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Next Up – Stryker

First it was Johnson & Johnson (see here – $70 million in combined fines and penalties in April 2011).  Then it was Smith & Nephew (see here – $22 million in combined fines and penalties in February 2012).  Then it was Biomet (see here – $22.8 million in combined fines and penalties in March 2012). Then it was Pfizer / Wyeth (see here  – $60 million in combined fines and penalties in August 2012).  Then it was Eli Lilly (see here – $29 million in combined fines and penalties in December 2012).

Next up, in the recent sweep of pharmaceutical / healthcare and medical device companies is Stryker Corporation.

Yesterday, the SEC announced that Stryker agreed to pay $13.2 million to resolve an SEC Foreign Corrupt Practices Act enforcement action via an administrative cease and desist order in which the company neither admitted or denied the SEC’s allegations.

The conduct at issue focused on various Stryker subsidiaries.  There is no allegation in the SEC’s order concerning Stryker Corp. itself other than the following.

“The financial results of all of the Stryker subsidiaries discussed herein were consolidated into Stryker’s financial statements.  Stryker’s foreign subsidiaries were organized in a decentralized, country-based structure, wherein a manager of a particular country’s operations had primary responsibility for all business within a given country. During the relevant period, each of Stryker’s foreign subsidiaries operated pursuant to individual policies and directives implemented by country or regional management. Stryker had corporate policies addressing anti-corruption, but these policies were inadequate and insufficiently implemented on the regional and country level. Accordingly, Stryker failed to devise and maintain an adequate system of internal accounting controls sufficient to provide reasonable assurance that the company maintained accountability for its assets and that transactions were executed in accordance with management’s authorization.”

In summary fashion, the SEC order states:

“From approximately August 2003 to February 2008 (the “relevant period”), Stryker made approximately $2.2 million in unlawful payments to various government employees including public health care professionals (collectively, the “foreign officials”) in Mexico, Poland, Romania, Argentina, and Greece. Stryker incorrectly described these expenses in the company’s books and records as legitimate consulting and service contracts, travel expenses, charitable donations, or commissions, when in fact the payments were improperly made by Stryker to obtain or retain business. Stryker earned approximately $7.5 million in illicit profits as a result of these payments.  During the relevant period, Stryker incorrectly described unlawful payments to foreign officials in its accounting books and records in violation of [the FCPA’s books and records provisions] and failed to devise and maintain an adequate system of internal accounting controls in violation [of the FCPA’s internal controls provisions.]”

Under the heading “Unlawful Payments In Mexico,” the order states:

Between March 2004 and January 2007, Stryker’s wholly-owned subsidiary in Mexico (“Stryker Mexico) made three payments totaling more than $76,000 to foreign officials employed by a Mexican governmental agency (the “Mexican Agency”) responsible for providing social security for government employees. Stryker made these payments to win bids to sell its medical products to certain public hospitals in Mexico. Stryker Mexico earned more than $2.1 million in profits as a result of these illicit payments.  These payments were made at the direction of Stryker Mexico employees, including country level management, and paid to the foreign officials through third party agents. For example, in January 2006, Stryker Mexico learned that the Mexican Agency was threatening to revoke a contract that Stryker Mexico had won to provide knee and hip products to certain public hospitals unless Stryker Mexico paid an employee of the Mexican Agency.  As a result of the demand by the employee of the Mexican Agency, Stryker Mexico directed its outside counsel in Mexico (the “Mexican Law Firm”) to make payment to the employee, on Stryker Mexico’s behalf, in order for Stryker to keep the winning bid.  At Stryker Mexico’s direction, the Mexican Law Firm paid the foreign official approximately $46,000 on behalf of Stryker Mexico and, as a result of this payment, the Mexican Agency did not revoke Stryker Mexico’s status as the winning bidder. The Mexican Law Firm then invoiced Stryker Mexico for $46,000 for purported legal services rendered, even though no such services were provided. Stryker Mexico recorded these improper payments as legitimate legal expenses in its books and records.  Stryker Mexico earned over $1.1 million in illicit profits on this contract alone. Stryker Mexico made two additional payments through intermediaries during the relevant period in much the same fashion, with the purpose of retaining or obtaining business from public hospitals. The additional payments were in excess of $34,000 and earned Stryker illicit profits of nearly $1 million.”

Under the heading “Improper Payments in Poland,” the order states:

“Between August 2003 and November 2006, Stryker’s wholly-owned subsidiary in Poland (“Stryker Poland”) made 32 improper payments to foreign officials in Poland for the purpose of obtaining or retaining business at public hospitals. In total, Stryker Poland made approximately $460,000 in unlawful payments resulting in more than $2.4 million of illicit profits. These improper payments were recorded in Stryker’s books and records as legitimate expenses, including reimbursement for business travel, consulting and service contract payments, and charitable donations.  For example, in May 2004, Stryker Poland paid for a foreign official then employed as the director of a public hospital in Poland, and her husband, to travel to New York City and Aruba. Although the official purpose of the trip was for the foreign official to attend a single-day tour of Stryker’s manufacturing and research facility in Mahwah, New Jersey, Stryker paid for the couple’s six-night stay at a hotel in New York City, attendance at two Broadway shows, and a five-day trip to Aruba before their return flight to Poland.  According to Stryker Poland’s records, expenses for the trip, including airfare, accommodations, and entertainment, totaled approximately $7,000, all of which Stryker Poland recorded as legitimate travel expenses.  Stryker Poland’s internal documents confirm a quid pro quo arrangement between Stryker Poland and the foreign official. For example, the form containing the schedule for the foreign official’s facility tour states that the purpose of the visit was to “strengthen [the public doctor’s] conviction that Stryker products are the best solution for her hospital,” and notes that “we won a big tender for [one product] (about $350,000) and in this year they are going to buy our products for $500,000.”  Stryker Poland also made additional improper travel payments, payments under purported consulting agreements totaling approximately $47,000, and gifts and donations of nearly $400,000, each of which was made to a state-employed healthcare professional for the purpose of Stryker Poland’s obtaining or retaining the business of public hospitals.”

Under the heading “Improper Payments in Romania,” the order states:

“From at least 2003 through July 2007, Stryker’s wholly-owned subsidiary in Romania (“Stryker Romania”) made 192 improper payments to foreign officials totaling approximately $500,000 in order to obtain or retain business with affiliated public hospitals.  Stryker Romania recorded these payments as legitimate sponsorships of foreign officials’ attendance, travel and lodging at conferences, and medical events, when in reality they were illicit payments made to obtain or retain business.  As a result of these payments, Stryker Romania earned more than $1.7 million in illicit profits.  For example, in April 2004, a Stryker Romania salesperson submitted a form to sponsor a foreign official’s lodging abroad to attend a conference. The form stated that a “business benefit[]” from the sponsorship was that, in return, Stryker Romania would receive a contract for the sale of a particular medical device. In addition, Stryker Romania internally discussed that the foreign official in question was “waiting to be confirmed as chief physician” at a public hospital, “thus becoming important” for an upcoming bid for a contract. Stryker Romania recorded the payment as a legitimate business travel expense even though its own internal documents demonstrated that the payment was made with the purpose of obtaining future business.”

Under the heading “Unlawful Payments in Argentina,” the order states:

“Between 2005 and 2008, Stryker’s wholly-owned subsidiary in Argentina (“Stryker Argentina”) made 392 commission payments, or “honoraria,” to physicians employed in the public healthcare system in order to obtain or retain business with affiliated public hospitals. Unlike traditional honorarium payments that are made in exchange for the provision of a service (such as making a speech), these honoraria were commissions that were calculated as a percentage of a total sale to a particular hospital and then paid to the public doctor associated with the sale. Stryker Argentina routinely made these payments by check to doctors at rates between 20% and 25% of the related sale. In total, Stryker Argentina made more than $966,500 in improper honoraria payments during the relevant period, causing Stryker Argentina to earn more than $1.04 million in profits from the public hospitals with which the doctors were associated. Stryker Argentina booked these payments as commission expenses in an account entitled “Honorarios Medicos,” when in fact they were unlawful payments made to compensate doctors for purchasing Stryker products.”

Under the heading “Unlawful Payments in Greece,” the order states:

“In 2007, Stryker’s wholly-owned subsidiary in Greece (“Stryker Greece”) made a sizeable and atypical donation of $197,055 to a public university (the “Greek University”) to fund a laboratory that was then being established by a foreign official who served as a prominent professor at the Greek University, and was the director of medical clinics at two public hospitals affiliated with the Greek University.  As a result of this donation, Stryker Greece earned a total of $183,000 in illicit profits.  The donation was made pursuant to a quid pro quo arrangement with the foreign official, pursuant to which Stryker Greece understood it would obtain and retain business from the public hospitals with which the foreign official was affiliated, in exchange for making the donation to the foreign official’s pet project. In an email from the country manager of Stryker Greece to the regional manager, the country manager emphasized that she believed the donation to the Greek University was necessary to secure future sales for Stryker Greece. The country manager wrote: “I think that anything below 30K will leave [the foreign official] disappointed. He did promise that he would direct his young assistants into using our trauma and sports medicine products. [The foreign official] is . . . difficult to get as a ‘friend’ and really tough to have as a disappointed customer.”  The regional manager asked,  “What do we get for the sponsorship – or is it just a gift?” The country manager confirmed the quid pro quo, stating, “For the sponsorship we get the Spine business and a promise for more products in his Department. . .”  At a later date, another country manager stated, “I am willing to support what [the foreign official] is asking for in order to secure the sales he is bringing in.” The regional manager then approved the request. Soon thereafter, the country manager said of his meeting with the foreign official: “Things went well (how couldn’t they—I offered him the amount he is asking for . . .). . . . My impression is that we will sta rt business again.”  Stryker Greece made the donation to the Greek University in three installments, each of which was improperly booked as a legitimate marketing expense in an account entitled “Donations and Grants.”

Based on the above allegations, the SEC found that Stryker violated the FCPA’s books and records and internal controls provisions.

In the SEC release, Andrew Calamari (Director of the SEC’s New York Regional Office) stated:

“Stryker’s misconduct involved hundreds of improper payments over a number of years during which the company’s internal controls were fatally flawed.  Companies that allow corruption to occur by failing to implement robust compliance programs will not be allowed to profit from their misconduct.”

As noted in the SEC’s release, the administrative order “requires Stryker to pay disgorgement of $7,502,635, prejudgment interest of $2,280,888, and a penalty of $3.5 million.  Without admitting or denying the allegations, Stryker agreed to cease and desist from committing or causing any violations and any future violations of the FCPA’s books and records and internal controls provisions.

The Stryker action is yet another example of the SEC obtaining a disgorgement remedy without finding or charging violations of the FCPA’s anti-bribery provisions.  (See here for a prior post on no-charged bribery disgorgement).

The SEC order also contains a separate section titled “Stryker’s Remedial Efforts” and states:

“In response to the Commission’s investigation, Stryker retained outside counsel to assist Stryker in conducting an internal investigation into Stryker’s compliance with the FCPA in the jurisdictions that were the subject of the staff’s inquiry, as well as in jurisdictions where issues arose through Stryker’s audit and hotline processes. Stryker voluntarily produced reports and other materials to the Commission staff summarizing the findings of its internal investigation. In total, Stryker produced over 800,000 pages of documents at Stryker’s expense, including courtesy translations of numerous key documents.  Since the time of the conduct detailed above, Stryker implemented a company wide anti-corruption compliance program, which includes: (a) enhanced corporate policies and standard operating procedures setting forth specific due diligence and documentation requirements for relationships with foreign officials, health care professionals, consultants, and distributors; (b) compliance monitoring and corporate auditing specifically tailored to anticorruption, including the hiring of a chief compliance officer and a sizeable full-time dedicated staff in both its internal audit and compliance functions to ensure FCPA compliance and the implementation of periodic self-assessments; (c) enhanced financial controls and governance; (d) expanded anti-corruption training to all Stryker employees; and (e) the maintenance of an Ethics Hotline which serves as a mechanism for employees to report any actual or suspected illegal or unethical behavior.  In addition to its internal anti-corruption enhancements, from 2007 through the present, Stryker engaged a third-party consultant to perform FCPA compliance assessments and compile written reports for Stryker’s operations in dozens of foreign jurisdictions across the world at least annually. Stryker voluntarily produced documents that permitted the Commission staff to assess how Stryker’s internal audit and compliance functions used the results of each of the assessments to implement additional enhancements to its infrastructure, to target jurisdictions for future assessments, and to create management action plans in collaboration with local management.  Based on the improvements described above, Stryker has demonstrated a commitment to designing and funding a meaningful compliance program in order to prevent and detect violations of the FCPA and other applicable anti-bribery laws.”

In this Wall Street Journal Risk and Compliance post, a Stryker spokesperson stated that the company “was advised that the Justice Department closed its investigation.”

Matthew Kipp (Skadden) represented Stryker.

Stryker’s November 2007 quarterly filing stated:

“In October 2007, the Company disclosed that the United States Securities and Exchange Commission has made an informal inquiry of the Company regarding possible violations of the Foreign Corrupt Practices Act in connection with the sale of medical devices in certain foreign countries.”

Thus, the time period from first instance of public disclosure of FCPA scrutiny to actual settlement was 6 years.

Yesterday Stryker’s stock was up approximately .07%.

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A few upcoming events that may be of interest to East Coast readers.

On Wednesday, October 30th, Brooklyn Law School will host a panel discussion of practitioners, in-house counsel, and professors titled “New Developments in FCPA Enforcement” (see here for more information).

On Saturday, Nov. 10th, I will be participating in a panel titled “Anti-Corruption Initiatives in the Arab World” as part of Harvard’s Arab Weekend.  (To learn more about the event and the other panelists, see here).

The Problem – And Solution – Regarding Foreign Outside Counsel Fees

Today’s post is from Zachary Cregar, a 2007 graduate of Duquesne Law School.

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The Problem – And Solution – Regarding Foreign Outside Counsel Fees

As foreign corruption prosecutions increase globally, corruption schemes commensurately grow ever more sophisticated.  Payments have evolved from proverbial cash-stuffed suitcases to complex schemes involving third-party intermediaries, cloaking bribes as payments for legitimate services.  Among third-parties, lawyers offer the most effective method of hiding bribes, and their potential for such is overlooked.  This has been brought to light in the recent allegations against Wal-Mart.  Fortunately there is a solution to this inevitably proliferating problem.  A foreign outside counsel expense management program should be utilized by all companies engaging foreign outside counsel.  The benefit is two-fold:  prevention and detection of foreign corrupt payments, and material reductions in outside counsel legal expenditures.

The Problem

There should be no mistaking the fact a payment made to a law firm that in turn bribes a foreign official can be a violation of the Foreign Corrupt Practices Act and its major counter-part, the UK Anti-Bribery Act.  Bribes paid through foreign outside counsel present a unique risk to detection.  By the very nature of the profession, bills for legal services are often cryptic to those without specific legal training, experience with specific practice specialties, or familiarity with local jurisdictional nuances.

There are several likely scenarios in which foreign legal professionals can be used as corruption subterfuge.  Consider the following; an American company hires outside counsel in a foreign country, where an employee or stakeholder of that firm is a foreign official, and is directly paid bribes under the guise of “legal fees.”  Corporate compliance “know your customer” programs, in a general sense, are designed to identify these individuals and flag them to avoid improper payments.

The second and more problematic scenario lies where foreign outside counsel is used as a third-party intermediary.  Here, foreign outside counsel submits invoices with bogus fees or expenses, and payments on those fees or expenses are passed on as bribes to foreign officials.  An even more concerning and probative subset of this scenario lies where foreign outside counsel excessively bills for legal services legitimately performed, and skims the extra off the top to pay bribes to foreign officials.  Because of the difficulty in detection, corporate anti-corruption compliance programs are unprepared to detect such risks.

Wal-Mart’s Alleged Foreign Counsel Problem

In an April 2012 exposé of Wal-Mart’s alleged foreign corruption, New York Times author David Barstow detailed how several outside lawyers retained by Wal-Mart in Mexico were used to pay nearly $8.5 million in bribes to local officials in order to expedite store expansions. Four days after the Times story broke, Wal-Mart stock dropped five percent.  To-date, Wal-Mart has spent approximately ninety-nine million dollars to conduct forensic investigations of the alleged bribery.

The Times article explained how a substantial portion of the alleged bribes were paid through two attorneys acting as “gestores,” a Mexican term for quasi-lobbyist middle-men paid to carry out bribes of government officials.  Over the course of several years, an executive for Wal-Mart de Mexico, Sergio Cicero Zapata, utilized two Mexican lawyers to deliver cash-stuffed envelopes to local government officials.  These attorney-gestores allegedly paid off all levels of local officials to expedite, inter alia, store zoning, code and environmental issues.  In fact, nearly half of all alleged bribes paid in Wal-Mart’s Mexican corruption scheme were paid through the two outside lawyers, who were in turn paid tens of thousands per permit facilitated.

Wal-Mart’s compliance regime allegedly failed to detect these payments.  After word spread internally of the alleged bribes, an in-house investigative team was sent to Mexico – with the specific directive to investigate these allegations – and failed to adequately reveal the outside lawyers’ roles in the corruption scheme.  It was not until Mr. Cicero’s allegations were made public that an investigative team, composed of outside counsel and auditors, independently revealed the scope of what had taken place.

A forensic recreation revealed that the Mexican lawyers handed cash over to foreign officials, and then submitted invoices to Wal-Mart with “brief, vaguely worded descriptions of their services.” The Wal-Mart de Mexico officials involved in the scheme then completed the purification of lawyer’s bribes by paying the invoices and recording them as legal fees in the company books.  Because the records for these two outside lawyers were coveted secretively by just a few individuals, the subsequent team encountered strong resistance to obtaining the legal billing records.  When finally obtained, the records did not look anything like legitimate legal invoices.

If true, the recent corruption allegations against Wal-Mart should erase any doubts about the importance of having a systematic foreign legal bill oversight process.  In a sense, Wal-Mart de Mexico’s outside counsel bribery scheme was rudimentary.  Yet the scheme evaded not only the company’s anti-corruption compliance program, but also the initial in-house investigation specifically directed to reveal this suspected program.

Pursuit of compliance policies that check for red flags and financial irregularities will have extreme difficulty in detecting the scenario, discussed supra, where outside counsel bills excessively for legitimate legal services and directs the skimmed proceeds to foreign officials.  Yet this is where one of the most critical anti-bribery problems lies.  Necessary compliance systems currently in place fail to reach sufficiency in this respect.

Increased Foreign Outside Counsel Spending, Increased Risk

As if the confluence of increased enforcement of global anti-corruption statutes and increasingly sophisticated corruptions schemes do not pose a serious enough risk to corporate due diligence, there are indications that U.S.-based corporations’ spending on and engagement of foreign outside counsel is on the rise.  Without increased supervision of the influx of payments to foreign outside counsel, the risk of those funds finding their way into the hands of corrupt foreign officials also increases.

The Solution – Foreign Outside Counsel Expense Management Program

Companies seeking to proactively detect and prevent foreign outside counsel corruption schemes must put into place checks and balances to limit the authority of insiders’ use of foreign outside counsel, and to continually monitor counsel.  Five concrete steps are immediately available.  In abbreviated fashion, the steps are as follows:

1)      Gatekeepers – Companies should specifically designate outside counsel gatekeepers.  These employees must be granted authority to vet foreign outside counsel, and approve use of each foreign firm.  With a list of approved and vetted firms in hand, gatekeepers can deny requests for use of lawyers that deviate from approved law firm panels.  Retention of outside counsel must fit within specified protocols, based on type of legal work to be performed, and necessity of utilization of a firm.  This is a basic protection against employees who seek to misappropriate corporate funds for legal work as a cover for foreign bribery.

2)      Guidelines & Protocols – Companies should adopt explicit billing and case-handling protocols by which all foreign outside counsel law firms must abide.  Guidelines are an expectation of how the firms will handle legal matters, and requires them to adhere to widely accepted ethical billing practices.  Guidelines should also specifically require electronic billing of invoices and indicate that bills will be audited pre-payment and/or post-payment.  Foremost for FCPA purposes, guidelines send the message to company employees and foreign law firms that legal bills are monitored by legally trained individuals capable of detecting financial irregularities.[i]

3)      Electronic Billing – Outside counsel, whether domestic or international, must be required to submit legal bills electronically.  Electronic legal billing software is obtainable as a service without the need for software development, and can accommodate international legal billing submissions.   Electronic legal billing provides for greater adherence to FCPA record-keeping requirements, and allows for greater auditing and metrics analysis.

4)      Auditing – Legal professionals familiar with the legal systems and cultural nuances of foreign jurisdictions should be utilized to review legal bills to determine reasonableness, appropriateness, and legitimacy thereof.  Among other things, auditors can determine whether excessive time was billed, whether those who billed for work actually performed the work, or whether the work billed was actually performed.  Again, a great deal of web-based software and services exist as ready-made platforms for legal bill auditing.  Auditors can be located anywhere in the world.

5)      Metrics Analysis – Finally, companies should employ legal professionals to analyze metrics and analytics derived from the electronic billing data.  While legal bill auditing can make determinations about whether each legal task was reasonable or legitimate, corrupt payments can also be detected on a meta-scale.  Compilations of large sets of data make possible quantification of firms’ costs-per case, effective rates, and firm-by-firm or regional comparisons.  Irregularities suggesting bribes may be detected by looking at overall statistics that otherwise would remain invisible.

For some companies, all of the above tasks may be handled by one individual.  For larger companies with substantial international legal operations, an in-house team may be required.  And still there are other options; many insurers and third-party claim administrators already have similar domestic systems in place.  The technology required is widely available, easily accessible and customizable to every company’s needs.

Conclusion

Steep anti-bribery pitfalls call for extraordinary preventative measures.  Without foreign outside counsel management and auditing programs, companies may pay later in FCPA penalties and excessive legal bills.  The allegations against Wal-Mart likely signal that a shift to using law firms in more complicated and covert bribery schemes is already underway.  Companies must have a check against individuals seeking to stay a step ahead of compliance programs.  While companies do not have the financial capabilities to proactively confront every conceivable FCPA risk, the scale of a foreign legal expense management program need only be relative to the scale of the engagement of international outside counsel.  The relatively small expenditures required to put these programs in place can reduce some of the largest liabilities faced by companies.  In a time of rising foreign legal expenditures and corruption threats, a little reassurance can go a long way.

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The views expressed in the above post are my own and do not reflect those of any past or present employer or client. I may be contacted at zdcregar@gmail.com.

Friday Roundup

Strange things tend to happen on Halloween, does your foreign local counsel present FCPA risk, insights from the boardroom, checking in on the Wynn-Okada battle royale, tobacco companies in the Middle East, a hat tip, and unmasked.  It’s all here in the Friday roundup.

Halloween Hearing Date

Strange things tend to happen on Halloween.  Thus, it is fitting that U.S. District Court Judge Keith Ellison (S.D. Tex.)  has set October 31st as the hearing date for the motion to dismiss in the SECs FCPA enforcement action against Mark Jackson and James Ruehlen.  See here for a prior post linking to the briefs and arguments.  How strange is this?  It is believed that the last time the SEC stood before a federal court judge to defend its FCPA enforcement theories was in 2002.  As noted in this previous post, the SEC lost that case.

Foreign Counsel Risk

A company engages foreign local counsel to help it accomplish a business objective.  The company pays thousands of dollars in legal bills  to the counsel without probably giving much thought to Foreign Corrupt Practices Act risk. 

In this recent article in the Duquesne Business Law Journal, Zachary Cregar (Liberty Mutual Insurance Group, Senior Litigation Auditor) sets forth the need to include foreign legal counsel due diligence and audits within an FCPA compliance program. 

Cregar concludes the article as follows.  “Foreign outside counsel supervision and legal bill auditing is not only a successful method of detecting corrupt payments, but it pays dividends beyond the realm of FCPA compliance. Cost savings from discovered billing irregularities will likely justify the cost of the program itself. While companies’ bottom lines are impacted by over-billing or fraudulent legal invoices, the financial stakes grow ever higher within the purview of the FCPA. Corporate anti-corruption and due diligence policies may be helpful in reducing hefty FCPA violation penalties after the fact. However, only vigorous, real-time auditing and detection of corrupt payments at the onset will avoid foreign corruption from even occurring.”

Current instances of FCPA scrutiny which involve, at least in part, questions regarding foreign legal counsel include Wal-Mart’s conduct in Mexico and Las Vegas Sands conduct in Macau.

Insights From the Boardroom

PwC’s Annual Corporate Director Survey, “Insights from the Boardroom 2012,” is available for download here.  It contains a few FCPA / bribery / corruption related statistics.

Which of the following has your company done in response to the 2011 SEC whistleblower rules?   43% of respondents indicated that their companies have expanded the role of internal audit for bribery and corruption compliance and 11% of respondents indicated that their companies scheduled more board discussions regarding bribery and corruption.

I argue in “Revisiting a Foreign Corrupt Practices Act Compliance Defense” here that, among other reasons, the FCPA should be amended to include a compliance defense because such a defense will better incentivize corporate compliance and thus reduce improper conduct.  I state that organizations with existing FCPA compliance policies and procedures will be incentivized to make existing programs better and that organizations currently without stand-alone FCPA policies and procedures (and statistics indicate there are many) will be incentivized to spend finite resources to implement compliance policies and procedures.

Imagine the FCPA is amended in 2012 to include a compliance defense. What would the numbers in PwC’s 2013 survey look like if respondents asked “which of the following has your company done in response to the FCPA compliance defense amendment.”  I can only speculate as to the exact numbers, but I am confident in saying that more than 43% of respondents would indicate that their companies expanded the role of internal audit for bribery and corruption compliance and that more than 11% of respondents would indicate that their companies scheduled more board discussions regarding bribery and corruption.

Another question in the survey was the following.  Indicate if you would like your board to devote more time in the upcoming year to considering the following matters?  As to bribery and corruption concerns, 2% said yes, much more time and focus than in the past; 20% said yes, but not a great increase from the past; 75% said no, a change is unnecessary; and 3% said no, decrease our time and focus— we spend too much time on this.

The PwC survery occurred this past summer and was based on responses of 860 public company directors (70% of whom serve on the board of companies with more than $1 billion in annual revenue).

Wynn-Okada

As noted in this previous summary post, it is one of the strangest instances of FCPA scrutiny one can imagine.  A corporate board member accuses the company of conduct that could implicate the FCPA, which then causes the SEC to open an inquiry, which then results in the company accusing the board member of separate and distinct conduct that could implicate the FCPA.

Its the Wynn-Okada battle royale.

Earlier this week Kazuo Okada (President of Aruze USA, Inc. – Aruze is the largest stockholder of Wynn Resorts with current ownership of approximately 20% of the outstanding shares) released this letter to Wynn’s shareholders concerning various corporate governance changes.

The letter states, under the heading “Suspicious $135 million donation to the University of Macau Development Foundation” as follows.

“In April 2011, the Board met, discussed, and approved a pledge by Wynn Macau, Limited (“Wynn Macau”), a subsidiary of the Company, to donate HK$1 billion (roughly $135 million) to the University of Macau Development Foundation, at a time when Wynn Macau was seeking local government approval to develop a third casino.  This donation is suspicious for a number of reasons, including its enormous size, the fact that the 10-year term of the pledge matches precisely the length of the casino license Wynn Resorts was seeking, and the fact that the lead trustee of the University of Macau Development Foundation also has a position in the Macau government which enables him to influence the issuance of gaming licenses. Mr. Okada questioned and objected to the donation and was ultimately the sole director to vote against it.  Mr. Okada has noted that “I am at a complete loss as to the business justification for the donation, other than that it was an attempt to curry favor with those that have ultimate authority for issuing gaming licenses.”  Following the April 2011 board meeting, pursuant to his rights as a director of the Company and in furtherance of his fiduciary duties to stockholders of the Company, Mr. Okada, sought to further investigate the Wynn Macau donation and requested additional information from Wynn Resorts concerning the donation and related matters.  When the Company refused to provide the information, Mr. Okada took legal action and was vindicated by a court order requiring Wynn Resorts to comply with Mr. Okada’s reasonable requests.  As Mr. Okada feared, the questionable Wynn Macau donation has already spawned at least four stockholder lawsuits against the Company and investigations by both the United States Securities and Exchange Commission (for possible violations of law including the Foreign Corrupt Practices Act) and the Nevada Gaming Board.  Not only is this enormous financial commitment a drain on the Company’s coffers, but now Wynn Resorts stockholders will be saddled with the added costs associated with responding to the regulatory investigations and lawsuits.  If the results of these investigations and lawsuits include the development of facts regarding legally questionable practices by the Company, stockholders will be at still further risk.”

In response, Wynn Resorts issued this statement which states as follows.  ““Aruze has not been a stockholder of Wynn Resorts, Limited since February 18, 2012 when its shares were redeemed by the Wynn Board after a lengthy, third-party investigation uncovered prima facie evidence of improper conduct under the Foreign Corrupt Practices Act by Mr. Okada, Universal Entertainment and Aruze in their dealings with Philippine officials.  This most recent filing is a regrettable attempt to divert attention from the issues facing Mr. Okada and Aruze. Given the fact that Aruze was ejected seven months ago as a Wynn shareholder based on conduct unacceptable for a gaming licensee, it has absolutely no rights as a shareholder to nominate directors and its invalid nominations have been rejected on this basis.”

Tobacco Companies in the Middle East

An interesting article (here) from the Saudi Gazette.

The article states as follows.  “In most countries, public smoking is banned. Taxes on the sale of cigarettes and other tobacco related products are high, and labeling on cigarette packs is often very graphic and clear: Smoking kills!  From the United States to Australia, governments are clamping down on tobacco companies with regulations to throttle consumption and it seems to be working. And so, tobacco companies have to seek other markets. The Middle East is fertile ground as anti-smoking legislation is weak at best, and a fast growing birthrate means a higher number of potential smokers. As a result, big tobacco companies quickly established regional headquarters for the GCC market in the UAE and set to work.”  The article then describes how a source tells of companies reaching out to “area [government] officials to lessen any impact on tobacco sales.”

As noted in this prior post,  in August 2010, U.S. tobacco companies Alliance One International and Universal Corporation resolved FCPA enforcement actions.

Hat Tip

A hat tip to Christopher Matthews, Samuel Rubenfeld and others associated with the Wall Street Journal’s Corruption Currents page on their two-year anniversary.  Corruption Currents (here) is a daily read for me and should be for anyone interested in FCPA and related topics. 

Who is that Masked Man?

A small town Midwesterner who saw the world and became interested in a law is who.  Thanks to Tom Fox (FCPA Compliance and Ethics Blog) for the opportunity to tell my story.  See here for the Q&A.

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A good weekend to all.

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