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Across The Pond, Rolls-Royce Also Resolves A $625 Million U.K. Enforcement Action

Rolls

This recent post went in-depth into the $170 million Foreign Corrupt Practices Act enforcement action against Rolls-Royce. As mentioned in the post, the FCPA enforcement action against Rolls-Royce was part of a broader $800 million global resolution that also included a U.K. Serious Fraud Office component as well as Brazil law enforcement action.

The approximate $625 million U.K. enforcement action comprised the bulk of $800 million global resolution (that would seem to make sense, Rolls-Royce is after all a U.K. company) and is summarized below including the several failure to prevent bribery counts under the Bribery Act.

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In Depth Into The Och-Ziff FCPA Enforcement Action

och ziff

Last week, the DOJ and SEC announced (here and here) a Foreign Corrupt Practices Act enforcement action against Och-Ziff Capital Management Group (and a related entity) for improper business practices in various African countries. The aggregate settlement amount was $412 million (a $213 million DOJ criminal penalty and a $199 million SEC resolution consisting of disgorgement and prejudgment interest), the 4th largest FCPA settlement amount of all-time.

As highlighted in this previous post, the SEC also found Daniel Och (CEO) and Joel Frank (CFO) culpable for certain of the improper conduct. As indicated in the post, this represents what is believed to be the first time in FCPA history that the SEC also found the current CEO and CFO of the issuer company liable, to some extent, for company FCPA violations. Moreover, the $2.2 million Och agreed to pay, without admitting or denying the SEC’s findings, is the largest settlement amount in FCPA history by an individual in an SEC action.

Whether the Och-Ziff enforcement action is the “first time a hedge fund has been held to account for violating the FCPA” (as the DOJ stated in its release) is a debatable point. (See here for the 2007 FCPA enforcement action on the DOJ’s FCPA website against hedge fund Omega Advisors).

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Can We Bring Quality FCPA Compliance and Investigative Services to the Underserved Middle Market?

Today’s post is from David Simon (Foley & Lardner).

*****

Professor Koehler (my former colleague at Foley & Lardner) has been critical of “FCPA Inc.” and, in particular, the astronomical costs associated with certain FCPA investigations and compliance measures.  My friends in the C-Suite of FCPA Inc. have responded defensively – reacting at least in part to a perception that these criticisms suggest a corner-cutting approach to important work that must be done properly.

As an FCPA lawyer with a foot in both camps, let me try to find some common ground.

I share Mike’s concerns.  While I understand that each case is different and that it is often necessary for investigating counsel to respond to outside forces that drive up costs, some of the eye-popping numbers can’t help but make one question the FCPA investigation/compliance value proposition.

This dynamic is especially troubling because, I fear, it drives the perception among many smaller and mid-sized companies that anti-bribery compliance is simply out of reach financially.  A recent survey of global corruption compliance in the middle market conducted by McGladrey confirms that this segment of the market is underserved.  That is dangerous and bad for all the interested parties – including the DOJ and SEC.  It simply isn’t good public policy for sound FCPA compliance advice and investigative resources to be available only to the Exxon Mobils of the world.

That said, the quality of the work should not be compromised by maintaining some focus on the value proposition.  Corner-cutting is not appropriate (and is almost never in the company’s long-term interests).  But aren’t there ways to manage costs and still produce quality work?  The answer is clearly yes.  And while the options for delivering more for less are myriad, let me propose three fairly modest concepts, which, if implemented, would help bring quality FCPA representation to many more companies that really need it:

1.         Give Strong but Practical Compliance Advice

We can start by heeding the counsel of the SEC and DOJ in last year’s Resource Guide:

  •  “DOJ and SEC have no formulaic requirements regarding compliance programs.  Rather, they employ a common-sense and pragmatic approach to evaluating compliance programs.”
  • “[T]here is no one-size-fits all program. . . . Indeed, small-and medium-sized enterprises likely will have different compliance programs from large multi-national corporations, a fact DOJ and SEC take into account when evaluating companies’ compliance programs.”

In other words, take it seriously, but be practical.  And take a risk-based approach to FCPA compliance.

In a world where FCPA compliance was the company’s number one focus (above and beyond making and selling stuff), a company would conduct “Full Monty” due diligence on all of its distributors (maybe even its customers).  It would employ a rigorous system for reviewing all gifts, meals and entertainment expenses in excess of $25.  (After all, $25 is a lot of money to a customs official in Borneo . . .)  It would conduct annual compliance audits of the books and records of all of its third-party intermediaries.

But really, does that approach make sense for most of our clients?  While there may be companies that have a risk profile that justifies these procedures, for many – indeed, the vast majority –  such an approach is simply impractical.  Let’s not make the perfect the enemy of the good.

To lawyers and compliance professionals:  Be practical. Be willing to sign-off on compliance procedures that are effective but tailored to the actual risk posed.  Don’t be afraid to divert from “best practices” when best practices are not risk justified.  Take a stand.  But be prepared to defend your decisions.

And to the enforcement agencies.  Be true to your word.  “[D]o not hold companies to a standard of perfection.” Accept common sense compliance judgments, even when things ultimately go wrong.

2.         Appropriately Scope FCPA and Bribery Investigations

When a company discovers conduct that may violate the FCPA or company policies, an investigation is necessary.  It never makes sense for a company to ignore such a discovery.  You are simply not serious about compliance if you do not take steps to understand what happened, why, how, and to respond appropriately.  The enforcement agencies are entirely justified in requiring this and in taking companies to account for failing to investigate and respond to indications of wrongdoing.

The problem for many companies is that they hear the words “FCPA investigation” and think millions of dollars – or tens of millions, or hundreds of millions – in costs and fees.  Too often, this leads companies to make the bad decision to forgo an investigation altogether.

But just as there is no “one-size-fits-all” FCPA compliance program, there is no “one-size-fits-all” FCPA investigation.  Proportionality and reasonableness are key.

The main driver of investigation cost is scope.  FCPA investigations that spin out of control usually do so because the scope is never clearly defined at the outset or because of significant scope-creep during the investigation.  Think about our country’s history with Independent Counsel investigations.  Without a clear, narrowly defined mandate, investigations can go on interminably.  Investigators investigate.  There is always some new lead to pursue, another witness to interview, another document to request and review.

The investigation scope needs to be reasonable and appropriately calibrated to the issues under investigation.  Scope must be clearly defined, and the investigator must keep the scope front of mind.  Discipline is key.

This is not to say that the scope should never change once defined.  Often, new significant facts are discovered and new issues identified.  Many times, these developments warrant a modification to the scope.  But those decisions should be approached thoughtfully and intentionally.  Scope modification is not the same thing as scope-creep.

Appropriately scoped investigations cost less.  Companies with limited legal and compliance resources can access quality investigative services and can fulfill the agencies’ directive that “companies should have in place an efficient, reliable, and properly funded process for investigating the allegation and documenting the company’s response.”

To the SEC and DOJ:  To make this work, you need to apply these same common-sense principles to your assessment of company investigations.  Be reasonable.  To outside auditors assessing the company’s response:  Ditto.

3.         Disaggregation of Services in FCPA and Bribery Investigations

One final modest idea to manage the cost of FCPA investigations:  Consider disaggregating services.

It is not necessary to have high-priced lawyers conduct every aspect of every investigation.  In the health care industry, they refer to “working at the top of your license.”  In other words, to enhance the efficiency of the provision of care, each professional should be put to his or her highest and best use.  Move the work down the chain of training and expertise where appropriate.  Application of the same concept in FCPA investigations can have the same pro-efficiency effect.

As a preliminary matter, it isn’t necessary for a company to hire outside counsel to conduct every FCPA investigation.  There are certainly some situations where the exclusive deployment of inside investigative resources is appropriate.

Even when outside counsel properly leads the investigation, the lead investigator should consider non-traditional deployment of resources so that everyone on the team is being put to his or her highest and best use.  A couple of examples:

Consider enlisting internal company resources to accomplish some investigative tasks.  Under the right circumstances, company IT personnel can help gather and process data for the investigation; internal audit or finance resources can help with the analysis of the books and records; and in-house counsel can perform certain investigative tasks.  Independence and perceptions of independence must be taken into consideration in every case, of course.  In some investigations, it won’t be appropriate to involve company personnel.  But in some, it will be entirely reasonable and appropriate.  And where it is, there will be substantial cost savings.

In addition, investigative counsel should consider outsourcing or alternative-sourcing aspects of the investigation.  Document review is an obvious example.  Consider using data review software to cull the relevant documents that warrant review.  (It is noteworthy that DOJ recently approved the use of this approach in the AB InBev/Grupo Modelo merger review.  If it works in antitrust, why not FCPA investigations?)  This can save hundreds of hours of lawyer and staff time.  It also often makes sense to outsource document review.  There are a number of firms that conduct quality document review at a much lower cost than using attorneys (even contract attorneys.)  I personally have used Novus Law, a document-related discovery firm, to handle all of the document review, management and analysis on a couple of document-heavy FCPA investigations.  They do an outstanding job (no quality compromises) at a fraction of the cost.

These are just a few ideas for changing the way we provide compliance and investigative services to give better access to these critical services to more companies.  How we do this is less important than that we do it.

Parker Drilling Resolves FCPA Enforcement Action Involving Conduct In Nigeria

It’s been quite a week on the FCPA enforcement front.

On Monday, the DOJ announced (here) criminal obstruction of justice charges against “Frederic Cilins a French citizen [for] attempting to obstruct an ongoing investigation into whether a mining company paid bribes to win lucrative mining rights in the Republic of Guinea.”

Yesterday, it was reported (here) that former Siemens executive Uriel Sharef had, as expected, settled the SEC enforcement action against him by agreeing, without admitting or denying the SEC’s allegations, to pay a $275,000 penalty.  (See here for the prior post discussing the DOJ’s and SEC’s December 2011 charges against Sharef and others).

Yesterday, the DOJ announced (here) that criminal charges “have been unsealed against one current and one former executive of the U.S. subsidiary of a French power and transportation company for their alleged participation in a scheme to pay bribes to foreign government officials.”  The individuals are:

Frederic Pierucci (“a current company executive who previously held the position of vice president of global sales for the Connecticut-based U.S. subsidiary) “who was charged in an indictment unsealed in the District of Connecticut with conspiring to violate the Foreign Corrupt Practices Act (FCPA) and to launder money, as well as substantive charges of violating the FCPA and money laundering.”  According to the DOJ, Pierucci, a French national, was arrested Sunday night at John F. Kennedy International Airport.

David Rothschild (“a former vice president of sales for the Connecticut-based U.S. subsidiary”) who pleaded guilty on Nov. 2, 2012, to a criminal information charging one count of conspiracy to violate the FCPA.  The charges against Rothschild and his guilty plea were recently unsealed.

Future posts will explore in more detail each of the above developments.

Today’s post is about yesterday’s other FCPA development – the announcement of the long-expected enforcement action against Parker Drilling (a Houston-based oil drilling services company) for conduct in Nigeria.

As indicated in this DOJ release, the Parker Drilling action “stemmed from the DOJ’s Panalpina-related investigations.”

As detailed in this prior post, in November 2010, the DOJ and SEC announced coordinated FCPA enforcement actions against Swiss-based freight forwarder Panalpina and six oil and gas companies that utilized its services in connection with business in Nigeria.  The November 2010 enforcement action resulted in approximately $237 million in combined DOJ/SEC settlement amounts.  (For additional reading on these actions, please visit the CustomsGate tab under the search feature of this site or see here where all the prior actions are linked).  As noted in this prior statistical post, Panalpina-related enforcement actions are one, of just a few unique events, that have given rise to the majority of FCPA enforcements since 2007, and Panalpina-related enforcement actions significantly contributed to the “spike” in FCPA enforcement actions in 2010.

Total fines and penalties in the Parker Drilling enforcement action were approximately $15.9 million (approximately $11.8 million in the DOJ enforcement action and approximately $4.1 million in the SEC enforcement action).

This post summarizes the DOJ’s and SEC’s allegations and resolution documents.

DOJ

The DOJ enforcement action involved a criminal information (here) against Parker Drilling resolved through a deferred prosecution agreement (here)

Criminal Information

Parker Drilling operated oil-drilling rigs in Nigeria owned by Parker Drilling (Nigeria Limited), a Nigerian entity and wholly-owned subsidiary of Parker Drilling Offshore International, Inc., (a Cayman Islands corporation wholly-owned by Parker Drilling).  According to the information, “Parker Drilling ceased drilling operations in Nigeria in 2006” and the conduct at issues focused on two issues or events that occurred between 8 to 12 years ago.

First, the information, like the prior Panalpina-related enforcement actions, alleged conduct in connection with obtaining temporary importation permits (TIPs) in Nigeria for oil-drilling rigs.  The information alleges that in 2001, Parker Drilling retained Panalpina to “obtain TIPs and TIP extensions on Parker Drilling’s behalf.  According to the information, between 2001 and 2002:

“Panalpina obtained new TIPs for Parker Drilling’s rigs by submitting false paperwork on Parker Drilling’s behalf to avoid the time, cost, and risk associated with exporting the rigs and re-importing them into Nigerian waters (a process that Panalpina referred to as the ‘paper process’ or ‘recycling.’).  Panalpina created and caused to be presented to Nigerian officials documents that reflected that the rigs had been physically exported and re-imported.  In reality, the drilling rigs never left Nigerian waters.”

Second, and more significant in terms of the conduct alleged in the information, the DOJ alleges conduct in relation to the Nigerian “Panel of Inquiry for the Investigation of All Cases of Temporary Import Permits Issued Between 1984 to Year 2000” (the “TI Panel”).  According to the information, the TI Panel was “presidentially appointed, operated under the auspices of the Nigerian President’s Office, and possessed the power to issue subpoenas and levy fines” in connection with certain duties and tariffs that the Nigerian Customs Service (“NCS”) collected or failed to collect between 1984 and 2000.

As to the TI Panel, the information alleges that beginning in 2002 the TI Panel began reviewing Parker Drilling.  According to the information, thereafter Parker Drilling engaged Nigeria Outside Counsel (a Nigerian citizen based in Nigeria who advised Parker Drilling on customs and other matters in Nigeria) and a Nigeria Agent (a Nigerian and British citizen based in the U.K. to assist Parker Drilling in connection with customs matters in Nigeria) who represented Parker Drilling before the TI Panel.

The information alleges that in 2004 “the TI Panel concluded that Parker Drilling had violated [Nigerian law] with respect to several of its TIPS” and that the “TI Panel assessed a fine of $3.8 million against Parker Drilling.”  The information then outlines a “bribery scheme,” that resulted in the TI Panel reducing Parking Drilling’s fine “to just $750,000.”

In connection with this “bribery scheme,” the information alleges conduct as to Employee A (a U.S. citizen based in Nigeria who, during the relevant time period, was the General Manager of Parker Drilling’s operations in Nigeria); Employee B (a U.S. citizen based in Nigeria who also was a General Manager of Parker Drilling’s Operations in Nigeria); Executive A (a U.S. citizen based in Houston who performed financial and compliance functions for Parker Drilling between 2002 through 2005); Executive B (a U.S. citizen based in Houston who performed a legal function for Parker Drilling); U.S. Outside Counsel (a U.S. citizen and partner in a U.S. law firm who served as Parker Drilling’s outside counsel who provided legal and business advice to Parker Drilling on customs and other issues in Nigeria).

Specifically, the information alleges that U.S Outside Counsel suggested that Parker Drilling retain the Nigeria Agent to resolve its Nigerian customs issues even though Nigeria Agent’s “resume, which U.S. Outside Counsel provided to Parker Drilling, did not reflect any past experience in Nigeria or handling customs issues.”  According to the information, Parker Drilling “conducted no additional due diligence into Nigeria Agent’s qualifications.”

The information alleges that “with one exception, Parking Drilling paid Nigeria agent indirectly through the U.S.-based law firm” and that “Executives A and B paid and caused to be paid all of Nigeria Agent’s expenses without receiving any invoices particularly describing the expenditures’ purposes.”   According to the information, many of expenses related to food, entertainment, social events and the like and the information alleges various meetings the Nigeria Agent had with various Nigerian foreign officials.

The information further alleges that Parker Drilling’s treasurer informed Executive B “that the lack of invoices could raise an issue in Parker Drilling’s ongoing Sarbanes Oxley audit.”  Thereafter, the information alleges, the Nigeria Agent sent an invoice and that Executive B “accepted the invoice and retained it in Parker Drilling’s files, knowing that the invoice did not accurately reflect the true purpose of Parker’s Drillings” prior payments to the Nigeria Agent.

The information then states as follows.  “All told, Parker Drilling transferred and caused to be transferred to Nigeria Agent approximately $1.25 million to address Parker Drilling’s TI Panel issues” and that “Nigeria Agent succeeded in reducing Parker Drilling’s TI Panel Fines.”

Based on the above conduct, the information charges one count of violating the FCPA’s anti-bribery provisions.  Although the above Panalpina-related allegations are incorporated by reference into the paragraphs charging the FCPA violation, the information specifically identifies only the TI Panel conduct and states as follows.  “Parker Drilling made and cause to be made from the United States … a series of payments totaling approximately $1.25 million to Nigeria Agent, knowing that all or a portion of those payments would be given or used to procure goods and services that were to be given to a foreign government official in return for the diminution of a lawfully assessed fine.”

Deferred Prosecution Agreement

The above charge against Parker Drilling was resolved via a DPA in which Parker Drilling admitted, accepted, and acknowledged that it was responsible for the acts of its officers, directors, employees and agents as charged in the information.

The DPA has a term of three years and under the heading “relevant considerations” it states as follows.

“The Department enters into this Agreement based on the individual facts and circumstances presented by this case and the Company.  Among the facts considered were the following:  (a) the Company’s cooperation, including conducting an extensive internal investigation and collecting, analyzing, and organizing voluminous evidence and information for the Department; (b) the Company has engaged in extensive remediation, including ending its business relationships with officers, employees or agents primarily responsible for the corrupt payments, enhancing its due diligence protocol for third-party agents and consultants, increasing training and testing requirements, and instituting heightened review of proposals and other transactional documents for all the Company’s contracts; (c) the Company has retained a full-time Chief Compliance Officer and Counsel who reports to the Chief Executive Officer and Audit Committee, as well as staff to assist the Chief Compliance Officer and Counsel; (d) the Company has already significantly enhanced and is committed to continue to enhance its compliance program and internal controls, including ensuring that its compliance program satisfies the minimum elements set forth [elsewhere in the DPA]; (e) the Company has implemented a compliance-awareness improvement initiative and program that includes issuance of periodic anti-bribery compliance alerts; (f) the Company has already implemented many of the elements described [elsewhere in the DPA]; and (g) the Company has agreed to continue to cooperate with the Department in any ongoing investigation …”.

Pursuant to the DPA, the advisory Sentencing Guidelines range for the conduct at issue was $14.7 million to $29.4 million.  The DPA then states as follows.

“The Company agrees to pay a monetary penalty in the amount of $11,760,000, an approximately 20% reduction off the bottom of the fine range […].  The Company and the Department agree that this fine is appropriate given the facts and circumstances of this case, including the Company’s cooperation, extensive remediation, committment to continue to enhance its compliance program, and culpability relative to other companies examined in this investigation.”

During the period of the DPA, Parker Drilling will have annual reporting obligations to the DOJ concerning its remediation and implementation of various compliance measures.  As is typical in FCPA DPAs, Parker Drilling also agreed to a “muzzle clause” (see this prior post for more information).

SEC

In a related enforcement action based on the same core conduct, the SEC brought a civil complaint (here) against Parking Drilling.

The introductory paragraph of the complaint states as follows.

“This matter involves violations of the Foreign Corrupt Practices Act (“FCPA”) by Defendant Parker Drilling Company.  In 2004, through its outside counsel, Parker Drilling retained a Nigerian agent to assist the company with customs disputes related to the importation of its drilling rigs into Nigeria. During the course of the agent’s work, two Parker Drilling executives knowingly paid the agent large sums of money through its outside counsel for, among other things, the “entertainment” of Nigerian foreign officials in an effort to obtain their influence in resolving the customs disputes.”

The SEC complaint also contains a paragraph with the same general Panalpina-related allegations as alleged in the DOJ’s criminal information.

Under the heading “Remedial Efforts” the complaint states as follows.

“Parker Drilling demonstrated significant cooperation and conducted an extensive internal investigation. Since the time of the conduct noted in this Complaint, Parker Drilling has made significant enhancements to its global anti-corruption compliance program, including: retaining a full-time Chief Compliance Officer and Counsel who reports to the Chief Executive Officer and Audit Committee and full-time staff to assist him; enhancing anti-corruption due diligence requirements for relationships with third parties; increasing compliance monitoring and corporate auditing specifically tailored to anti-corruption; implementing a compliance awareness initiative that includes issuance of periodic anti-bribery compliance alerts; enhancing financial controls and governance; and expanding anti-corruption training throughout the organization.”

Based on the above conduct, the SEC charged an FCPA anti-bribery violation and an FCPA books and records and internal controls violation.  Other than restating the language of the books and records and internal controls provisions, the SEC complaint does not contain any specific allegations concerning these charges.

As noted in this SEC release, Parker Drilling agreed to pay disgorgement of 3,050,00 plus pre-judgment interest of $1,040,818, and consented to the entry of a final judgment permanently enjoining it from future FCPA violations.

Mitchell Ettinger, Saul Pilchen and Stephanie Cherny (Skadden, Arps) represented Parker Drilling.

Parker Drilling in this release stated as follows.

“After an extensive investigation, with which we fully cooperated, we are pleased to have reached agreement with the DOJ and the SEC, and we will continue to maintain a vigorous FCPA compliance program, to emphasize the importance of compliance and ethical business conduct, and to enhance our compliance efforts.”

Parker Drilling had previously disclosed that the DOJ and SEC’s investigations concerned “certain of our operations relating to countries in which we currently operate or formerly operated, including Kazakhstan and Nigeria.”

Of Note From The Eli Lilly Enforcement Action

This previous post went long and deep as to the Eli Lilly enforcement action from last month.  This post continues the analysis by highlighting additional notable issues.

If This Is The Standard, Then Every Issuer Is An FCPA Violater.

This previous post discussed how the SEC’s August 2012 FCPA enforcement action against Oracle diluted FCPA enforcement to a new level.

The SEC’s China allegations against Lilly further dilutes FCPA enforcement.  The focus of the allegations is that sales representatives at Lilly-China, between 3-6 years ago, submitted false expense reports for items such as wine, speciality foods, a jade bracelet, meals, visits to bath houses, card games, karaoke bars, door prizes, spa treatments and cigarettes.  Because the SEC charged only FCPA books and records and internal controls violations based on these allegations, the identity of the ultimate recipients was not relevant, although the SEC did allege that the ultimate recipients were “government-employed physicians.”

If the SEC’s position is that an issuer violates the FCPA’s books and records and internal controls provisions because some employees, anywhere within its world-wide organization, submit false expense reports for such nominal and inconsequential items, then every issuer has violated and will continue to violate the FCPA.

Once again, the SEC’s charging decisions prove hallow its recent Guidance related rhetoric.  (See here for the prior post).

What Is Really Being Accomplished?

Let me state for the record, lest there be any misunderstanding, that I support strong FCPA enforcement as to conduct Congress intended to capture in passing the FCPA, that adheres to fundamental legal principles, and that actually makes a difference in accomplishing the FCPA’s objective.  My criticisms and concerns of the DOJ and SEC’s FCPA enforcement has been across a wide spectrum, including that in egregious instances of corporate bribery, the DOJ has been too lenient.  See here for my article “The Facade of FCPA Enforcement” and here for my November 2010 Senate testimony.

To be sure, certain things were accomplished by the Lilly enforcement action.  $29.4 million was added to the U.S. treasury and FCPA Inc.’s pre-enforcement action professional fees and expenses likely exceeded that amount.

Beyond this, it is an open question whether the Lilly enforcement action really accomplished anything.

For starters, let’s start with the SEC’s mission.  As stated on its website, the SEC’s mission is “to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation.”

How is this mission accomplished by the Poland and Russia allegations in the SEC’s complaint?

The Poland allegations concern approximately $39,000 in payments made by Lilly-Poland approximately 12 years ago to a legitimate and bona fide Polish charitable foundation, albeit one allegedly headed by the Director of a Government Health Fund.

The Russia allegations, the only allegations in the complaint that give rise to FCPA anti-bribery charges, concern the conduct of Lilly-Vostok and its use of various third parties in connection with government pharmaceutical business.  There is only one paragraph in the SEC’s complaint concerning specific knowledge of the alleged improper conduct and that paragraph (para. 28 of the complaint) cites a Lilly-Vostok e-mail from 18 years ago and another Lilly-Vostok e-mail from 13 years ago.

The same what is really being accomplished question could also be asked concerning a post-enforcement action requirement imposed on Lilly by the SEC.

The SEC devoted a paragraph of its complaint to “Lilly’s Remedial Measures” and stated as follows.

“Since the time of the conduct noted in this Complaint, Lilly has made improvements to its global anti-corruption compliance program, including: enhancing anticorruption due diligence requirements for relationships with third parties; implementing compliance monitoring and corporate auditing specifically tailored to anti-corruption; enhancing financial controls and governance; and expanding anti-corruption training throughout the organization.”

In other words, per the SEC, over the last approximate decade, Lilly has made extensive enhancements to its FCPA compliance program.  Against this backdrop, what is really being accomplished by the requirement that Lilly engage a compliance consultant for a 60 day period?

“Check The Box” Due Diligence?

One of the greater frustrations I experienced during my FCPA practice career was attending meetings with SEC FCPA enforcement attorneys and learning of the alternate world they lived in.  In their alternate world, companies – 7 to 10 years ago – were supposed to have current FCPA best practices throughout their organization and the absence of such current best practices was evidence of FCPA books and records and internal control violations.

I was reminded of this alternate world when reading the SEC’s release (here) in connection with the Lilly enforcement action.  In it, Kara Novaco Brockmeyer (Chief of the SEC Enforcement Division’s Foreign Corrupt Practices Unit) stated as follows. “Eli Lilly and its subsidiaries possessed a ‘check the box’ mentality when it came to third-party due diligence.”

“Check the Box” due diligence?

The SEC’s allegations concerning due diligence (or lack thereof) focus on the conduct of Lilly-Vostok, a Russian subsidiary, between 1994 through 2005.  In other words, 7 to 18 years ago.   Even the SEC acknowledged that, as to the relevant third-parties, “Lilly’s due diligence” consisted of “ordering a Dun and Bradstreet report and conducting a search using an internet service to scan publicly available information.”  Elsewhere, the SEC acknowledges that Lilly-Vostok “in conjunction with outside counsel” conducted due diligence on various third parties.

Effective due diligence?  Probably not – the SEC alleges that certain beneficial owners were not identified and that there was no documentation that certain third parties were capable of performing the engaged services.  Due diligence consistent with today’s best practices?  Probably not.

Yet to call such due diligence efforts – which took place 7 to 18 years ago – “check the box” is emblematic of the SEC’s alternate reality.

The Double Standard On Display

I have frequently written about the FCPA’s double standard.  (See here for all prior posts).  The double standard regards the seemingly obvious fact that there is little intellectual or moral consistency between enforcement of the FCPA and enforcement of the U.S. domestic bribery statute (18 USC 201).  The double standard is present when a U.S company’s interaction with a “foreign official” is subject to more scrutiny and different standards than its interaction with a U.S. official.

Prior double standard posts (here and here) have explored the frequency in which U.S. business gives to charitable donations favored by influential politicans.  No consequences or legal action is taken.

Yet when a U.S. company gives to charitable donation favored by foreign politicians – well that is stuff of bribery and corruption.  In addition to the Chudow (Poland) Castle Foundation allegations in the SEC’s Lilly complaint, is the following allegation concerning Russia.

“From 2005 through 2008, Lilly-Vostok made various proposals to government officials in Russia regarding how Lilly-Vostok could donate to or otherwise support various initiatives that were affiliated with public or private institutions headed by the government officials or otherwise important to the government officials. Examples included their personal participation or the participation of people from their institutions in clinical trials and international and regional conferences and the support of charities and educational events associated with the institutes. At times, these proposals to government officials were made in a communication that also included a request for assistance in getting a product reimbursed or purchased by the government. Generally, Lilly-Vostok personnel believed these proposals were proper because of their relevance to public health issues and many of the proposals were reviewed by counsel. Nonetheless, Lilly-Vostok did not have in place internal controls through which such proposals were vetted to ascertain whether Lilly-Vostok was offering something of value to a government official for a purpose of influencing or inducing him or her to assist Lilly-Vostok in obtaining or retaining business.”

No DOJ Involvement

As indicated in the prior Lilly post, the Lilly enforcement action was the latest in a series of FCPA enforcement actions begun in 2011 against pharmaceutical / health care-related companies.  All actions (Johnson & Johnson, Smith & Nephew, Biomet, and Pfizer) have been based on the same general set of allegations (things of value to various foreign health care providers for an alleged business purpose).  However, the Lilly enforcement action is the only enforcement action with no DOJ involvement.  In “The Facade of FCPA Enforcement,” I discuss how the lack of enforcement transparency contributes to the facade of enforcement when the same core set of facts are resolved with materially different results.

A Message For Internal Audit

I have long discussed (see here and here for prior posts and here for a recent interview) the importance of FCPA goggles for internal audit and finance professionals – meaning that internal audit and finance personnel should be specifically trained to approach their specific job functions not only in the traditional way, but also with “FCPA goggles” on.  I have noted that it is clear from recent FCPA enforcement actions that the SEC expects much more from non-legal personnel when it comes to FCPA compliance, including the ability to spot FCPA issues and display a high degree of (I’ll call it) intellectual curiosity as to certain issues.

The SEC’s complaint against Lilly contains an emphatic message to the internal audit community.  Paragraph 46 of the complaint states, in full, as follows.

“[D]espite an understanding that certain emerging markets were most vulnerable to FCPA violations, Lilly’s audit department, based out of Indianapolis, had no procedures specifically designed to assess the FCPA or bribery risks of sales and purchases.  Accordingly, transactions with off-shore entities or with government-affilated entities did not receive specialized or closer review for possible FCPA violations.  In assessing these transactions, the auditors relied upon the standard accounting controls which primarily assured the soundness of the paperwork.  There was little done to assess whether, despite the existence of facially acceptable paperwork, the surrounding circumstances or terms of a transaction suggested the possibility of an FCPA violation or bribery.”

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