Friday Roundup
Transparency International’s latest Corruption Perception Index, monitor issues, scrutiny alert, Chinese SOEs, SEC press releases, hot, and for the reading stack. It’s all here in the Friday roundup.
Transparency International’s Latest Corruption Perceptions Index
Transparency International, a global civil society organization dedicated to the fight against corruption, released recently the 20th edition of its Corruption Perceptions Index (“CPI”). (See here for TI’s release). As stated by TI, the CPI “measures the perceived levels of public sector corruption worldwide” and 175 countries are ranked with Denmark, New Zealand, Finland, Sweden, Norway, and Switzerland (topping the list – i.e. low levels of perceived corruption) and South Sudan, Afghanistan, Sudan, North Korea and Somalia (on the bottom of the list – i.e. high levels of perceived corruption).
TI’s CPI is a popular tool on which many business organizations rank perceived risk, but query whether the CPI is a reliable or meaningful measure of the specific risks specific business organizations face when competing in the global marketplace?
For starters, perceptions are just that, perceptions. To be sure, there are countless honest and ethical people living in Somalia just as there are countless dishonest and unethical people living in Denmark. Moreover, at its core, FCPA risk is the function of specific business actors (employees and agents) coming into contact with specific foreign officials, in the context of specific foreign business conditions. These risk points are often industry specific and within a country are often region specific. None of these factors, or very few, are captured by the CPI.
Thus, while I enjoy each time this year looking at the CPI map, I don’t think it is a very useful tool for business organizations when adopting policies and procedures designed to minimize FCPA risk.
Monitor Issues
An interesting blurb here from Courthouse News Service.
“Siemens and a monitor charged with keeping watch over the German conglomerate’s compliance with a settlement agreement over federal corruption and bribery charges can fight to keep records of that agreement out of the hands of reporters, a federal judge ruled. (See 2014 WL 6817009). 100Reporters – a press outlet with a self-proclaimed mission to “cover corruption of all sorts” – sued the Justice Department under the Freedom of Information Act this past summer, seeking records of Siemens’ compliance with a 2008 settlement of violations of the Foreign Corrupt Practices Act. Siemens pleaded guilty and agreed to pay a precedent-setting $1.6 billion penalty to U.S. and EU authorities to settle charges that it routinely used bribes and slush funds to secure massive public works contracts around the world. Part of the settlement included four-year compliance monitoring by Dr. Theo Waigel, who was given broad access to Siemens’ confidential and commercially sensitive information and records to make annual reports to the Justice Department. The DOJ closed the compliance monitoring in 2012, determining that Siemens had “satisfied its obligations under the plea agreement.” After the Justice Department denied 100Reporters’ request for compliance monitoring documents – including the four annual reports from Waigel – and the group sued, Siemens and Waigel demanded to get involved, citing the right of intervention. For Siemens’ part, the company argued that the reports contained confidential and proprietary information not fit for public consumption. Waigel complained that his personal reputation – and the unfettered access of future compliance monitors – was on the line because he promised Siemens confidentiality while examining the company’s records and delivering his reports to the Justice Department. Both Siemens and Waigel have a legal interest in fighting 100Reporters’ FOIA request, U.S. District Judge Rudolph Contreras held in a 31-page ruling issued Wednesday. Specifically, Contreras dismissed 100Reporters’ claims that Siemens, Waigel and the DOJ are all fighting from the same legal position. “Requiring Siemens to monitor the DOJ’s litigation posture from the sidelines until Siemens disagrees with a decision by the agency is inefficient and impractical; indeed, Siemens likely would have limited, if any, insight into the DOJ’s strategy during the litigation, and once Siemens did learn of a hypothetical shift in the DOJ’s position, such as a decision to release a specific category of materials, it might be too late for Siemens to undue any damage done,” Contreras wrote. Furthermore, not allowing Siemens and Waigel to intervene now – and forcing them to wait months or years until the Justice Department has done its withholding analysis – would put them both in danger of missing federal filing deadlines, the judge said. The potential injury to Siemens if the documents are released is both “particularized and sufficiently imminent,” Contreras wrote. “It is not surprising, then, that 100Reporters cannot cite a single FOIA case in which a court denied on standing grounds the application of a prospective intervenor whose own confidential materials were the clear subject of the FOIA request,” he added. Contreras also rejected calls by 100Reporters to limit Siemens’ involvement solely to FOIA exemption 4, which bars release of confidential and commercially sensitive information. “A more functional and practical approach is required, and fatally, 100Reporters fails to offer any concrete or realistic consequences to this litigation from Siemens’s (or Waigel’s) intervention that might require the court to impose a limitation on the scope of the defenses that an intervenor may raise as this case, which still is in its infancy, proceeds to the merits,” Contreras wrote. The judge refused 100Reporters’ claims that allowing Siemens and Waigel to get involved would unnecessarily delay the proceedings, advising the group in a footnote “raise such concerns then,” if and when any delays occur.”
The California Lawyer goes in-depth in an article titled “The Secret Life of a Corporate Monitor.”
“Without naming the subjects of his monitoring, Dan Ray talked generally about the highly secretive world of government-appointed corporate monitors, where progress reports are confidential, judges rarely get involved, and the DOJ alone determines whether corporations have complied with terms of the agreements. Monitors are not government employees or agents, and they do not contract with or receive payment from the government. Fees generally are negotiated between the corporation and the monitor.”
Through some basic internet research, it is not that difficult to figure out which companies Ray monitored. (See here, here and here).
Scrutiny Alert
The Financial Times reports:
“In a Florida court on Tuesday, a judge granted a request by US prosecutors to seize an ice cream cooler, a walk-in freezer, dozens of other pieces of catering equipment and three properties belonging to a woman called Mamadie Touré. It was just one of a ceaseless stream of such requests, through which the authorities seek forfeiture of what they say are ill-gotten assets. But this was no ordinary woman and no ordinary case. Ms Touré is the widow of Lansana Conté, a dictator who ruled the resource-rich but dirt poor west African state of Guinea for 24 years before his death in 2008. And US prosecutors’ interest in Ms Touré runs to much more than a few refrigerators and some Jacksonville real estate. Their court filing in the forfeiture request spells out the details of a two-year US investigation into one of the most wide-ranging cases of alleged corruption in recent years. Prosecutors alleged in that filing, lodged last week and seen by the Financial Times, that Ms Touré received bribes totalling $5.3m to help a mining company win iron-ore rights in Guinea. The rights in question were to exploit the northern half of a hillside called Simandou, considered the planet’s richest virgin deposit of iron ore. The company involved is not named in the filing. But references to documents published in a Guinean inquiry, to the timing of the award of the mining rights and to a separate criminal case make it obvious that the company is BSG Resources, the mining arm of Israeli billionaire Beny Steinmetz’s family conglomerate.”
Chinese SOEs
An interesting article recently in the Wall Street Journal. According to the article:
“At the end of 2013, China had about 155,000 firms owned by central, provincial and local governments, according to the Ministry of Finance. Beijing itself directly controls less than 120 of the biggest and most strategically significant industrial companies, which are responsible for building the world’s largest nuclear reactors and most extensive high speed rail network, buying up mining and agricultural resources overseas, and spreading Chinese goodwill with infrastructure projects across the developing world. […] Many smaller state-owned firms make goods with no obvious strategic significance, like spirits and toothpaste …”.
The article contains an interesting chart comparing six China SOEs with U.S. counterparts. According to the chart, the six SOEs have approximately 2.6 million employees.
SEC Press Releases
Russell Ryan (King & Spalding and former assistant director of enforcement at the SEC ) returns to the Wall Street Journal’s opinion page with this dandy piece titled “Get the SEC Out of the PR Business.” He begins:
“Press releases are par for the course when the Securities and Exchange Commission files a case in federal court that it must later prove to a judge or jury. But the agency is increasingly shunting cases into its own administrative proceedings, where it initiates the prosecution and ultimately decides guilt or innocence—along with the severity of any sanctions—subject to only limited review in court. Given the SEC’s peculiar quasi-judicial role in these cases, you might think the agency would refrain from gratuitously stoking prehearing publicity against the accused. Think again. The SEC now routinely issues press releases when it files charges in administrative cases it will eventually decide. This practice calls into question the agency’s ability to decide those cases fairly and impartially.”
[…]
“SEC releases also stray beyond a fair and accurate summary of agency action. Many confuse what happened by asserting—often in the headline or lead sentence—that the SEC “charged” the accused with wrongdoing. But at this initial stage only SEC staff employees, typically from the enforcement division, have “charged” any wrongdoing. Commissioners, at least in theory, have merely scheduled a hearing to determine whether the employees can prove their charges—a determination the commissioners are supposed to make after an administrative judge conducts the hearing and makes a preliminary decision. Not surprisingly, media reports often reinforce the misperception that SEC commissioners are prosecuting these cases rather than deciding them. One of the most troubling features of SEC prehearing press releases is the partiality they betray in favor of agency prosecutors over the accused. In virtually all cases, the SEC allows its prosecuting employees not only to ghostwrite the official press release but also to insert gratuitous quotations that embellish the formal accusations with more colorful words and phrases like “tricks,” “calculated fraud,” “reaping substantial profits,” and “choosing profits over compliance.” The accused is never extended similar courtesies. When the SEC initiates enforcement action administratively rather than in court, it should embrace its primary role as impartial decision maker. That means resisting the urge to stoke prehearing publicity and maintaining strict neutrality in both fact and appearance. By failing to do so, the SEC risks having administrative fines and other sanctions swept aside if a court someday concludes, quite reasonably, that agency press releases plausibly suggest prejudgment of cases or lack of impartiality. The agency may consider that scenario unlikely. But given its determination to prosecute more cases administratively, that may not be a risk worth taking.”
Hot
You probably already knew that FCPA and related practices are hot. But just in case you need another reminder, see here. The latest edition of “What’s Hot and What’s Not in the Legal Profession” contains the following under the “hot” category.
“Anti-corruption. Larger U.S. firms continue to increase enforcement of the Foreign Corrupt Practices Act, leading to more prosecutions. The U.K., China, Brazil and Canada have all enacted anti-bribery laws in the past few years and are now increasing investigations.”
You can elevate your FCPA knowledge and practical experience by attending the FCPA Institute in Miami (Jan. 12-13, 2015). Join other firm lawyers, in-house counsel, auditing professionals and others already registered for the FCPA Institute – Miami by clicking here to register. CLE credit is available.
Reading Stack
The lastest edition of Debevoise & Plimpton’s always informative FCPA Report is here.
From Foley & Lardner attorney Aaron Murphy and Daniel Seltzer (Senior Director, Anticorruption for Accenture) “The End of Whac-A-Mole Compliance: A Global Approach to Anti-Corruption Actions.”
*****
A good weekend to all.
Look In The Mirror Moments?
For some time, I have used the picture to the left in various public presentations when discussing certain public policy aspects of this new era of Foreign Corrupt Practices Act enforcement.
Two developments related to China caused me to ponder the picture once again.
The first concerns a letter recently sent by U.S. Treasury Secretary Jacob Lew to Chinese Vice Premier Wang Yang. The second concerns the general thrust of much “western” commentary concerning China’s recent enforcement action against GlaxoSmithKline.
Lew Letter
As highlighted in this recent Wall Street Journal article, Treasury Secretary Lew “warned his Chinese counterpart in a recent letter that a spate of antimonopoly investigations against foreign companies could have serious implications for relations between the two countries.” As noted in the article, “the warning comes after international business lobbies have raised complaints over a string of monopoly and pricing probes that they say unfairly focus on foreign companies.”
Predictably, China reportedly responded to the letter and concerns by stating – as noted in the article – that foreign and domestic Chinese companies are treated equally, that foreign companies are “welcome to hire the most famous lawyers in the world” to dispute Chinese allegations, and that if foreign companies disagree with Chinese law enforcement interpretations any company is free to “take the discrepancies to court.”
Although outside the FCPA context, the trading of barbs between the U.S. and China has FCPA parallels as concerns have been raised about U.S. enforcement of the FCPA against foreign companies and similar “see you in court” type statements have been made by the DOJ in response.
It is a fact that the clear majority of the largest FCPA enforcement actions of all-time (based on settlement amounts) are against foreign companies.
It is also a fact that many of these enforcement actions have been based on spare jurisdictional allegations. For instance and as highlighted in this prior post, the 2013 FCPA enforcement action against Total (the $398 million settlement amount was the third largest in FCPA history) was based on the following salient points:
- The enforcement action was against a French oil and gas company for making improper payments to an Iranian Official through use of an employee of a Swiss private bank and a British Virgin Islands company.
- The vast majority of the alleged improper conduct took place between 1995 and 1997 (that is 16 to 18 years ago prior to the enforcement action).
- The sole U.S. jurisdictional nexus (a required legal element for an anti-bribery violation since Total is a foreign issuer) is a 1995 wire transfer of $500,000 (representing less than 1% of the alleged bribe payments at issue) from a New York based account.
Expansive FCPA enforcement theories against foreign actors made its way into the Senate’s 2010 FCPA hearing when Senator Christopher Coons stated: “Today we the only nation that is extending extraterritorial reach and going after the citizens of other countries, we may someday find ourselves on the receiving end of such transnational actions.”
As a matter of law, Senator Coon’s statement was technically inaccurate, there is no extraterritorial jurisdiction over foreign actors under the FCPA’s anti-bribery provisions, but the expansive jurisdictional theories are what I have called “de facto extraterritoriality.”
In any event, the concluding point is this: aggressive enforcement of domestic laws against foreign companies raise various policy issues and can lead to “lawfare.” At the very least, when the tables are turned it ought to cause U.S. law enforcement agencies and policy makers to look in the mirror because Secretary Lew’s recent warning letter may be viewed by some as the “pot calling the kettle black.”
China GSK Enforcement Action
As previously highlighted here, in September GSK announced that it had agreed to pay approximately $490 million to resolve a Chinese law enforcement investigation after a Chinese court ruled “that GSK China Investment Co. Ltd (GSKCI) has, according to Chinese law, offered money or property to non-government personnel in order to obtain improper commercial gains, and been found guilty of bribing non-government personnel.”
The general thrust of certain “western” reporting of the China action was critical in various respects as highlighted below.
- “an opaque justice system ultimately controlled by the Communist Party” (here)
- “after a one day closed hearing” (here)
- “The bribery conviction of a GSK unit took all of one day in Chinese court” “Unlike the U.S. Department of Justice, which often allows the companies accused of bribery to spend years conducting their own internal investigations–often followed with non-prosecution agreements–these convictions came just 15 months after Chinese officials began their investigation.” “Chinese authorities moved very quickly to assess significant penalties in a forum that provided very little transparency” (here)
- “Many of us had wondered when the GSK investigation in China would end and we all found about the trial when it was announced in the newspapers last week. It certainly showed that the quality of justice in China is quite different than in the west. While it is not entirely clear how long the trial lasted, it appeared that it was [a one-day trial] …” (here)
Without in any way trying to comprehensively compare the overall U.S. legal system to the overall Chinese legal system, the following attributes of FCPA enforcement must at least be acknowledged.
The vast majority of corporate FCPA enforcement actions lack transparency and the resolution documents (whether a non-prosecution agreement, deferred prosecution agreement or civil administrative order) are the result of an opaque process ultimately controlled by the same office prosecuting or bringing the action.
As to the swiftness of FCPA enforcement actions, one can only assume that the majority of general counsels and board of directors of companies under FCPA scrutiny would be jumping for joy if the scrutiny – from start to finish – would resolve itself in 15 months rather than the typical 3-5 years (and in some instances more) of FCPA scrutiny lingering.
The concluding point is this: before criticizing how other countries are enforcing their anti-corruption laws (something the U.S. government has been pleading for other countries to do for years), we should at least look in the mirror regarding various aspects of FCPA enforcement.
Trade Barriers And Distortions As A Root Cause Of Bribery – A Focus On China
I do not normally cite Chinese criminal defendants; in fact, I never have.
Yet, individuals from all circumstances in life are capable of recognizing the big picture and when such individuals with actual experience with the root causes of bribery make a valid point, we should at least take notice.
As highlighted in this recent Wall Street Journal article, Liu Tienan (the former head of China’s National Energy Administration and Senior Director in the National Development Reform Commission) admitted to accepting bribes in connection with various projects. As noted in the article, “in his three decades at NDRC, Mr. Liu became one of the most powerful party officials running an agency that is rooted in China’s Communist past and that still decides which companies can expand and how banks should allocate loans.”
As noted in the article, at a hearing Mr. Liu reportedly testified that reducing official power is key to curbing corruption and stated “the major point, which is based on my own experience, is to give the market a great deal of power to make decisions.”
As Tom Fox observed on his FCPA Compliance and Ethics Blog, “it is almost if Lui is channeling his inner FCPA Professor when he speaks against artificial barriers to market entry.”
Indeed, I have long maintained that trade barriers and distortions are often the root causes of bribery and a reduction in bribery will not be achieved without a reduction in trade barriers and distortions.
These barriers and distortions – whether complex customs procedures, import documentation and inspection requirements, local sponsor or other third-party requirements, arcane licensing and certification requirements, quality standards that require product testing and inspection visits, or other foreign government procurement practices – all serve as breeding grounds for bribery.
The formula is not complex.
- 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.
Several FCPA enforcement actions demonstrate this point (see my article “Revisiting a Foreign Corrupt Practices Act Compliance Defense” pgs. 619-625). In addition, as highlighted in this prior post, there is a positive correlation between regulatory burdens when doing business in a foreign country and corruption in that foreign country.
In short, removal of trade barriers and distortions can help reduce bribe demands and the focus of the anti-corruption community should be less narrowly focused on pounding the pavement for more enforcement of FCPA-like laws (see prior posts here and here). Among other things, enforcement of FCPA-like laws only addresses the supply of bribes, not the demand of bribes, or the root causes of many bribes. More energy and attention should be spent on encouraging nations to eliminate trade barriers and distortions.
Back to Liu’s comments and how various trade barriers and distortions in China can serve as the root cause of bribery and corruption.
For instance, why is the Hollywood film industry under FCPA scrutiny for its practices in China? It probably has something to do with the fact that “Hollywood studios have spent more than a decade working their way into China past government quotas, censors, and ever-changing regulations.” (See here).
More comprehensively, consider a recent report by Covington & Burling detailing “market access restrictions and other restraints on foreign investment” in China. As noted in the firm’s release:
“[Covington] developed an unparalleled database of publicly recorded laws, regulations, and other measures containing provisions that frame or limit foreign investment in China. The Covington team searched hundreds of thousands of measures issued by 80 central government agencies and five representative provincial-level governments, and in the process identified hundreds of provisions restraining foreign investment in China.
Beyond published measures, we reviewed key trade publications and conducted interviews with industry groups to identify and catalogue administrative practices that also may have a restraining effect on foreign investment. As foreign business leaders in China are well aware, many of the biggest obstacles to foreign participation in the Chinese economy are imposed unofficially by government officials exercising legal or extralegal discretion.
[…]
To facilitate our ability to identify restraining measures, we defined the following three categories of restraints:
Category 1: Restraints that favor domestic investors or investments over foreign investors or investments;
Category 2: Restraints that favor state-owned investors or investments over privately-owned (including foreign-owned) investors or investments; and
Category 3: Restraints that possibly favor domestic investors or investments over foreign investors or investments, depending on whether foreign-invested enterprises (FIEs) established in China would be regarded as “Chinese” entities and therefore deemed eligible to receive, on an equal basis, benefits made available to such entities.
[…]
[Covington’s] manual review process identified over 800 restraints, which could be divided into three broad groups:
Pre-establishment restraints that impede market access for foreign investment;
Post-establishment restraints that treat foreign-invested entities less favorably; and
Broad policy statements that potentially result in less favorable treatment for foreign investors and investments during both the pre-establishment and post-establishment stages.
We found that within these three groups, restraining measures in China could be further subdivided into (i) four types of pre-establishment restraints – discriminatory local partner/equity requirements, market entry restrictions, approval process restraints, and technology transfer-related measures –and (ii) three types of post-establishment restraints – differentiated treatment through targeted enforcement, government financial support, and government procurement. In addition, we determined that the large number of broad policy statements we identified also constitute an important group of restraints, even though they do not mandate specific discriminatory treatment in and of themselves, because they often lead central government agencies or local governments to promulgate discriminatory measures or to exercise their administrative discretion in ways that disadvantage foreign investors and investments.
Investment activities by foreign businesses are also subject to restraining administrative practices, which reflect the following three characteristics of China’s administrative system:
Industrial policies explicitly designed to support the development of domestic industries and champions;
Relatively opaque approval processes led by officials explicitly mandated to help China achieve its industrial policy goals; and
The absence of effective recourse if approval authorities have not complied with international commitments or China’s own regulations.”
For a complete copy of the Covington report see here. (See also this prior post which highlights a similar publication from Covington on “China’s Approval Process for Inbound Foreign Direct Investment”).
In short, Liu is right.
Key to achieving a reduction in bribery and corruption is eliminating trade barriers and distortions.
This problem of course is not China specific.
As noted in this recent op-ed in the Wall Street Journal by India’s Prime Minister Narendra Modi, his new administration is committed to “eliminating unnecessary laws and regulations, making bureaucratic processes easier and shorter, and ensuring that our government is more transparent, responsive and accountable.” (See also here as relevant to India).
Although trade barriers and distortions are often a root cause of bribery, I am not confident that there will be a broad consensus to eliminate such trade barriers and distortions. After all, as highlighted in this recent post, trade barriers and distortions are used by all governments as “carrots” and “sticks” to accomplish selfish domestic goals whether political, economic or national security.
That is fine on one level, but so long as this dynamic persists, a reduction in bribery will not be fully achieved because trade barriers and distortions are often the root causes of bribery.
Friday Roundup
GSK announces verdict in China, the silly season, interesting read, Alibaba, and get it right! It’s all here in the Friday roundup.
GSK Verdict in China
Earlier today, GlaxoSmithKline announced:
“[T]he Changsha Intermediate People’s Court in Hunan Province, China ruled that GSK China Investment Co. Ltd (GSKCI) has, according to Chinese law, offered money or property to non-government personnel in order to obtain improper commercial gains, and been found guilty of bribing non-government personnel. The verdict follows investigations initiated by China’s Ministry of Public Security in June 2013. As a result of the Court’s verdict, GSKCI will pay a fine of £297 million [approximately $490 million USD] to the Chinese government. […] The illegal activities of GSKCI are a clear breach of GSK’s governance and compliance procedures; and are wholly contrary to the values and standards expected from GSK employees. GSK has published a statement of apology to the Chinese government and its people on its website (www.gsk-china.com). GSK has co-operated fully with the authorities and has taken steps to comprehensively rectify the issues identified at the operations of GSKCI. This includes fundamentally changing the incentive program for its salesforces (decoupling sales targets from compensation); significantly reducing and changing engagement activities with healthcare professionals; and expanding processes for review and monitoring of invoicing and payments. GSK Chief Executive Officer, Sir Andrew Witty said: “Reaching a conclusion in the investigation of our Chinese business is important, but this has been a deeply disappointing matter for GSK. We have and will continue to learn from this. GSK has been in China for close to a hundred years and we remain fully committed to the country and its people. We will continue to expand access to innovative medicines and vaccines to improve their health and well-being. We will also continue to invest directly in the country to support the government’s health care reform agenda and long-term plans for economic growth.”
For more, see here from the BBC.
“The court gave GSK’s former head of Chinese operations, Mark Reilly, a suspended three-year prison sentence and he is set to be deported. Other GSK executives have also been given suspended jail sentences. The guilty verdict was delivered after a one-day trial at a court in Changsha, according to the Xinhua news agency.”
The GSK penalty was described as the biggest fine in Chinese history. The $490 million fine is also believed to be one of the largest bribery/corruption fines ever. For instance, a $490 million settlement would rank third on the top ten list of FCPA settlements.
Perhaps the most interesting aspect of the GSK development is reference in the company’s release to the charges involving “non-government personnel.” In the U.S., it is a prominent enforcement theory that employees of various state-run health care systems – including in China – are “foreign officials” under the FCPA. (See here).
Another interesting aspect of the GSK development – and one foreshadowed in this 2013 post – is how the Chinese verdict will impact GSK’s scrutiny in its home country (United Kingdom). As highlighted in the post, the U.K. has a unique double jeopardy principle and, as explained by former SFO Director Richard Alderman, the U.K. “double jeopardy law looks at the facts in issue in the other jurisdiction and not the precise offense. Our law does not allow someone to be prosecuted here in relation to a set of facts if that person has been in jeopardy of a conviction in relation to those facts in another jurisdiction.”
GSK remains under investigation for conduct outside of China as well.
The U.S. does not have a similar double jeopardy principle, relevant to the extent GSK has shares listed on a U.S. exchange and its conduct in China and elsewhere has been under FCPA scrutiny.
As indicated in the prior post, GSK’s scrutiny – and now liability – in China makes for an interesting case study in enforcement competition.
The Silly Season
Offensive use of the FCPA to accomplish a business objective or advance a litigating position is an observable trend highlighted in my article “Foreign Corrupt Practices Act Ripples.” As noted here, the FCPA has also been used offensively to score (or at least attempt to score) political points.
The election season is upon us and during this “silly season” perhaps the silliest use of the FCPA ever is happening – not once – but twice.
As noted in this article:
“Michigan Democrat Gary Peters profited from a French oil company [Total S.A.] that admitted to bribing Iranian officials for access to their oil fields. […] The Peters campaign did not return requests for comment about whether he was aware of the bribery scandal. […] Republican Senate nominee Terri Lynn Land called on him to divest from the company, but the three-term congressman refused. […] “Gary Peters will do anything to make a dollar and say anything to win an election,” Land spokesman Heather Swift said in a statement. “The more Michigan voters learn about Gary Peters the more they know they can’t trust him to put Michigan first.”
Silly. And there is more.
As noted in this separate article from the same source:
“Sen. Jeanne Shaheen has invested tens of thousands of dollars in a French oil company that admitted to bribing Iranian officials. […] Shaheen’s family owns between $50,000 and $100,000 of stock in Total S.A., the fourth-largest oil company in the world, through a mutual fund.”
Two scoops of silly.
And now for some facts.
Per the DOJ/SEC’s own allegations in the 2013 Total FCPA enforcement action, the vast majority of the alleged improper conduct took place between 1995 and 1997 (that is 17 to 19 years ago). So old was the conduct giving rise to the Total enforcement action, that the DOJ made the unusual statement in the resolution document that “evidentiary challenges” were present for both parties given that “most of the underlying conduct occurred in the 1990s and early 2000s.”
Interesting Read
Speaking of those FCPA ripples, Hyperdynamics Corporation has been under FCPA scrutiny since 2013 and its recent annual report makes for an interesting read as to the wide-ranging business effects of FCPA scrutiny. Among other things, the company disclosed approximately $7.5 million in the prior FY for legal and other professional fees associated with its FCPA scrutiny. Not all issuers disclose pre-enforcement action professional fees and expenses, so when a company does, it provides an interesting data-point.
Chinese Issuers
I began writing about Chinese companies and the FCPA in this 2008 article at the beginning of the trend of Chinese companies listing shares on U.S. exchanges. This 2009 post returned to the issue and noted that with the IPO market showing signs of life again, and with foreign companies increasingly turning to U.S. capital markets, and with many of these companies doing business in FCPA high-risk countries, the number of FCPA enforcement actions against foreign issuers is likely to increase. That, of course, has turned out to be true.
Today, of course, is the IPO of Chinese company Alibaba, expected to be largest U.S. IPO ever. The company’s business model does not exactly rank high in terms of FCPA risk, but recall that the FCPA has always been a law much broader than its name suggests because of the books and records and internal control provisions.
Even as to the anti-bribery provisions, it is at least worth noting, as highlighted in this recent New York Times article:
“Alibaba’s [recent acquisition of a company] provides an example of how the rapid growth of the private sector is also benefiting the country’s political elite, the so-called princelings, or relatives of high-ranking officials. […] Although Alibaba declined to comment for this article, citing regulatory restrictions on public statements ahead of a public offering, the company has said it relies on the market — not political connections — to drive its business. “To those outsiders who stress companies’ various ‘backgrounds,’ we didn’t have them before, we don’t have them now, and in the future we won’t need them!” the company said in a statement in July after a report that several investment companies tied to the sons and grandsons of senior Communist Party leaders owned stakes in Alibaba, including New Horizon Capital, whose founders include the son of former Prime Minister Wen Jiabao.”
As noted in the article, over the past year JPMorgan and several other financial services companies have come under FCPA scrutiny for alleged relationships with princelings.
Get It Right!
It’s a basic issue.
If you are writing about the Foreign Corrupt Practices as a paid journalist you have an obligation to get it right and engage in due diligence before hitting the publish button.
This Corporate Counsel article states:
“It’s already been a big year for enforcement activity under the U.S. Foreign Corrupt Practices Act. In the first half of 2014 alone, the U.S. Department of Justice and the U.S. Securities and Exchange Commission initiated 15 actions against companies alleged to have violated the international corruption law.”
For the record, in the first half of 2014, there have been three corporate FCPA enforcement actions: HP, Alcoa and Marubeni.
*****
A good weekend to all.
Friday Roundup
The problem with NPAs and DPAs, how does your product go to market in China, media coverage in China, victory, scrutiny alerts and updates, and for the reading stack. It’s all here in the Friday roundup.
The Problem With NPAs and DPAs
I’ve long called for the abolition of NPAs and DPAs in the FCPA context as part of a two-pronged reform approach (see here among other posts). As highlighted here among other posts, NPAs and DPAs are problematic across a wide spectrum and the agreements often contain meaningless or senseless language.
This recent Wall Street Journal Law Blog post titled “5 Things Companies Agree to But Can’t Deliver On in DPAs” is a worthy read. It begins:
“FCPA lawyers have a love-hate relationship with deferred-prosecution agreements,” said Laurence Urgenson, a partner at Mayer Brown. “We need them to get around the collateral consequences of prosecutions…but there is language in the agreements that drives us crazy.” Mr. Urgenson said the agreements originated with settlements prosecutors would reach with individuals, often children, placing certain requirements on them as a condition for the charges eventually being dropped. But many of those requirements make no sense in a settlement with a company; Mr. Urgenson picked out some of his favorites.”
How Does Your Product Go To Market In China?
Returning to issues discussed in this 2011 post and this 2011 post, this recent article in Food Navigator – Asia (not my typical source of FCPA material) states as follows concerning practices in China:
“One currently emerging trend is how companies are apparently becoming more comfortable to talk openly about measures they are taking to avoid gaining approvals and still move their products to market. Indeed, four companies outlined to us the agreements they had made with Chinese distributors to deliver their products to locations near to China and then leave the local partners to navigate their movement into the People’s Republic. Most likely, this would be done in cahoots with ministry officials in deals that would involve sweeteners and other transactions. ‘Once we’ve delivered the product, it isn’t our problem what our partner decides to do with it,’ an executive at a U.S.-based multinational told us in Hong Kong. ‘It’s not the cost of approvals that concerns us, it’s the time,” a mid-market manufacturer, also from the U.S., told us. “It is important for us that we hit China right now.’ Not all the companies we talked to about this were from America, but the fact that two were was surprising. This is not least because business practices there are governed by the FCPA … […] What is surprising to us is not the fact that these practices exist at all, it is how U.S. businesses in particular have now become comfortable enough to openly brief the press about their part in this trend.”
That makes two of us that are surprised!
Media Coverage in China
This prior 2012 post titled “All the News That Fit? To Print” highlighted the practice of paying journalists for media coverage in China. Related to the general issue is this recent New York Times article which describes how “journalists who worked for a business news website under investigation in Shanghai have described a scheme of extorting Chinese companies, which were pressed to pay in return for the production of flattering articles or the burying of damaging ones.”
Victory
In this prior post I exposed how the DOJ and SEC literally re-wrote the FCPA statute in the November 2012 issued FCPA Guidance. The post highlighted the difference – even a first year law student would be expected to see – between what the FCPA actually says and the version of the FCPA in the Guidance.
Set forth below is the text of the FCPA regarding the “obtain or retain business” element.
”anything of value to
any foreign official for purposes of
(A) (i) influencing any act or decision of such foreign official in his official capacity, (ii) inducing such foreign official to do or omit to do any act in violation of the lawful duty of such official, or (iii) securing any improper advantage; or
(B) inducing such foreign official to use his influence with a foreign government or instrumentality thereof to affect or influence any act or decision of such government or instrumentality,
in order to assist such issuer in obtaining or retaining business for or with, or directing business to, any person;
Set forth below is how the text of the FCPA was [originally] portrayed in the FCPA Guidance.
“anything of value to
any foreign official for purposes of
(A) (i) influencing any act or decision of such foreign official in his official capacity, (ii) inducing such foreign official to do or omit to do any act in violation of the lawful duty of such official, or (iii) securing any improper advantage; or
(B) inducing such foreign official to use his influence with a foreign government or instrumentality thereof to affect or influence any act or decision of such government or instrumentality, in order to assist such issuer in obtaining or retaining business for or with, or directing business to, any person;
Recently, I received an interesting e-mail from a reader who was confused by my prior post because the FCPA Guidance does not portray the FCPA as suggested in my original post. The reader was right! That’s because the DOJ/SEC changed the version of the FCPA originally set forth in the Guidance to its proper form. To prove that the original FCPA Guidance literally re-wrote the FCPA, here is the version of the FCPA that originally appeared in the FCPA Guidance which relevant portions highlighted.
Subtle yes, but sometimes victory occurs in the shadows.
Scrutiny Alerts and Updates
HP Russia
Related to the April 2014 DOJ enforcement action against HP related entities (see here for the prior post), the DOJ announced yesterday that HP Russia formally pleaded guilty.
As stated in the DOJ release
“In a brazen violation of the FCPA, Hewlett Packard’s Russia subsidiary used millions of dollars in bribes from a secret slush fund to secure a lucrative government contract,” said Principal Deputy Assistant Attorney General Marshall Miller. “Even more troubling was that the government contract up for sale was with Russia’s top prosecutor’s office. Tech companies, like all companies, must compete on a level playing field, not resort to secret books and sham transactions to hide millions of dollars in bribes. The Criminal Division has been at the forefront of this fight because when corruption takes hold overseas, American companies and the rule of law are harmed. Today’s conviction and sentencing are important steps in our ongoing efforts to hold accountable those who corrupt the international marketplace.”
“Today’s conviction and sentence of HP Russia demonstrates that the United States Attorney’s Office is dedicated to aggressively prosecuting all forms of corporate fraud that touch our district, wherever they may occur,” said U.S. Attorney Melinda Haag. “HP’s cooperation during the investigation is what we expect of major corporate leaders facing the challenges of doing business around the world.”
“For more than a decade HP Russia business executives participated in an elaborate scheme that involved paying bribes to government officials in exchange for large contracts,” said Assistant Director in Charge of the FBI’s Washington Field Office Andrew McCabe. “There is no place for bribery in any business model or corporate culture. Along with the Department of Justice, the IRS and international law enforcement partners, the FBI is committed to investigating corrupt backroom deals that threaten our global commerce.”
Image Sensing Systems
Earlier this week, the company issued the following release:
“Image Sensing Systems, Inc. today announced that the DOJ has closed its inquiry into the Company in connection with the previously disclosed investigation of potential violations of the FCPA citing the Company’s voluntary disclosure, thorough investigation, cooperation and voluntary enhancements to its compliance program. The SEC earlier notified the Company that it had closed its investigation under the FCPA without recommending enforcement action. Kris Tufto, Image Sensing Systems chief executive officer, commented, “We are very pleased to conclude the DOJ and SEC investigations without further action. From the very beginning, we have voluntarily cooperated with the authorities and have worked diligently to implement measures to enhance our internal controls and compliance efforts. We understand that those efforts have been recognized and that the resolution of the investigation reflects this cooperation.” As previously reported by Image Sensing Systems, it had learned in early 2013 that Polish authorities were conducting an investigation into alleged violations of Polish law by two employees of Image Sensing Systems Europe Limited SP.Z.O.O., its Polish subsidiary, who had been charged with criminal violations of certain laws related to a project in Poland. A special subcommittee of the audit committee of the board of directors immediately engaged outside counsel to conduct an internal investigation. Image Sensing Systems voluntarily disclosed the matter to the DOJ and the SEC, and it has cooperated fully with those agencies in connection with their review.”
Alstom
Regarding the previously announced U.K. criminal charges against Alstom (see here for the prior post), the U.K. Serious Fraud Office recently released this charge sheet detailing the charges in connection with alleged conduct in India, Poland and Tunisia.
Reading Stack
A very interesting read from the New York Times “Foreign Powers By Influence at Think Tanks.” The article begins as follows.
“More than a dozen prominent Washington research groups have received tens of millions of dollars from foreign governments in recent years while pushing United States government officials to adopt policies that often reflect the donors’ priorities, an investigation by The New York Times has found. The money is increasingly transforming the once-staid think-tank world into a muscular arm of foreign governments’ lobbying in Washington.”
Forbes asks – is it “silly season” in China? What is perhaps silly is the advice highlighted in the article to negotiate the regulatory minefield:
“[B]uild a network. ‘Involve some powerful local Chinese partners in some peripheral areas in order to build a political foundation. I don’t necessarily recommend an overall partnership, since they would be better off with a well-placed approach in specific areas. Have a partnership in marketing or R&D and develop a perception that you are working closely with Chinese firms, but in reality you will not give away anything that is sensitive.”
This is probably only going to increase a company’s risk because of the FCPA’s third-party payment provisions.
*****
A good weekend to all.