The Latest Disclosures
A Friday focus on disclosures. The SEC asks Oracle – what about that FCPA issue, the SEC takes an interest in Libya, and yet another voluntary disclosure.
Oracle
As noted in this previous post, in September 2011 Joe Palazzolo and Samuel Rubenfeld broke the story in the Wall Street Journal, “U.S. Probes Oracle Dealings,” that “U.S. authorities are investigating whether Oracle Corp., one of the world’s largest software companies by sales, violated federal antibribery laws in its dealings abroad …”. According to the report, “agents in the FBI’s Washington field office and fraud prosecutors in the Justice Department’s Criminal Division are handling a criminal investigation, which has been underway for at least a year.” Palazzolo and Rubenfeld also report that the SEC is also investigating for possible civil violations. According to the report, “the agencies are examining whether Oracle employees or agents acting on the company’s behalf made improper payments in Africa in order to land sales of database and applications software.”
Since then, Oracle’s SEC filings have been silent as to any FCPA inquiry. The SEC wants to know why as demonstrated by this February Q&A between the SEC Division of Corporation Finance and Oracle filed by the company.
SEC: “We also note various news articles indicating that the company has been subject to investigations regarding possible Foreign Corrupt Practices Act violations for more than a year. Please tell us how you considered the guidance in paragraphs 50-3 through 50-5 of ASC 450-20-50 in evaluating the need to disclose these pending matters.”
Oracle Response: “We make a quarterly assessment of legal matters, including the matters referenced in the Staff’s inquiry above, to determine how those matters should be treated in the context of the accounting and disclosure requirements of paragraphs 50-3 through 50-5 of ASC 450-20-50. For those matters referenced above, we evaluated whether it was reasonably possible that a loss or a loss exceeding amounts already recognized may be incurred. We determined that the estimated ranges of additional losses for those matters referenced above, if any, either individually or in the aggregate, would not have a material effect on our consolidated financial position, results of operations or cash flows. Consequently, we believe our disclosures comply with the aforementioned guidance.”
ASC 450-20-50 you ask? ASC 450 is the former FASB 5 standard regarding gain and loss contingencies (i.e. when a company should record, disclose or not disclose certain contingencies).
Libya
Two foreign oil companies with ADRs traded on U.S. exchanges recently disclosed SEC scrutiny concerning conduct in Libya.
In this recent SEC filing, French oil company Total S.A. stated as follows.
“In June 2011, the SEC issued to certain oil companies – including, among others, TOTAL – a formal request for information related to their operations in Libya. TOTAL is cooperating with this non-public investigation.”
See here for a recent prior post concerning Total’s FCPA scrutiny in Iran.
In this recent SEC filing, Italian oil company Eni SpA stated as follows.
“On June 10, 2011 Eni received by the US SEC a formal judicial request of collection and presentation of documents (subpoena) related to Eni’ s activity in Libya from 2008 to 2011. The subpoena is related to an ongoing investigation without further clarifications nor specific alleged violations in connection to “certain illicit payments to Libyan officials” possibly violating the US Foreign Corruption Practice Act. At the end of December 2011, Eni received a request for the collection of further documentation aiming at integrating the subpoena previously received. Eni is fully collaborating with the US SEC.”
For more on the recent Libya disclosures, see here from Samuel Rubenfeld at Wall Street Journal Corruption Currents.
As highlighted in this prior post, in July 2010, Eni was a party in the DOJ/SEC’s Bonny Island Nigeria focused FCPA enforcement action which resulted in $365 million in combined fines and penalties.
Another Voluntary Disclosure
SL Industries (here – a New Jersey based designer, manufacturer and marketer of power electronics, motion control, power protection, and other related products) recently disclosed (here) as follows.
“The Company is conducting an investigation to determine whether certain employees of SL Xianghe Power Electronics Corporation, SL Shanghai Power Electronics Corporation and SL Shanghai International Trading Corporation, three of the Company’s indirect wholly-owned subsidiaries incorporated and operating exclusively in China, may have improperly provided gifts and entertainment to government officials. Based upon the initial investigation, which is ongoing, the preliminary estimate of the amounts of such gifts and entertainment does not appear to be material to the Company’s financial statements. There can be no assurance, however, that after further inquiry the actual amounts will not be in excess of what is currently estimated. Such estimate does not take into account the costs to the Company of the investigation or any other additional costs. The Company’s investigation includes determining whether there were any violations of laws, including the U.S. Foreign Corrupt Practices Act. Consequently, on March 29, 2012, the Company’s outside counsel contacted the DOJ and the SEC voluntarily to disclose that the Company was conducting an internal investigation, and agreed to cooperate fully and update the DOJ and SEC periodically on further developments. The Company has retained outside counsel and forensic accountants to assist in its investigation of this matter. Because the investigation is ongoing, the Company cannot predict at this time whether any regulatory action may be taken or any other adverse consequences may result from this matter.”
According to my tally, the new disclosures discussed above means that in the last six weeks, seven companies have newly disclosed FCPA scrutiny. See here for the prior post “The Sun Rose, a Dog Barked, and a Company Disclosed FCPA Scrutiny.” If SEC filings are your ideal form of pleasure reading, you can hardly wait to see what next week holds.
A good weekend to all.
All The News That’s Fit? To Print
This recent article from the New York Times (“In China Press, Best Coverage Cash Can Buy”) caught my eye. It discusses how Chinese journalists are often “more than willing to let flattering news about Western and Asian businesses appear in print and broadcast media – if the price is right.” The article notes that “while Western companies and many Chinese journalists are loath to discuss the subject, public relations and advertising firms are sometimes surprisingly candid about their roles as brokers in buying flattering coverage, referred to [in China] as ‘soft news’ or ‘paid news.'”
In the article, Ogilvy & Mather (one of the world’s largest advertising agencies that services Fortune Global 500 companies and a unit of NASDAQ listed WPP) essentially admits, in certain instances, to facilitating such payments for its clients. Also in the article a “Chinese account manager for another American public relations firms was strikingly frank about paying for coverage.”
The FCPA implication?
In the eyes of the enforcement agencies, employees of state-owned or state-controlled enterprises (i.e. most Chinese media outlets) are “foreign officials” under the FCPA. Given the agencies’ interpretation coupled with the agencies increasingly boundless interpretation of “obtain or retain business”, it will be interesting to see how they react (if they haven’t already) to the front-page New York Times article. Is the type of conduct described in the New York Times article the type of conduct that Congress sought to prohibit when it passed the FCPA? Likely no, but then again this same question could be asked in connection with many recent FCPA inquiries and enforcement actions.
While not a direct parallel to the issues discussed in the New York Times article, in FCPA Opinion Procedure Release 08-03 (here), TRACE International Inc. proposed to pay for certain expenses for journalists employed by Chinese state-owned media outlets to attend a TRACE press conference in Shanghai. According to TRACE in the request, “it is common practice for foreign and domestic companies operating in the PRC to provide a stipend and travel expenses to journalists in connection with a press conference and such stipends are not conditioned on subsequent coverage of the press conference or the nature of the coverage.” Given the various representations offered by TRACE, including that the payments were not contrary to Chinese law and that they would be accurately recorded in its books and records, the DOJ opined that it did not intend to take any enforcement action with respect to the payments. The DOJ noted that the expenses would fall within the FCPA’s affirmative defense in that they appeared to be directly related to the promotion, demonstration, and explanation of TRACE’s products or services. However, in its opinion, the DOJ stated it did not “place [any] weight on the fact that it may be common practice for companies in the PRC to provide such benefits to journalists attending a press conference.”
The New York Times article notes that the above dynamic may not be limited to China. The article states, “media outlets in Europe, Japan, the Philippines, Latin America and even the United States may venture into various gray area, encouraging companies to pay for journalists’ travel or underwriting favorable reporting or agreeing to take out advertising packages in exchange for coverage.”
Next Up – Biomet
First it was Johnson & Johnson (see here – $70 million in combined fines and penalties in April 2011). Then it was Smith & Nephew (see here – $22 million in combined fines and penalties in February 2012). Next up in the sweep of the medical device industry – based on the enforcement theory that certain foreign health care providers are “foreign officials” – is Biomet. Biomet (here) is an Indiana-based company that designs, manufactures and markets products used primarily by musculoskeletal medical specialists in both surgical and non‐surgical therapy.
Total fines and penalties in the Biomet enforcement action were approximately $22.8 million ($17.3 million via a DOJ deferred prosecution agreement, and $5.5 million via a settled SEC civil complaint).
DOJ
The DOJ enforcement action involved a criminal information (here) against Biomet resolved through a deferred prosecution agreement (here).
Criminal Information
In substance, the information begins as follows. “Argentina has a public healthcare system wherein approximately half of hospitals are publicly owned and operated. Health care providers (“HCPs”) who work in the public sector are government employees, providing health care services in their official capacities. Therefore, such HCPs in Argentina are ‘foreign officials’ as that term is defined in the FCPA.” “Brazil has a socialized public healthcare system that provides universal health care to all Brazilian citizens, and the majority of hospitals are publicly-controlled. HCPs who work in the public sector are government employees, providing health care services in their official capacities. Therefore, such HCPs in Brazil are ‘foreign officials’ as that term is defined in the FCPA.” “China has a national healthcare system wherein most Chinese hospitals are publicly owned and operated. HCPs who work at publicly-owned hospitals are government employees, providing health care services in their official capacities.”
The information charges one count of conspiracy to violate the FCPA, three substantive FCPA anti-bribery charges (one charge focused on conduct in Argentina, one charge focused on conduct in Brazil, and one charge focused on conduct in China) and one charge of violating the FCPA’s books and records provisions.
As to the conspiracy charge, the information alleges that between 2000 to 2009, Biomet and others conspired to “secure lucrative business with hospitals in the Argentine, Brazilian, and Chinese public health care systems by making and promising to make corrupt payments of money and things of value to publicly-employed HCPs.”
According to the information, it was part of the conspiracy that “Biomet, certain of its executives, employees, and subsidiaries” – (1) “agreed to pay publicly employed Argentine HCPs 15-20 percent commissions in exchange for the purchase of Biomet products” (2) “agreed to pay Brazilian HCPs 10-20 percent commissions through Brazilian Distributor [a Brazilian company that had exclusive distribution rights for Biomet reconstructive products in Brazil] in exchange for the purchase of Biomet products” and (3) “agreed to pay Chinese HCPs commissions through Chinese Distributor [a Chinese company that acted as a distributor of Biomet products in China], and paid for travel for Chinese HCPs, in exchange for the purchase of Biomet products.”
The information also alleges that it was further part of the conspiracy that at the end of Biomet’s fiscal year from 2000 to 2009 “Biomet, its executives, employees, and subsidiaries falsely recorded the payments on its books and records as ‘commissions,’ ‘royalties,’ ‘consulting fees,’ ‘other sales and marketing,’ and ‘scientific incentives,’ in order to conceal the true nature of the payments in the consolidated books and records of Biomet Argentina [a wholly-owned Argentine subsidiary of Biomet through which Biomet conducted business in Argentina], Biomet International [a wholly-owned Delaware subsidiary of Biomet through which Biomet sold products into Brazil], Scandimed [a wholly-owned Swedish subsidiary through which Biomet sold products into China and elsewhere], and Biomet China [a wholly-owned Chinese subsidiary through which Biomet sold products into China], which books and records were incorporated into the books and records of Biomet for purposes of preparing Biomet’s year-end financial statements, which were filed with the SEC …”.
The information alleges as follows. “In total, from 2000 to 2008, Biomet, Biomet Argentina, Biomet International, Scandidmed, and Biomet China, and their related subsidiaries and employees, authorized the payment, directly or indirectly, of at least $1.5 million, some or all of which was paid to publicly-employed HCPs to induce the purchase of Biomet products.”
As to Argentina, the information largely focuses on internal e-mails or memos which indicated that “royalties are paid to surgeons if requested” and that the payments “are disclosed in the accounting records as commissions.” The information details a 2005 internal investigation into certain allegations of improper conduct, but alleges that thereafter problematic payments continued to be made. For instance, a 2007 internal e-mail states as follows. “Doctors receive a ‘consulting fee’ for every surgery.” According to the information, in August 2008 “Biomet distributed new compliance guidelines that emphasized the FCPA and related issues, and the company’s managing director for Argentina sought advice from the company’s lawyers, causing Biomet to suspend payments to Argentine doctors.”
As to Brazil, the information largely focuses on internal e-mail or memos noting that the Brazilian Distributor was paying commissions to doctors and that the Brazlian Distributor admitted that it “paid doctors for buying Biomet products and described the payments as ‘scientific incentives.”
As to China, the information discusses various internal e-mails which reference: the China Distributor “paying a 10-15% ‘rebate’ to surgeons on the sale of Biomet artificial hips;” a Scandimed employee stating that, regarding commissions to surgeons, “Scandimed has no control over this … as we understand it, giving commissions or gifts of various kinds to surgeons is common in China;”the China Distributor stating that a “Doctor will become the most loyal customer of Biomet if we send him to Switzerland”; and the China Distributor stating as follows – “Doctor is the department head of [public hospital] and that Doctor uses about 10 hips and knees a month and its on an uptrend, as he told us over dinner a week ago … Many key surgeons in Shanghai are buddies of his. A kind word on Biomet from him goes a long way for us. Dinner has been set for the evening of the 24th. It will be nice. But dinner aside, I’ve got to send him to Switzerland to visit his daughter.” The information also references a distribution memo which states that “Chinese surgeons typically receive a commission on sales, which can range from 5% to 25% and that distributors are expected to hold banquets for surgeons and to sponsor meetings.” Another internal e-mail discusses “consulting fees paid to doctors for conducting clinical trials” and a “proposal for a two week visit for Chinese doctors to the United Kingdom, with the second week being a ‘holiday’ paid for by Chinese Distributor.” The information also alleges that in October 2007 “Biomet China sponsored the travel of 20 surgeons to Barcelona and Valencia for training, including a substantial portion of the trip being devoted to sightseeing and other entertainment at Biomet’s expense.” According to the information, in 2005 “Director of Internal Audit [based in Warsaw, Indiana] instructed an auditor to classify improper payments being made to doctors in connection with certain clinical trials as ‘entertainment’ and in 2007, the product manager for Biomet China sent an e-mail to [an Associate Regional Manager based in Hong Kong] “discussing ways to evade efforts by the Chinese government to halt corruption in health care by requiring all international companies to declare actual cost for import to the government, noting, ‘obviously, China government doesn’t have ability to forbid the corruption from hospitals & surgeons …’ and proposing four methods for avoiding the regulation, including falsified invoices.
DPA
The DOJ’s charges against Biomet were resolved via a deferred prosecution agreement. Pursuant to the DPA, Biomet admitted, accepted and acknowledged “that it is responsible for the acts of its officers, employees and agent, and wholly-owned subsidiaries” as set forth in the information.
The term of the DPA is three years and it states that the DOJ entered into the agreement based on the following factors: Biomet investigated and disclosed to the DOJ and SEC the misconduct, “a portion of which was voluntarily disclosed”; Biomet reported its findings to the DOJ and SEC; Biomet cooperated fully in the DOJ and SEC investigation; Biomet undertook remedial measures, including the implementation of an enhanced compliance program and agreed to undertake further remedial measures as set forth in the DPA; Biomet agreed to continue to cooperate with the DOJ, SEC, and foreign authorities in any related investigations; “Biomet has cooperated and agreed to continue to cooperate with the DOJ in the DOJ’s investigations of other companies and individuals in connection with business practices overseas in various markets;” and “were the DOJ to initiate proseuction of Biomet and obtain a conviction, instead of entering into the agreement to defer prosecution, Biomet would potentially be subject to exclusion from participation in federal health care programs pursuant to 42 USC 1320a-7(a).”
Pursuant to the DPA, the advisory Sentencing Guidelines range for the conduct at issue was $21.6 – $43.2 million. The DPA states as follows. “Biomet agrees to pay a monetary penalty in the amount of $17.28 million, a 20 percent reduction off the bottom of the fine range. Biomet and the DOJ agree that this fine is appropriate given Biomet’s extensive internal investigation, the nature and extent of Biomet’s cooperation in this matter, Biomet’s cooperation in the DOJ’s investigation of other companies … and Biomet’s extraordinary remediation.” The guidelines calculation notes that Biomet received a credit for “substantial assistance in the prosecution of others.”
Pursuant to the DPA, Biomet agreed to engage an independent compliance monitor “for a period of not less than 18 months” and to provide periodic reports to the DOJ regarding remediation and implementation of the enhanced compliance measures as described in an attachment to the DPA. As is customary in FCPA DPA’s, Biomet agreed that it shall not make any public statement contradicting its acceptance of responsibility.
See here for the DOJ’s release.
SEC
The SEC’s settled civil complaint (here) against Biomet is based on the same core conduct as described above. In summary it alleges “violations of the FCPA by Biomet and four of its subsidiaries to obtain sales for their medical device business” and that from “2000 through August 2008, Biomet and its four subsidiaries paid bribes to public doctors employed by public hospitals and agencies in Argentina, Brazil, and China.”
Among other things, the SEC’s complaint alleges that “executives and auditors at Biomet’s Indiana headquarters were aware of the Argentine payments to doctors as early as 2000.” The SEC alleges as follows. “Internal audit took no steps to determine why royalties were paid to doctors purchasing Biomet medical devices, or why the payments to the doctors were 15-20 percent of sales. The internal auditors did not obtain any evidence of services provided for the payments. In fact, the internal audit report concluded that there were adequate controls in place to properly account for royalties paid to surgeons without any supporting documentation.” Elsewhere, the SEC alleges that “despite the bribery” [the] Latin America Auditor’s only recommendation was to change the journal entry from ‘commission expenses’ to ‘royalties.'”
The SEC complaint references the September 2007 letter “Commission staff” sent to Biomet “inquiring of payments made to public doctors” but that “while the inquiry was underway in certain countries, additional conduct was occurring at Biomet Argentina.” For instance, the complaint alleges that in March 2008, “Managing Director of Biomet Argentina again reported the payments to surgeons to internal compliance personnel but no efforts were made by compliance to stop the practice.”
As to Biomet’s FCPA anti-bribery violations, the SEC complaint alleges that “Biomet employees who were U.S. nationals approved the payments to Argentine doctors and the arrangements with the Brazilian Distributor and Chinese Distributor that included payments to doctors.”
As to Biomet’s failure to maintain adequate internal controls, the complaint alleges as follows. “Biomet failed to implement internal controls to detect or prevent bribery. Biomet and four subsidiaries were involved in bribery that lasted for over a decade. The conduct involved employees and managers of all levels involved in Biomet’s sales in Argentina, Brazil and China. False documents were routinely created or accepted that concealed the improper payments.”
Based on the above allegations, the SEC complaint charges violations of the FCPA’s anti-bribery provisions and books and records and internal controls provisions.
As stated in the SEC’s release (here), without admitting or denying the SEC’s allegations, Biomet consented to the entry of a court order requiring payment of approximately $4.4 million in disgorgement and approximately $1.1 million in prejudgment interest.
The SEC’s release states as follows. “Biomet’s compliance and internal audit functions failed to stop the payments to doctors even after learning about the illegal pratices.” Kara Brockmeyer (Head of the SEC’s FCPA Unit) stated as follows. “A company’s compliance and internal audit should be the first line of defense against corruption, not part of the problem.”
In this release, Biomet’s President and Chief Executive Officer, Jeffrey R. Binder, stated: “Biomet has long been committed to upholding the highest standards of ethical and legal conduct both in the United States and abroad. Over the past several years, we have significantly enhanced our global compliance procedures and financial controls, and we fully intend to work with the independent monitor and the Department of Justice and Securities and Exchange Commission to bolster our FCPA compliance practices and procedures. Moving forward, we intend to continue to adhere to our enhanced global compliance procedures, and to promote the Company’s commitment to the highest ethical standards in all the markets that we serve.”
Laurence Urgenson (Kirkland & Ellis – here) and Asheesh Goel (Ropes & Gray – here) represented Biomet.
As to the origins of the FCPA inquiry, Biomet’s most recent quarterly filing stated as follows. “On September 25, 2007, Biomet received a letter from the SEC informing the Company that it is conducting an informal investigation regarding possible violations of the Foreign Corrupt Practices Act in the sale of medical devices in certain foreign countries by companies in the medical devices industry. […] On November 9, 2007, the Company received a letter from the Department of Justice requesting any information provided to the SEC be provided to the Department of Justice on a voluntary basis.”
Business Effects
Previous posts have explored the FCPA’s long tentacles (here), collateral civil litigation resulting from FCPA scrutiny or enforcement actions (here and here), how FCPA scrutiny can impact mergers (here), how FCPA scrutiny can impact the cost of capital (here), and numerous prior posts have highlighted professional fees and expenses in connection with FCPA inquiries.
In short, failure to comply with the FCPA has real business effects in addition to any ultimate fine and penalty amount announced on resolution day. This post summarizes several recent business effects associated with FCPA scrutiny.
*****
As previously indicated in this Wall Street Journal Corruption Currents post by Samuel Rubenfeld, S&P recently cut its debt rating on Avon Products Inc. Among the reasons cited for the downgrade was “expenses related to the ongoing investigation under the Foreign Corrupt Practices Act.” (See here). As noted in this recent New York Times White Collar Watch piece by Professor Peter Henning, professional fees and expenses incured by Avon in connection with its internal FCPA review have approached $250 million – and there hasn’t even yet been an enforcement action. Over the past three years and doing the math, Avon has spent approximately $225,000 per day on its FCPA inquiry. One can debate whether such expenses (as well as the other business effects noted in this post) should happen or are truly necessary, but the point remains such effects are happening.
Sticking with the investigative fees issue, Weaterford International recently stated in its March 15th annual report (here) that since disclosure of its FCPA scrutiny (as well as Iraq Oil for Food and OFAC scrutiny) it has “incurred $123 million for legal and professional fees in connection with complying with and conducting” the on-going investigations. According to the company, “this amount excludes the costs [the company has] incurred to augment and improve our compliance function.”
*****
Diebold, which disclosed FCPA issues in July 2010 (see here), stated in March 14th proxy solicitation materials (here) that the cash bonus of Thomas Swidarski (President and CEO) was reduced by the Compensation Committee. According to the materials, the Committee concluded that “given the CEO’s ultimate responsibility for the oversight of the company, as a result of the impact to the company of the global FCPA investigation it was appropriate that Mr. Swidarski’s cash bonus be reduced.” Nevertheless the materials indicate that Swidarski did receive a $1 million cash bonus (on top of his other compensation) … but it could have been more. Another component of the proxy materials that caught my eye was discussion of the Board Special Committee set up to oversee the “global FCPA review.” The materials note as follows. “This committee met in person or telephonically seven times in 2011.
*****
In other disclosure news, Dun & Bradstreet (the world’s leading source of commercial information and insight on businesses) announced earlier this week (see here) that it “has been reviewing certain allegations that local employees may have violated the Foreign Corrupt Practices Act and certain other laws in our China operations. D&B is cooperating with the local Chinese investigation, and has voluntarily reported these matters to the U.S. Department of Justice and the U.S. Securities and Exchange Commission.”
D&B’s FCPA disclosure was contained in the same release in which the company stated it “has temporarily suspended its Shanghai Roadway D&B Marketing Services Co Ltd. operations in China, pending an investigation into allegations that its data collection practices may violate local Chinese consumer data privacy laws.”
D&B’s FCPA disclosure marks the third time in the last four weeks that a company has newly disclosed FCPA scrutiny.
Friday Roundup
Reader mail, an Olympic loophole, this week’s disclosure(s), the SEC speaks, and so do executives … it’s all here in the Friday Roundup.
Reader Mail
At times, even I ask myself why I spend countless hours maintaining a free website. Then I receive an e-mail from a reader such as the one below (the reader encouraged me to share it) and I keep writing.
“I just wanted to thank you for your blog. My son-in-law, [former Africa Sting defendant], was involved in the sting case.
After his arrest we found your website and learned alot from it. We had never heard of the fcpa before all of this happened. Your site was the most informative and easy for nonlawyers to understand. I would check it everyday for updates! It was my lifeline! Thank you again for writing so much about the case. I’m just glad it is over and life can go back to normal.
Sincerely,
[Relative of former Africa Sting defendant]”
Olympic Loophole
A recent article in the Wall Street Journal (A Battle for Mongolia’s Copper Lode – Feb. 22nd) reminded me of a post lost in the unpublished archives.
Last August, Rio Tinto PLC, which manages the Oyu Tolgoi mine in Mongolia, announced (here) that the company “signed an agreement with the Mongolian National Olympic Committee (MNOC) to be a Gold Partner sponsor for the Mongolian National Team competing at the London 2012 Olympic and Paralympic Games.” In the release, Rio Tinto Country Director Mongolia, David Paterson, stated “we are sponsoring the National Olympic Team as part of our long-term commitment to Mongolia and Oyu Tolgoi.” The release further stated as follows. “Rio Tinto’s Olympic sponsorship is just one of many ways the company is contributing to Mongolia’s development. For example, Rio Tinto invests in numerous programmes that assist regional and local communities and young Mongolians in the areas of education and training, local procurement practices and sustainable development.”
An August 2011, Wall Street Journal article discussing Rio Tinto’s sponsorship states that Mongolia “is a key battleground for mining companies, which are vying to extract its rich mineral deposits” and that the Oyu Tolgoi project “is expected to yield 1.2 billion metric tons of copper and 650,000 ounces of gold a year in its first 10 years, as well as silver and other metals.”
For more on Rio Tinto’s involvement at Oyu Tolgoi, see here from the company’s website.
On one level, engaged corporate citizens with a committment to community welfare and development is a good thing and ought to be encouraged.
But, on another level, and FCPA jurisdictional issues aside (although Rio Tinto’s ADR’s are traded on a U.S. exchange), is a company’s sponsorship of a country’s Olympic team any less problematic than a company providing a laptop computer or an expensive bottle of wine to an employee of a state-owned or state-controlled enterprise? What about pre-paid gifts cards (oops, getting ahead of myself, that is coming up next)? Such instances have never been the sole basis for an FCPA enforcement action, but such allegations (or those similar) are frequently included in FCPA enforcement actions suggesting that the enforcement agencies do indeed view such conduct as problematic.
Strange as it may sound, the FCPA’s anti-bribery provisions are only implicated when something of value is provided, directly or indirectly, to a foreign official to influence the official in obtaining or retaining business. The FCPA’s anti-bribery provisions are not implicated when the thing of value is provided to a foreign government itself. Even the DOJ recognizes this. See here for DOJ Opinion Procedure Release 09-01 in which the DOJ states that the proposed course of conduct “fall[s] outside the scope of the FCPA in that the [thing of value] will be provided to the foreign government, as opposed to individual government officials …”.
Is this an FCPA loophole? If so, ought it be closed?
This Week’s Disclosure(s)
Back to those pre-paid gift cards.
On Feb. 16th in this prior post, I commented (somewhat tongue-in-cheek) that every week another company seems to be disclosing FCPA scrutiny. So far two weeks have passed and there have been two new disclosures. This week’s disclosure is from W.W. Grainger Inc. (consistently ranked as one of the “world’s most admired companies” by Forbes). In a recent SEC filing, the company (a broad-line distributor of maintenance, repair and operating supplies and other related products and services) stated as follows.
“The Company is conducting an inquiry into alleged falsification of expense accounts submitted by employees in certain sales offices of Grainger China LLC, a subsidiary of the Company. In the course of the investigation the Company learned that sales employees may have provided prepaid gift cards to certain customers. The extent and value of the gift cards are subject to further inquiry. The Company’s investigation includes determining whether there were any violations of laws, including the U.S. Foreign Corrupt Practices Act. Consequently, on January 24, 2012, the Company contacted the U.S. Department of Justice (DOJ) and the Securities and Exchange Commission (SEC) to voluntarily disclose that the Company was conducting an internal investigation, and agreed to fully cooperate and update the DOJ and SEC periodically on further developments. The Company has retained outside counsel to assist in its investigation of this matter. Because the investigation is on-going, the Company cannot predict at this time whether any regulatory action may be taken or any other potential consequences may result from this matter.”
Finally on the disclosure front, in August 2011, Brucker Corp. made an FCPA disclosure concerning its Brucker Optics subsidiary in China. Recently, the company further disclosed as follows.
“As previously reported, in 2011 the Audit Committee of our Board of Directors commenced an internal investigation, with the assistance of independent outside counsel and an independent forensic consulting firm, in response to certain anonymous communications received by us alleging improper conduct in connection with the China operations of our Bruker Optics subsidiary. The Audit Committee’s investigation, which included a review of compliance by Bruker Optics and its employees in China and Hong Kong with the requirements of the Foreign Corrupt Practices Act (FCPA) and other applicable laws and
regulations, has been completed. The investigation found evidence indicating that payments were made that improperly benefited employees or agents of government-owned enterprises in China. The investigation also has found evidence that certain employees of Bruker Optics in China and Hong Kong failed to comply with our corporate policies and standards of conduct. As a result, we have taken personnel actions, including the termination of certain individuals. We have also terminated our business relationships with certain third party agents, implemented an enhanced FCPA compliance program, and strengthened the financial controls and oversight at our subsidiaries operating in China and Hong Kong. We have also initiated a review of the China operations of our other subsidiaries, which is being conducted with the assistance of an independent audit firm.
“In the fiscal year ended December 31, 2011, $4.3 million was recorded for legal and other professional services incurred related to the internal investigation of these matters.”
As noted in Brucker’s initial filing, in 2010, the China operations of Bruker Optics accounted for less than 2.5 percent of the Company’s consolidated net sales and less than 1.0 percent of its consolidated total assets.
SEC Speaks
The Subject to Inquiry Blog published by McGuireWoods has this post regarding the recent SEC Speaks event. Regarding anti-corruption enforcement, the post states as follows.
The Commission now has a “cross-border group” charged with ferreting out corruption in corporations that trade on US exchanges, but are headquartered abroad. The group is particularly interested in the accounting policies and financial disclosures of cross-border companies, many of which rely on “small US audit firms.” As a result, the SEC is leaning on audit firms, which the SEC regards as “gatekeepers.” To that end, the SEC issued guidance in 2010 and again in 2012, advising that they conduct risk-based analyses of their overseas clients. According to Kara Brockmeyer, head of the SEC’s FCPA Unit, the SEC has seen a spike in Form 8-K reports of accounting irregularities, as well as a jump in Rule 10A reports. She expects additional 10A reports to flow in through the Office of the Whistleblower.
Brockmeyer noted that the SEC is also devoting significant resources to Foreign Corrupt Practices Act (FCPA) enforcement. The SEC’s FCPA Unit is focusing heavily on international cooperation, teaming with regulators around the world. She highlights the FCPA Unit’s cooperation with Switzerland, Russia, and China, each of which recently enacted anticorruption laws. The FCPA Unit brought 20 FCPA enforcement cases 2011, including 19 against companies and one against an individual. Brockmeyer cautioned, however, that the 2011 numbers should not be seen as a model. Indeed, in 2012 the SEC has already charged 14 individuals with FCPA violations, compared with only five companies charged.
From the Executive’s Mouth
Some excerpts from earnings conference calls that caught my eye.
From Bill Utt (President, CEO and Chairman of KBR Inc.) during a recent call. “I would also like to report that in February KBR successfully concluded our three-year independent corporate monitorship related to KBR’s 2009 plea under the US Foreign Corrupt Practices Act case. Overall, the engagement with our corporate monitor was a positive experience for KBR. We remain committed to consistently doing the right thing every time, and our commitment to compliance is a fundamental part of KBR’s culture. In fact, our compliance programs are paying off in terms of new work as we were recently awarded an international project where our compliance program was a differentiating factor in KBR securing the work.”
From Kevin Royal (Senior VP, CFO of Maxwell Technologies) during a recent call. “Now I would like to provide an update regarding the shareholder derivatives. As we have disclosed in past public filings in 2010, two shareholders had alleged that certain of our past and current officers and directors failed to prevent us from violating the US Foreign Corrupt Practices Act, or FCPA. It is important to note that the Company is only a nominal defendant in this suit. In December 2011 mediation was held and a proposed settlement was reached wherein $3 million would be paid to plaintiff’s counsels, with $2.7 million to be paid by our insurance carrier, and $290,000 would be paid by the Company. In addition, we would be required to insure that certain corporate governance measures are in place and in force. The agreement is subject to among other things, court approval and notice to our shareholders. Without admitting any wrongdoing, the defendants to this suit are willing to enter into this settlement in order to expedite resolution of the matter, and to relieve the defendants and the Company from further financial burden. We are pleased that this suit is near final settlement, and look forward to putting this matter behind us.” [For a recent post on FCPA-related civil litigation titled “A Purpose or Parasitic” – see here].
From Bernard Duroc-Danner (President and CEO of Weatherford International in response to a question about the company’s FCPA inquiry) “Well, there’s not a lot to say about, that I can say, about the DOJ process. To a degree, I think it fell off the screen as it were. For us it moves slowly, that’s all I can tell you. So, I don’t have much of an update that I can tell you. And actually even if I could, I wouldn’t have much of an update period.”
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On that note, a good weekend to all.