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“Game-Changing” Day at the SEC

In August 2009, Robert Khuzami, the SEC’s Director of the Division of Enforcement, announced that the SEC will be creating five “national specialized units dedicated to particular highly specialized and complex areas of securities law” – including an FCPA unit. (see here).

Khuzami also announced that the SEC was working on other initiatives of interest to FCPA followers including creation of “a public policy statement that will set forth standards to evaluate cooperation by individuals in enforcement actions” as well as “recommend[ation] to the Commission that the SEC enter into Deferred Prosecution Agreements, in which the [Division of Enforcement] agree[s] in the appropriate case to forego an enforcement action against an individual or entity subject to certain terms, including full cooperation, a waiver of statutes of limitations, and compliance with certain undertakings.”

Yesterday, there were developments on each of these issues.

First, the SEC (see here) announced that Cheryl J. Scarboro will lead the FCPA unit. As indicated in the release, Scarboro is an SEC veteran having served as Associate Director, Assistant Director, Deputy Assistant Director, and Staff Attorney in the Division of Enforcement. For many years, Scarboro has been a primary SEC voice on FCPA issues and an active participant at many FCPA conferences.

Second, the SEC (see here) announced a series of measures “to further strengthen its enforcement program by encouraging greater cooperation from individuals and companies in the agency’s investigations and enforcement actions.”

“New cooperation tools” not previously available to the SEC, will now include, among other things:

* “Cooperation Agreements — Formal written agreements in which the Enforcement Division agrees to recommend to the Commission that a cooperator receive credit for cooperating in investigations or related enforcement actions if the cooperator provides substantial assistance such as full and truthful information and testimony.”

* “Deferred Prosecution Agreements — Formal written agreements in which the Commission agrees to forego an enforcement action against a cooperator if the individual or company agrees, among other things, to cooperate fully and truthfully and to comply with express prohibitions and undertakings during a period of deferred prosecution.”

and

* “Non-prosecution Agreements — Formal written agreements, entered into under limited and appropriate circumstances, in which the Commission agrees not to pursue an enforcement action against a cooperator if the individual or company agrees, among other things, to cooperate fully and truthfully and comply with express undertakings.”

The SEC release notes that “similar cooperation tools have been regularly and successfully used by the Justice Department in its criminal investigations and prosecutions.”

More details about these measures can be found in a revised and newly issued version of the SEC’s enforcement manual beginning at pg. 119 (see here).

The SEC news conference announcing these appointments and initiatives is available on the SEC’s website.

While not FCPA specific, these measures as applied to FCPA enforcement are likely to lead to even less judicial scrutiny (not that there is much judicial scrutiny at present) as to SEC interpretations of the FCPA and as to whether factual evidence actually exists to support each element of an FCPA charge.

In fact, as set forth in the manual (p. 130) “[a]n admission or an agreement not to contest the relevant facts underlying the alleged offenses” is a key factor the SEC will consider in determining whether a company should receive a deferred prosecution agreement.

For those anxious to see FCPA enforcement actions contested in an open, transparent, and adversary proceeding, yesterday’s announcements will be a blow as I expect FCPA enforcement to become even more opaque in the future.

Stay tuned as much is surely to be written about these new measures in the coming weeks and months.

Monitors

Most FCPA enforcement actions against companies are resolved through a non-prosecution or deferred prosecution agreement (NPA’s / DPA’s).

Many NPA’s / DPA’s require the company to engage a compliance monitor for a set time period (generally 2-4 years).

Although monitors are not the “rage” they used to be a few years ago, recent FCPA enforcement actions against Control Components, Inc., KBR/Halliburton, and Siemens have included some form of a compliance monitor.

In a recent speech to an FCPA audience, Assistant AG Breuer (see here) indicated that:

“In appropriate cases, [DOJ] will also continue to insist on a corporate monitor, mindful that monitors can be costly and disruptive to a business, and are not necessary in every case. That said, corporate monitors continue to play a crucial role and responsibility in ensuring the proper implementation of effective compliance measures and in deterring and detecting future violations.”

Those interested in corporate monitors (whether in the FCPA context or otherwise) will want to review a recent report on monitors from the Government Accountability Office. (see here).

Among other interesting numbers are the following:

Since 1993 through September 2009, DOJ has entered into 152 NPA’s or DPA’s.

Of the 152 agreements, 48 required the appointment of a compliance monitor.

What does it take to become a monitor? A DOJ background certainly doesn’t hurt. GAO found that of the 48 NPA’s or DPA’s that required the appointment of a monitor, 42 different individuals were selected. Of those 42, 23 (approximately 55%) were former DOJ officials, something many find controversial in that a prior DOJ position could affect the monitor’s independence and impartiality.

Although the GAO report does not specifically discuss (or identify) the monitors in FCPA enforcement actions, a May 2008 DOJ letter to the House Judiciary Committee (see here) does list corporate entities along with the monitor appointed. To my knowledge, the following were FCPA enforcement actions: Aibel Group/Vetco Ltd., Baker Hughes, Ingersoll Rand, InVision Technologies, Micrus, Monsanto, Paradigm, Schnitzer Steel, Statoil, and York.

To see what one of those “FCPA monitors” has to say (here) is the excerpt from the Corporate Crime Reporter interview.

Statoil Charges Dismissed

In October 2006, Statoil ASA (a Norwegian company with shares traded on a U.S. exchange – and thus an “issuer” under the FCPA) settled an FCPA enforcement action by agreeing to pay $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.

The DOJ action was settled through a three-year deferred prosecution agreement (see here).

Under a deferred prosecution agreement, criminal charges against the company are filed with a court, but prosecution of the charges is deferred if the company adheres to the requirements of the agreement (such as acknowledging and accepting responsibility for the alleged conduct, cooperating with the DOJ’s continued investigation, engaging a compliance monitor, and implementing more stringent FCPA policies and procedures, etc.) throughout the term of the agreement.

At the end of the term, usually 2-3 years, and if the company has complied with its obligations, DOJ agrees that it will seek dismissal of the charges.

Deferred prosecution agreements and non-prosecution agreements have become the most common method of resolving corporate FCPA enforcement actions.

The Statoil prosecution was precedent setting at the time as it was the first time the DOJ brought criminal FCPA charges against a non-U.S. company.

The DOJ announced today (see here) that Statoil satisfied its obligations under the deferred prosecution agreement and that a court has formally dismissed the charges.

In this respect, Statoil may again be precedent setting as I am not aware of any other instance in which the DOJ has issued a press release announcing the end of a deferred prosecution agreement (even though it would seem that several others have ended).

If my recollection is correct and if this perhaps is a change in DOJ policy, “hear-hear” as it increases transparency.

Other posts which have mentioned Statoil can be found here and here.

“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?

Benchmarking FCPA Compliance

Over at the White Collar Crime Prof Blog (see here), Professor Ellen Podgor has posted her essay titled “Educating Compliance” (see here) in which she argues that the U.S. government should more actively participate in “promoting compliance with the law.”

In discussing some examples of where the government does pro-actively educate compliance with the law, Profesor Podgor refers to the DOJ’s Lay-Person’s Guide to the FCPA (see here) and the DOJ’s Opinion Procedure Regulations (see here).

While perhaps lacking the “pro-active” label Professor Podgor advocates, an additional resource for companies seeking guidance on FCPA “best practices” is the actual FCPA non-prosecution and deferred prosecution agreements themselves. More often than that, these agreements will contain an appendix that contains the minimum elements of an FCPA compliance program that the DOJ has “signed off on” as part of the settlement process.

Reviewing these agreements, one will find, virtually verbatim, the same elements. For instance, see the Novo Nordisk agreement (here – pgs. 19-21), the Fiat agreement (here pgs. 34-36) and the Faro Technologies agreement (here pgs. 14-16).

While these minimum elements are not the “be-all and end-all” of FCPA compliance, and while any FCPA corporate compliance policy should be specifically calibrated to a company’s risk profile, these elements consistently included by DOJ in resolution agreements are certainly a good initial benchmark for any company’s FCPA compliance policies and procedures.

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