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DOJ, SEC Receive FCPA Training

The Department of Justice and the Securities and Exchange Commission enforce the Foreign Corrupt Practices Act.

It is thus a bit strange that the DOJ and SEC are receiving FCPA training.

Yet, piecing together information from two prominent law firm event calendars (see here and here) that is exactly what is occuring today in Washington D.C. at the SEC headquarters.

Described as a “joint FCPA training program” for the DOJ, SEC, and FBI and the “SEC’s FCPA Boot Camp” the speakers appear to include a who’s who of the FCPA defense bar.

What prompted this training session? What is the full agenda of topics? What type of questions will DOJ and SEC personnel ask?

Inquiring minds want to know.

Inquiring minds may also wonder – is it proper for the DOJ and SEC to receive training from lawyers and law firms that are frequent “adversaries” in FCPA enforcement actions?

The event is not included on the SEC’s event calendar (see here), but DC readers may want to show up at the SEC’s headquarters today and say “I’m here for the FCPA training” to see what happens.

If anyone has information or insight as to this event, please leave a comment.

A few other DOJ / SEC items of interest to pass along.

Make Your Voice Heard

According to this release, the SEC is seeking public comment on various sections of the recently enacted Dodd-Frank financial reform package. The SEC will post all submissions on SEC’s Internet Web site. As noted in the release, “members of the public who wish to submit official comments on particular rulemaking initiatives should submit comments during the official comment period that starts with the notice of the initiative published in the Federal Register.” (emphasis added).

To learn more about Section 922’s whistleblower provisons, see here and here. To learn more about Section 1504’s Resource Extraction Issuer Disclosure provisions see here.

The Revolving Door Continues to Revolve

Some of you, I know, think it is no big deal when a DOJ prosector enforces a law one day and then the next day defends clients against enforcement of that same law.

Others of you, I know, think that this is an important public policy issue worthy of discussion.

Whatever your persuasion, it should be noted that yet another DOJ attorney with FCPA responsibilties has left government service for a private law firm to engage in an FCPA practice.

According to this Main Justice story, Steven Fagell, Assistant Attorney General Lanny Breuer’s deputy chief of staff, is leaving the DOJ to return to Covington & Burling LLP (Breuer’s previous employer), the firm he worked at prior to joining the DOJ in January 2009. Main Justice reports that “as a member of the Criminal Division’s senior leadership team, Fagell served as a counselor to Breuer and worked on a broad range of issues including the Financial Fraud Enforcement Task Force and the Foreign Corrupt Practices Act.” According to Tim Hester, Covington’s managing partner, Fagell is expected to work on FCPA matters at the firm (see here).

For other recent movement betweent the DOJ and the FCPA bar see here, here and here.

Former SEC FCPA Enforcement Attorney Critical of SEC’s Recent Veraz Networks Inc. Enforcement Action

Richard Grime is a former high-ranking SEC FCPA enforcement attorney. While at the SEC, Grime “played a prominent role in the Commission’s FCPA program, spoke at FCPA conferences, and participated or supervised many of the Commission’s FCPA cases. He also worked closely with the Department of Justice on countless parallel investigations.” (See here).

Grime is currently a partner at O’Melveny & Myers LLP and is listed as the lead author of this recent release regarding the SEC’s recent enforcement action against Veraz Networks Inc.

The Veraz enforcement action was discussed in this prior post. Among other things, I noted in the post that the Veraz enforcement action contributes to several pillars of what I have been calling the facade of FCPA enforcement. In short, one pillar is the frequency in which FCPA enforcement actions are resolved based on uninformative, bare-bones, and legal conclusory statements of facts or allegations. Check as to the Veraz enforcement action, I stated. Another pillar discussed is the increasing and alarming trend of FCPA enforcement actions being resolved based on tenuous, dubious and untested legal theories. Check as to the Veraz enforcement action, I stated given that the enforcement action (like so many) is based on the SEC’s theory, never accepted by a court, that employees of state-owned or state-controlled enterprises are “foreign officials” under the FCPA.

Grime and his co-authors strike the same themes in the release.

Among other things, Grime and his co-authors state that the SEC “complaint discloses little information about the specifics of the alleged misconduct” and “the complaint is remarkably ambiguous about the substance of the alleged violations.”

According to Grime and his co-authors:

“The complaint refers to ‘gifts,’ ‘illicit payments,’ and ‘questionable expenses,’ but provides little useful insight as to the surrounding circumstances or even the value of some of the alleged gifts and payments. Similarly, the complaint does not state how the company recorded the payments or how the records were inaccurate.”

Why does this matter?

As Grime and his co-authors note: “given that there are few FCPA court opinions, the SEC should seek through these settled complaints to fully explain the facts underlying its actions and how those facts violate the law.”

As to the enforcement agencies’ interpretation of the key “foreign official” element, Grime and his co-authors state as follows:

“Like numerous prior cases, the SEC alleges that employees of foreign government-controlled companies are foreign ‘government officials.’ Until a court decides otherwise, the SEC and the Department of Justice will continue to broadly interpret the FCPA and companies will need to diligence the ownership and control of commercial organizations across the world to avoid running afoul of the FCPA.”

Grime and his co-authors also dish up this criticism of the Veraz enforcement action:

“By punishing Veraz for such conduct, the SEC provides little incentive for a company to voluntarily disclose misconduct, cooperate, and thereby seek leniency. It is unstated whether Veraz cooperated with the SEC investigation, but the company did disclose that it spent $3 million on the investigation. For that sum, the company presumably assisted the SEC’s investigation, but no credit (or explanation for a lack of credit) is given. The specter that even small payments will be prosecuted may drive companies to conclude that remediation without the government’s involvement is the wiser approach.”

The 1981 GAO Report

The year was 1981.

The FCPA was a mere infant – approximately 3.5 years old. Those living with it were concerned with its ambiguities and complying with it.

In March 1981, the “investigative arm” of Congress, the Government Accountability Office (GAO) released a report, “Impact of Foreign Corrupt Practices Act on U.S. Business.” (See here and here).

The report was based, in part, on a GAO questionnaire survey of 250 companies randomly selected from the Fortune 1000 list of the largest industrial firms in the U.S.

The questionnaire addressed the FCPA’s relationship to the following four areas: (1) corporate policies and/or codes of conduct, (2) corporate systems of accountability, (3) cost burdens, if any, incurred by management to comply with the act, and (4) corporate opinions regarding the (i) acts effect on U.S. corporate foreign sales, (ii) the clarity of the act’s provisions, (iii) the potential effectiveness of an international antibribery agreement, and (iv) perceived effectiveness of the act in reducing questionable payments.

The GAO also discussed the FCPA’s impact with leading public accounting firms, professional accounting and auditing organizations, professional legal associations and business and public interest groups. In addition, the GAO discussed enforcement of the FCPA with DOJ and SEC officials and examined documentation relating to enforcement activities. Also interviewed by the GAO were officials from the Overseas Private Investment Corporation, Department of Commerce, Treasury, and State.

The GAO report covers all the topics listed above. However, this post relates to the clarity of the FCPA’s provisions.

Chapter 4 of the Report is titled “Issues Surrounding the Act’s Antibribery Provisions.”

The chapter begins by noting that there is “confusion over what constitutes compliance with the act’s antibribery provisions.”

The report notes that “corporate and governmental officials have criticized the anti-bribery provisions as being ambiguous about what constitutes compliance.”

The ambiguities include confusion or uncertainty about a host of issues, including the “definition of ‘foreign official.””

At the time, the term “foreign official” specifically excluded any employee whose duties are essentially ministerial or clerical.” This exclusion was eliminated in the 1988 amendments to the FCPA. Otherwise the definition of “foreign official” the GAO report found to be ambiguous is same today – “any officer or employee of a foreign government or one of its departments, agencies or instrumentalties.” [Note -the public international organization prong was added in 1998].

The report notes:

“This definition has been criticized as unclear. Lawyers we contacted questioned whether employees of public corporations, such as national airlines or nationalized companies, are considered foreign officials. Similar questions have surfaced in countries – particularly developing countries – where there are small and frequently closely related groups, including both business and government relationships as well as families. Individuals within these groups frequently move between the private and public sectors, often without a clear distinction.”

The report then discusses the DOJ’s guidance program and begins by noting that “President Carter expressed concern over the potential effect of the act’s alleged ambiguities in September 1978 – only 9 months after its passage.” “To reduce this uncertainty, he directed the Department of Justice to give the business community guidance concerning its enforcement intentions under the act.”

The report notes that in March 1980, the DOJ implemented its “long awaited guidance program” but that the “program has yet to effectively address the ambiguities, and it is doubtful it will.”

In concluding Chapter 4 of the Report, the GAO notes:

“the act is an expression of congressional policy, and rigorously defined and completely unambiguous requirements may be impractical and could provide a roadmap for corporate bribery. On other hand, companies, whether registered with SEC or domestic concerns under Department of Justice jurisdiction, should be subject to clear and consistent demands by the Government agencies responsible for enforcing the act.”

An option the GAO recommends is that “the Justice Department, SEC, and other interested agencies […] offer legislative proposals which would amend the act to more explicitly define the antibribery provisions and [such an amendment] could cover concepts such as the definition of “foreign official.”

GAO notes “because of the importance of the act and the questions and concerns about the antibribery provisions, close congressional oversight is needed.”

Not surprsingly, both DOJ and SEC disagreed with the GAO’s findings. In its responses, the agencies attack, not the substance of the findings, but the GAO’s methodology.

The GAO report states:

“Both SEC and Justice disagree with our recommendations that they develop alternative ways to address the antibribery provisions. They contend that our statistics suggest that ambiguities in the act are not a sigifnicaint problem.”

In 1981, the investigative arm of Congress found, based on extensive study, that the FCPA’s “foreign official” element was ambiguous.

Here we are some thirty years later having the same discussion.

[Here is another interesting nugget. In June 1981, John Fedders was named to be the SEC’s Director of Enforcement, replacing Stanley Sporkin who left to become general counsel at the CIA. During a news conference, Fedders “pledged to enforce, with discretion, the Foreign Corrupt Practices Act, which he criticized as being ambiguous.” See Owen Ullmann, “Corporate Lawyer Gets SEC Enforcement Post,” Associated Press, June 29, 1981.]

Is the FCPA a Government Cash Cow?

Last December, I noticed this piece which discussed the increase in FCPA enforcement. One reason, according to the authors (including a former assistant director of the Division Enforcement of the SEC) – “governments will keep pursuing corrupt business practices for one very simple reason–it’s lucrative.”

Interesting point isn’t it?

If one were to calculate the “rate of return” / “return on investment” in a typical Foreign Corrupt Practices Act enforcement action it would be enormous. Most FCPA enforcement actions result from corporate voluntary disclosures whereby company counsel deliver to the prosecutors three-ring binders of the relevant documents and witness interview memos from the internal investigation and otherwise cooperate. Thus, it does not take much in terms of government resources to prosecute a typical FCPA enforcement action which typically leads to multi-million dollar fines and penalties.

Where does this money go?

Straight to the U.S. treasury.

Say what you want about the SFO’s BAE enforcement action, but at least a portion of that money went to the alleged “victims” of the wrongful conduct prosecuted – the people of Tanzania. (See here).

The suggestion that one of the reasons for the rise in FCPA enforcement is because it is a lucrative cash cow for the government would seem not to be dispelled by comments made this week in an American Lawyer article “Here Comes the Payoff Police” (here) by a former high-ranking DOJ FCPA official. The comment that caught my attention is this:

“The government sees a profitable program, and it’s going to ride that horse until it can’t ride it anymore.”

*****

Here are some other tidbits that caught my eye this week.

More Pre-Enforcement Action News

It used to be that FCPA enforcement actions made the news. Now, it’s pre-enforcement action. Alcatel-Lucent (here) stay tuned it’s coming. Technip (here) stay tuned it’s coming. Panalpina (here) stay tuned it’s coming.

Add to the list Pfizer and Johnson & Johnson. See here for the Main Justice piece.

FCPA Unit in S.F.

As detailed here and elsewhere, the SEC’s San Francisco branch office has a new unit devoted exclusively to the FCPA. “The fact that we have a significant presence of companies in Silicon Valley who do business internationally, specifically in Asia, makes us well-suited for addressing these kinds of issues,” said Tracy L. Davis, the assistant regional director in charge of the new San Francisco unit. “That’s one of the reasons why San Francisco is a particularly good location for an FCPA unit.”

A good weekend to all.

In The News

The SEC Goes Searching

Last August (see here) when Robert Khuzami, the SEC’s Director of the Division of Enforcement, announced that the SEC would be creating a specialized FCPA unit he said, among other things, that:

“The Foreign Corrupt Practices Act unit will focus on new and proactive approaches to identifying violations of the Foreign Corrupt Practice Act…”

In February, Cheryl Scarboro (the head of the SEC’s FCPA Unit) similarly stated (here) that “the new unit will give us the resources and the ability to do even more going forward,” that the new unit will allow the SEC to do more industry investigations, and that one industry the SEC is focusing on is the pharmaceutical industry.

Given these comments, it should come as no surprise that a recent Wall Street Journal article notes that the SEC enforcement division sent letters “within the past two months” to several companies in the pharmaceutical and energy industries” “as part of an investigation by the SEC division that looks into potential violations of the FCPA.” According to the article, the letters ask the companies “about their internal controls to guard against bribery” specifically in terrorism-sponsor states such as Cuba, Iran, Sudan, and Syria. According to the article, “it isn’t clear which companies received the letters.” The article also notes that “the SEC probe, which is in its early stages, comes as the Justice Department’s criminal fraud section has sent letters in recent weeks to a number of pharmaceutical companies asking about payments made to foreign officials in several nations…” Both the SEC and DOJ declined to comment for the article.

Bribes for Books

A post earlier this week talked about the World Bank and other multilateral development banks (see here).

Fitting because recently the World Bank (see here) “debarred Macmillan Limited, a U.K. company, declaring the company ineligible to be awarded Bank-financed contracts for a period of six years in the wake of the company’s admission of bribery payments relating to a Trust Fund-supported education project in Southern Sudan.” According to the release, “the debarment can be reduced to three years subject to continued cooperation.”

In a press release yesterday (see here), the company said “the international publishing business, Macmillan Publishers Ltd UK (“Macmillan”), has today confirmed that it has voluntarily referred to the Serious Fraud Office its concerns over historic payments made by a subsidiary of its education business, Macmillan Education, to secure a contract in Southern Sudan.”

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