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FCPA Training – “The First Few Minutes”

The A&E Network has a show, “The First 48,” that I watch on occasion (see here). The show follows real-life homicide detectives from around the country during the “first 48 hours” of an investigation as they race against time to find the suspect.

Why is the “first 48 hours” so important? Because the chance of solving the case is apparently reduced by approximately 50% if the detectives do not get a lead in the “first 48 hours.”

So what in the world does this have to do with FCPA training?

Just as the “first 48 hours” are critical to the success of a homicide investigation, the “first few minutes” are critical to the success of FCPA training.

During those critical “first few minutes” one needs to properly set the tone and engage participants on their level.

If one starts off an FCPA training session like this … “today I will be talking about a U.S. law that makes it a crime to bribe foreign government officials to get business” – you just lost a good portion of your audience and, regardless of what you say during the rest of the training sesssion, your training session will not be as successful as it could have been.

Crime? Steve in the second row of the audience has a clean record and wouldn’t hurt a fly. He coaches his son’s soccer team and worships on the weekend. Joe is thinking to himself, “I have never committed a crime and I don’t intend to – what does this FCPA training session have to do with me?”

Government? Melissa is in the first row of the audience. Her job function is internal audit and finance. She has absolutely no contact or communication with government officials and is thinking to herself “does this company even do business with foreign governments – what does this FCPA training session have to do with me?”

Business? Francisco, the logistics manager from outside the U.S., has been flown in for the FCPA training session. He is thinking “business – I’m not a sales and marketing guy, I just make sure our product gets into and out of the country and I occasionally help secure various licenses and permits for the company – what does this FCPA training session have to do with me?”

For reasons described in other postings on this blog, FCPA training is indeed relevant to the Steve, Melissa and Francisco’s in a company.

To avoid having participants’ minds wander during the “first few minutes” of FCPA training, it may be more effective to start off the training session along these lines.

“Today, I will be talking about a U.S. law that applies to all of you – regardless of whether you are in the sales and marketing department, the executive office suite, the finance and audit department, or the logistics department. This law can cover a wide range of payments the company makes, or could make, either directly or indirectly, in doing business or seeking business in foreign markets. Your understanding of this law and how it may relate to your specific job function will best ensure that the company remains compliant with this law and is able to achieve its business objectives.”

HP To Channel Partners – You MUST Complete FCPA Training

Engaging a foreign agent, representative, distributor or channel partner (collectively “channel partners”) can greatly assist a company in increasing foreign sales. After all, these individuals or entities “know the landscape.”

As readers of this blog well know, engaging a foreign channel partner can also be risky business under the FCPA.

In a previous post, I talked about certain minimum elements of an effective FCPA compliance program as typically set forth in DOJ non-prosecution or deferred prosecution agreements (see here).

One of those elements is the “promulgation of a compliance code, standards and procedures designed to reduce the prospect of violations of the FCPA” which “should apply to all directors, officers, and employees and, where necessary and approopriate, outside parties acting on behalf [of a company] in a foreign jurisdiction, including agents, consultants, representatives, distributors, teaming partners, and joint venture partners.”

HP has apparently determined that it is necessary and appropriate for its global network of approximately 155,000 channel partners to complete HP’s regulatory compliance training program or risk losing their partner status (see here).

A HP spokesperson confirmed that “HP is, in fact, working to have all of its global channel partners undergo training regarding government legal and regulatory compliance [including the FCPA] as part of establishing or renewing their Business Development Agreement” with HP.

The FCPA As A Foreign Policy Stick

Michael Jacobson’s piece (see here) about using the FCPA as perhaps a way to increase pressure on Iran has been discussed elsewhere (see here).

Below are some additional issues to consider.

The suggestion that the FCPA “gives the government extraterritorial reach over non-U.S. companies” and that “any foreign company listed on the U.S. stock exchange falls under FCPA jurisdiction” is not entirely accurate.

True, the FCPA’s books and records and internal control provisions apply to non-U.S. companies which issue stock on a U.S. exchange, and true the books and records and internal control provisions contain no specific jurisdictional requirement. If a company is an issuer (including a foreign issuer) it must comply with the books and records and internal control provisions.

However, the jurisdictional reach of the anti-bribery provisions as to foreign companies is a different story.

The anti-bribery provisions were amended in 1998 to include an alternative “nationality” jurisdictional test for U.S. issuers and domestic concerns (see 78dd-1(g) and 78dd-2(i)).

As a result of these amendments, the original “use of the mails or any means or instrumentality of interstate commerce” nexus is no longer required and the reach of the anti-bribery provisions as to U.S. companies and U.S. citizens is indeed extraterritorial.

However, for a foreign issuer, the old “use of the mails or any means or instrumentality of interstate commerce” jurisdictional nexus is still applicable because the alternative jurisdictional test in 78dd-1(g) only applies to an “issuer organized under the laws of the U.S.”

The other way in which a foreign company (other than an issuer) or foreign national can become subject to the FCPA anti-bribery provisions is through application of 78dd-3 (also added by the 1998 amendments). However, 78dd-3 has a “while in the territory of the U.S. […] make use of the mails or any means or instrumentality of interstate commerce” jurisdictional requirement as well.

Big picture, for foreign companies (whether issuers or not) there is a U.S. jurisdictional requirement for the anti-bribery provisions to apply.

One sees this when looking at the Statoil enforcement action, which as Jacobson points out, is indeed the first time the U.S. held a foreign company accountable under the FCPA’s criminal anti-bribery provisions – in the Statoil case for improper payments to Iranian officials to secure oil and gas rights in Iran.

However, the U.S. did not assert anti-bribery jurisdiction over Statoil merely on the basis of “its listing on the U.S. stock exchange.”

Rather, Statoil was subject to the anti-bribery provisions because the improper payments were routed through a U.S. bank in New York, thus providing the U.S. the nexus needed to hold a foreign company accountable (see here for the criminal information describing the payments through the U.S. bank account and invoking the “means and instrumentality of interstate commerce” jurisdictional clause and here for the SEC cease and desist order finding violations of the anti-bribery provisions and finding that the improper payments were routed through a U.S. bank account in New York).

The point is, because of the U.S. nexus jurisdictional requirement of the anti-bribery provisions as to foreign companies, using the FCPA to hold foreign companies accountable in Iran is not as simple as Jacobson makes it seem.

Two “bigger picture” points as well.

First, I remain skeptical as to the suggestion that increased FCPA focus by U.S. enforcement authorities as to conduct in a particular country “could sufficiently deter many companies from doing business” in that particular country.

Those that adhere to this theory have, for instance, a “China issue” to address (i.e. it is common knowledge that U.S. enforcement authorities have announced several FCPA enforcement actions relating to conduct in China, yet such increased focus by the U.S. as to China business conduct has done little to deter companies from doing business in China).

Second, and more relevant to Jacobson’s assertion that “even the suggestion of increased focus by the United States […] could sufficiently deter many companies from doing business with Iran,” is the following fact regarding Statoil in Iran.

In 2006 (as discussed above) Statoil paid $21 million in combined DOJ and SEC fines and penalties for improper payments that assisted the company in securing contracts for the South Pars field in Iran.

To my knowledge, the Statoil enforcement action is the only FCPA enforcement action concerning business conduct in Iran.

The Statoil case is thus the only “test case.”

And it is a unique test case at that because both the DOJ and SEC material specifically refer to the South Pars field (often times DOJ/SEC material is silent as to specific projects), as does the company’s annual reports filed with the SEC.

No doubt Jacobson is right when he says that the 2006 FCPA enforcement action had a “major impact” on Statoil. As Jacobson points out, “[s]ince then, Statoil has spent millions of dollars in building a more robust internal anti corruption compliance system and putting good governance procedures into place.”

You know what else Statoil has done since the 2006 enforcement action?

It has continued to do business in Iran, including in the same South Pars fields that were the subject of the 2006 FCPA enforcement action.

Here is what the company’s website says about its activity in Iran (see here).

“StatoilHydro is offshore development operator for phases 6, 7 & 8 of the South Pars gas and condensate field in the Iranian sector of the Persian Gulf. We have also engaged in onshore exploration and drilling activities.”

More specifically, here is what Statoil’s website says about South Pars (see here).

“Phases 6, 7 & 8 of South Pars – the world’s largest gas field – are being developed by StatoilHydro as operator under an agreement signed with its local partner Petropars and the National Iranian Oil Company (NIOC) in October 2002.”

For those who enjoy reading SEC’s filings, Statoil’s Annual Report on Form 20-F (2008) (see here) indicates the company has invested $225 million in developing South Pars.

So, what does the only Iran “test case” show?

At least from public documents, it appears to show that enforcing the FCPA against a foreign company doing business in Iran does not even deter the subject of the enforcement action from continuing to do business in Iran.

“I Fully Expect That The Number of FCPA Prosecutions Will Continue To Rise”

Lanny Breuer delivered these words today before the National Association of Criminal Defense Lawyers.

Who is Lanny Breuer?

He is the Assistant Attorney General, Criminal Division.

When he speaks about the FCPA, one ought take notice.

Breuer’s full remarks can be found here (FCPA remarks begin at pg. 5).

*****

We keep hearing about those 100+ FCPA investigations in the pipeline, but the government closed the books on its fiscal year yesterday with a relatively quite September.

The new fiscal year has ushered in change though as the DOJ unveiled a slick new website (check it out here). What logo will DOJ assign to the next FCPA release … a calculator, a flying eagle, the scales of justice, a shield?

My bet is on the calculator … for a FCPA books and records violation.

“We Don’t Want The Auditors Raising Any Questions on Iraq Business”

Yet another Iraqi Oil-For-Food enforcement action.

Yesterday, the DOJ and SEC announced resolution of an enforcement action against AGCO Corp. (a Georgia-based manufacturer and supplier of agricultural machinery and equipment) as well as AGCO Limited (AGCO’s a wholly-owned subsidiary headquartered in the United Kingdom responsible for AGCO’s business in Europe, Africa, and the Middle East)(see here, here, here, here, and here).

Big picture, AGCO acknowledged responsibility for improper payments made by its subsidiaries and agents to the former government of Iraq in order to obtain contracts with the Iraqi Ministry of Agriculture under the United Nations Oil-For-Food program.

DOJ filed a criminal information against AGCO Limited charging one count of conspiracy to commit wire fraud and to violate the FCPA’s books and records provisions.

According to the DOJ, AGCO Limited paid approximately $550,000 to the former government of Iraq to secure three contracts. DOJ and AGCO entered into a three-year deferred prosecution agreement under which DOJ will defer prosecution upon, among other things, AGCO’s payment of a $1.6 million penalty. According to the DOJ, the basis for the deferred prosecution agreement was, among other things, AGCO’s cooperation in the DOJ’s investigation, its implementation of remedial measures, and its settlement with the SEC (see below).

Why no substantive FCPA anti-bribery charges in this case and other Iraqi Oil-For-Food cases (Novo Nordisk, Fiat, AB Volvo, etc.)? The anti-bribery provisions apply to payments to “foreign officials,” not foreign governments. Thus, in this and the other cases, conspiracy to commit wire fraud and to violate the FCPA books and records provisions were charged.

Because AGCO is an issuer, the SEC also played a role in the enforcement action. The SEC filed a settled civil complaint charging AGCO with violating the FCPA’s books and records and internal control provisions.

According to the SEC, certain AGCO subsidiaries made – through a Jordanian agent – approximately $5.9 million in kickback payments to Iraq in the form of “after-sales service fees” to secure contracts worth approximately $14 million. These payments were disguised or improperly recorded in the subsidiaries’ books and records which were consolidated with AGCO’s for SEC filing purposes. According to the SEC, “AGCO knew or was reckless in not knowing that kickbacks were paid in connection with its subsidiaries’ transactions.”

The SEC ordered AGCO to pay $18.3 million in combined disgorgement, interest, and penalties.

In a previous post (see here), it was noted that FCPA compliance is a task that not just company lawyers need to be concerned with, but rather a task that internal audit and finance should also be concerned with and actively involved in as well. It was noted that internal audit and finance personnel must be specifically trained to approach their specific job functions with “FCPA goggles” on.

Reading the SEC complaint against AGCO, it is clear that various AGCO personnel could have used a pair of “FCPA goggles” as the complaint is an indictment of the entire company’s control function.

In para 23, the SEC charges, among other things, that:

the “accrual account [where the kickback payments were recorded] was created by AGCO Ltd.’s marketing staff with virtually no oversight from AGCO Ltd.s’ finance department;”

“no one questioned the existence of the dual accounts;”

“no one questioned why the [accrual account] contained approximately ten percent of the contract value despite the fact that there was no contract in place requiring that such ten percent be paid to the ministry or anyone else;”

“when the finance department authorized payments from the [accrual account], it did not ask for or receive any proof of service to warrant the payments;” and

an employee cautioned the business manager for Iraq and his supervisor that “we don’t want the auditors raising any questions on Iraq Business!”

Further, in para 25, the SEC charges, among other things, that:

“Sales and marketing personnel were able to enter into contracts without review from the legal or finance departments;”

“an accounting employee described the Finance Department employees as ‘blind loaders’ who input information into AGCO’s books without any adequate oversight role;” and

“marketing personnel were able to create accrual accounts […] without any oversight and caused accounts to be created and payments to be made without proper documentation.”

In para. 26, the SEC charges, among other things, that:

“AGCO Ltd.’s structure at the time allocated inappropriate accounting and finance responsibilities to the marketing department;” and

“turnover in the marketing department […] was high and employees were forced to shoulder a great deal of the accounting burden.”

AGCO’s management and legal department did not fare much better.

In para. 27, the SEC charges, among other things, that:

“AGCO did not conduct any due diligence on the [Jordanian] agent or require that the agent undergo FCPA training;” and

the “agent’s contract with AGCO did not accurately explain the agent’s services and payments, and lacked any FCPA language.”

What would the results look like if your company or your client’s company was “put under the internal controls microscope” in an FCPA enforcement action?

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