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Issues To Consider From The Olympus Enforcement Action

Issues

This prior post went in-depth into the recent $22.8 million Foreign Corrupt Practices Act enforcement action against Olympus Latin American Inc.

This post continues the analysis by highlighting various issues to consider.

20th Enforcement Action

Certain people seem to be confused about the reasons why Foreign Corrupt Practices Act enforcement has generally increased over the past decade.

However, there are several practical (as well as provocative) reasons.

Among the more obvious practical reasons (no doubt it is provocative as well) is that in 2002 the FCPA enforcement agencies came up with the theory that employees (such as physicians, nurses, mid-wives, lab personnel, etc.) of certain foreign health care systems are “foreign officials” under the FCPA and thus occupy a status equal to Presidents, Prime Ministers, and other bona-fide foreign officials that Congress had in mind when passing the FCPA in 1977.

It is one of the more aggressive and dubious FCPA enforcement theories there is.  It has never been subjected to judicial scrutiny and perhaps most telling as to its validity and legitimacy, the DOJ has never charged an individual with an FCPA violation based on this theory.

Nevertheless, the theory is frequently used in FCPA enforcement actions and the Olympus enforcement action represents the 20th time it has been used in a corporate enforcement action.

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Issues To Consider From The Qualcomm Enforcement Action

Issues

This prior post went in-depth as to the recent $7.5 million Qualcomm Foreign Corrupt Practices Act enforcement action based on alleged improper hiring and other practices in China.

This post continues the analysis by highlighting various issues to consider.

Timeline

Qualcomm’s FCPA scrutiny was, at least partially, related to September 2010 formal order of private investigation from the SEC that arose from a “whistleblower’s” allegations made in December 2009 to the audit committee of the Company’s  Board of Directors and to the SEC. As Qualcomm previously disclosed, “the audit committee completed an internal review of the allegations with the assistance of independent counsel and independent forensic accountants. This internal review into the whistleblower’s allegations and related accounting practices did not identify any errors in the Company’s financial statements.”

More directly related to the FCPA scrutiny, according to Qualcomm’s previous disclosures: “On January 27, 2012, the Company learned that the U.S. Attorney’s Office for the Southern District of California/DOJ has begun a preliminary investigation regarding the Company’s compliance with the Foreign Corrupt Practices Act (FCPA), a topic about which the SEC is also inquiring.”

Thus, from start to finish Qualcomm’s FCPA scrutiny lasted between 4-6 years (depending on one’s interpretation of the above disclosures).

If the SEC wants the public to have confidence in its FCPA enforcement program, it must resolve instances of FCPA scrutiny much quicker. Whether its nearly 6 years or merely 4 years, this long time period is simply inexcusable.

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FCPA Flash – A Conversation With Paul Pelletier

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The new FCPA Professor contains a new feature – the FCPA Flash podcast.

The goal of FCPA Flash is to provide, in an audio format, the same fresh, candid and informed commentary about the Foreign Corrupt Practices Act and related topics as readers have come to expect from the written posts on FCPA Professor.

This FCPA Flash episode is a conversation with  Paul Pellletier, a former Principal Deputy Chief of the DOJ’s fraud section and currently a member of Mintz Levin. Pelletier has written some excellent recent pieces on the DOJ’s FCPA enforcement program (see here and here) and in the podcast he discusses the long time periods often associated with FCPA inquiries, FCPA investigative costs, and how the DOJ can best allocate its resources to fight bribery.

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Potpourri

Potpourri

Disgraceful, scrutiny alerts, resource alert, for the reading stack, and for your consideration.  It’s all here in a potpourri edition of FCPA Professor.

Disgraceful

It’s a disgraceful practice.

A for-profit business invites a high-ranking DOJ official to its private event in which people have to pay to hear the public official speak.

It’s a disgraceful practice.

The for-profit company treats the DOJ official’s comments as if they own his words and then put the words behind a paywall.

Andrew Weissmann, the DOJ’s fraud section chief, recently spoke at GIR Live, an event hosted by a private for-profit company. According to this teaser post Weissmann spoke about issues of public concern including “how the department will factor in compliance, how it intends to reward those that self-report, and how it aims to increase transparency around resolutions and declinations.”

I requested a transcript of Mr. Weissmann’s remarks from the DOJ press office and was told: “[Mr. Weissmann] did not prepare formal remarks but spoke from notes, so I don’t have anything to provide. You’re welcome to check with the event organizers to see if they have a recording of it.”

Thankfully, Carlos Ayres was at the event and publicly posted a summary of Mr. Weisssmann’s remarks on the FCPAmericas website. According to his post:

“Weissmann said that the DOJ will publish in the next weeks a list of questions that companies can expect to be asked when being assessed by the DOJ’s new compliance consultant.”

“Weissmann said that the DOJ will shed more light on declination decisions in the short term, publishing related data with aggregate information.”

“Weissmann stated that DOJ will make an effort to complete cases for companies that self-report within one year.”

Thank you Mr. Ayres for your public service in sharing the comments of a high-ranking DOJ official on matters of public concern.

Scrutiny Alerts

HSBC Holdings

The company recently disclosed:

“Hiring practices investigation

The US Securities and Exchange Commission (the ‘SEC’) is investigating multiple financial institutions, including HSBC, in relation to hiring practices of candidates referred by or related to government officials or employees of state-owned enterprises in AsiaPacific. HSBC has received various requests for information and is cooperating with the SEC’s investigation. Based on the facts currently known, it is not practicable at this time for HSBC to predict the resolution of this matter, including the timing or any possible impact on HSBC, which could be significant.”

Novartis

The Swiss company, which qualifies as an issuer under the FCPA, was recently the focus of news reports. According to this article:

“South Korean authorities raided Novartis offices in search of evidence the company provided bribes to local doctors, according to media reports. The Seoul Western District Prosecutors’ Office confiscated various documents, including account books, in order to determine whether rebates the drug maker offered physicians may have actually been bribes.”

Mondelēz International, Inc.

Approximately five years ago (see here for the prior post), Kraft Foods disclosed FCPA scrutiny resulting from its acquisition of Cadbury in connection with a manufacturing facility in India.  Kraft, now known as Mondelēz International, Inc., recently disclosed:

“As we previously disclosed, on February 1, 2011, we received a subpoena from the SEC in connection with an investigation under the FCPA, primarily related to a facility in India that we acquired in the Cadbury acquisition. The subpoena primarily requests information regarding dealings with Indian governmental agencies and officials to obtain approvals related to the operation of that facility. We are continuing to cooperate with the U.S. and Indian governments in their investigations of these matters, including through ongoing meetings with the U.S. government to discuss potential conclusion of the U.S. government investigation. On February 11, 2016, we received a “Wells” notice from the SEC indicating that the staff has made a preliminary determination to recommend that the SEC file an enforcement action against us for violations of the books and records and internal controls provisions of the Exchange Act in connection with the investigation. We intend to make a submission to the staff of the SEC in response to the notice.”

So-called Wells Notices are rare in the FCPA context for the simple reason that few issuers actually publicly push back against the SEC.  See here for an example of a company that prevailed against the SEC after receiving a Wells Notice.

Key Energy Services

The company has been under FCPA scrutiny since Spring 2014 and continues to bleed cash in connection with its scrutiny. In this recent filing, the company disclosed $2.7 million “related to” its FCPA scrutiny.

Sweet Group

The U.K. Serious Fraud Office recently announced:

“Construction and professional services company Sweett Group PLC was … sentenced and ordered to pay £2.25 million as a result of a conviction arising from a Serious Fraud Office investigation into its activities in the United Arab Emirates. The company pleaded guilty in December 2015 to a charge of failing to prevent an act of bribery intended to secure and retain a contract with Al Ain Ahlia Insurance Company (AAAI), contrary to Section 7(1)(b) of the Bribery Act 2010. The relevant conduct occurred between 1 December 2012 and 1 December 2015.”

In the release, David Green (Director of the SFO) stated:

“Acts of bribery by UK companies significantly damage this country’s commercial reputation. This conviction and punishment, the SFO’s first under section 7 of the Bribery Act, sends a strong message that UK companies must take full responsibility for the actions of their employees and in their commercial activities act in accordance with the law.”

As further noted in the release:

“His Honour Judge Beddoe described the offence as a system failure and said that the offending was patently committed over a period of time. Referring to Section 7 of the Bribery Act 2010 and to Sweett’s ignorance of its subsidiary’s actions , HHJ Bedoe said:

The whole point of section 7 is to impose a duty on those running such companies throughout the world properly to supervise them. Rogue elements can only operate in this way – and operate for so long – because of a failure properly to supervise what they are doing and the way they are doing it.

The SFO’s investigation into Sweett Group PLC, which commenced on 14 July 2014, uncovered that its subsidiary company, Cyril Sweett International Limited had made corrupt payments to Khaled Al Badie, the Vice Chairman of the Board and Chairman of the Real Estate and Investment Committee of AAAI to secure the award of a contract with AAAI for the building of the Rotana Hotel in Abu Dhabi. The amount is broken down as £1.4m in fine, £851,152.23 in confiscation. Additionally, £95,031.97 in costs were awarded to the SFO.”

Maxwell Technologies

In 2011, Maxwell Technologies (a California-based manufacturer of energy storage and power delivery products) resolved parallel DOJ and SEC FCPA enforcement actions concerning alleged business conduct in China by agreeing to pay approximately $14 million. The company recently disclosed:

“In January 2011, we reached settlements with the SEC and the U.S. Department of Justice (“DOJ”) with respect to charges asserted by the SEC and DOJ relating to the anti-bribery, books and records, internal controls, and disclosure provisions of the U.S. Foreign Corrupt Practices Act (“FCPA”) and other securities laws violations. We paid the monetary penalties under these settlements in installments such that all monetary penalties were paid in full by January 2013. With respect to the DOJ charges, a judgment of dismissal was issued in the U.S. District Court for the Southern District of California on March 28, 2014.

On October 15, 2013, we received an informal notice from the DOJ that an indictment against the former Senior Vice President and General Manager of our Swiss subsidiary had been filed in the United States District Court for the Southern District of California. The indictment is against the individual, a former officer, and not against the Company and we do not foresee that further penalties or fines could be assessed against us as a corporate entity for this matter. However, we may be required throughout the term of the action to advance the legal fees and costs incurred by the individual defendant and to incur other financial obligations. While we maintain directors’ and officers’ insurance policies which are intended to cover legal expenses related to our indemnification obligations in situations such as these, we cannot determine if and to what extent the insurance policy will cover the legal fees for this matter. Accordingly, the legal fees that may be incurred by us in defending this former officer could have a material impact on our financial condition and results of operation.

Swiss Bribery Matter

In August 2013, our Swiss subsidiary was served with a search warrant from the Swiss federal prosecutor’s office. At the end of the search, the Swiss federal prosecutor presented us with a listing of the materials gathered by the representatives and then removed the materials from our premises for keeping at the prosecutor’s office. Based upon the our exposure to the case, we believe this action to be related to the same or similar facts and circumstances as the FCPA action previously settled with the SEC and the DOJ. During initial discussions, the Swiss prosecutor has acknowledged both the existence of our deferred prosecution agreement (“DPA”) with the DOJ and our cooperation efforts thereunder, both of which should have a positive impact on discussions going forward. Additionally, other than the activities previously reviewed in conjunction with the SEC and DOJ matters under the FCPA, we have no reason to believe that additional facts or circumstances are under review by the Swiss authorities. In late March 2015, we were informed that the Swiss prosecutor intended to inform the parties in April 2015 as to whether the prosecutor’s office would bring charges or abandon the proceedings. However, to date, the Swiss prosecutor has not issued its formal decision. At this stage in the investigation, we are currently unable to determine the extent to which we will be subject to fines in accordance with Swiss bribery laws and what additional expenses will be incurred in order to defend this matter. As such, we cannot determine whether there is a reasonable possibility that a loss will be incurred nor can we estimate the range of any such potential loss. Accordingly, we have not accrued an amount for any potential loss associated with this action, but an adverse result could have a material adverse impact on our financial condition and results of operation.”

As noted here by Wall Street Journal – Risk & Compliance Journal, in the same disclosure Maxwell disclosed approximately $2.4 million in FCPA professional fees and expenses in 2015.

Resource Alert

As highlighted here, Stanford Law School and Sullivan & Cromwell recently announced the launch of an FCPA clearinghouse –  “a public database that aggregates and curates source documents and provides analytic tools related to enforcement of the Foreign Corrupt Practices Act (FCPA).”

For the Reading Stack

An informative read here in Bloomberg Law from John Cunningham and Geoff Martin (both of Baker & McKenzie) titled “Casting a Wider Net: Conspiracy Charges in FCPA Cases.”

Another informative read here in the New York Times regarding the DOJ’s Kleptocracy Asset Recovery Initiative.

For Your Consideration

Did U.S. involvement in Afghanistan result in more corruption? Did the U.S. fail to conduct adequate due diligence on intermediaries (a frequent FCPA enforcement theory against companies)? NPR explores the issue here.

Issues To Consider From The PTC Enforcement Action

IssuesThis post went in-depth regarding this week’s $28 million Foreign Corrupt Practices Act enforcement action against PTC Inc. and related entities.

This post continues the analysis by highlighting various issues to consider.

Timeline

As highlighted in this previous post, the company first disclosed its FCPA scrutiny in August 2011. Thus, the timeline was approximately 4.5 years.

Pre and Post – Enforcement Action Professional Fees and Expenses

Unlike some issuers under FCPA scrutiny, PTC does not appear to have disclosed its pre-enforcement action professional fees and expenses over the past 4.5 years. If the company’s scrutiny followed a typical path, those pre-enforcement action professional fees and expenses likely were equal to or exceeded the $28 million settlement amount.

Given that PTC did not disclose its pre-enforcement action professional fees and expenses, it is unlikely that the company will disclose its post-enforcement action professional fees and expenses either. However, there will be plenty because, as a condition of settlement, the company is required to report to the DOJ for a three year term.

Let’s pause to consider whether this is truly necessary or simply another government required transfer of shareholder wealth to FCPA Inc. (see here, here and here for prior posts).

In the words of the DOJ:

“The [PTC Entities] engaged in extensive remedial measures, including a review and enhancement of the Companies’ and PTC Inc.’s compliance program, the establishment of a dedicated compliance team at the corporate level and at PTC China and enhanced policies for business partners, the termination of the business partners involved in the misconduct described in the Statement of Facts …, and the implementation of new customer travel policies and additional controls around expense reimbursement.”

In the words of the SEC:

“As part of its internal review and investigation, PTC undertook significant remedial measures including terminating the senior staff at PTC-China implicated in the FCPA violations. PTC also revised its pre-existing compliance program, updated and enhanced its financial accounting controls and its compliance protocols and policies worldwide, and implemented additional specific enhancements in China. These steps included: (1) reviewing and enhancing its anti-bribery policy, code of ethics, and gifts and entertainment policies to correct previous deficiencies; (2) establishing a dedicated compliance team, including a chief compliance officer and a new compliance director in China; (3) expanding its other compliance resources in China, including hiring a new vice president of finance for Asia and adding additional legal staff in China; (4) hiring a new management team in China, including a new China President; (5) enhancing its FCPA training for employees; (6) severing its relationships with the business partners that were implicated in the FCPA violations and discontinuing the use of COD partners or business referral partners generally; (7) implementing a comprehensive due diligence program for all other business partners that includes a risk-scoring system operated by a third party vendor and that includes FCPA training as part of the onboarding process; (8) obtaining quarterly anti-corruption certifications from sales staff; and (9) undertaking periodic compliance audits.”

Against this backdrop, is it truly necessary for PTC to report to the government for three years regarding its “remediation efforts to date, their proposals reasonably designed to improve the Companies’ internal controls, policies, and procedures for ensuring compliance with the FCPA and other applicable anti-corruption laws, and the proposed scope of the subsequent reviews”?

One Core Enforcement Action

Certain FCPA Inc. participants have adopted creative counting methods when it comes to keeping FCPA enforcement statistics.

No doubt, some will count the PTC enforcement action as three separate enforcement actions (the DOJ component, the SEC component as to the company, and the SEC component as to the individual) even though each action was based on the same core conduct. Counting FCPA enforcement actions this way distorts FCPA enforcement statistics because this week’s action was one core action.

First Individual DPA by the SEC

The Yu Kai Yuan DPA, which the SEC termed the first DPA with an individual in an FCPA case, might be the most inconsequential legal document you will ever read.

Based on the same core conduct in the DOJ NPA and the SEC administrative order, the SEC alleged that Yuan (a Chinese citizen who resides in Shanghai and was last a sales executive for PTC entities in China in 2011) caused violations of the FCPA’s books and records and internal controls provisions.

The only specific allegation as to Yuan in the DPA is the first paragraph which merely identifies him. There is no other specific allegation regarding him including how he caused violations of the FCPA’s books and records and internal controls provisions.

Without admitting or denying the SEC’s allegations, Yuan agreed to refrain from violating the “federal and state securities law” and to “refrain from violating the applicable rules promulgated by any self-regulatory organization or professional licensing board.”

If what the SEC is seeking is more individual enforcement actions in connection with corporate FCPA actions, the Yuan DPA represents one way to juice the statistics.

Additional Sloppy or Incomplete Pleading

The recipients of the travel and entertainment alleged were employees of alleged Chinese state-owned entities.

That is all the DOJ and SEC state in the resolution documents.

Even though the two-factor control and function test set forth in Esquenazi is flawed (see pgs. 24-43 in this article for a detailed discussion of why), it would seem incumbent on the enforcement agencies to include allegations or findings relevant to this two-factor test as the business community (at least one intended audience of FCPA resolution documents) remains confused regarding the contours of the “foreign official” element.

Assumed Causation

Like many, many other FCPA enforcement actions, the PTC action assumes causation.

In other words, it is assumed that the only reason the Chinese SOEs purchased PTC products and services is because certain of the SOE employees engaged in non-business travel and received other things of value such as iPods, wine and clothing from PTC entities.

Such assumed causation, very much relevant to disgorgement issues, would seem to speculative at best.

Just Plain Silly

Speaking of assumed causation, some have asserted that the Yuan individual DPA by the SEC was “inspired in part by the Yates memo issued over at the Justice Department.”

My own two cents is that suggesting such a connection is just plain silly. The Yuan DPA signatures began in November 2015 and as stated by the SEC the DPA was the “result of significant cooperation [Yuan] provided during the SEC’s investigation” – an investigation which began in 2011.

Application of DD-3

One often overlooked reason for the general increase in FCPA enforcement in the modern era is that in 1998 the statute was expanded through the dd-3 portion of the FCPA which applies to, generally speaking, non-issuer foreign companies and foreign nationals, to the extent the “while in the territory of the U.S.” jurisdictional prong has been satisfied.

The DOJ’s NPA was against PTC China entities, not PTC Inc., and invoked dd-3. While not explicit in the resolution documents, the “while in territory of the U.S.” jurisdictional prong was presumably met given that certain PTC China employees accompanied the alleged Chinese “foreign officials” on their travels to the U.S.

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