heading, “Discovery, Self-Reporting and Remediation” the SEC order states as follows.

“Rockwell discovered the DI Payments and the third-party payment mechanism in 2006 through its normal financial review process. This process was part of Rockwell’s global corporate compliance/internal controls program, which had targeted China for enhanced FCPA training and scrutiny starting in 2004. Upon discovery of the issue, Rockwell hired counsel and investigated the DI Payments with the oversight of its Board of Directors. It voluntarily self-reported the DI Payments to the Commission and voluntarily provided the Commission Staff with all relevant facts found in the investigation, and otherwise cooperated with the Commission. As a result of the discovery of this matter, Rockwell undertook numerous remedial measures, including employee termination and disciplinary actions, enhancements to its internal controls and compliance program and conducted a broad, global review of its other operations.”

The SEC order further states as follows.

“In connection with the payments described above, Rockwell failed to make and keep accurate books, records and accounts as required by Section 13(b)(2)(A) of the Exchange Act.”

“Further, as evidenced by the DI Payments (as described above) and leisure travel payments, Rockwell failed to devise or maintain sufficient internal controls as required by Section 13(b)(2)(B) of the Exchange Act.”

As noted in the SEC order, Rockwell, without admitting or denying the SEC’s findings, agreed to “pay disgorgement of $1,771,000, prejudgment interest of $590,091and a civil money penalty of $400,000.”

The SEC order concludes by noting that “the Commission is not imposing a civil penalty in excess of $400,000 based upon [Rockwell’s] cooperation” in the investigation.

See here for Rockwell’s press release.

David Simon (Foley & Lardner – here) and Greg Bruch (Willkie Farr & Gallagher – here) represented Rockwell.

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The Rockwell matter represents the second time in the past month (approximately) that the SEC has resolved an FCPA inquiry via the administrative cease and desist route. See here for the prior post regarding Ball Corporation.

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Other FCPA enforcement actions focused on alleged improper travel and entertainment benefits to employees of Chinese state-owned enterprises include: Lucent Technologies (see here) and UTStarcom Inc. (see here).

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Other FCPA enforcement actions focused (in whole or in part) on allegedly improper payments to employees of so-called Chinese “Design Institutes” include: ITT Corp. (see here); and Avery Dennison (see here).

Carson “Foreign Official” Challenge Fully Briefed

Yesterday various defendants in the U.S. v. Carson case pending in the Central District of California filed a reply brief (see here).

The brief begins as follows.

“In 1977, Congress could have enacted a general anti-bribery statute that made it a crime to pay a commercial bribe to any foreign national, but it did not. Rather, the FCPA criminalizes improper payments only to a “foreign official.” Thus, making an improper payment to a “foreign official” violates the FCPA; making that same payment to someone who is not a “foreign official” does not. This is undisputed.”

“The Government argues that “[s]tate-owned business enterprises [‘SOEs’] may, in appropriate circumstances, be considered instrumentalities of a foreign government and their officers and employees to be foreign officials.” But Congress (i) knew about SOEs when it enacted the FCPA, (ii) knew that some of the questionable payments in the pre-FCPA era may have been made to employees of SOEs, and (iii) knew how to include SOEs in the definition of “foreign official” if it had wanted to do so. Clearly, Congress did not do so, and contrary to the Government’s arguments, there is no evidence that Congress intended SOEs to be covered by this criminal statute, or intended the word “instrumentality” to encompass broadly anything through which a foreign government achieves an “end or purpose.” In fact, the plain language of the statute and its history illustrate that the FCPA was aimed at preventing improper payments to traditional government officials. If Congress had wanted SOEs to be included in the definition of “instrumentality,” it would have expressly said so – just as it did in 1976 when it enacted the Foreign Sovereign Immunities Act (“FSIA”).”

“Having no statutory authority for its sweeping position, the Government is thus unable to define the “appropriate circumstances” when an SOE allegedly falls within the FCPA. The Government states only that it is a “fact-based determination.” But facts in isolation are irrelevant unless analyzed in the context of a legal framework. And for over two hundred years it has been “emphatically the province and duty of the judicial department” – not the jury – “to say what the law is.” Marbury v Madison, 5 U.S. (1 Cranch) 137 (1803). Thus, while a jury may decide disputed issues of fact, this Court must first decide the law.”

“Defendants’ Motion squarely challenges the Government’s unsupported legal
interpretation of the FCPA by arguing that the term “instrumentality” simply does not include SOEs, and thus employees of SOEs are not, as a matter of law, “foreign officials.” The Government labels Defendants’ position as extreme, insisting that it “is not asking for a legal conclusion that all SOEs are instrumentalities,” only for a ruling that “the term instrumentality . . . can include SOEs.” But it is the Government’s position that is unreasonable, because the Government cannot articulate any principled test – and there is no test, other than one invented from whole cloth – for what would make one SOE, but not another, a government “instrumentality” under the FCPA. Accordingly, the Government’s concession, that some SOEs fall within and some outside the statute, coupled with the complete lack of any meaningful or discernable standards for deciding which is which, undermines the Government’s position and requires that it be rejected because it would render the FCPA unconstitutionally vague as applied.”

“Accordingly, the Court should hold that employees of SOEs are not “foreign
officials” under the FCPA and should dismiss Counts One through Ten of the
Indictment. Contrary to the Government’s overblown rhetoric, the sky will not fall upon such a ruling; rather, the issue will be returned to its proper forum: Congress. See Skilling v. United States, 561 U.S. ___, 130 S. Ct. 2896, 2933 (2010) (“If Congress desires to go further . . . it must speak more clearly than it has.”).”

This previous post links to the Defendants’ motion and my declaration filed in support. This previous post links to the DOJ’s opposition brief as well as supporting declarations from the State Department and the FBI.

The Carson defendants also moved (see here) to strike the State Department declaration or in the alternative for a court order requiring the State Department employee to appear for questioning at next week’s hearing). As noted in this prior post, the same State Department declaration was ordered stricken in the Lindsey “foreign official” challenge and is also being challenged in the O’Shea “foreign official” challenge – see here.

*****

In a related development, last week the DOJ announced (here) that “Flavio Ricotti, a former executive of [Control Components, Inc. – the same employer as the above referenced defendants challenging the DOJ’s “foreign official” interpretation] has pleaded guilty for his participation in a conspiracy to secure contracts by paying bribes to officials of foreign state-owned companies as well as officers and employees of foreign and domestic private companies.” See here for the plea agreement.

As noted in the DOJ release, “Ricotti pleaded guilty […] to a one-count superseding information [see here] charging him with conspiring to make corrupt payments to foreign government officials, and officers and employees of private companies in several countries, including Saudi Arabia and Qatar, in violation of the Foreign Corrupt Practices Act (FCPA) and the Travel Act.”

The DOJ release further states as follows. “In connection with his guilty plea, Ricotti admitted that he conspired with other CCI employees to offer a payment to an official of Saudi Aramco, a Saudi Arabian state-owned oil company, in connection with attempting to obtain a valve contract for CCI in 2003. Ricotti also admitted to conspiring with other CCI employees to make a payment to an employee of a private company so that the employee would assist in awarding to CCI a valve contract in Qatar.”

As further noted in the DOJ release:

“In related cases, two defendants previously pleaded guilty to conspiring to bribe officers and employees of foreign state-owned companies on behalf of CCI. On Jan. 8, 2009, Mario Covino, the former director of worldwide factory sales for the valve company, pleaded guilty [see here] to one count of conspiracy to violate the FCPA and admitted to causing the payment of approximately $1 million in bribes to officers and employees of several foreign state-owned companies. On Feb. 3, 2009, Richard Morlok, the former finance director for the valve company, pleaded guilty [see here] to one count of conspiracy to violate the FCPA and admitted to causing the payment of approximately $628,000 in bribes to officers and employees of several foreign state-owned companies. Covino and Morlok are scheduled to be sentenced in February 2012.”

See here for July 2009 enforcement action against Control Components, Inc.

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