Category: China

JPMorgan’s Hiring Practices In China Under Scrutiny

Citing a “confidential United States government document,” the New York Times reports that “Federal authorities have opened a bribery investigation into whether JPMorgan Chase hired the children of powerful Chinese officials to help the bank win lucrative business …”.

The Times article states:

“In one instance, the bank hired the son of a former Chinese banking regulator who is now the chairman of the China Everbright Group, a state-controlled financial conglomerate […] After the chairman’s son came on board, JPMorgan secured multiple coveted assignments from the Chinese conglomerate, including advising a subsidiary of the company on a stock offering, records show. The Hong Kong office of JPMorgan also hired the daughter of a Chinese railway official. That official was later detained on accusations of doling out government contracts in exchange for cash bribes, the government document and public records show. The former official’s daughter came to JPMorgan at an opportune time for the New York-based bank: The China Railway Group, a state-controlled construction company that builds railways for the Chinese government, was in the process of selecting JPMorgan to advise on its plans to become a public company, a common move in China for businesses affiliated with the government. With JPMorgan’s help, China Railway raised more than $5 billion when it went public in 2007.”

As the Times article notes, JPMorgan made passing reference to the inquiry in its most recent quarterly filing.  The August 7th filing identified, under the heading “Regulatory Developments” the following.

“A request from the SEC Division of Enforcement seeking information and documents relating to, among other matters, the Firm’s employment of certain former employees in Hong Kong and its business relationships with certain clients.”

The Times article quotes me as follows.

“While the hire of a son or daughter itself is not illegal, red flags would be raised if the person hired was not qualified for the position, or, for example, if a firm never received business before and then lo and behold, the hire brought in business.”

Indeed, there have been Foreign Corrupt Practices Act enforcement actions where the conduct at issue involved the hiring of children or spouses of alleged “foreign officials.”

For instance, in the Tyson Foods enforcement action, part of the FCPA conspiracy alleged was “to place the wives of the [Mexican government] veterinarians on [a subsidiary company’s] payroll, providing them with a salary and benefits, knowing that the wives did not actually perform any services …”.  According to the DOJ, approximately $260,000 “in improper payments were made to the … veterinarians, both indirectly and directly, including through payments to wives of [the] veterinarians.”

In the Daimler enforcement action, the DOJ alleged that the company and its subsidiary in China “employed agents to assist in securing commercial vehicles and Unimog business from Chinese governent customers.”  Also the allegations supporting the FCPA conspiracy charge were:  (i) the company made “a purported commission payment” to “the wife of a Chinese government official at Sinopec” in connection with the sale of commercial vehicles to Sinopec; and (ii) the company made a payment “to a relative of a Chinese government official” associated with the Bureau of Geophysical Prospecting in connection with the sale of commercial vehicles to the entity.

In the Siemens enforcement action, the DOJ alleged that that Siemens Bangladesh “paid $5,000 to the daughter of a Bangladesh Telegraph Telephone Board (BTTB) official ostensibly to work as an ‘engineer’ on the BTTB project, despite the fact that Siemens Bangladesh did not need such an engineer and did not have the budget for the position.”

In the UTStarcom enforcement action, the SEC’s allegations included that the company “provided foreign government customers or their family members with work visas and purportedly hired them to work for [the company] in the U.S., when in reality they did no work for the company.”

In the Paradigm enforcement action, according to the DOJ, “during the same time frame as [a business deal was being discussed with an alleged Mexican “foreign official”], the same [alleged “foreign official”] requested that Paradigm Mexico hire his brother.”  The DOJ stated:  “Paradigm Mexico acquiesced to that demand and hired the decision maker’s brother as a driver. While employed at Paradigm Mexico, the brother did perform some work as a driver.”

Certain other FCPA enforcement actions have also alleged other things of value given to children or spouses of alleged “foreign officials.”

As to a potential cause and effect relationship between JPMorgan’s alleged hiring of children of alleged foreign officials, the article, in addition to the above, also states:

“Before hiring [the son of the chairman of the China Everbright Group], JPMorgan appeared to do little if any business with China Everbright, based on a review of securities filings and news reports. Since then, though, China Everbright has emerged as one of its prized Asian clients.”

“The Ministry of Railways has never hired JPMorgan directly, securities filings and news reports suggest. But those records indicate that the China Railway Group, the construction company whose largest customer is thought to be the Chinese government, hired JPMorgan to take it public in 2007. [The daugher of the former deputy chief engineer of China’s railway ministry] was hired around this time.  […]  About four years later, when [the daughter] was an associate at the bank, JPMorgan won out again. This time, according to media reports, the operator of a high-speed railway from Beijing to Shanghai picked the bank to steer it through its own public offering. That deal fell apart after a 2011 train collision killed 40 people and injured hundreds.”

For additional reading see here from the Wall Street Journal, here from Reuters, here from Fortune, here from the Washington Post, here from the Financial Times and here from The New Yorker (noting “of all the allegations of bribery lodged in recent years against foreign businesses in China  …  [JPMorgan’s scrutiny] is likely to produce dyspepsia in corporate suites in Beijing and Shanghai, where bright, fresh-faced hires are sometimes known less by their credentials than by their parentage”).

On Monday, the first day of trading after the Times article, JPMorgan’s stock closed down 2.7% to $51.83.

Friday Roundup

Future enforcement actions and scrutiny alerts, in the interest of completeness, and for the reading stack.  It’s all here in the Friday Roundup.

Future Enforcement Actions and Scrutiny Alerts

Stay tuned for future FCPA enforcement actions against Diebold and ADM in the approximate $50 million range.

Diebold

Diebold recently stated as follows in this filing.

“Diebold continues to monitor its compliance with the FCPA. It also is continuing its cooperation with the U.S. Department of Justice (DOJ) and Securities and Exchange Commission (SEC) in their ongoing inquiries, and is making continued progress toward a timely resolution of this matter. The company has agreed in principle with the DOJ and the SEC to the terms of a proposed settlement of their inquiries, which terms remain subject to final approval by all parties. These proposed settlement terms include combined payments to the U.S. government of approximately $48.0 million in disgorgement, penalties and prejudgment interest, and the appointment of an independent compliance monitor for a minimum period of 18 months.”

ADM

Archer Daniels Midland Company recently stated as follows in this release.

“ADM has been in discussions with the U.S. Department of Justice and the U.S. Securities and Exchange Commission regarding a previously disclosed FCPA matter dating back to 2008 and earlier. Based upon recent progress in these discussions, ADM believes it is appropriate to increase its provision to $54 million, a $29 million increase over the $25 million established in the first quarter.”

In the Interest of Completeness

This recent post generically referred to the SEC’s case against Fabrice Tourre.  In the interest of completeness, the Wall Street Journal also stated as follows.

“For a chance, SEC attorneys went to trial against a real-live person and allowed a jury to decide whether he had violated the law.  This is progress, and a welcome departure from the SEC’s custom of charging institutions and then demanding money paid by shareholders to settle case without having to go to court.  And despite his loss, kudos to Mr. Tourre for manfully seeking to clear his name while accepting the risk of trial.  (Here).

I also liked this recent editorial from the Wall Street Journal concerning the Tourre case.

“The Securities and Exchange Commission is doing a victory lap over last week’s verdict against former Goldman Sachs trader Fabrice Tourre, but its spin is revealing about the political motivation behind the case. Lead SEC prosecutor Matthew Martens keeps saying again and again that the case was ‘about Wall Street greed.’ Last time we checked, greed is not a crime under the securities laws or any other statutes in the federal code. […] Greed has existed since man committed original sin, and no doubt it has always existed on Wall Street and most other places. Greed in moderation might even be  called ambition. While the media most often attribute it to bonus-seeking  traders on Wall Street, greed can exist in other locations, too. Perhaps you  have noticed how frequently prosecutors leave their government jobs for higher  pay as corporate attorneys. Mr. Martens may eventually be one of them.”

Speaking of which, this previous Friday roundup highlighted former SEC Enforcement Director of Enforcement Robert Khuzami’s new position at Kirkland & Ellis.  This Bloomberg column states:

“The appalling — yet hardly surprising — news that Robert Khuzami, the former enforcement director at the Securities and Exchange Commission, has cashed in his four-year stint for a $5 million-plus salary at Kirkland & Ellis, a prominent Wall Street law firm, is the latest example of the corrupt relationship between money and power in the U.S.”

Speaking of which, in this post on his Corruption Crime and Compliance site, Michael Volkov states: “I am sure Justice Department and Securities and Exchange Commission lawyers sometimes sit back and marvel at the world they have helped create …”.

Indeed, this is why I have long argued that the unique attributes of FCPA enforcement and the special government policies that impact enforcement, and thus make it a highly niched area of law, warrant special solutions. As to DOJ and SEC FCPA enforcement attorneys who have supervisory and discretionary positions and articulate government FCPA policies, it is in the public interest that such individuals be prohibited, when leaving government service, from providing FCPA defense or compliance services in the private sector for a five-year period.

See here for an article in the New York Times regarding fake receipts in China.  Among other things, the article states:

“[The use of fake receipts] is so pervasive that auditors at multinational corporations are also being duped. The British pharmaceutical company GlaxoSmithKline is still trying to figure out how four senior executives at its China operation were able to submit fake receipts to embezzle millions of dollars over the last six years. Police officials say that some of the cash was used to create a slush fund to bribe doctors, hospitals and government officials. […]  China’s fapiao system took root in the late 1980s and early 1990s, when the government began requiring companies to use official receipts issued by the tax authorities for every business transaction. The receipts usually come with a number and government seal.  But the tax receipt system was quickly exploited. Gangs began producing high-quality imitations of the official invoices using specially designed printers with markings that bore a striking likeness to red government seals.  And at many companies, rogue employees started colluding with advertising, consulting and travel agencies to forge or falsify receipts for the purpose of embezzling corporate funds.”

Looking for a good slide show to spice up FCPA training?  See here from the Huffington Post regarding companies that recently resolved FCPA enforcement actions.

This article is titled “False Claims Act Settlements Often are Business Deals” and states:

“But for contractors, the decision on whether to settle a case or to fight accusations and go to trial can have less to do with guilt or innocence and more to do with practical business considerations. ‘Often, it’s really just a cost-benefit analysis,’ said Jonathan Cone, counsel at the Crowell & Moring LLP law firm. ‘In some cases, it’s actually more cost-effective to settle a case rather than risk losing business with the federal government.'”

Spot-on and the logic is even more compelling the bigger and sharper the DOJ’s stick becomes (i.e. a criminal FCPA enforcement action vs. a civil False Claims Act action).

*****

A good weekend to all.

Friday Roundup

Make your voice heard, scrutiny alerts, “foreign official” fun, and for the reading stack.  It’s all here in the Friday roundup.

Make Your Voice Heard

Yesterday, the U.K. Serious Fraud Office announced a consultation on “a draft Code of Practice setting out their approach to the use of Deferred Prosecution Agreements (DPAs).”  According to the release, the U.K. is seeking “views on eight points covered in the draft Code, including the circumstances when a prosecutor should consider a DPA, the criteria to apply when making this decision, and on the disclosure approach envisaged.”

Make your voice heard, “comments are welcome from interested individuals and organisations” and “the consultation closes on Friday 20 September 2013.”  See here for my previous post urging the U.K. to reject DPAs.

Staying in the U.K. this report states as follows.  “The UK Serious Fraud Office is actively investigating two cases under the Bribery Act, said Kevin Davis, the SFO’s chief investigating officer. He also revealed that a further six cases which might lead to prosecutions were under investigation.”

Scrutiny Alerts

Medtronic

Let’s say law enforcement sets up a sobriety checkpoint on the highway.  A sober driver successfully passes through it.  Would we call this an instance of law enforcement “declining” to prosecute the driver for drunk driver?

Of course not, and the same logic should apply in the FCPA context as well.

In June 2008, Medtronic disclosed as follows.

“On September 25, 2007, the Company received a letter from the SEC requesting  information relating to any potential violations of the U.S. Foreign Corrupt  Practices Act in connection with the sale of medical devices in an unspecified  number of foreign countries, including Greece, Poland and Germany. The letter  notes that the Company is a significant participant in the medical device  industry, and seeks any information concerning certain types of payments made  directly or indirectly to government-employed doctors. A number of competitors  have publicly disclosed receiving similar letters. On November 16, 2007, the  Company received a letter from the Department of Justice requesting any  information provided to the SEC. The Company is cooperating with both requests.”

In June 2009, Medtronic disclosed as follows.

“On September 25, 2007, the Company received a letter from the SEC requesting  information relating to any potential violations of the U.S. Foreign Corrupt  Practices Act in connection with the sale of medical devices in an unspecified  number of foreign countries, including Greece, Poland and Germany. Turkey, Italy  and Malaysia have since been added to the inquiry. The letter notes that the  Company is a significant participant in the medical device industry, and seeks  any information concerning certain types of payments made directly or indirectly  to government-employed doctors. A number of competitors have publicly disclosed  receiving similar letters. On November 16, 2007, the Company received a letter  from the Department of Justice requesting any information provided to the SEC.  Since that time the SEC and Department of Justice have made additional requests  for information from the Company. The Company is cooperating with the requests.”

Earlier this week, Medtronic stated as follows.

“On September 25, 2007 and  November 16, 2007, the Company received letters from the U.S. Securities and  Exchange Commission (SEC) and the U.S. Department of Justice (DOJ),  respectively, requesting information relating to any potential violations of the  U.S. Foreign Corrupt Practices Act in connection with the sale of medical  devices in several non-U.S. countries. A number of competitors have publicly  disclosed receiving similar letters. Subsequently, the SEC and DOJ made  additional requests for information from the Company. In June 2013, the SEC and  the DOJ both informed the Company that they would be closing their  investigations without pursuing any enforcement action or charges against the Company.”

The headline on the FCPA Blog read “Medtronic Wins Double Declination.”  The headline on the Risk & Compliance Blog of the Wall Street Journal read “Medtronic Says SEC, DOJ Declined to Prosecute for FCPA Violations.”

I just don’t understand it at all.  (See here for more).

HLW International / Sweett Group

Architecture firm HLW International LLP and Sweett Group Ltd. (a U.K. based construction company) recently were the subject of a leading Wall Street Journal article titled “Inside U.S. Firm’s Bribery Probe” by Joe Palazzolo and Chris Matthews.  The focus of the article concerns the construction of a hospital in Morocco and the alleged promise by a Sweet executive that HLW would get the design contract if it agreed to pay 3.5% of the contract value to “an official inside the United Arab Emirates President’s personal foundation, which was funding the project.”

Charitable donations have been the focus of prior FCPA enforcement actions against Eli Lilly and Schering-Plough as well as the focus of Wynn Resort’s current FCPA scrutiny.

“Foreign Official” Fun

In the Carson “foreign official” challenge, Judge Selna concluded, in denying the defendants’ motion to dismiss (see here),  that “the question of
whether state-owned companies qualify as instrumentalities under the FCPA is a  question of fact.” Judge Selna stated that “several factors bear on the  question of whether a business entity constitutes a government instrumentality”  including the following.

• The foreign state’s characterization of the  entity and its employees;
• The foreign state’s degree of control over  the entity;
• The purpose of the entity’s activities;
• The  entity’s obligations and privileges under the foreign state’s law, including  whether the entity exercises exclusive or controlling power to administer its  designated functions;
• The circumstances surrounding the entity’s  creation; and
• The foreign state’s extent of ownership of the entity,  including the level of financial support by the state (e.g., subsidies,  special tax treatment, and loans).

According to Judge Selna, the above “factors are not exclusive, and no single factor is dispositive.”

According to this recent article in the Wall Street Journal:

“Companies listed on China’s stock exchanges received 85.68 billion yuan ($13.83 billion) in government subsidies last year, up 23% from a year earlier, while corporate profits rose less than 1%, according to a Chinese data provider. The subsidies were equivalent to more than 4% of the companies’ total profits last year, up from around 3% between 2009 and 2011. The subsidies—largely from local authorities but also from the national government—took the form of cheap land, tax rebates, support for loan repayments and straight-up cash. There were a range of reasons, including research and development and support for government environment priorities.”

Reading Stack

The Seventh Edition of the FCPA Handbook from O’Melveny & Myers.

A focus on Southeast Asia in the always informative FCPA Update from Debevoise & Plimpton.

A  mini-roundup of Canada’s recent amendments to its Corruption of Foreign Public Officials Act here (Osler), here (Dentons), and here (Fasken Martineau).

*****

A good weekend to all.

Friday Roundup

Another individual defendant added to the broker-dealer enforcement action, scrutiny alert, want to open a building in China open to the public?, and additional boondoggle specifics.  It’s all here in the Friday roundup.

Additional Individual Defendant Added to the Broker-Dealer Enforcement Action

This previous post highlighted the SEC examination that led to DOJ and SEC charges (including FCPA charges) against Tomas Clarke (a Direct Access Partners (“DAP”) Executive Vice President who worked out of the company’s Miami office) and Alejandro Hurtado (a back-office employee of DAP in Miami).  The enforcement action is based on alleged improper payments to Maria Gonzalez (V.P. of Finance / Executive Manager of Finance and Funds Administration at Bandes, an alleged Venezuelan state-owned banking entity that acts as the financial agent of the state to finance economic development projects).

Earlier this week, the DOJ announced here that Ernesto Lujana (a managing partner at DAP and a branch manager of its Miami offices) was arrested and charged (see here for the criminal complaint) in connection with the same alleged bribery scheme.   As noted in the DOJ’s release “Lujan was charged with one count each of conspiracy to violate the Foreign Corrupt Practices Act (FCPA), violation of the FCPA, conspiracy to violate the Travel Act and violation of the Travel Act [as well as] conspiracy to commit money laundering and money laundering.

Like in the previous enforcement action, the SEC also brought an enforcement action (see here for the complaint) against Lujana.  In this SEC release, Andrew Calamari (Director of the SEC’s New York Regional Office) stated as follows.  “For a scheme this bold to succeed, it required the sneaky collaboration of several individuals including the head of the Miami office.  Lujan and the others may have believed they were covering their tracks, but the SEC’s exam and enforcement teams unraveled their fraud.”

Scrutiny Alert

The Wall Street Journal reported yesterday in this article that GlaxcoSmithKline “is investigating allegations from an anonymous tipster that it sales staff in China was involved in widespread bribery of doctors to prescribe drugs, in some cases for unauthorized uses, between 2004 and 2010.”

The article reported as follows.  “According to e-mails and other documents reviewed by the Wall Street Journal, the tipster has alleged that Glaxo’s China sales staff provided doctors with speaking fees, cash payments, lavish dinners and all-expenses-paid trips in return for prescribing the drug firm’s products.”  As reported in the WSJ article, a Glaxo spokesman confirmed that the company is investigating the allegations, but that after thoroughly investigating “each and every claim” from the anonymous source, the company “has found no evidence of corruption or bribery in or China business.”

The WSJ article further noted that “in 2010 Glaxo disclosed it had been contacted by the Justice Department and the SEC about its overseas operations as part of a wider FCPA investigation into pharmaceutical industry practices abroad.”

As noted in this prior year in review post,  in 2012 50% of corporate FCPA enforcement actions involved, in whole or in part, foreign health care providers (such as physicians, nurses, mid-wives, lab personnel, etc.).  See here for a prior post on the origins and prominence of this enforcement theory.

Want to Open a Building in China Open to the Public?

This recent article in the South China Morning Post reminded me of the many business barriers (including arcane and complex licensing, certification and inspection requirements) which often funnel companies seeking to do business in a foreign country into an arbitrary world of low-paying civil servants who frequently supplement their meager salaries through payments condoned in the host country.

The article states, in pertinent part, as follows.

“To obtain a fire-safety certificate from a local fire department, a business owner must pass five ‘checkpoints’ in a complicated and lengthy administrative process.  Each checkpoint is guarded by officials in charge of site inspections and reviewing construction blueprints, equipment and contingency plans. Bribes considerably expedite the process that officials might otherwise draw out for weeks, months or years. Bribes range from a few thousand yuan to hundreds of thousands, per official, depending on their rank and the size of the project. But money isn’t everything – some officials must be wined and dined or given luxury cigarettes. Others request the services of prostitutes. […] Salaries of firefighters are quite low – about 3,400 yuan (HK$4,300) a month in Shanghai – and many come from poor or rural families, as the job hazards dissuade many people from joining. […] However, competition for administrative posts within fire departments was fierce, and only those with strong connections or family influence would stand a chance of winning non-frontline jobs where the real money was made.”

Additional Boondoggle Specifics

This recent Friday roundup detailed boondoggle specifics concerning Wal-Mart’s FCPA scrutiny and related investigation.  As noted here, Jeff Gearheart, the executive officer overseeing global compliance for Wal-Mart Stores Inc., told analysts last week that “300 legal and accounting professionals have logged more than 100,000 hours toward FCPA issues.”

*****

A good weekend to all.

Friday Roundup

The U.S. intervenes, I disagree, I agree, and say what.  It’s all here in the Friday roundup.

U.S. Intervenes in Wynn-Okada Dispute

Numerous prior posts (see here, here and here for instance) have highlighted the dispute between Wynn Resorts and its former board member Kazuo Okada.  Earlier this week, Bloomberg reported as follows.  “The U.S. asked to intervene in a lawsuit brought by Wynn Resorts Ltd., which accused Okada of making improper payments to Philippine gambling regulators. The Justice Department said in an April 8 filing in state court in Las Vegas that it doesn’t want the civil case to disrupt its criminal investigation into the same underlying allegations.”  According to Bloomberg:  “Okada’s lawyers have said they would probably oppose the request “in whole or in part,” according to the filing. Wynn Resorts won’t oppose its request, the Justice Department said.”  For additional coverage, see here from the Las Vegas Review-Journal.

I Disagree

Earlier this week a reader of the FCPA Blog (see here) posed the following question.  “One thing  that has not gotten much discussion is the possibility that the apparent slowdown in FCPA enforcement may be due to the spike in declinations.”

Putting aside the big-picture and highly relevant issue of what is a declination (see here as well as other embedded posts on this issue), when addressing the issue of FCPA enforcement statistics, it is important to keep in mind (as highlighted in this prior post) the following.

Just three unique historical events (Iraq Oil for Food, Bonny Island, Nigeria conduct, and Panalpina-related issues) served as the foundation for 35% of all corporate FCPA enforcement actions between 2007-2011 and resulted in 55% of settlement amounts in corporate enforcement actions between 2007-2011.  Adding just the 2008 Siemens enforcement action to the settlement amount calculation, results in just four unique historical events accounting for 77% of settlement amounts in corporate enforcement actions between 2007-2011.

Recognizing these events and how they impacted FCPA enforcement data is important to understanding why FCPA enforcement has declined in recent years.

Even though FCPA enforcement has declined in recent years, unique events giving rise to FCPA enforcement actions have remained relatively constant between 2007 and 2012.  In 2007, corporate FCPA enforcement actions were the result of 15 unique events.  In 2008, corporate FCPA enforcement actions were the result of 10 unique events.  In 2009, corporate FCPA enforcement actions were the result of 11 unique events.  In 2010, corporate FCPA enforcement actions were the result of 14 unique events.  In 2011, corporate FCPA enforcement actions were the result of 16 unique events.  In 2012, corporate FCPA enforcement actions were the result of 12 unique events.

I Agree

Dieter Juedes (who like me is a product of Sheboygan County, Wisconsin) recently published “Taming the FCPA Overreach Through an Adequate Procedures Defense” in the William & Mary Business Law Review.  Among other things, the article “proposes specific statutory language that Congress could use in adopting such a defense and it establishes precise factors to be promulgated by the DOJ and SEC for determining whether a firm’s procedure would be deemed “adequate.”

Given my prior article “Revisiting a Foreign Corrupt Practices Act Compliance Defense,” I agree with the general thrust of Juedes’s article.

Say What?

I don’t quite understand the logic or rationale of this op-ed piece in the South China Morning Post by Robert Precht (director of Justice Labs Limited, a Hong Kong think tank).

Precht argues that “the efforts of some Western countries to enforce their own anti-bribery laws in China are more likely to produce false accusations and hinder democratic reform than reduce corruption.”  He states as follows.  “One of the unintended harms of enforcing the US anti-bribery law in China is that it may actually stifle efforts to end corruption. US journalists, human rights workers and university researchers play an important role in shining light on the darker recesses of Chinese politics. Preventing Americans from making gifts to Chinese to obtain information useful to promote democratic reform will hinder the disclosure role the Americans play.”

According to Precht, “the solution is simple.”  He argues that “the US Congress should amend the law, providing that it will only be applied in countries that meet certain minimum requirements of democracy and will not be applied in authoritarian regimes such as China.”