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Friday Roundup

Another acknowledgment of the logic, whistleblower statistics, a guilty plea, and for the reading stack.  It’s all here in the Friday roundup.

Another Acknowledgment of the Logic

Previous posts here and here have highlighted recent speeches by top SEC officials in which they acknowledge the underlying logic supporting a compliance defense.  Deputy Attorney General James Cole did the same in this recent speech before a bank compliance officer crowd.

“At the Department of Justice, we know that compliance officers within financial institutions, and the lawyers, bankers, and others who work with them, are the first line of defense against abuse within these institutions.  Compliance officers are critical to protecting both a bank’s reputation and its bottom line.  They’re essential when it comes to preventing criminal activity – and if that effort is not entirely successful, detecting and reporting such conduct.  It is not an exaggeration to say that compliance is fundamental to protecting the security of our financial institutions and is essential to the integrity of our entire financial system. Despite, and in some ways because of, this crucial role, I know that working in compliance is often difficult.  Compliance is seldom thought of as a ‘money-maker’ for any bank, and it may be challenging to get sufficient resources and authority to do the job well.  To some, compliance may not seem to fit within the culture of a fast-moving, cutting-edge institution.  And at times, certain business units or managers may seem downright hostile toward the compliance function. We at the Department of Justice understand this reality.  And we appreciate that, despite these challenges, you and your colleagues are fully committed to helping protect the integrity of your institutions and our financial system.”


The notion that compliance must be firmly embedded in a corporation’s culture has been raised before, including at this conference, by many government officials.  You’ve heard a great deal about the importance of ‘tone at the top.’  Indeed, companies regularly argue during negotiations that they have taken various steps to set the right tone at the highest levels of their institutions.  But based on what we have seen, we cannot help but feel that the message is not getting through often enough or clearly enough. Despite years of admonitions by government officials that compliance must be an important part of a corporation’s culture, we continue to see significant violations of law at banks, inadequate compliance programs, and missed opportunities to prevent and detect crimes.”

In “Revisiting a Foreign Corrupt Practices Act Compliance Defense,” I argue, among other things, that a compliance defense will better incentivize corporate compliance and reduce improper conduct.  Compliance is a cost center within business organizations and expenditure of finite resources on FCPA compliance is an investment best sold if it can reduce legal exposure, not merely lessen the impact of legal exposure.

In short, an FCPA compliance defense will best allow compliance professionals in the FCPA context to – in the words of Cole – “get sufficient resources and authority to do the job well.”

Will the DOJ and SEC ever be capable of realizing that a compliance defense is a race to the top, not a race to the bottom?  (See here for the prior post).  Will the DOJ and SEC ever have the courage to realize that a compliance defense can best help the enforcement agencies accomplish its laudable goals? (See here for the prior post).

Whistleblower Statistics

The Dodd-Frank Act enacted in July 2010 contained whistleblower provisions applicable to all securities law violations including the Foreign Corrupt Practices Act.  In this prior post from July 2010, I predicted that the new whistleblower provisions would have a negligible impact on FCPA enforcement.  As noted in this prior post, my prediction was an outlier (so it seemed) compared to the flurry of law firm client alerts that predicted that the whistleblower provisions would have a significant impact on FCPA enforcement.  So anxious was FCPA Inc. for a marketing opportunity to sell its compliance services, some even called the generic whistleblower provision the FCPA’s “new” whistleblower provisions.

So far, there have not been any whistleblower awards in connection with FCPA enforcement actions.  Given that enforcement actions (from point of first disclosure to resolution) typically take between 2-4 years, it still may be too early to effectively analyze the impact of the whistleblower provisions on FCPA enforcement.

Whatever your view, I previously noted that the best part of the new whistleblower provisions were that its impact on FCPA enforcement can be monitored and analyzed because the SEC is required to submit annual reports to Congress.  Recently, the SEC released (here) its annual report for FY2013.

Of the 3,238 whisteblower tips received by the SEC in FY2013, 4.6% (149) related to the FCPA.  As noted in this similar post from last year, of the 3,001 whisteblower tips received by the SEC in FY2012, 3.8% (115) related to the FCPA.  In FY2011 (a partial reporting year)  3.9% of the 334 tips received by the SEC related to the FCPA.

Yes, there will be in the future a whistleblower award made in the context of an FCPA enforcement action.  Yes, there will be much ink spilled on this occasion and wild predictions about this “new trend.”  Yet, I stand by my prediction – now 3.5 years old, that Dodd-Frank’s whistleblower provisions will have a negligible impact on FCPA enforcement.

“Foreign Official” Pleads Guilty

Earlier this week, the DOJ announced that Maria Gonzalez, the alleged “foreign official” at the center of the FCPA enforcement actions against individuals associated with broker-dealer Direct Access Partners LLC, pleaded guilty to “conspiring to violate the Travel Act and to commit money laundering, as well as substantive counts of these offenses.”  Gonzalez (V.P. of Finance / Executive Manager of Finance and Funds Administration at Bandes – an alleged state-run economic development bank in Venezuela) is to be sentenced on August 15, 2014.

As noted in the DOJ’s release:

“Previously, three former employees of the Broker-Dealer – Ernesto Lujan, Jose Alejandro Hurtado, and Tomas Alberto Clarke Bethancourt – each pleaded guilty in New York federal court to conspiring to violate the Foreign Corrupt Practices Act (FCPA), to violate the Travel Act and to commit money laundering, as well as substantive counts of these offenses, relating, among other things, to the scheme involving bribe payments to Gonzalez.  Sentencing for Lujan and Clarke is scheduled for Feb. 11, 2014, before U.S. District Judge Paul G. Gardephe.  Hurtado is scheduled for sentencing before U.S. District Judge Harold Baer Jr. on March 6, 2014.”

Reading Stack

An interesting read from a Vietnam media source regarding the notion that – just like in tango – it takes two in a bribery scheme and that many instances of bribery are the result of harassment by foreign officials and extortion-like demands.  When passing the FCPA in 1977, Congress fully recognized and understood this reality and that is why it did not seek to capture facilitation payments in the FCPA.  (See here for more reading).


A good weekend to all.

The Odd Dynamic Persists

When Congress passes a law with various provisions which apply generically to any securities law violations without thinking through, on a micro level, the intersection of such provisions, odd dynamics can result.

That was my observation in this 2012 post concerning Khaled Asadi v. GE Energy, a whistleblower case brought under Dodd-Frank’s Anti-Retaliation Provision alleging underlying conduct that could implicate the Foreign Corrupt Practices Act.  The trial court held (subsequently affirmed on appeal – see 720 F.3d 620) that a foreign national could not avail themselves of protection under the Anti-Retaliation Provision because the provision does not apply extraterritorially.  I noted it was an odd result, because that same foreign national could be awarded a whistleblower bounty under Dodd-Frank.

As highlighted in this previous post, a similar case was brought in early 2013 by Meng-Lin Liu, a former compliance officer for Siemens AG in China.

Yesterday, Judge William Pauley (S.D.N.Y.) dimissed the complaint brought under the Anti-Retaliation Provision of Dodd-Frank.  Adopting the reasoning in the Asadi case, Judge Pauley concluded that “there is simply no indication that Congress intended the Anti-Retaliation Provision to apply extraterritorially.”  Judge Pauley noted that Liu’s complaint (brought by a Taiwanese resident against a German corporation for acts concerning its Chinese subsidiary relating to alleged corruption in China and North Korea), “must be dismissed” “because the Anti-Retaliation Provision does not apply overseas.”

For more on the decision, see here from Reuters, here from Wall Street Journal Risk and Compliance.

As to the odd dynamic framed above, Judge Pauley stated:

“The issue is not whether persons located abroad can be ‘whistleblowers’ and thus eligible for whistleblower awards, but whether the Anti-Retailiation Provision’s protections extend to overseas whistleblowers.  The fact that a person outside the United States may be a “whistleblower” under Dodd-Frank does not compel the conclusion that he is protected by the Anti-Retaliation Provision.”

In short, the odd dynamic persists.

Assuming the truth of Liu’s factual allegations, the DOJ and/or SEC could bring an FCPA action (at least books and records and internal controls charges) against Siemens regardless of whether the payment scheme had a U.S. neuxs, Liu could qualify for a Dodd-Frank whistleblower bounty if an SEC enforcement action was brought, but Liu can not qualify for protection under the Anti-Retaliation Provision for blowing the whistle on the allegations.

Judge Vacates SEC Rule Regarding Resource Extraction Disclosure Provisions

The day after Congress passed the massive Dodd-Frank Act in July 2010, I  published this post regarding Section 1504 (“Disclosure of Payments by Resource Extraction  Issuers”), a “miscellaneous” provision tucked into the bill at the last moment.  I predicted that Section 1504 was sure to cause much angst and substantially  increase compliance costs and headaches for numerous companies that already have extensive FCPA compliance policies and procedures by further requiring disclosure of perfectly legal and legitimate payments to foreign governments.  I noted that Section 1504 was akin to swatting a flay with a bazooka and that just because bribery and corruption are bad, does not mean that every attempt to  curtail bribery and corruption is good or represents sound policy.

I further noted that in passing Section 1504, Congress(as if most members of Congress likely even knew that the miscellaneous provisions was tucked into the massive Dodd-Frank Act) was revisiting an issue sensibly put to rest many years ago in passing the FCPA.

The background is as follows.

The FCPA as enacted in 1977 contained (and still contains) an outright prohibition on improper payments to “foreign officials” to obtain or retain business (the anti-bribery provisions) as well as books and records and internal control provisions – but not disclosure provisions.  The original versions of what became the “FCPA” (i.e. the “Foreign Payments Disclosure Act” and other similar bills) started out with disclosure provisions, including provisions requiring all U.S. companies to disclose all payments over $1,000 to any foreign agent or consultant and any and all other payments made in connection with foreign government business.

As to these disclosure provisions, many people, including most notably Senator Proxmire (D-WI – a Congressional leader on what would become the FCPA), were concerned that the disclosure obligations were too vague to enforce and would require the disclosure of thousands of payments that were perfectly legal and legitimate. Proxmire said during congressional hearings, “I would think they [the corporations subject to the disclosure requirements] would want some certainty. They want to know what they have to report and what they don’t have to report. They don’t want to guess and then find themselves in deep trouble because they guessed wrong.”

The final House Report on what would become the FCPA is even more clear. It states (when discussing the various disclosure provisions previously debated, but rejected): “Most disclosure proposals would require U.S. corporations doing business abroad to report all foreign payments including perfectly legal payments such as for promotional purposes and for sales commissions. A disclosure scheme, unlike outright prohibition, would require U.S. corporations to contend not only with an additional bureaucratic overlay but also with massive paperwork requirements.”

Back to Section 1504 of Dodd-Frank.

Numerous prior posts have highlighted the judicial challenge to the SEC rule implementing Section 1504.  Yesterday U.S. District Court Judge John Bates vacated the SEC’s rule.  (See here for the decision).  The decision was not as to the merits of Section 1504, rather as to the SEC’s rule implementing Section 1504, and the decision is thus focused on administrative law specifics.

Regardless, I applaud the decision.

Feel good legislation that regulates an area that is already subject to criminal prohibitions while imposing significant compliance burdens on companies (the SEC itself estimated that the provision would cost U.S. public companies at least $1 billion in initial compliance costs and
$200 to $400 million in ongoing compliance costs) does not represent sound public policy.

For additional coverage of the decision, as well as links to other commentary, see here from Samuel Rubenfeld at Wall Street Journal Risk & Compliance Journal.

Judicial Challenge Filed As To Resource Extraction Disclosure Provisions

The day after Congress passed the massive Dodd-Frank Act in July 2010, I published this post regarding Section 1504 (“Disclosure of Payments by Resource Extraction Issuers”), a “miscellaneous” provision tucked into the bill at the last moment.  (The post provides a general overview of Section 1504’s provisions).  I predicted that Section 1504 was sure to cause much angst and substantially increase compliance costs and headaches for numerous companies that already have extensive FCPA compliance policies and procedures by further requiring disclosure of perfectly legal and legitimate payments to foreign governments.  I indicated that Section 1504 was akin to swatting a flay with a bazooka and that just because bribery and corruption are bad, does not mean that every attempt to curtail bribery and corruption is good.

As highlighted by various posts since July 2010, the SEC’s final rules implementing Section 1504 were long-delayed and only came into effect this past August.  (See here for the final rules).

Against this backdrop, it is little surprise that last week the following organizations – the American Petroleum Institute, the Chamber of Commerce, the Independent Petroleum Association of America, and the National Foreign Trade Council – filed a complaint (here) in the U.S District Court, District of Columbia, against the SEC:  seeking a judicial declaration that Section 1504 violates the First Amendment and is thus null and void; and seeking to vacate Section 1504 on the grounds that the SEC acted arbitrarily and capriciously in violation of the Administrative Procedures Act in implementing Section 1504’s final rules.

In pertinent part, the complaint alleges that Section 1504 compels “U.S. oil , gas, and mining companies to engage in speech – in violation of their First Amendment rights – that would have disastrous effects on the companies, their employees, and their shareholders.”  As to the SEC’s purported defense that its rules implementing  Section 1504 were required by law, the plaintiffs allege that the SEC “grossly misinterpreted its statutory mandate” and paid “lip service” to the requirement that SEC rules factor in a cost-benefit analysis.

The complaint cites the SEC’s own estimate that Section 1504 will “cost U.S. public companies at least $1 billion in initial compliance costs and $200 to $400 million in ongoing compliance costs” and that it “could add billion of dollars of [additional] costs” through the loss of trade secrets and business opportunities.  All this, the complaint states, for the purported benefit that Section 1504 “may result in social benefits” that “cannot be readily quantified with any precision” (citing to the SEC).

The SEC has experienced rough waters of late in the D.C. Circuit and that court is where several SEC rules have found their final resting place.  The plaintiff’s attorney in many of those cases has been Eugene Scalia (Gibson Dunn – here).  (See here for a recent Wall Street Journal article about Scalia and here for a recent Wall Street Journal op-ed by Scalia).  Scalia is representing the Section 1504 plaintiffs and this judicial challenge will be interesting to follow.

Decision In GE Whistleblower Case Creates An Odd Dynamic

As noted in this prior post, in February Khaled Asadi (previously employed by G.E. Energy (USA) LLC (“GE Energy”) as its Country Executive for Iraq, located in Amman, Jordan) filed a civil complaint (here) in the Southern District of Texas against G.E. Energy.   GE Energy is a wholly-owned subsidiary of General Electric Company (“GE”).

The complaint alleged that G.E. harassed and pressured Asadi to vacate his position, and ultimately terminated him after he informed his supervisor and G.E.’s Ombudsperson “regarding potential violations of the Foreign Corrupt Practices Act committed by G.E. during negotiations for a lucrative, multi-year deal with the Iraqi Ministry of Electricity.”  The substance of Asadi’s complaint was that “on or about June of 2010 Mr. Asadi was alerted by a source in the Iraqi Government that GE had hired a woman closely associated with the Senior Deputy Minister of Electricity (Iraq) to curry favor with the Ministry while in negotiation for a Sole Source Joint Venture Contract with the Ministry of Electricity. (According to the complaint, the Joint Venture Agreement between GE and the Ministry of Electricity was signed in Baghdad on December 30, 2010 and the exclusive materials and repairs provision was estimated to be valued at $250,000,000 for the seven year agreement.)

Asaid asserted a claim for whistleblower retaliation under Dodd-Frank which created a private cause of action for whistleblowers subject to retaliatory discharge and permits relief including reinstatement and back pay for a whistleblower who prevails in federal court.

Recently, U.S. District Court Judge Nancy Atlas granted GE’s motion to dismiss Asadi’s amended complaint (see here for the memorandum and order).  In short, Judge Atlas noted that the definition of “whistleblower” under Dodd-Frank is an individual who provides information “to the SEC” and that because Asadi did not claim to report GE’s alleged FCPA violations to the SEC, but rather to his supervisor and to GE’s ombudsperson, Asadi “does not fit within Dodd-Frank’s definition of a whistleblower.”

As to Asadi’s claim that he could still qualify as a whistleblower “even if he did not make a report directly to the SEC … because his disclosures were ‘required’ or ‘protected’ under SOX and the FCPA,” Judge Atlas did not reach the issue of whether he could qualify as a whistleblower on these grounds because his “claims fails on other grounds.”  Specifically, Judge Atlas found, relying on the Supreme Court’s 2010 decision in Morrison v. National Australia Bank Ltd., that “the language of the Dodd-Frank Anti-Retaliation Provision is silent regarding whether it applies extraterritorially” and that therefore there is a “presumption that the Provision does not govern conduct outside the United States.”  Judge Atlas then concluded that Dodd-Frank’s Anti-Retaliation Provision does not extend to or protect Asadi’s extraterritorial whistleblowing activity.

In dicta, Judge Atlas noted that Asadi argued that because the FCPA “is clearly intended to apply extraterritorially, the [Anti-Retaliation] Provision also must extraterritorially.”  However, Judge Atlas stated that “because the facts alleged by Asadi do not fit within the Anti-Retailation Provision, the Court need not, and does not, address Asadi’s argument that the FCPA extends the territorial reach of the Provision.”  Nevertheless, Judge Atlas did note that “although Asadi has alleged that his internal disclosures at GE pertained to bribery of foreign officials, he has cited the Court to no provision of the FCPA that ‘protects’ or ‘requires’ his internal report of the alleged bribery.”

For more on Judge Atlas’s decision, see here from Reuters.

Although not a case of precedent, if the reasoning of Asadi is followed by other courts, the odd result could be that Dodd-Frank’s Anti-Retailiation Provisions do not apply extraterritorially, even though foreign nationals can potentially be awarded whistleblower bounties under the law.  I guess this is what can happen when Congress passes provisions which apply generically to any securities law violations without thinking through, on a micro level, the intersection of such provisions.


The Asadi decision is believed to be just the second judicial decision concerning the intersection between D0dd-Frank’s whistleblower provisions and the FCPA.  See this prior post for the decision in Nollner v. Southern Baptist Convention, Inc. (M.D. Tenn., April 3, 2012).

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