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New Article – “Foreign Corrupt Practices Act Ripples”

By on July 15, 2014 in Business Effects, FCPA Scholarship
Ripple

In house counsel and other compliance professionals are often looking for additional ways to stress the importance of Foreign Corrupt Practices Act compliance to corporate leaders. A common way to do this is forwarding to corporate leaders the latest multi-million dollar settlement with the message “this could be us” if we don’t invest in and implement FCPA compliance best practices.

This common method however often fails to resonate with corporate leaders. Moreover, 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.

To be most effective in communicating with corporate leaders regarding the need for pro-active FCPA compliance, in house counsel and other compliance professional need to speak to corporate leaders in business terms that matter such as liquidity, market capitalization, cost of capital, lost or delayed business opportunities and the like.

My new article, “Foreign Corrupt Practices Act Ripples” (available for download here), recently published in the American University Business Law Review, assists in house counsel and compliance professionals stress the importance of FCPA compliance by highlighting issues that matter most to corporate leaders.

The article abstract is as follows.

An obvious reason to comply with the Foreign Corrupt Practices Act (“FCPA”) is that non-compliance can expose a company to a criminal or civil FCPA enforcement action by the Department of Justice (“DOJ”) and/or the Securities and Exchange Commission (“SEC”). However, this Article highlights 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.

By coining a new term of art – the “three buckets” of FCPA financial exposure – and through various case studies and examples, this Article demonstrates how FCPA scrutiny and enforcement can impact a company’s business operations and strategy in a variety of ways from: pre and post-enforcement action professional fees and expenses; to market capitalization; to cost of capital; to merger and acquisition activity; to impeding or distracting a company from achieving other business objectives; to private shareholder litigation; to offensive use of the FCPA by a competitor or adversary to achieve a business objective or to further advance a litigating position.

This Article thus shifts the FCPA conversation away from a purely legal issue to its more proper designation as a general business issue that needs to be on the radar screen of business managers operating in the global marketplace. By highlighting the many ripples of FCPA scrutiny and enforcement, it is hoped that more business managers can view the importance of FCPA compliance more holistically and not merely through the narrow lens of actual enforcement actions.

Help shift the FCPA conversation by sharing the article (available for download here) with your clients, corporate boards, audit committees and other corporate leaders.

Potpourri

By on June 23, 2014 in Business Effects, FCPA Appeals, FCPA Jurisprudence, Foreign Official, Multimedia, Root Causes, Trade Barriers and Distortions

Today’s post is short on written words, but long on content.

Recently, I had the pleasure to again visit with Thomas Fox for his Foreign Corrupt Practices Act Compliance and Ethics Report.  In this episode I discuss:

  • The 11th Circuit’s recent “foreign official” ruling (see here, here, here and here for prior posts).  Among the issues discussed are my involvement in the “foreign official” challenges, what was not at issue in the 11th Circuit appeal and what was at issue, and the court’s flawed reasoning.
  • My new book “The Foreign Corrupt Practices Act in a New Era”) (see here and here for prior posts).
  • My FCPA Institute – a unique two-day learning experience ideal for a diverse group of professionals seeking to elevate their FCPA knowledge and practical skills.  The inaugural FCPA Institute is July 16-17th in Milwaukee, WI.

During the past month, I also had the pleasure to conduct two webinars hosted by Hiperos (a leader in third party risk management).

The first webinar was titled “Understanding the Root Causes of FCPA Scrutiny and Enforcement” (see here to view the hour long event).  The webinar:

  • Highlights the fallacy that only “bad” and “unethical” companies are the subject of FCPA scrutiny and explores certain foreign business realities and conditions that often serve as the root causes of FCPA scrutiny and enforcement.
  • Discusses what 99% compliance means.
  • Uses the root causes of many FCPA enforcement actions to highlight how an essential component of FCPA compliance is understanding the boring, day-to-day aspects of a company’s business in foreign markets and targeting, through training and other compliance policies, the relatively low-level employees and others who engage in these day-to-day activities.

The second webinar was titled ““The Ripple Effect:  Understanding Financial and Business Consequences of FCPA Scrutiny and Enforcement” (see here to view the hour long event).  The webinar:

  • Highlights how 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.
  • Discusses the “three buckets” of FCPA financial exposure:  (1) pre-enforcement action professional fees and expenses; (2) enforcement action settlement amounts: and (3) post-enforcement action professional fees and expenses and highlights how bucket #1 is typically (in many cases 3, 5, 10 or higher times the settlement amount) the greatest financial hit to companies the subject of FCPA scrutiny or enforcement.
  • Explores other negative financial consequences that often result from FCPA scrutiny or enforcement such as market capitalization, cost of capital, M&A activity, lost or delayed business opportunities, and FCPA-related litigation.
  • Shifts the FCPA conversation from being a purely legal issue to its more proper designation as a general business issue that needs to be on the radar screen of business managers and highlights how the FCPA’s many ripples instruct that business managers should view the importance of FCPA compliance more holistically and not merely through the narrow lens of actual enforcement actions.

Thank you for reading FCPA Professor every day.

With today’s post, you have the opportunity to hear me discuss FCPA, FCPA enforcement, and FCPA compliance issues for 2 hours and 30 minutes … should you so choose.

Potpourri

By on September 24, 2013 in Business Effects, Cambodia, Contagion Effects, Foreign Investment Issues, Pharmaceutical Industry

Countering the contagion effect and please come to Cambodia.

Countering the Contagion Effect

A contagion effect generally refers to how one company’s actions or scrutiny can spread throughout an entire industry in which the company operates.

Much has been written about pharmaceutical company GlaxoSmithKline’s scrutiny in China (see here) and how GSK’s scrutiny has led to scrutiny of other multinational pharmaceutical companies operating in China.

In a recent conference call with investors, global healthcare products company Covidien sought to pro-actively counter the contagion effect.  During the call, the first words out of the mouth of Covidien Chairman, President and CEO Jose Almeida were as follows.

“Before we get into the strategy, let me spend a moment and  speak about three things that are very important to our company; ethics,  integrity and the quality of what we make. There’s been a lot of conversation  about FCPA  issues in China, Russia, Brazil. You hear that a lot and read them a lot in the  Wall Street Journal in the last two months.  Covidien has an unparalleled effort in creating an  environment where our employees are trained and they practice ethical behavior.  There’s no good business where there’s no ethics behind the business of our  products.  We’re very proud to have pioneered  significant amount of changes in how we do business in many countries in the  world. We were early adopters of the code of [EviMed] but not only we adopt it  for the US, we moved that code and we have it on a global basis.  Covidien provides a significant amount of training  for our sales reps in every part of the world, telling them what is right and  what is not right. We also have compliance committees and grants committees that  absolutely filter any kind of disbursement of money that would go to a society  or training of physicians.  Covidien does not permit, or it does not pay for physicians  to travel from their country of origin to attend any third-party conference in a  different country. We stopped doing that close to four years ago, because we  thought that some of the practices were not aligned with our code of conduct,  and how Covidien wants to do business.  So we have 38,000 employees around the globe and I can tell you that we do  everything we can to make sure that we’re doing the right things for our  customers and doing them in an ethical way. We also have patient safety at the  top of our mind all the time. Quality of our products is the most important  thing that we have. It’s not just about the reputation of the company; it is  about the patient that is receiving their treatment. And not having adherence to  quality will create an issue in safety for those patients, and we feel very  proud about our track record.”

Please Come to Cambodia

Much has been written about whether the FCPA and its enforcement deters foreign investment.  (See here for instance).

Companies obviously make foreign investment decisions based on a host of legal and non-legal risks and thus empirically separating and measuring the impact of FCPA enforcement on foreign investment decisions is difficult.  Moreover, despite the general rise in FCPA enforcement concerning conduct in certain high risk jurisdictions such as China, India, and Brazil, there continues to be vast amounts of foreign direct investment in those countries by companies subject to the FCPA prohibitions.

Any “evidence” that the FCPA and its enforcement deters foreign investment thus tends to be anecdotal.

Such as this recent article in the Cambodia Daily concerning recent remarks by U.S. Ambassador William Todd.

According to the article, despite Todd’s “efforts to promote Cambodia as an attractive destination for business, major American companies are reluctant to invest here as they still perceive the country as indelibly corrupt.”  The article quotes Todd as follows.

“I believe now is the time for big U.S. businesses to come here. And I believe that they want to come here—but I believe that the issue about corruption is preventing them from coming here.”

“The corruption issue, to be frank with you, has created what we think is a drag on the economy. It’s basically something that’s prevented a lot of U.S. businesses from coming in here.”

“I see probably three or four companies a week who want to do business here in Cambodia, who either want to buy things, or sell things, or open things,” he said, “and I’ve seen some very large business—some of America’s largest—and they want to basically make 100-billion-dollar investments, 200-billion-dollar investments and so on, but they get scared off.”

“Offensive” Use Of The FCPA

By on June 6, 2013 in Business Effects, Offensive Use of FCPA, UTStarcom Inc.

Ordinarily, companies are in a defensive position when it comes to the Foreign Corrupt Practices Act.

However, in this new era, the FCPA is increasingly being used “offensively” to achieve a business objective or to further advance a litigating position.  Previous posts here, here, and here have explored various examples of this dynamic.

The latest example of “offensive” use of the FCPA, as highlighted here by the on-line news agency Main Justice, is in connection with the fight between Dish Network and Tokyo-based SoftBank for Sprint Nextel, the nation’s No. 3 wireless carrier.

As noted here, “in a letter submitted to the Federal Communications Commission, which is reviewing SoftBank’s $20 billion deal to acquire 70 percent of Sprint, Dish draws attention” to the 2009 FCPA enforcement action against UTStarcom.  (See here for the prior post).

As noted in the prior post, UTStarcom agreed to pay $3 million via a DOJ non-prosecution agreement and an SEC civil settlement “for the actions of UTS-China [its wholly-owned subsidiary) and its employees and agents, who arranged and paid for employees of Chinese state-owned telecommunications companies to travel to popular tourist destinations in the United States, including Hawaii, Las Vegas and New York City.”  According to the DOJ, it agreed to the non-prosecution agreement based on the company’s “voluntary disclosure, thorough self-investigation of the underlying facts, the cooperation provided by the company to the Department, and the remedial efforts undertaken by the company.”  The SEC’s complaint also included allegations that the company: (i) “provided other gifts and benefits to foreign government customers, including paying for them to attend executive training programs at U.S. universities,” (ii) provided “foreign government customers or their family members with work visas and purportedly hir[ing] them to work for [the company] in the U.S., when in reality they did no work for the company,” and (iii) made payments to purported consultants in China and Mongolia who provided no documented services, under circumstances that showed a high probability that the payments would be used to bribe foreign government officials.”

The asserted connection between the 2009 FCPA enforcement action and the battle for Sprint?

Why of course, Softbank’s founder Masayoshi Son was on the board of UTStarcom during certain time periods relevant to the conduct at issue in the FCPA enforcement action.

In this letter to the FCC, Dish asserted that the 2009 UTStarcom enforcement action “is relevant to the public interest analysis of the proposed transaction, and that it is incumbent upon … SoftBank to provide a full explanation of these matters.”

In this reply Softbank stated that the UTStarcom enforcement action is not relevant to the proposed transaction.  In pertinent part, the letter states as follows.

“Those settlements do not involve SoftBank or Mr. Masayoshi Son, Chairman and CEO of SoftBank. The settlement documents do not name, implicate, or otherwise relate to SoftBank or Mr. Son, and are legally and factually irrelevant to this proceeding.”

“DISH suggests that these settlements raise a potential issue in this proceeding because Mr. Son at one time served as the Chairman of the Board ofUTSI.  Neither the DoJ or SEC settlement documents, however, even mention SoftBank or Mr. Son. This is hardly surprising. Mr. Son was not an operating officer of UTSI at any time and the alleged violations came to light years after Mr. Son left the Board, which he did in 2004. The FCPA-related misconduct, according to the settlement documents, involved an executive of the company’s Chinese subsidiary, UTStarcom China Co., Ltd.”

In this reply DISH stated, in pertinent part, as follows.

“The ties between SoftBank, Mr. Son, and UTSI, which at minimum raise the question of whether Softbank was in control of UTSI during the relevant period, make SoftBank’s assertion that the non-prosecution agreement does “not relate to” either SoftBank or Mr. Son difficult to believe.”

“In light of the close involvement of SoftBank and Mr. Son with UTSI, SoftBank’s effort to discount the relevance of UTSI’s admitted misconduct appears misguided. SoftBank would better aid the Commission’s evaluation of its applications by providing additional information. For example, who were the employees of the government-controlled telecommunications companies who were the beneficiaries of the admitted misconduct? With what agencies or departments of the Chinese government were they affiliated? Were they involved in regulation of the telecommunications sector?”

The current era of FCPA enforcement has long tentacles. And with increasing frequency, the “offensive use” of the FCPA is one of them.

Africa Sting Continues To Sting

By on May 15, 2013 in Africa Sting, BlastGard International, Business Effects, Yochanan Cohen

Judge Richard Leon called the collapse of the DOJ’s manufactured Africa Sting case in 2012 “the end of a long and sad chapter in the annals of white collar criminal enforcement.” (See here for the prior post).

As highlighted in my article, “What Percentage of DOJ FCPA Losses is Acceptable?” bringing criminal charges and marshalling the full resources of law enforcement agencies against an individual alters the lives of real people and their families, sidetracks real careers, empties real bank accounts in mounting a defense, and causes often irreversible damage to real reputations.

The manufactured Africa Sting case also had a negative impact on companies that employed the individuals charged in the case.  Previous posts here, here and here explored the various business effects of the Africa Sting case.

The Africa Sting case continues to have a negative impact on companies indirectly involved in the manufactured case.  In 2011, BlastGard International Inc. acquired HighCom Security Inc.  HighCom’s former CEO Yochanan Cohen was one of the individuals charged in the Africa Sting in January 2010.  In a recent disclosure BlastGard stated as follows.

“On January 19, 2010, the U.S. Department of Justice (“DOJ”) unsealed indictments of 22 individuals from both the law enforcement and defense supply industry, one of whom was HighCom’s then Chief Executive Officer, Yochanan Cohen, as an individual for allegedly violating [the FCPA].  (Note: On February 24, 2012, the United States District Court of Columbia, upon consideration of the government’s motion to dismiss, ordered the dismissal (with prejudice) of the indictment and superseding indictments against 22 defendants.)  HighCom was not a party to this indictment. HighCom has always taken, and continues to take seriously, our obligation as an industry leader to foster a responsible and ethical culture, which includes adherence to laws and industry regulations in the United States and abroad.  Following this indictment, Mr. Cohen stepped down from his daily responsibilities as CEO of HighCom.  As a result of this indictment, although not a named party to the indictment, in March 2010, HighCom was placed under a policy of denial by the U.S. State Department.  This resulted in a suspension of HighCom’s ability to export certain armor products under U.S. Government Regulations.  This effectively ended HighCom’s export capacity and significantly impacted its operations and ability to deliver product to its customers and in particular fulfill its shipment obligations under the U.N. contract awarded in late 2009.  HighCom was suspended by the US Dept. of Defense and added to its Excluded Party List. This severely restricted its ability to sell product in the US defense sector. To regain its export privileges under US State Department regulations, Mr .Cohen, as CEO and majority shareholder, was required to resign as an executive corporate officer and director and fully divest his equity interest in HighCom. On January 25, 2011, Mr. Cohen entered into a binding Letter of Intent to sell his equity interest to BlastGard International Inc. and closing occurred on March 4, 2011.”

“Concurrent with Mr. Cohen’s resignation both as a director and officer of HighCom and the sale of his equity interest to BlastGard, BlastGard filed with the US State Department to have the policy of denial lifted in order to regain HighCom’s ability to export certain armor products again.  As of March 29, 2011 this order of denial had been lifted and HighCom’s export privileges have been reinstated.  HighCom also successfully applied to the US Defense Dept to be removed from the Excluded Party List (“EPLS”). The successful reinstatement of HighCom’s export authority and its removal from the EPLS has dramatically improved HighCom’s ability to sell and market its products.  BlastGard has also been reinstated as a vendor for potential bids under the United Nations and has already completed several small orders since its reinstatement. However, on February 6, 2012, the United Nations notified the Company that the UN Secretariat Review Committee met on January 27, 2012 to review the vendor registration status of HighCom Security, Inc. The Committee noted the indictment of HighCom’s former CEO on four counts. Based on those charges, and in accordance with the UN’s policy with regards to ethics and compliance issues, placed an immediate hold on the registration status of HighCom, pending the UN’s internal review. The Company requested that the UN reconsider their decision as HighCom is under new ownership and management and that since their decision the United States District Court of Columbia dismissed all charges against the former CEO. A final decision is still pending the UN’s internal review.”

“In March 2011, BlastGard’s management team officially assumed operational control of HighCom.  Since this time we have accomplished a number of key compliance tasks and are currently in the process of finalizing manufacturing agreements with several key partners.  As stated in the paragraph above, BlastGard has received official communication from the U.S. State Department that HighCom’s export authority has been reinstated. In addition to this, BlastGard has completed registration through both the Directorate of Defense Trade Controls as well as the Bureau of Industry and Security (“BSI”). The purpose of these registrations is to allow BlastGard control over the export management and compliance program moving forward.  HighCom also completed their ISO certification which had been revoked under HighCom due to missed audits.  BlastGard management has been able to complete an internal audit and management review, in addition to meeting with BSI for the external audit review and in March 2012 HighCom secured ISO certification. Communication with the United Nations is ongoing. On February 6, 2012, the Company was notified by letter that the United Nation’s Vendor Review Committee (“VRC”) had recommended to immediately place on hold the registration status of HighCom Security. This VRC decision to place on hold our registration status was based on integrity/ethical issues surrounding the former CEO’s actions. Soon after this decision was made, we were notified that on February 21, 2012 the government dismissed all the charges against the former CEO. The Company has been in communication with the United Nations Procurement Division regarding this matter and on March 15, 2012, the Company was informed that the VRC had met regarding our request for re-instatement and that its recommendation is currently under consideration. To date we have not been re-instated but we are in communication with the United Nations Procurement Division in an effort of securing re-instatement. BlastGard has also made significant personnel changes within HighCom and restructuring of operating locations and costs. Since the completion of our acquisition of HighCom, the Company has focused its employee time and capital resources primarily on the development of the business of HighCom. Our results of operations for 2012 demonstrate the benefits of these changes.”

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