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Friday Roundup

Roundup2

Is this appropriate, sentenced, scrutiny alerts and updates, quotable, a future foreign official teaser?, Brazil update, and for the reading stack.

It’s all here in the Friday roundup.

Is This Appropriate?

If this truly is an event, “Drinks With an FBI Agent – Inside Stories From the Foreign Corrupt Practices Act,” is it appropriate?

Sentenced

Chinea and DeMeneses Sentences

The DOJ announced

“Benito Chinea and Joseph DeMeneses, the former chief executive officer and former managing director of a broker-dealer Direct Access Partner “were sentenced to prison … for their roles in a scheme to pay bribes to a senior official in Venezuela’s state economic development bank, Banco de Desarrollo Económico y Social de Venezuela (Bandes), in return for trading business that generated more than $60 million in commissions.”

Chinea and DeMeneses were each sentenced to four years in prison.  They were also ordered to pay $3,636,432 and $2,670,612 in forfeiture, respectively, which amounts represent their earnings from the bribery scheme.  On Dec. 17, 2014, both defendants pleaded guilty to one count of conspiracy to violate the Foreign Corrupt Practices Act and the Travel Act.”

In the release, Assistant Attorney General Leslie Caldwell stated:

“These Wall Street executives orchestrated a massive bribery scheme with a corrupt official in Venezuela to illegally secure tens of millions of dollars in business for their firm. The convictions and prison sentences of the CEO and Managing Director of a sophisticated Wall Street broker-dealer demonstrate that the Department of Justice will hold individuals accountable for violations of the FCPA and will pursue executives no matter where they are on the corporate ladder.”

U.S. Attorney Preet Bharara of the Southern District of New York stated:

“Benito Chinea and Joseph DeMeneses paid bribes to an officer of a state-run development bank in exchange for lucrative business she steered to their firm. Chinea and DeMeneses profited for a time from the corrupt arrangement, but that profit has turned into prison and now they must forfeit their millions of dollars in ill-gotten gains as well as their liberty.”

Elgawhary Sentence

This previous post highlighted the DOJ enforcement action against Asem Elgawhary, a former principal vice president of Bechtel Corporation and general manager of a joint venture operated by Bechtel and an Egyptian utility company, for allegedly accepting $5.2 million in kickbacks to manipulate the competitive bidding process for state-run power contracts in Egypt.

The DOJ recently announced that Elgawhary was sentenced to 42 months in federal prison.

When the Alstom enforcement action was announced in December 2014 (see here and here for prior posts), Elgawhary was described as an Egyptian “foreign official.”

So what was Elgawhary?

A former principal vice president of Bechtel Corporation and general manager of a joint venture operated by Bechtel and an Egyptian utility company or a Egyptian “foreign official?”

Can the DOJ have it both ways?

Scrutiny Alerts and Updates

Anheuser-Busch InBev

Anheuser-Busch InBev recently disclosed in its annual report:

“We have been informed by the U.S. Securities and Exchange Commission and the U.S. Department of Justice that they are conducting investigations into our affiliates in India, including a non-consolidated Indian joint venture that we previously owned, ABInBev India Private Limited, and whether certain relationships of agents and employees were compliant with the FCPA. We are investigating the conduct in question and are cooperating with the U.S. Securities and Exchange Commission and the U.S. Department of Justice.”

Bilfinger

As highlighted in this previous post, in December 2013 German-based Bilfinger paid approximately $32 million to resolve an FCPA enforcement action concerning alleged conduct in Nigeria.  The enforcement action was resolved via a three-year deferred prosecution agreement.

As noted in the previous post, Bilfinger’s CEO described the conduct at issue as “events from the distant past.”

From the not-so distant past, Bilfinger recently announced:

“Bilfinger received internal information last year indicating that there may have been violations of the Group’s compliance regulations in connection with orders for the supply of monitor walls for security control centres in several large municipalities in Brazil. The company immediately launched a comprehensive investigation. The allegation relates to suspected bribery payments from employees of a Bilfinger company in Brazil to public officials and employees of state companies.”

See here for a follow-up announcement from the company.

As a foreign company, Bilfinger is only subject to the FCPA’s anti-bribery violations to the extent the payment scheme involves a U.S. nexus (as was alleged in the prior Bilfinger FCPA enforcement action).

IBM

Canadian media reports:

“Seven people, including Revenue Quebec employees and officials with computer companies IBM and EBR, were [recently] arrested … in connection with an alleged corruption scheme aimed at obtaining a government IT contract worth $24 million.Two Revenue Quebec employees, Hamid Iatmanene and Jamal El Khaiat, stand accused of providing privileged information about an upcoming government contract to a consortium made up of IBM and Quebec company Informatique EBR Inc.”

As highlighted here, in 2000 IBM resolved an FCPA enforcement action.

As highlighted here, in 2011 IBM resolved another FCPA enforcement action.  This enforcement action was filed in federal court (back in the day when the SEC actually filed FCPA enforcement actions in federal court vs. its preferred in-house method now) and Judge Richard Leon was concerned about the settlement process.  As highlighted here, Judge Leon approved the settlement, but his July 2013 final order states, among other things:

“[For a two year period IBM is required to submit annual reports] to the Commission and this Court describing its efforts to comply with the Foreign Corrupt Practices Act (“FCPA”), and to report to the Commission and this Court immediately upon learning it is reasonably likely that IBM has violated the FCPA in connection with either improper payments to foreign officials to obtain or retain business or any fraudulent books and records entries …””

According to media reports, Judge Leon stated: “if there’s another violation over the next two years, it won’t be a happy day.”

Quotable

In this Law360 article, Richard Grime (former Assistant Director of Enforcement at the SEC and current partner at Gibson Dunn) states regarding recent alleged FCPA violations.

“It’s not that you couldn’t intellectually [conceive of] the violation. It’s that the government is sort of probing every area where there is an interaction with government officials and then working backwards from there to see if there is a violation, as opposed to starting out with the statute … and what it prohibits.”

Given that most SEC FCPA enforcement actions are the result of voluntary disclosures, it is a curious statement.  Perhaps its companies, at the urging of FCPA Inc., that are probing every area where there is an interaction with government officials and then working backwards?

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As reported here:

“Greek authorities [recently] indicted 64 people to stand trial over years-old allegations of bribery involving Siemens AG, the German engineering giant … A probe of corporate dealings from 1992 to 2006 allegedly found that Greece had lost about 70 million euros in the sale of equipment from Siemens to Greek telephone operator Hellenic Telecommunications also known as OTE, which was still owned by the state at the beginning of that period … A panel of judges decided that those indicted, including both Greek and German nationals, should stand trial for bribery or money laundering. The list of suspects includes former Siemens and OTE officials.”

As noted here, Joe Kaeser (President and CEO of Siemens) reportedly stated:

“I really believe the country (Greece) can move to the future, rather than trying to find the solutions in the past.” He added that his company had a “dark history,” mentioning compliance issues. But he said it was not a “black and white story” when asked whether the indictments had been politically motivated by the current friction between the German and Greek governments. “Looking at the past doesn’t help the future because the past is the past.”

If the U.S. brings FCPA enforcement actions based on conduct that in some instances is 10 – 15 years old, it is not surprising that Greece is doing the same.  Yet is this right?

As the U.S. Supreme Court recently stated in Gabelli:

“Statute of limitations are intended to ‘promote justice by preventing surprises through the revival of claims that have been allowed to slumber until evidence has been lost, memories have faded, and witnesses have disappeared.  They provide ‘security and stability to human affairs.  [They] are ‘vital to the welfare of society [and] ‘even wrongdoers are entitled to assume that their sins may be forgotten.’ […] It ‘would be utterly repugnant to the genius of our laws if actions for penalties could ‘be brought at any distance of time.’”

****

Since day one, I called Morgan-Stanley’s so-called declination politically motivated.  (See here and here).

I am glad to see that FCPA commentator Michael Volkov recently joined the club.  Writing on the Garth Peterson / Morgan Stanley so-called declination, Volkov states:  “my intelligence on the case indicated that … [the] DOJ apparently wanted to demonstrate for political reasons that it could recognize a company’s compliance program to decline a case against a company.

A Future Foreign Official Teaser?

As recently reported by the Wall Street,

“China’s leadership is preparing to radically consolidate the country’s bloated state-owned sector, telling thousands of enterprises they need to rely less on state life support and get ready to list on public markets. […] Communist Party leaders plan to release broad guidelines in the next months for restructuring the country’s more than 100,000 state-owned enterprises, according to government officials and advisers with knowledge of the deliberations. […]  Strategically important industries such as energy, resources and telecommunications are marked for consolidation, the officials and advisers say. The merged entities would then be reorganized as asset-investment firms, with a mandate to make sure they run more like commercial operations than arms of the government. Upper management will be under orders to maximize returns and prepare many of the companies for eventual listing on stock markets, these people say.”

In U.S. v. Esquenazi, the 11th Circuit concluded that  an “instrumentality” under the FCPA is an “entity controlled by the government of a foreign country that performs a function the controlling government treats as its own.” The Court recognized that what “constitutes control and what constitutes a function the government treats as its own are fact-bound questions” and, without seeking to list all “factors that might prove relevant,” the court did list “some factors that may be relevant” in deciding issues of control and function.

As to control, the 11th Circuit listed the following factors:

“[whether] the foreign government’s formal designation of that entity; whether the government has a majority interest in the entity; the government’s ability to hire and fire the entity’s principals; the extent to which the entity’s profits, if any, go directly into the governmental fisc, and, by the same token, the extent to which the government funds the entity if it fails to break even; and the length of time these indicia have existed.”

As to function, the 11th Circuit listed the following factors:

“whether the entity has a monopoly over the function it exists to carry out; whether the government subsidizes the costs associated with the entity providing services; whether the entity provides services to the public at large in the foreign country; and whether the public and the government of that foreign country generally perceive the entity to be performing a governmental function.”

Have fun applying this test should China’s proposed changes go forward.

Brazil Update

My own cents regarding Brazil’s recent implementation of regulations regarding certain features of its Clean Companies Act (a law which provides for only civil and administrative liability of corporate entities for alleged acts of bribery) is that the regulations are a yawner for any company that is already acting consistent with FCPA best practices.

Yet, if you feel the urge to read up on Brazil’s recent regulations, comprehensive coverage can be found here from Debevoise & Plimpton and here from FCPAmericas.

For the Reading Stack

A thoughtful article here from Alexandra Wrage (President of Trace) regarding the “cult of the imperfect.”  It states:

“Sir Robert Alexander Watson-Watt is credited with saving thousands of lives in Britain during the worst days of World War II after developing Chain Home, a low-frequency radar system able to detect aircraft from about 90 miles away. He openly encouraged what he called the “cult of the imperfect” among his team. He knew that Britain didn’t need the best possible radar system in five years; the country needed a viable radar system urgently. Immediately. Watson-Watt, who was knighted shortly after the Battle of Britain, is said to have instructed his team to strive for the third-best option, because “the second-best comes too late . . . the best never comes.

[…]

Perfect due diligence risk assessments never come. And even second-best may come too late. Just get started. You’ll see more protections and benefits from good (for now) than perfect (some day, maybe . . .).”

Sound advice that I agree with and completely consistent with Congressional intent in enacting the FCPA’s internal controls provisions and even prior enforcement agency guidance.

Problem is, the DOJ and SEC wear rose-colored glasses, including as to conduct years ago, and if a company is acting consistent with FCPA best practices 99% of the time, that means 1% of the time they are not.

*****

A good weekend to all. On Wisconsin!

Senate Remains Interested In FCPA Issues

Senate

Granted it has been approximately four years since the Senate held its Foreign Corrupt Practices hearing in November 2010.  (The House followed-up with an FCPA hearing in June 2011).

FCPA reform legislation was never introduced (for potential reasons why – see this article), yet the Senate very much remains interested in FCPA issues.

The Senate Judiciary Committee recently released this document which contains Attorney General Nominee Loretta Lynch’s responses to various Senator questions.

The remainder of this post excerpts all FCPA related questions and Lynch’s answers.

As highlighted below, the Q&A’s cover the following topics:  DOJ guidance, DOJ declinations, “FCPA abuses” (as stated in a series of questions), Andrew Weissman’s FCPA reform positions prior to recently re-joining the DOJ (see here for the prior post), international cooperation, FCPA reform (including a compliance defense), and the time it takes to resolve FCPA investigations.

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FROM SENATOR GRASSLEY (R-IA)

Q: In 2012, the Department of Justice and Securities Exchange Commission (SEC) issued joint guidance detailing Foreign Corrupt Practices Act (FCPA) enforcement information and the agencies’ enforcement priorities. While the guidance clarified portions of the law and some of the agencies’ enforcement theories, many companies and individuals seeking to comply with the FCPA have asked for further, and continued, clarification. This request was expressed to Attorney General Eric Holder and Assistant Attorney General Leslie Caldwell during previous Committee hearings.

a. If confirmed, will you commit to working with companies and individuals to further improve the Guidance?

RESPONSE: If I am confirmed as Attorney General, I look forward to continuing the outreach efforts that the Department has been making with the private sector to understand their needs and concerns and, if necessary, update and/or improve the Guide.

b. Will you commit to updating the Guidance, when necessary, to reflect changes in DOJ enforcement practices?

RESPONSE: If I am confirmed as Attorney General, I look forward to continuing efforts that the Department has been making to provide meaningful guidance in the FCPA context where necessary and appropriate.

In the area of FCPA enforcement, there is little guiding case law available for compliance practitioners to rely on. However, the FCPA Guidance that was issued in 2012 took an important first step in helping practitioners understand how the enforcement agencies’ interpret the statute. The Guidance includes six anonymized examples of declinations— instances where the DOJ and SEC declined to bring FCPA-related enforcement actions in recognition of the companies’ timely voluntary disclosures, meaningful cooperation, and sophisticated compliance policies and controls. The continued publication of FCPA declinations would foster greater FCPA compliance by providing practitioners with a better understanding of how the FCPA is interpreted. If confirmed, would you support increasing DOJ transparency regarding declination decisions?

RESPONSE: As you know, the United States Attorney’s Manual provides a mechanism to allow for notification to an individual (or entity), where appropriate, that an investigation as to that individual (or entity) is being closed. If I am confirmed as Attorney General, I look forward to continuing the Department’s practice of providing meaningful guidance in the FCPA context (such as procedures to respond to opinion requests) and of actively pursuing and implementing means by which declinations and other information about the decision to prosecute, or not, can be responsibly and appropriately shared.

FROM SENATOR CRUZ (R-TX)

DOJ Foreign Corrupt Practices Act Abuses

In much the same way as civil forfeiture, critics of the FCPA note that the Department of Justice collects and retains for use (without further congressional approval or disbursal from the Treasury) fines paid in settlement of federal FCPA investigations. This ability to retain FCPA fines incentivizes not only a vigorous application of the FCPA, but also “creative” legal theories (which can lead to investigations of companies for potentially innocuous behavior). Critics of the FCPA, and the Department’s pursuit of FCPA investigations, point out that the combination of investigation and potential litigation expenses frequently drive what may be innocent companies to settle, which both cements the revenue source for the Department and prevents federal judges from having opportunities to interpret provisions of the FCPA.

Do you agree or disagree with the claim that the ability of the Department of Justice to keep and use FCPA settlement fines incentivizes application of the FCPA? If you disagree with this claim, please provide a detailed explanation as to why.

RESPONSE: I disagree with this claim, which I believe is built on a faulty premise regarding the process by which criminal fines and other financial penalties are paid and subsequently put to use. Fines for FCPA violations are not “kept” or “used” by the Department, and no such use incentivizes application of the FCPA. Rather, as with all cases, the Department considers the strength of the evidence and other long-standing policy considerations (see, e.g., United States Attorney’s Manual (USAM) 9-28.300) in determining whether to bring an FCPA prosecution.

A company convicted of an FCPA violation pays any accompanying fine not to the Department but to the relevant U.S. district court clerk’s office. Those funds are then directed to the Crime Victim Fund, which is a U.S. Treasury fund created pursuant to Title 42, United States Code, Section 10601. Funds paid into the U.S. Treasury are not available for use by the Department except through the appropriations process or by statute.

A company that settles an FCPA investigation through a non-prosecution or deferred prosecution agreement pays any accompanying financial penalty not to the Department but to the U.S. Treasury. Pursuant to Congressional authorization and strict Departmental oversight, a small percentage of these funds may be made available to the Department. More specifically, in 1993 Congress authorized the creation of a 3% working capital fund (“3% Fund”) for the Department. See Public Law 113-234, 28 C.F.R. Section 527. Three percent of penalties associated with certain financial recoveries, including through non-prosecution and deferred prosecution agreements, are paid into the 3% working capital fund. After rigorous review by the Collection Resources Allocation Board, overseen by the Justice Management Division, the Department may award funds from the 3% Fund to support certain litigation, data administration, and personnel costs.

Has your office actually tried any FCPA cases to a verdict in federal court? If the answer is yes, please provide details about these cases.

RESPONSE: The Eastern District of New York has participated in a number of significant FCPA investigations with the Fraud Section of the Criminal Division of the Department, and it continues to do so. To date, these investigations have resulted in two corporate resolutions: (1) In re Ralph Lauren, NPA, $882,000 penalty, press release at: http://www.justice.gov/opa/pr/ralph-lauren-corporation-resolves-foreign-corrupt-practices-actinvestigation-and-agrees-pay; and (2) In re Comverse Technology, Inc., NPA, $1.2 million penalty, press release: http://www.justice.gov/opa/pr/comverse-technology-inc-agrees-pay-12- million-penalty-resolve-violations-foreign-corrupt); and one guilty plea by Garth Peterson of Morgan Stanley (and a declination against Morgan Stanley) (press release: http://www.justice.gov/opa/pr/former-morgan-stanley-managing-director-pleads-guilty-roleevading-internal-controls-required). While the Department has conducted FCPA trials in many districts, the United States Attorney’s Office for the Eastern District of New York has not had an FCPA trial to date.

As you know, the Criminal Division’s Fraud Section is charged with investigating and enforcing the criminal provisions of the FCPA. Recently, Andrew Weissmann was selected to be the Chief of the Fraud Section. Mr. Weissmann is a former prosecutor and FBI general counsel. In private practice, however, Mr. Weissmann has been an outspoken critic of DOJ’s FCPA program. Specifically, in a report36 Mr. Weissmann drafted for the U.S. Chamber of Commerce’s Institute for Legal Reform, he has recommended that: (1) a compliance defense to the FCPA should be added; (2) a company’s liability should be limited for the prior actions of a company it has acquired; (3) a “willfulness” element should be added for corporate criminal liability; (4) a company’s liability should be limited for the actions of a subsidiary; and (5) the definition of “foreign official” under the FCPA should be changed.

Do you agree with any, some, or all of Weissmann’s proposals for reforming the FCPA?

RESPONSE: It is my understanding that Mr. Weissmann made these comments while in private practice and in connection with his representation of the U.S. Chamber Institute for Legal Reform (“Chamber”). It is also my understanding that, in the intervening time period, the Department has met with the Chamber, as well as other stakeholders, to engage in a healthy and productive dialogue regarding the Department’s interpretation and application of the FCPA. If confirmed as Attorney General, I would continue to foster dialogue with the Chamber and other stakeholders regarding our FCPA program.

Which of these changes (if any) do you think could be done administratively, as opposed to legislatively?

RESPONSE: I do not support the proposed changes. Several of them would be a significant departure from general principles of corporate criminal law, effectively creating unique exceptions for FCPA cases that are unwarranted, are contrary to Congress’s intent in enacting the FCPA, and would impose often insurmountable obstacles to effective enforcement of the FCPA.

In 2004, then-Deputy Attorney General (and current director of the Federal Bureau of Investigation) James Comey stated that “[the Department of Justice wants] real time enforcement, so that the public and potential white collar criminals see that misdeeds are swiftly punished.” Despite this statement, the 2014 OECD Foreign Bribery Report noted that “the average time taken (in years) to conclude foreign bribery cases has steadily increased over time, [from an average of 1.3 years in 2004] peaking at an average of 7.3 years taken to conclude the 42 cases in 2013.” Lengthy federal investigations not only place a tremendous financial burden on the targeted corporations and their shareholders, but also on taxpayers who shoulder the agency’s expenses for conducting the investigation.

Do you agree or disagree with Director Comey’s statement regarding the value of real-time law enforcement? If you disagree with this statement, please provide a detailed explanation as to why.

RESPONSE: I agree that law enforcement must move swiftly and responsibly in investigating both white collar and other criminal activity. I also agree that, for deterrence purposes, it is important to move quickly and bring charges against those individuals and companies that have engaged in criminal behavior. While the Department has been working diligently to find meaningful and reasonable ways to reduce the time white collar FCPA investigations take, the question’s reliance on the OECD Foreign Bribery Report is misplaced. As I understand it, the referenced statistic is based on an aggregate of all the OECD Working Group members’ cases, rather than isolating the time taken by the United States in its cases. Also, this statistic does not measure the length of the criminal investigation. Rather, it measures the time between the last criminal act and the sanction, increasing substantially the time measured, since the Department (or foreign law enforcement) might not learn about a potential violation until years after the last criminal act has occurred.

Given that the FCPA Unit within the Department’s Fraud Section has expanded its personnel from 2004 to today, and given that the Department receives even more international cooperation today than it did in 2004, do you agree or disagree that the Department should be witnessing reduced investigative timelines for FCPA investigations rather than increased timelines? If you disagree with this statement, please provide a detailed explanation as to why.

RESPONSE: Additional resources and cooperation are greatly appreciated and can often be key factors in expediting criminal investigations. However, they are only two of many factors that can influence the time it takes to conduct a successful investigation of any kind. Compared to other white collar investigations, the challenges associated with FCPA investigations can be much greater. Because of the nature of the offense, most of the evidence in these cases is typically located overseas. While international cooperation efforts have expanded significantly over the past ten years, the process for obtaining evidence from overseas is still time-consuming.

Before you are confirmed to serve as the next Attorney General, will you or will you not commit to dramatically reducing the timeline of FCPA-related Fraud Unit investigations, in order to reduce the financial burden on potentially innocent corporations and reduce investigation-related taxpayer expenses? If you will not commit to reducing these investigative timelines, please provide a detailed explanation as to why.

RESPONSE: Under my leadership, the Eastern District of New York has been committed to increasing the speed of its white collar investigations, including its FCPA investigations. As a result of the particular challenges of corporate and overseas investigations, however, the investigations can take a significant amount of time. While improvements in this area can be made, irresponsibly or artificially expediting an investigation solely for the sake of speed can harm the investigation and the pursuit of justice, as well as create greater harms to the targets, subjects, and witnesses in our investigations. If I am confirmed as Attorney General, you can be assured that the Department will continue to review each case on its merits and will move as expeditiously and responsibly as possible.

Often, many of the countries with corrupt officials are the same countries that harbor terrorists, that seek to undermine U.S. foreign policy, and that have rampant bid rigging and illegal cartel conduct. On the opposite side of the equation, there are an increasing number of countries that have passed new anti-bribery statutes in the hope of curbing their own internal corruption problems and spurring legitimate economic growth.

How will you marshal the criminal justice resources of the Department of Justice to enforce the FCPA in a way that helps in the fight against terrorism, cartel conduct, and international money laundering? Please provide a detailed explanation, based on your current experience as United States Attorney for the Eastern District of New York, of how you intend to tackle the problem.

RESPONSE: As the United States Attorney for the Eastern District of New York, I am well aware of the link between corruption, corrupt regimes, and transnational crime, including economic crime, human trafficking, narcotics trafficking, money laundering, and even terrorism. In addition to prosecuting foreign corruption, narcotics trafficking, money laundering, and terrorism cases, the Department works closely with its counterparts throughout the U.S. government to devise and implement robust anticorruption strategies. For example, my Office has worked closely with the intelligence community on terrorism and corruption-related matters. The Department further participates, along with colleagues in other agencies in the U.S. government, in developing anticorruption policies through various international organizations and anticorruption conventions, including the Organization for Economic Cooperation and Development’s Working Group on Bribery, the G-7, the G-20, and the U.N. Convention Against Corruption. The Department also consults with civil society organizations involved in the battle against corruption. If confirmed as the Attorney General, I would continue to ensure that fighting corruption overseas, as well as domestically, remains a top priority for the Department. I would ensure that resources are appropriately directed to enforcing U.S. laws targeting foreign corruption, recovery of assets stolen by kleptocrats, and corrupt regimes.

Given that more and more countries are enacting and enforcing anti-bribery statutes, would you agree or disagree that the FCPA ought to be amended to restrict FCPA jurisdiction to countries that do not have a prima facie anticorruption infrastructure? If you disagree with this statement, please provide a detailed explanation as to why.

RESPONSE: Such an exception would be unique under federal law. I disagree with this approach, as I believe it would do harm to the Department’s anticorruption efforts. The Department works closely with countries that are developing their own anticorruption infrastructures, and we are well aware that it can take years of persistent effort to create an effective and holistic response to corruption of domestic and foreign officials.

As a recent OECD Report on Foreign Bribery noted, enforcement of existing anticorruption statutes, particularly those targeting foreign bribery, is improving but has a long way to go to see consistent and effective enforcement even among top economies in the world.

The Department of Justice generally emphasizes the benefit of voluntary self-disclosure to, and voluntary cooperation with, FCPA investigations. Corporations are increasingly questioning the benefit, however, of rushing toward self-disclosure without demonstration of some sort of legal or cost benefit for doing so. To address this, some practitioners have suggested that the FCPA should contain a “safe harbor” from criminal prosecution for corporations that (1) have robust compliance programs, (2) self-disclose potential FCPA violations, and (3) cooperate fully with the Department’s investigation, akin to what the Antitrust Division has for cartel enforcement. (The Department would, of course, be able to continue to obtain non-criminal penalties for violations.)

Do you agree or disagree with the statement that there should be an FCPA “safe harbor provision” to help corporations that are trying to do the right thing? If you disagree with this statement, please provide a detailed explanation as to why.

RESPONSE: I do not believe a “safe harbor provision” is necessary or desirable. Both the U.S. Sentencing Guidelines and the Department of Justice already provide significant benefits for companies that have robust compliance programs, self-disclose potential FCPA violations, and cooperate fully with the Department’s investigation. Indeed, in a recent FCPA matter, the Criminal Division and the Eastern District of New York declined to prosecute Morgan Stanley based on many of those factors, among others, despite the fact that one of its Managing Directors bribed a foreign official to obtain business for and on behalf of Morgan Stanley.

If you agree with the concept of an FCPA safe harbor provision, please describe what the structure or contours of such a safe harbor provision should be, and how you would implement that provision. Please provide a detailed explanation, based on your current experience as United States Attorney for the Eastern District of New York, of how you would write and implement such a provision.

RESPONSE: The factors outlined in your question are important considerations in all FCPA cases, but I do not believe that a “safe harbor provision” is necessary or desirable.

Members of the business community, practitioners, commentators, and even members of Congress have expressed frustration with the Department of Justice’s failure to publicize declined FCPA prosecutions, even where there is public knowledge that a particular corporation is under investigation. This practice may have several negative effects, including preventing corporations from having clarity about what type of conduct is considered acceptable. Given the Department’s financial incentive to ensure robust application of the FCPA, there is concern that this refusal to publish decline-to-prosecute information is intended to protect the FCPA fine-based revenue source for the Department.

Would you agree or disagree with the statement that FCPA decline-to-prosecute decisions should be made available to the public? If you disagree with this statement, please provide a detailed explanation as to why.

RESPONSE: I agree that the Department should continue to explore ways by which it can responsibly share information while protecting the many sensitive interests that federal, criminal investigations implicate. The Department has a longstanding general practice of refraining from discussing non-public information on matters it has declined to prosecute. This practice is designed to protect ongoing investigations, privacy rights and other interests of uncharged parties, and sensitive, internal law enforcement deliberations. This practice and these considerations apply across the enforcement of all federal criminal laws.

Nevertheless, I must emphasize that the Department does pursue means by which declinations and other information about the decision to prosecute can be responsibly shared with entities or individuals under investigation, the business community, practitioners, commentators, and members of Congress. The United States Attorney’s Manual (USAM) describes situations in which a United States Attorney can exercise discretion to provide notice that an investigation is being closed. See USAM § 9-11.155. Further, in the last two years, the Department has made great efforts to provide more information and transparency in the area of the FCPA, including the publication of A Resource Guide to the U.S. Foreign Corrupt Practices Act (the “Resource Guide”). The Resource Guide, which was written by the Department and the U.S. Securities and Exchange Commission (SEC), provides the public with extensive information about the Department’s FCPA enforcement approach and priorities. It contains a section on declinations and sets out criteria prosecutors consider in declining to bring a prosecution under the FCPA. In addition, the Department responds to opinion requests concerning its enforcement intent about actions that may be perceived as violating the anti-bribery provisions of the FCPA. See Title 15, United States Code, Sections 78dd-l(e) and 78dd-2(f). These opinion letters provide significant additional insight into the Department’s enforcement views, as well as transparency for companies, individuals, and practitioners as to what is acceptable or not.

Before you are confirmed to serve as the next Attorney General, will you or will you not commit to publishing information about the FCPA cases that the Department has decided not to pursue or prosecute? If you will not commit to publishing this information, please provide a detailed explanation as to why.

RESPONSE: I will commit to continuing the Department’s practice of actively pursuing and implementing means by which declinations and other information about the decision to prosecute, or not, can be responsibly and appropriately shared. As detailed in my answer to the preceding question, the United States Attorney’s Manual already provides a mechanism to provide notice that an investigation is being closed. I also commit to continuing the Department’s recent efforts to provide more information and transparency, as it did by publishing the Resource Guide.

Issues To Consider From The Avon Enforcement Action

Issues

This recent post dived deep into the Avon FCPA enforcement action.

This post continues the analysis by highlighting various issues to consider associated with the enforcement action.

The Gray Cloud of FCPA Scrutiny Lasted A Long Time And Was Very Expensive

Avon disclosed its FCPA scrutiny in China in October 2008.  In other words, it was 6 years and 2 months from the time of disclosure to the actual enforcement action.  While FCPA scrutiny typically lasts between 2-4 years, Avon’s FCPA scrutiny was extraordinarily long.  (For additional reading see this prior post “The Gray Cloud of FCPA Scrutiny Simply Lasts Too Long”).

Avon’s FCPA scrutiny was also very expensive.  For years, the whisper in the FCPA community was how expensive  – and dragged out – FCPA’s internal investigation and pre-enforcement professional fees and expenses were.  Not all companies disclose pre-enforcement action professional fees and expenses, but Avon did and those figures were approximately $500 million (see here).

Avon’s FCPA scrutiny thus supported the claim in my article “Foreign Corrupt Practices Act Ripples” that settlement amounts in an actual FCPA enforcement action are often only a relatively minor component of the overall financial consequences that can result from FCPA scrutiny or enforcement in this new era.  Indeed, the broader effects of Avon’s FCPA scrutiny (including pre-enforcement action professional fees and expenses and an impact on bond ratings) is discussed in the article.

Given the above-mentioned whispers, one of the most interesting portions of the DOJ’s DPA was the following.

“The Department also considered that the Company, taking into account its own business interests, expended considerable resources on a company wide review of and enhancements to its compliance program and internal controls.  While the Company’s efforts in this regard were taken without Department request or guidance, and at times caused unintended delays in the progress of the Department’s narrower investigations, the Department recognizes that the Company’s efforts resulted in important compliance and internal controls improvements.”

Root Cause

It has been highlighted numerous times on these pages (see here for instance).

The root cause of many FCPA enforcement actions are foreign trade barriers and distortions.  The narrative is rather simple.

  • Trade barriers and distortions create bureaucracy.
  • Bureaucracy creates points of contact with foreign officials.
  • Points of contact with foreign officials create discretion.
  • Discretion creates the opportunity for a foreign official to misuse their position by making bribe demands.

The following is not meant to excuse Avon’s conduct, only to put it in the proper perspective.

The root cause of Avon’s FCPA scrutiny was that China had significant trade barriers and distortions applicable to direct selling of products.  As highlighted in the resolution documents, “under China’s newly promulgated direct selling regulations, to conduct direct sales, a company was required to obtain a national direct selling license and approvals from each province and municipality in which it sought to conduct direct sales.”

As I have long argued, the way to reduce bribery is not just to bring more corporate enforcement actions.  It is to address the root causes of bribery by seeking a reduction in trade barriers and distortions.

Two Enforcement Actions In One

The Avon enforcement action was really two distinct enforcement actions in terms of conduct.

On one level, Avon’s indirect China subsidiary intentionally disguised certain payments of things of value (individually small, but in the aggregate large) from Avon during the general time period in which they were occurring.

Yet, the second prong of the enforcement action, more problematic from a corporate governance standpoint, is that once Avon learned of the improper conduct in 2005/2006, Avon failed to take steps to stop and remedy the situation.

Much like the developing story around Wal-Mart’s FCPA scrutiny, Avon appears to be more of a corporate governance sandwich with the FCPA as a mere condiment.  Based on the conduct alleged by the DOJ and SEC, Avon (the parent company) appeared to fail to take ownership of the issues at its indirect China subsidiary on a real-time basis.  (For additional details on this aspect of the enforcement action see this prior post).

If “only” the alleged improper payments by Avon China had taken place, it stands to reason that the settlement amount would have been much lower.

Surprisingly Limited

Based on Avon’s pre-enforcement action disclosures, many were expecting that the Avon FCPA enforcement would be broader than just China.  After all, Avon disclosed that it was conducting an internal review in a “number of countries selected to represent each of the Company’s international geographic segments” and according to its website the company does business in over 100 countries.

That the Avon enforcement action was limited to China highlights an issue that can be highlighted in most FCPA enforcement actions.  While it is easy in hindsight to fault a company for internal control failures as to the specific payments alleged, that the company conducted an internal review in many other countries and found nothing (at least nothing serious enough to be alleged in an FCPA enforcement action) does suggests that the company’s overall internal controls were reasonable and adequate.

Items Of Interest From The Layne Christensen Company Enforcement Action

Yesterday’s post dived deep into the Layne Christensen Company SEC FCPA enforcement action.

This post continues the analysis by highlighting various issues associated with the enforcement action.

4 for 4

In 2014, there have been four SEC corporate FCPA enforcement actions (Layne Christensen, Smith & Wesson, Alcoa, and HP).  All have been resolved via the SEC’s administrative process.

My recent article, “A Foreign Corrupt Practices Act Narrative,” (see pgs. 991-995) discusses this trend and how it is troubling as it places the SEC in the role of regulator, prosecutor, judge and jury all at the same time.  As Judge Rakoff recently observed, “from where does the constitutional warrant for such unchecked and unbalanced administrative power derive?”

Another noticeable feature of the Layne Christensen action was that the company resolved the SEC’s action without admitting or denying the SEC’s findings.  Smith & Wesson likewise resolved its FCPA enforcement action in this way.

$4

It is reasonable to assume that the SEC included findings in its order for a specific reason (and not just to practice its typing skills).

It is therefore noteworthy that the SEC’s order includes this finding:

“Layne Christensen made more than $10,000 in small payments to foreign officials through various customs and clearing agents that it used in Tanzania, Burkina Faso, Mali, Mauritania, and the DRC. These payments ranged from $4 to $1,700 and were characterized in invoices submitted by the agents as, among other things, “intervention,” “honoraires,” “commissions,” and “service fees.”

Stay tuned for (I predict) coming law firm client alerts and memos on this $4 payment.

As highlighted in this prior post, if the DOJ and SEC are genuine in their message that they are only “focused on bribes of consequence,” on payments of “real and substantial value” and in companies spending compliance dollars in the “most sensible way,” there is something very easy and practical for the enforcement agencies to do.

Only allege conduct that actually determines the ultimate outcome of the enforcement action.

Same Process, Different Results

Does voluntary disclosure and cooperation result in:

An SEC administrative cease and desist order?  Yes, see Layne Christensen.

An SEC non-prosecution agreement?  Yes, see Ralph Lauren.

An SEC deferred prosecution agreement?  Yes, see Tenaris.

An SEC civil complaint?  Yes, see Archer Daniels Midland Company.

Granted, the facts of each FCPA enforcement action are unique, but what drives FCPA practitioners and their clients crazy about the FCPA enforcement process is a lack of transparency and predictability of outcomes.

What Would Have Happened Had The SEC Been Put To Its Burden Of Proof?

Pardon me for being “that guy,” but what would have happened had the SEC been put to its burden of proof on its finding that Layne Christensen violated the FCPA’s anti-bribery provisions?  The SEC’s allegations all concerned payments outside the context of government procurement but rather to allegedly secure favorable tax treatment, customs clearance, work permits, relief from regulatory inspections, etc.

It is a matter of fact, that the SEC has been put to its ultimate burden of proof only once concerning alleged payments outside the context of government procurement and it lost that case.  (See here for the discussion of SEC v. Mattson and Harris). For a broader discussion of this issue, including DOJ actions, see this article.

Moreover, many of the SEC’s findings would seem to potentially implicate the FCPA’s facilitating payments exception.  On that score, in SEC v. Jackson & Ruehlen, a court ruled that the SEC has the burden of negating this statutory exception, something the SEC was unable to do in that case (based on certain similar facts as alleged in the Layne Christensen action) which resulted in a defendant-friendly settlement on the eve of trial.  (See here).

Finally, no doubt Layne Christensen as part of its cooperation likely agreed to toll statute of limitations or waive statute of limitations defenses altogether.  Yet it is worth highlighting that the bulk of the SEC’s findings concern conduct that allegedly occurred between 2005 and July 2009; in other words, beyond the FCPA’s typical 5 year statute of limitations.

Timeline

As highlighted in this 2010 post, Layne Christensen initially disclosed its FCPA scrutiny in Fall 2010.  The company’s first disclosure stated, in pertinent part:

“In connection with the Company updating its Foreign Corrupt Practices Act (“FCPA”) policy, questions were raised internally in late September 2010 about, among other things, the legality of certain payments to customs clearing agents in connection with importing equipment into the Democratic Republic of Congo (“DRC”) and other countries in Africa.  […] Although the Company has had a long-standing published policy requiring compliance with the FCPA and broadly prohibiting any improper payments by the Company to foreign or U.S. officials, the Company has adopted additional policies and procedures to enhance compliance with the FCPA and related books and records requirements. Further measures may be required once the investigation is concluded.”

In short, Layne Christensen’s FCPA scrutiny – from point of first public disclosure to resolution – lasted approximately 4 years.

The “Three Buckets” 

In my article, “Foreign Corrupt Practices Act Ripples,” I coin the term “three buckets” of FCPA financial exposure and demonstrate how settlement amounts in an actual FCPA enforcement action (“bucket #1) are often not the most expensive aspect of FCPA scrutiny and enforcement.

In nearly every case in which a comparison can be made, “bucket #1” (pre-enforcement action professional fees and expenses) is the most expensive aspect of FCPA scrutiny.

The numbers in Layne Christensen serve as another instructive reminder.

Bucket #1 = in excess of $10 million (based on the company’s disclosures)

Bucket #12 = $5.1 million

Bukcet #3 (post enforcement action professional fees and expenses) are to be determined.  A noticeable aspect of the Layne Christensen action (one based on a voluntary disclosure and cooperation) is that the company has a reporting obligation imposed upon it.  As stated in the SEC’s order, Layne Christensen shall “report to the Commission periodically, at no less than nine-month internals during a two-year term, the status of its FCPA and anti-corruption related remediation and implementation of compliance measures.”

Compliance Enhancements, Etc.

During its period of FCPA scrutiny, Layne Christensen previously disclosed the following compliance enhancements.

  • contracted with a third party forensics accounting team to conduct an in-depth review of the operations in Africa and to make recommendations for improvement to the internal control systems;
  • reviewing existing arrangements with third parties interacting with government officials in international locations in an effort to assure that contracts and agreements include anti-corruption terms and conditions;
  • performing due diligence on third parties interacting with government officials in international locations and implementing a process to assess potential new third parties;
  • terminated certain agency and business relationships;
  •  established a separate position of, and appointed, a chief compliance officer, effective March 30, 2011, under the supervision of our Senior Vice President, General Counsel and Secretary to facilitate implementation and maintenance of compliance policies, procedures, training, reporting and internal reviews, with indirect reporting responsibility to the audit committee;
  • developed new procedures to improve the controls over cash handling and record retention;
  • conducting a company-wide risk assessment, including an employee survey, to ascertain whether similar issues may exist elsewhere in the Company;
  • initiated an enhanced company-wide, comprehensive training of Company personnel in the requirements of the FCPA, including training with respect to those areas of the Company’s operations that are most likely to raise FCPA compliance concerns; and
  • continued to enhance our training of management, including our operations managers, to emphasize further the importance of setting the proper tone within their organization to instill an attitude of integrity and control awareness and the use of a thorough and proper analysis of proposed transactions.

 

Of Note From the Tyco Enforcement Action

[A new job has been posted to the FCPA Professor Jobs Board – see here.  If your organization is seeking FCPA or related talent, the Jobs Board is an easy and efficient vehicle to connect with thousands of sophisticated readers.]

Yesterday’s post (here) went long and deep as to the Tyco enforcement action.  This post continues the analysis by highlighting additional notable issues.

The Tyco Enforcement Action Should Be An FCPA Practitioners New Best Friend

During the negotiation phase of resolving an FCPA enforcement action with the DOJ and/or the SEC, a topic that often comes up, and an analysis that an FCPA practitioner frequently performs, is comparing the conduct at issue in the current case to prior enforcement actions.  The enforcement agencies typically dismiss such comparative efforts by practitioners by saying that every enforcement action (and negotiation) is unique and that what the agencies did in one enforcement action is not binding in another.  On the flip side, and a position I think is imminently reasonable, is that the enforcement agencies ought to be bound by some consistency in enforcement approaches.

If so, the Tyco enforcement action should be the FCPA practitioners new best friend.

For starters, this enforcement action involved a company that settled a wide-ranging fraud action in 2006 – one that involved a material FCPA component (see here for the prior SEC action).  In that 2006 action, Tyco was permanently enjoined from, among other things, future FCPA violations.  (For more on so-called “obey the law injunctions – see this recent guest post and this prior post).

The government bluntly stated in this week’s enforcement action that certain of the misconduct occurred even after the 2006 injunction.  In addition, and per the government, the alleged misconduct in this week’s enforcement action was carried out by several different methods, the conduct occurred over a lengthy time period and involved conduct in approximately 25 countries.

Even so, against this backdrop of an injunction being violated and widespread misconduct in approximately 25 countries, Tyco was offered a non-prosecution agreement by the DOJ and the government did not require an imposition of a corporate monitor.

Should an FCPA practitioner in the future be faced with anything other than a DOJ NPA or should a monitor be insisted upon by the government, the Tyco enforcement action should be your new best friend.

Assessing Tyco’s Culpability

Yes, as noted above, Tyco is now an FCPA “recidivist.”  By my count, it has now joined ABB, Baker Hughes, and General Electric in that category.

Yet in reading the Tyco enforcement action, I am hardly surprised nor shocked.  The company is a diversified global company operating in more than 60 countries with more than 100,000 employees worldwide.  The vast majority of the conduct at issue in the enforcement actions allegedly occurred between 2000 and 2006.

Furthermore, there is no allegation or suggestion that Tyco (the parent company entity) knew of or participated in the improper conduct.  For instance, the closest Tyco connection alleged is in the SEC’s complaint concerning conduct in Turkey.  However, even there, the SEC only alleges a dual officer structure between the relevant subsidiary and executive officers while at the same time alleging that there was “no indication that any of these individuals [the dual officers] knew of the illegal conduct.”   In other respects, the resolution documents allege or suggest that various indirect subsidiaries took steps to conceal the conduct at issue or circumvent Tyco’s internal controls.

I’ve said before and I will say again (based on nearly a decade of FCPA practice experience conducting FCPA internal investigations around the world) that if every large multi-national company with diverse global business units, with tens of thousands of employees scattered across the world, would hire FCPA counsel to do a complete and thorough world-wide review of the company’s operations, given the current enforcement theories, including the standardless books and records and internal controls theories of enforcement, 95% of companies would find problematic conduct (the other 5% of companies either hired counsel not well versed on the current enforcement theories and/or counsel did not look hard enough).

It Takes A While … Just To Negotiate

As noted in this previous post regarding Pfizer, the gray cloud that is FCPA scrutiny can hang over a company for a long time.  On this issue, it is interesting to note that Tyco’s most recently quarterly filing stated that the company began its negotiations with the DOJ and SEC in February 2010.

The FCPA As An M&A Issue

The $26 million in combined fines and penalties will not be borne entirely by Tyco and its shareholders.  The FCPA frequently finds its way into corporate divestitures and other transactions.

On this note, Tyco’s most recent quarterly filing stated as follows concerning previously spun off business units and now separate companies.  “Covidien  and TE Connectivity agreed, in connection with the 2007 Separation, to cooperate with the Company in its responses regarding these matters. Any judgment required to be  paid or settlement or other cost incurred by the Company in connection with the FCPA investigation matters would be subject to the liability sharing provisions of the Separation and Distribution  Agreement, which assigned liabilities primarily related to the former Healthcare and Electronics businesses of the Company to Covidien and TE Connectivity, respectively, and provides that the Company  will retain liabilities primarily related to its continuing operations. Any liabilities not primarily related to a particular segment will be shared equally among the Company, Covidien and TE  Connectivity.”

In addition, as noted in the NPA, one of Tyco’s business units is poised to be spun-off to Pentair Inc. later this week.  The NPA states as follows.  “Tyco agrees that if this separation and merger occur during the term of this Agreement, Tyco shall, for any business entities, operations, or units involved in the conduct [at issue] and included in the spin-off and merger, including provisions in any separation agreement binding the relevant and culpable entities to the [compliance] obligations [set forth in the NPA].  Tyco shall no longer be responsible for ensuring compliance by any separated entities, operations or units with the obligations described in the [NPA].”

More Foreign Healthcare Providers as “Foreign Official”

This recent post traced the origins and prominence of the enforcement theory that employees of certain foreign health care systems are “foreign officials” under the FCPA.  Add the Tyco enforcement action to the list as the enforcement action included conduct involving Chinese health care providers, Saudi Arabian health care providers, and Polish health care providers.

With the Tyco action on the list, 5 of the 9 (55%) core corporate enforcement actions this year have been based, in whole or in part, on this theory.

More Chinese Design Institutes

The number of FCPA enforcement actions involving Chinese design institutes (an entity category that has given many an FCPA practitioner a headache trying to figure them out) has grown with the Tyco enforcement action.  As noted in this previous post concerning Watts Water Technologies, other enforcement actions that have involved, in whole or in part, Chinese design institutes include the following:  Rockwell Automation (here), ITT (here), and Avery Dennison (here).

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