Category: Compliance

Survey Results Should Cause Concern

Senator Frank Church, Senator William Proxmire and Representative Robert Eckhardt were the main Congressional leaders when it came to passage of the Foreign Corrupt Practices Act.  None are with us today, but if they were, it would be interesting to hear their reaction to the plethora of FCPA related survey information in the public domain 37 years after passage of the FCPA.

My hunch is that these Congressional leaders would be flabbergasted.

For instance, Kroll and Compliance Week recently released a joint “2014 Anti-Bribery and Corruption Benchmarking Report” (see here to download).  The self-reported survey produced 197 responses from a range of industries and respondents were employed by companies with a median worldwide employee headcount of approximately 9.600.

The survey result that most caught my eye is the following:  81% of respondents anticipate the bribery and corruption risks to their company over the next 2-3 years to increase (51%) or remain the same (30%).

This response ought to prompt questions whether the current approach to enforcement – as well as enforcement policy – are effective.

I’ve long maintained that while ad hoc enforcement of alleged bribe payers is an important aspect of reducing bribery and corruption, the singular focus on actual enforcement statistics and the “pound the pavement” for more enforcement mantra of many does little to address the root causes of bribery and corruption in many instances.  Foreign 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.

Moreover, enforcement policy ought to be focused on creating the best positive incentives.  The DOJ and SEC recognized this basic point in the FCPA Guidance, yet recent survey responses also ought to prompt many questions whether current enforcement policy is indeed creating the best positive incentives.

The vast majority of FCPA enforcement actions are based, in whole or in part, on the conduct of various third parties.  Yet, the Kroll / Compliance Week survey reports that 58% of respondents said they never train third parties on anti-corruption efforts. (Survey respondents reported an average of 3,868 third parties).

This Grant Thorton General Counsel survey also contained survey results that should cause concern as to the effectiveness of current enforcement policy.  According to the survey:

“Even with the movement towards the codification of compliance plans by the DOJ and the SEC over a year ago, only 29% of survey respondents state that they have implemented all of the guidelines, while 47% are “not sufficiently familiar” with the guidelines to reply. Among organizations that have not fully implemented the DOJ and SEC guidelines, 65% responded that a “lack of compliance staff and budgets” was the primary reason.”

Ditto for the recent LRN “2014 Ethics & Compliance Program Effectiveness Report” which found:

“Fewer than half of all programs average at least substantial progress on the critical hallmarks identified in the DOJ/SEC guidance on the Foreign Corrupt Practices Act.”

So what would the best positive incentive be to achieve greater adoption of best practices and thus FCPA compliance?

I have long submitted that an FCPA compliance defense (along the lines outlined in my article “Revisiting a Foreign Corrupt Practices Act Compliance Defense“) is an appropriate answer. So have several former high-ranking DOJ enforcement officials (see here among other posts).

I am not suggesting that an FCPA compliance defense is a panacea, but what I am suggesting and what I hoped to demonstrate in this post is that a compliance defense is the best positive incentive to achieve greater FCPA compliance.

While I can only speculate what various survey responses would be if there was an FCPA compliance defense, I am confident in predicting that more than 42% of companies would train third-parties on anti-corruption efforts, more than 29% of companies would be acting fully consistent with widely accepted best practices, and that more compliance staff and budgets would result.

And I further submit that these would all be good developments as an FCPA compliance defense is not a race to the bottom (as has been suggested) but rather a race to the top.

SEC Chair White’s Recent Speech Touches Upon Several FCPA Related Issues

SEC Chair Mary Jo White recently delivered this speech titled “Three Key Pressure Points in the Current Enforcement Environment.”  White addressed the following “pressure points” through her “lens as the Chair of the SEC”

(1) the pressure of multiple regulators in the same or overlapping investigations;

(2) the decision to charge individuals, entities, or both; and

(3) the range of remedies and ultimate resolutions.

The SEC’s FCPA enforcement program touches upon all of these issues and this post highlights certain ironies in White’s speech.

 As to the first “pressure point” –  “which regulators are involved,” White stated in pertinent part:

“The first variable is which regulators are, or are likely to be, involved.  The answer, of course, will depend on the nature of the alleged conduct as well as the jurisdiction and interest of regulators and prosecutors.  And the number and type of regulators involved will define the range of possible outcomes, and dictate the kind of advice you will give clients.

When I first went back into private practice in 2002, investigations were often conducted by one, maybe two, regulators.  Frequently, investigations were conducted in parallel by the SEC and criminal authorities, as they are today.  But usually, that was it.  Now, it is common to have investigations with more – sometimes many more – than two regulators, whether they are additional federal regulators, state prosecutors, attorneys general, or foreign regulators.  There are many reasons for this, including: the internationalization of enforcement; the global nature of many of today’s securities frauds; the increased regulatory activity on the state level; and the increased complexity of our markets.

So, with numerous regulators with overlapping mandates to investigate any given potential case, how do we stay in our lanes?  Or is it inevitable that we overcrowd every domestic and international highway on today’s enforcement landscape?

Of course, each agency makes its own decision about which investigations to pursue, thus leading to a crowded highway in many investigations.  Enforcers may perceive that outcome as both necessary and desirable if their mandates are to be strongly implemented and their messages heard.  From my perch at the SEC, I surely have that inclination, wanting us to be involved in any matter that touches our jurisdiction, so that we can shape the outcome in a way that is consistent with our view of the law and appropriate conduct.

But, at the same time, we regulators need to keep in mind the impact we have on those we regulate and ensure that our own respective interests do not lead to unjust, duplicative outcomes.  Especially in an era of scarce resources, regulatory choices and coordination are critical.  Each agency should make a frank assessment of whether it brings the right expertise, jurisdictional authority, and appropriate remedies to the table.

There are actually some coordination successes we can point to and build upon.  For example, in the FCPA area, the SEC and DOJ, and frequently other international regulators, have a long history of coordinating effectively, to the point that the SEC and DOJ jointly developed the “Resource Guide” that closely examines the SEC and DOJ approach to FCPA enforcement.  In the typical case, the SEC and DOJ will investigate in parallel from the outset, and if the matter settles, the SEC usually obtains the disgorgement as part of its resolution and DOJ obtains the penalty.  This division of labor and remedies achieves full accountability without regulatory “double dipping.”

[…]

Collectively, we should also try to avoid unnecessary competition among ourselves for cases and headlines.  While I realize we may not always achieve this goal in practice, enforcement is serious business and we have a professional responsibility to use our agency resources wisely and in a manner that best applies our specific expertise and enforcement tools.  And there is never room for anything other than a thorough investigation of all the evidence – wherever and to whomever it may lead.  Rushes to judgment or to the courthouse can potentially result in both injustices and charges that may not capture all of the culpable parties or misconduct.

Of course, there is often good reason for conducting criminal and regulatory investigations in parallel.  In appropriate cases, we need to rely on our criminal law enforcement colleagues, who have the power to jail, to work with us.  But what does and should determine whether a securities fraud case is brought civilly, criminally, or both?

It may help to think about the cases in three categories.  The first are those that do not involve intentional wrongdoing, but rather failures of controls or reporting obligations.  These cases fall squarely within the SEC’s wheelhouse and will rarely, if ever, be brought criminally.  Examples include failure to supervise cases; violations of broker-dealer rules like the market access rule, Rule15c3-5; cases involving unprofessional, but not fraudulent, audits; failures of investment advisers to follow compliance rules; or violations by exchanges of their own rules.  These are important cases that influence conduct in the industry and ensure a significant focus on compliance and controls.  But they are not criminal cases because the misconduct rarely involves intent.

The second category of cases are those that clearly have a criminal component – those involving egregious, fraud-based conduct with a strong evidentiary trail.  These cases are often the most sophisticated frauds causing significant investor harm, brazen attempts to steal money through offering frauds or Ponzi schemes, or blatant frauds on the markets through insider trading.  There is no ambiguity in these cases – egregious conduct deserves the severe sanction of imprisonment, and often in these cases, the criminal authorities are participants in the investigation from the beginning.

The third category – the most difficult to define – are those on the line, where a criminal case is possible but not necessarily apparent on the face of the conduct.Often, such cases rely on prosecutors ready to bring cases where the evidence is not overwhelming but is sufficient to find the offense beyond a reasonable doubt.  It is often in these cases that the criminal authorities monitor the SEC investigations to determine whether sufficient evidence has developed to justify criminal interest.  And it is in these cases that we at the SEC must maintain open channels of communication with the criminal authorities to determine whether they have sufficient interest in the matter to participate in interviews of witnesses and other evidence gathering exercises.

The bottom line is that the decision of whether a case will go criminal will typically turn on the strength of the evidence and the type of offense under investigation – which are the appropriate factors to consider in making such a determination.”

White’s concerns regarding “overcrowding,” “duplicative outcomes” and “double dipping” of course were spot-on.  Indeed “double dipping” is what occurs in most FCPA enforcement actions involving issuers – see here for the prior post.

The irony of course is that she mentioned the DOJ/SEC’s overlapping FCPA jurisdiction as a success when, in the minds of many, overlapping FCPA jurisdiction is Exhibit A for “overcrowding,” “duplicative outcomes” and “double dipping.”  For starters, as highlighted in “The Story of the Foreign Corrupt Practices Act,” the SEC never wanted any part in enforcing the FCPA’s anti-bribery provisions.

Among the FCPA reform proposals advanced by Philip Urofosky (former DOJ Assistant Chief of the Fraud Section) in this article is to “eliminate overlapping enforcement jurisdiction” – in other words Urofosky writes, “the SEC should get out of the anti-bribery business.”

He writes as follows.

“The SEC’s enforcement of the anti-bribery provisions raises a fundamental matter of fairness.  Take two companies, one public and one private, and assume that both violate the FCPA and realize the same illicit gain from the violation.  The private company will be subject only to DOJ’s jurisdiction and will therefore be exposed to a criminal fine of up to twice its gain.  The public company, on the other hand, will be subject both to that criminal fine and to a civil fine and disgorgement of the illicit proceeds, thus potentially paying a third more in fines than the private company for the same conduct.”

For additional support for this reform proposal, see Professor Barbara Black’s article (here) “The SEC and the Foreign Corrupt Practices Act:  Fighting Global Corruption Is Not Part of the SEC’s Mission.”

As to the second “pressure point” –  “what defendants are being charged,” White stated in pertinent part:

“Irrespective of which and how many investigators you face, the second decision point in nearly every securities enforcement investigation is who will be charged as a defendant – a decision that again is, and should be, dictated by the nature of the misconduct and strength of the evidence.

[…]

First, I want to dispel any notion that the SEC does not charge individuals often enough or that we will settle with entities in lieu of charging individuals.

The simple fact is that the SEC charges individuals in most of our cases, which is as it should be.  A recent Harvard survey shows that since 2000, the SEC has charged individuals in 93% of our actions involving nationally listed firms in which we charged fraud or violations of books and records and internal control rules.  An internal, back-of-the envelope, analysis the staff did recently indicates that since the beginning of the 2011 fiscal year, we charged individuals in 83% of our actions. Under either calculation, those percentages are very high – which means that the cases where individuals are not charged are by far the exception, not the rule.

I expect that this is probably not news to most of you who have had individual clients charged by the SEC.  It should also not be a surprise that we focus our investigations initially on the individuals closest to the wrongdoing and work outward and upward from there to determine who else should be charged, including whether to charge the corporation.  A company, after all, can only act through its employees and if an enforcement program is to have a strong deterrent effect, it is critical that responsible individuals be charged, as high up as the evidence takes us.  And we look for ways to innovate in order to further strengthen our ability to charge individuals.

One new approach to charging individuals is to use Section 20(b) of the Exchange Act.  Although this section dates back to the original Exchange Act of 1934, chances are you may not be very familiar with it because, frankly, it has not been a common charge.  Before you start reaching for your smart phones to look it up, let me save you the trouble.  Section 20(b) imposes primary liability on a person who, directly or indirectly, does anything “by means of any other person” that would be unlawful for that person to do on his or her own. This is analogous in the criminal context to 18 U.S.C. Section 2(b), which provides for criminal liability as a principal for anyone who “willfully causes an act to be done which if directly performed by him or another would be” a criminal violation.

We are focusing on Section 20(b) charges where – as is frequently the case in microcap and other frauds – individuals have engaged in unlawful activity but attempted to insulate themselves from liability by avoiding direct communication with the defrauded investors.  It is potentially a very powerful tool that can reach those who have participated in disseminating false or misleading information to investors through offering materials, stock promotional materials, or earnings call transcripts, but who might not be liable under Rule 10b-5(b) following the Supreme Court’s decision in Janus because they may not be the “maker” of the statement.

Just as importantly, though, as with 18 U.S.C. Section 2(b), Exchange Act Section 20(b) is a form of primary liability, rather than secondary liability, which would require proof of a separate violation by someone other than the defendant.  So, we can use Section 20(b) where aiding and abetting or controlling person theories may fall short because there is no underlying violation by someone else, such as, for example, when the other person who publicly makes the misleading statements lacks knowledge that they were misleading.

In this portion of her speech, White stated:  “the simple fact is that the SEC charges individuals in most of our cases, which is as it should be.”

Fact-check.

As highlighted in this prior post, between 2008 – 2013, 82% of corporate SEC FCPA enforcement actions have not (at least yet) resulted in any SEC charges against company employees.  Thus far in 2014 there have been two corporate SEC FCPA enforcement actions and none have involved (at least yet) charges against company employees.  The last time the SEC has brought an FCPA enforcement action against individuals in connection with a corporate enforcement action was in February 2012 (see here).

As to the third “pressure point,” – “determining the appropriate resolution,” White stated in pertinent part:

“[L]let me share a bit about our current thinking on some of the non-monetary remedies and resolutions we are currently emphasizing at the SEC – the use of bars, monitors, and admissions.

One the SEC’s most powerful non-monetary remedies to protect the public from future harm is our authority to bar wrongdoers who work in the industry or appear before the SEC.  And I have encouraged our Enforcement Division to increase the use of these bars in appropriate cases and to ensure that we obtain bars for periods of time that respond to the seriousness of the misconduct.

We have also been more focused on seeking and obtaining undertakings requiring the use of monitors or independent compliance consultants, and doing so in a way that directly addresses the root causes of the misconduct.  Ensuring that defendants address their deficiencies and implement corrective actions is critical to making sure that our actions protect investors from future harm.

Another popular tool we have implemented since I became Chair is to require admissions of wrongdoing in certain cases.  As I have described before, we seek admissions in cases where there is a heightened need for public accountability or for the investing public to know the unambiguous facts.  And, we have now required admissions in a number of significant cases. Expect to see more as we go forward and the new protocol evolves.”

As highlighted over the past several years in SEC FCPA enforcement year in review posts, it is a mystery to many how and why certain FCPA enforcement actions include a civil penalty, disgorgement and prejudgment interest, whereas other enforcement actions include only disgorgement and prejudgment interest, whereas other enforcement actions include only disgorgement, whereas other enforcement actions include only a civil penalty.

****

In this recent speech, Andrew Ceresney (SEC Division of Enforcement Director) stated:

“I have found that you can predict a lot about the likelihood of an enforcement action by asking a few simple questions about the role of the company’s legal and compliance departments in the firm.  Are legal and compliance personnel included in critical meetings?  Are their views typically sought and followed?  Do legal and compliance officers report to the CEO and have significant visibility with the board?  Are the legal and compliance departments viewed as an important partner in the business and not simply as support functions or a cost center?  Far too often, the answer to these questions is no, and the absence of real legal and compliance involvement in company deliberations can lead to compliance lapses, which, in turn, result in enforcement issues.

When I was in private practice, I always could detect a significant difference between companies that prioritized legal and compliance and those that did not.  When legal and compliance were not equal partners in the business, and were not consulted as a matter of course, problems were inevitable. “

In this recent speech SEC Commissioner Kara Stein talked about the important “role of gatekeepers” and stated:

The Role of Gatekeepers

“So who is in a position, either within or outside a firm, to help? In effect, who are the gatekeepers that are able to disrupt or prevent misconduct? Certainly auditors and outside legal counsel can play this role. As most of you know, it doesn’t stop there. Executives, compliance officers, in-house counsels, and boards of directors also can help.

Each of these persons is in a unique position to monitor and promote legal compliance. Accountants and lawyers provide services that issuers need to access our capital markets. And their services are provided to multiple firms, which enables them to promote compliance broadly.

Internal gatekeepers play just as vital a role in compliance. Compliance officers must design, test, and update firm policies. Firm management and the board generally must approve these policies and monitor compliance with them. Executives, hopefully with the help of a good Chief Compliance Officer (CCO), must establish a strong “tone at the top.” Because, as we all know, the compliance function won’t work without buy-in and commitment at the top.

A recurring theme in many of the cases that I review each week is the failure of some of these important players or gatekeepers to disrupt or prevent misconduct. This troubles me greatly, and I know it troubles all of you as well.

How can the Commission help you make prevention more effective? What are the best incentives? Carrots? Sticks? Or both?

First, let’s talk about sticks. The Commission recently imposed a $200 million penalty against a large bank for misstating financial results and lacking effective internal controls. This breakdown in controls, a core part of compliance, contributed to billions – yes billions – in trading losses. The penalty was unprecedented for this type of case and is one of the largest penalties in the history of the Commission. Yet it amounted to a tiny fraction of the firm’s net income for just one quarter.

If our actions become nothing more than a footnote in the litigation reserve section of a firm’s financial statements, or a brief media storm that can be easily weathered before it is back to business as usual, have we been effective?

Or is it more effective to hold individuals to account? The people who could have, and should have, prevented the harm? This may help empower each of you in making the case to your clients and your firms that they should heed your advice.

I applaud our enforcement staff for bringing some tough and important cases. For example, we recently brought a financial fraud case against the Chief Financial Officer of a large public company, a case against a Chief Compliance Officer for violations of custody and compliance rules, and a case against the directors of an investment company for failing to properly oversee the fair valuation of fund securities.

But one gatekeeper that often is absent from the list of cases I see every week are the lawyers. Lawyers often serve as trusted advisers, and they give advice on almost every corporate transaction. They prepare and review disclosures that investors rely upon – disclosures that are at the core of the Commission’s regulatory program. And in most cases, they do a good job. But when lawyers provide bad advice or effectively assist in a fraud, sometimes their involvement is used as a shield against liability for both themselves, and for others.

Are we treating lawyers differently from other gatekeepers, such as accountants? I think we should carefully review the role that lawyers play in our markets, with a view towards how they can better help deter misconduct and prevent fraud.

Another critical partner is the CCO. Many of you in the audience are CCOs, and I appreciate the important work that you do each day. The CCO is a relatively new position, and the role has evolved significantly over time.

It is clear to me that the vast majority of CCOs are working hard and getting good results. But many of you are nonetheless concerned about possible enforcement actions against CCOs. There is a concern that charging CCOs will have the unintended consequence of weakening the compliance function. I have heard it said that these cases may lead to a drop in the quality of CCOs, because the best candidates will not be willing to serve. And those CCOs that remain willing to assume the role will be less effective because, for example, they may avoid certain functions such as participating in firm committees. That is not the intention.

If you read the facts in the cases we bring, you will see that they are not cases against CCOs that were promoting compliance. Instead, they are cases against CCOs that were assisting fraud, ignoring red flags, not asking the tough questions, and not demanding answers.

These cases should empower you within your firms to continue to be vigilant and assertive. And know that we “have your back” when others try to prevent you from doing your job. For example, the Commission recently brought a case against a portfolio manager for misleading the firm’s CCO by forging documents to conceal his failure to report personal trades.

While these enforcement cases are important, carrots to incentivize the right behavior may be even more critical. This, of course, raises an important threshold question – what is the right behavior? It will depend on the type of gatekeeper, the role that he or she plays, and the facts and circumstances of each case. For some gatekeepers, such as accountants, the role is well-defined. For others, such as CCOs, it is less so.

This creates uncertainty, which I believe is at the heart of the concerns that I’ve heard about CCO liability. We owe it to you to remove some of this uncertainty so that you can fully unleash your power to prevent harm.

One way to do this is for the Commission to provide guidance that sets clearer expectations on what it means to act appropriately. And when those expectations are met, a CCO can have comfort that he or she will not face liability.

What are the right expectations for CCOs? Again, I need your input. Should the Commission establish a minimum baseline of conduct for CCOs? It could contain basic obligations, such as requiring the CCO to establish and implement policies, and escalate issues that arise. And to whom should the CCO escalate issues? Executives at the firm? The board? A firm committee? And what happens if the CCO receives an unsatisfactory response? There are no easy answers here, but we must make the effort to bring guidance and clarity to you on these issues. And we need your help to get it right.”

Friday Roundup

U.S. reportedly did not cooperate, Avon’s reaches a settlement “understanding” and other scrutiny alerts, the “financial SWAT team,” at the SEC, FCPA Inc. news, and for the reading stack.  It’s all here in the Friday roundup.

U.S. Reportedly Did Not Cooperate

The DOJ talks a lot about cooperation with foreign law enforcement partners with its comes to its Foreign Corrupt Practices Act enforcement program.  For instance, and as noted in this prior post, in June 2013 the DOJ’s Acting Assistant Attorney General stated:

“Through our increased work on prosecutions with our foreign counterparts and our participation in various multi-lateral fora like the OECD and United Nations, it is safe to say that we are cooperating with foreign law enforcement on foreign bribery cases more closely today than at any time in history.  This type of collaboration is absolutely critical if we are going to have a meaningful impact on corruption internationally.  As our economies become more interdependent, corruption itself is increasingly transnational.  What may be a domestic corruption concern for one country may very well be a foreign bribery concern for another.”

In 2012 and 2013 (see here and here) the DOJ brought related FCPA enforcement actions against BizJet and various former executives regarding, in part, conduct involving officials from Panama’s Aviation Authority.

Panama also investigated the conduct at issue, but according to this report in Panama-Guide.com (a website that provides English translations of original source news articles):

“Panama’s Superior Prosecutor for Organized Crime requested the judges responsible for the case to provisionally close a case involving allegations of the payments of bribes to officials of the Civil Aviation Authority by the US company BizJet, that received the contract to maintain the presidential aircraft between 2004 and 2009. The prosecutor sent his request in early March 2014, because law enforcement authorities in the United States failed to respond to a second request for judicial assistance in order to clarify key pieces of data (evidence) contained in the Panamanian investigation. The prosecutor sent their first request for assistance to the United States in May 2012 asking for collaboration, but the answer they sent in response to the Panamanian investigators was not enough (insufficient) for them to continue the investigation. They sent a second request for assistance in 2013, asking for the evidence that linked the Panamanians to the alleged bribes.  According to judicial sources, these elements would be important to the process. The director of the AAC, Rafael Barcenas, confirmed that the officials mentioned in investigation in the United States are still working for the entity, and while there is no legal decision his office will not take any action against them.”

Scrutiny Alerts

Avon

Yesterday, Avon disclosed as follows regarding the FCPA scrutiny it has been under since 2008.

“We have now reached an understanding with respect to terms of settlement with each of the DOJ and the staff of the SEC. Based on these understandings, the Company would, among other things: pay aggregate fines, disgorgement and prejudgment interest of $135 [million] with respect to alleged violations of the books and records and internal control provisions of the FCPA, with $68 [million] payable to the DOJ and $67 [million] payable to the SEC; enter into a deferred prosecution agreement (“DPA”) with the DOJ under which the DOJ would defer criminal prosecution of the Company for a period of three years in connection with alleged violations of the books and records and internal control provisions of the FCPA; agree to have a compliance monitor which, with the approval of the government, can be replaced after 18 months by the Company’s agreement to undertake self monitoring and reporting obligations for an additional 18 months. If the Company remains in compliance with the DPA during its term, the charges against the Company would be dismissed with prejudice. In addition, as part of any settlement with the DOJ, a subsidiary of Avon operating in China would enter a guilty plea in connection with alleged violations of the books and records provision of the FCPA. The expected terms of settlement do not require any change to our historical financial statements. Final resolution of these matters is subject to preparation and negotiation of documentation satisfactory to all the parties, including approval by our board of directors and, in the case of the SEC, authorization by the Commission; court approval of the SEC settlement; and court approval of the DPA and acceptance of the expected guilty plea by an Avon subsidiary operating in China. We can provide no assurances that satisfactory final agreements will be reached, that authorization by the Commission or the court approvals will be obtained or that the court will accept the guilty plea or with respect to the timing or terms of any such agreements, authorization, and approvals and acceptance.”

A $135 million settlement will be the 11th largest in terms of fine / penalty amounts.

Some media outlets were quick to link disclosure of the future FCPA settlement to the approximate 10% slide in Avon’s stock price yesterday.  For instance, USA Today stated:

“Avon Products stock swooned more than 12% in mid-day trading after the company agreed to pay $135 million for long-standing federal changes that it paid bribes in China and other countries.”

However, Avon’s FCPA disclosure was in the same SEC filing in which the company disclosed, among other things, a 6% drop in total units sold during Q1, beauty sales were off 12%, and sales in North America fell 22%.

Johnson Controls

In its most recent quarterly filing, Johnson Controls first disclosed the following:

“In June 2013, the Company self-reported to the Securities and Exchange Commission (SEC) and the Department of Justice (DOJ) alleged Foreign Corrupt Practices Act (FCPA) violations related to its Building Efficiency marine business in China dating back to 2007. These allegations were isolated to the Company’s marine business in China which had annual sales ranging from $20 million to $50 million during this period. The Company, under the oversight of its Audit Committee and Board of Directors, proactively initiated an investigation into this matter with the assistance of external legal counsel and external forensic accountants. In connection with this investigation, the Company has made and continues to evaluate certain enhancements to its FCPA compliance program. The Company continues to fully cooperate with the SEC and the DOJ; however, at this time, the Company is unable to predict the ultimate resolution of this matter with these agencies.”

In 2007, Johnson Controls was a signatory to the York International FCPA enforcement action (see here and here) principally involving alleged conduct in connection with the Iraq Oil for Food Program.  According to the DOJ, “nearly all of the conduct described in the [York International Criminal] Information took place prior to York’s acquisition by Johnson Controls, Inc. on December 9, 2005.”

JPMorgan

In its most recent quarterly filing, JPMorgan disclosed as follows regarding its pending FCPA scrutiny:

“Referral Hiring Practices Investigations. Various regulators are investigating, among other things, the Firm’s compliance with the  Foreign Corrupt Practices Act and other laws with respect to the  Firm’s hiring practices related to candidates referred by clients, potential clients and government officials, and its engagement of consultants in the Asia Pacific region. The Firm is cooperating with these investigations.”

Teva Pharamaceuticals

In August 2012, the company first disclosed its FCPA scrutiny and in its most recent SEC filing disclosed as follows.

“Beginning in 2012, Teva received subpoenas and informal document requests from the Securities and Exchange Commission (“SEC”) and the Department of Justice (“DOJ”) to produce documents with respect to compliance with the U.S. Foreign Corrupt Practices Act (the “FCPA”) in certain countries. Teva has provided and will continue to provide documents and other information to the SEC and the DOJ, and is cooperating with the government in their investigations of these matters. Teva is also conducting a voluntary worldwide investigation into certain business practices that may have FCPA implications and has engaged independent counsel to assist in its investigation. In the course of its investigation, which is continuing, Teva has identified issues in Russia, certain Eastern European countries, certain Latin American countries and other countries where it conducts business that could rise to the level of FCPA violations and/or violations of local law. In connection with its investigation of these issues, Teva has become aware that Teva affiliates in certain countries under investigation provided to local authorities inaccurate or altered information relating to marketing or promotional practices. Teva continues to bring these issues to the attention of the SEC and the DOJ. No conclusion can be drawn at this time as to any likely outcomes in these matters.”

Och-Ziff

Och-Ziff Capital Management disclosed as follows in its recent quarterly filing:

“Beginning in 2011, and from time to time thereafter, the Company has received subpoenas from the Securities and Exchange Commission and requests for information from the U.S. Department of Justice in connection with an investigation involving the Foreign Corrupt Practices Act and related laws. The investigation concerns an investment by a foreign sovereign wealth fund in some of the Och-Ziff funds in 2007 and investments by some of the funds, both directly and indirectly, in a number of companies in Africa. At this time, the Company is unable to determine how the investigation will be resolved and what impact, if any, it will have. An adverse outcome could have a material effect on the Company’s consolidated financial statements. “

“Financial SWAT Team”

It receives scant attention compared to FCPA enforcement, but another prong of the DOJ’s efforts to combat bribery and corruption is its Kleptocracy Asset Recovery Initiative under which prosecutors in the DOJ Asset Forfeiture and Money Laundering Section work in partnership with federal law enforcement agencies to forfeit the proceeds of foreign official corruption. (See this 2009 post highlighting Attorney General Holder’s announcement of the program).

Earlier this week, speaking at Ukraine Forum on Asset Recovery Attorney General Holder announced “the creation of a dedicated Kleptocracy squad within the FBI.”  He stated:

“This specialized unit will partner with our Asset Forfeiture and Money Laundering Section to aggressively investigate and prosecute corruption cases – not only in Ukraine, but around the world. The squad of about a dozen personnel will consist of case agents and forensic analysts who are capable of unraveling the intricate money laundering transactions commonly employed by kleptocrats. Their sophisticated work will be supported by deputy marshals from the United States Marshals Service and analysts from FinCEN, which is our financial intelligence unit. And this new initiative will provide the United States with increased capacity to respond rapidly to political crises as they arise – so we can help prevent stolen assets from being dissipated or secreted away by deposed regimes.”

At the SEC

Further to the notion that SEC enforcement seems at times to be a numbers game, SEC Chair Mary Jo White testified as follows before the House Financial Services Committee.

“The Commission continues to pursue companies that bribe foreign officials to obtain or retain business, and over the last two-and-a-half years, we have obtained over $679 million in monetary relief from FCPA actions. For example, the SEC has brought FCPA actions charging a company with a bribe scheme involving business with Aluminum Bahrain; another company with various bribes and improper payments in the Middle East and Africa and violations of U.S. sanctions and export control laws involving Cuba, Iran, Syria, and Sudan; and a third company with bribe schemes involving business with the National Iranian Oil Company. The Commission is also focused on holding individuals accountable, with ongoing FCPA-related litigation against former executives of a number of corporations.”

Fact check.

Since 2008,  approximately 82% of corporate SEC FCPA enforcement actions have not (at least yet) resulted in any SEC charges against company employees and the SEC has not brought an individual FCPA enforcement action since 2012.

Although White’s FCPA testimony focused on the numbers, elsewhere she was quick to point out that:

“Quantitative metrics alone, however, are not the proper yardstick of the measure of Enforcement’s effectiveness. Enforcement considers the quality, breadth, and effect of the actions pursued.”

Staying with the SEC, its tough to beat the following for lack of transparency.  Recently in an insider trading enforcement action, the SEC entered into a non-prosecution agreement with an “individual.”

FCPA Inc. News

Few FCPA Inc. participants are publicy-traded companies.  Thus, it is often difficult to take the pulse of FCPA Inc. other than anecdotal information.  However, one FCPA Inc. participant that is publicly traded is FTI Consulting.  In a recent earnings release, the company stated:

“The major driver of quarterly results was Forensic and Litigation Consulting with a record quarter, fueled by a number of front-page newspaper assignments from across the globe relating to high-stakes client events ranging from FCPA investigations to mortgage-backed security litigations. Similarly, our Technology business continued to perform very well, driven by ongoing FCPA and financial services investigations as well as increased cross-border M&A related ‘second request’ activity.”

As previously highlighted, as Acting Assistant Attorney General for the Criminal Division, Mythili Raman often carried forward much of the same rhetoric former Assistant Attorney General Lanny Breuer frequently articulated concerning the DOJ’s FCPA enforcement program.  Raman will now be joining Breuer at Covington & Burling.  The firm announced that “Mythili Raman … is joining Covington & Burling as a partner. Ms. Raman will practice in the firm’s litigation and white collar groups and be resident in the Washington office.”

As noted in this Covington biography:

“As Acting Assistant Attorney General of the Criminal Division from 2013-2014, and before then, as the Principal Deputy Assistant Attorney General of the Criminal Division from 2009-2013, Ms. Raman oversaw the work of more than 600 prosecutors and led the Justice Department’s national and international criminal law enforcement initiatives, including investigations of [among other things] violations of the U.S. Foreign Corrupt Practices Act.”

For additional coverage see here from the New York Times and here from the Wall Street Journal.

For the Reading Stack

ProPublica takes a look at various aspects of white-collar law enforcement, including the “Breu Crew” (a reference to former Assistant Attorney General Lanny Breuer”) in “The Rise of Corporate Impunity.”  See here for my article “Lanny Breuer and Foreign Corrupt Practices Act Enforcement.”

Three cheers for Northwestern Professors Juliet Sorensen and Karen Alter for resisting the “feel good” notion that the International Criminal Court ought to be prosecuting corruption.  Writing in “Let Nations, Not the World, Prosecute Corruption,” the authors state:

“It is easy to understand the attraction of adding the crime of corruption to the International Criminal Court’s jurisdiction. Like violent atrocities, embezzlement and blackmail may be perpetrated on innocents. Corruption can be an international crime, featuring offshore accounts, money laundering and bribery of foreign officials. Moreover, when political leaders are involved in mass corruption, their crimes can become too dangerous for local judges and prosecutors to tackle. […] But to add this crime to the court’s jurisdiction would be a mistake. It is limited for good reason to genocide, war crimes, crimes against humanity and in the future, the crime of aggression.  […]  Before we give the court a new and even harder crime to prosecute, we must make sure that it can succeed in its core mandate. What international criminal law does best is prosecute those most responsible, at the apex of the pyramid, when individual nations are unwilling or unable to do so.  Finally, we must recognize that already the International Criminal Court faces a crisis of political support. […]  The status quo is surely not a perfect one. But international intervention is not a panacea. The International Criminal Court needs to stay focused on the important task of prosecuting those most responsible for mass atrocities. Rather than put more resources into international criminal prosecution, the resources and energy of the international community should go towards bolstering national resources to investigate, prosecute, and deter public corruption.”

See here for “Anti-Corruption Compliance:  Meeting the Global Standard” recently published in Bloomberg BNA’s Corporate Law and Accountability Report by Arnold & Porter attorneys Keith Korenchuk, Samuel Witten and Daniel Bernstein:

“Designing an effective anti-corruption compliance program that meets the requirements of many different jurisdictions seems like a daunting task. Executives at global companies are likely to ask themselves: Do we need dozens of different compliance programs? Will we be subject to conflicting standards in the various countries where we do business? How can we ensure proper oversight of activity that occurs all over the globe? In addressing these questions, multinational companies should take note of the broad global consensus that has developed around what governments and international organizations expect of corporate anti corruption compliance programs. While there is no one-size-fits-all program—and a company must bear in mind applicable local laws—this global standard is welcome news. Here we review the commonly accepted best practices for an anti-corruption compliance program.”

From various Jones Day attorneys (here), “India’s New Corporate Social Responsibility Requirements – Beware of the Pitfalls”:

“In August 2013, the Indian parliament passed the Indian Companies Act, 2013 (the “New Act”), which has replaced the Companies Act of 1956. The New Act has made far-reaching changes affecting company formation, administration and governance, and it has increased shareholder control over board decisions. […]  One of the New Act’s most startling changes—which came into effect on April 1, 2014—has been to impose compulsory corporate social responsibility  obligations (“CSR”) upon Indian companies and foreign companies operating in India. These obligations mainly come in the form of mandatory amounts companies must contribute to remediating social problems. This is a wholly new requirement; although companies were permitted, within certain limits, to make charitable contributions in the past, the New Act is essentially a self-administered tax.  […] If the Indian company undertaking CSR is a subsidiary of a United States entity, or if its business activities “touch” the U.K., then the U.S. Foreign Corrupt Practices Act (“FCPA”) or the U.K. Bribery Act (“UKBA”), respectively, as well as other regulatory laws of these jurisdictions, may apply to the Indian company’s CSR payments. This may raise serious issues of compliance and liability.”

See here for “China Introduces New Health Care Sector Anti-Corruption Regulations” by Richard Grams and Allan Golder:

“As part of a concerted effort to tackle systemic commercial bribery in the country’s health care sector, China’s National Health and Family Planning Commission recently introduced separate new regulations aimed at hospitals and physicians, as well as the medical product companies that supply them.”

*****

A good weekend to all.

The Fallacy Of “Good Companies Don’t Bribe – Period”

Policy debates can be diverted by simplistic rhetoric.

In the minds of some, “good companies don’t bribe – period.”  Stated differently, in the minds of some, only “bad” and “unethical” companies are the subject of Foreign Corrupt Practices Act scrutiny or resolve FCPA enforcement actions.

Indeed, “good companies don’t bribe – period” was the title of a Minneapolis StarTribune business column which assailed those who have criticized various aspects of the FCPA or FCPA enforcement.  In support of the position that “good companies don’t bribe – period,” the article stated:

“The [FCPA] has established America’s reputation as a strong proponent of ethical business practices abroad.  As Microsoft recognizes in its anti-corruption policy: ‘corruption promotes poverty, hunger, disease and crime, and keeps societies and individuals from reaching their full potential. Corruption is one of the leading obstacles to economic and social development. Microsoft is committed to observing the standards of conduct set forth in the [FCPA] and the anti-corruption and anti-money-laundering laws of the countries in which it operates.’”

The absolutist position that “good companies don’t bribe – period” was undermined a few months later when it was reported that the DOJ and SEC both “opened preliminary investigations into bribery accusations involving Microsoft in China, Italy and Romania.”  A Microsoft executive acknowledged the investigation and stated:

“Like other large companies with operations around the world, we sometimes receive allegations about potential misconduct by employees or business partners, and we investigate them fully regardless of the source. We also invest heavily in proactive training, monitoring and audits to ensure our business operations around the world meet the highest legal and ethical standards.  […] We are a global company with operations in 112 countries, nearly 98,000 employees and 640,000 business partners. […]  We have more than 50 people whose primary role is investigating potential breaches of company policy, and an additional 120 people whose primary role is compliance. In addition, we sometimes retain outside law firms to conduct or assist with investigations. This is a reflection of the size and complexity of our business and the seriousness with which we take meeting our obligations. We also invest in proactive measures including annual training programs for every employee, regular internal audits and multiple levels of approval for contracting and expenditure. In a company of our size, allegations of this nature will be made from time to time. It is also possible there will sometimes be individual employees or business partners who violate our policies and break the law. In a community of 98,000 people and 640,000 partners, it isn’t possible to say there will never be wrongdoing.”

How is it that Microsoft, a company championed as a leader in ethical and compliant business conduct, became the subject of FCPA scrutiny?  For the same reasons that many ethically sound business organizations have resolved FCPA enforcement actions and for the same reasons that over one-hundred companies are currently the subject of active FCPA scrutiny.  These reasons are broad concepts of corporate criminal liability and the inherent realities of doing business in the global marketplace.

Consider a multinational company that employs 10,000 individuals.  Even if the company engages leading compliance professionals and spends millions of dollars conducting an FCPA risk assessment and implementing FCPA compliance policies and procedures consistent with best practices, and even if 99% of the company’s employees abide by the policy in all respects on a daily basis, this still means that 100 instances of non-compliance – and thus potential FCPA scrutiny – occur every day.

Wal-Mart Discloses FCPA Compliance Enhancements

Last week Wal-Mart released this Global Compliance Program Report on FY 2014.

The report covered a number of topics including Foreign Corrupt Practices Act and related anti-corruption matters.  As previously disclosed (see here for the prior post), Wal-Mart details that in FY 2014 it has spent in excess of “$109 million on enhancements to its global anti-corruption compliance program and financial controls.”

This significant investment in FCPA compliance should be relevant as a matter of law in the future if a non-executive employee or agent acts contrary to Wal-Mart’s policies and procedures and in violation of the FCPA.  (See my article “Revisiting a Foreign Corrupt Practices Act Compliance Defense“).

Compliance defense detractors say that such a defense will promote “check-a-box compliance” and a “race to the bottom.”

There is nothing “check-a-box” about spending $109 million on FCPA compliance enhancements in one year nor can one credibly argue that if other companies follow Wal-Mart’s enhancements and approach that this is a “race to the bottom.”

The key policy issue is this.

Wal-Mart has engaged in FCPA compliance enhancements in reaction to its high-profile FCPA scrutiny.

Perhaps if there was a compliance defense more companies would be incentivized to engage in compliance enhancements pro-actively.

A compliance defense is thus not a “race to the bottom” it is a “race to the top”  (see here for the prior post) and it is surprising how compliance defense detractors are unable or incapable of grasping this point.

In pertinent part, the Wal-Mart report provides:

“People

“[C]ompliance with the Foreign Corrupt Practices Act (FCPA) and other anti-corruption laws remained a key priority for the company. Walmart hired a number of anti-corruption directors and other anti-corruption staff in both its global headquarters and in its International retail markets during the year. The anti-corruption director for each market reports to a dedicated anti-corruption team in Walmart’s Home Office in Bentonville, Arkansas, which is led by the company’s Global Anti-Corruption Compliance Officer. Collectively, this global team is charged with conducting due diligence, developing and providing anti-corruption training, and overseeing the implementation of the company’s anti-corruption policies and procedures throughout the world.

To ensure that Walmart has an effective anti-corruption compliance program, the company continued to work closely with external anti-corruption compliance experts to continue reviewing, assessing and developing its anti-corruption program during the year. In total in Fiscal 2014, the company has spent in excess of $109 million on enhancements to its global anti-corruption compliance program and financial controls. With the addition of new anti-corruption resources, the company transitioned some anti-corruption compliance work from external consultants to internal staff during Fiscal 2014. This effort is critical to promoting the long-term sustainability and capability of the company’s anti-corruption compliance team.

Second, the company added personnel to the compliance program in its International division both through internal transfers of existing associates and through new hires. Notably, by the end of Fiscal 2014 the company had appointed 10 market-level CCOs in the International division to build and lead the compliance teams in the company’s retail markets. The company also appointed regional CCOs to lead and support the compliance organization within three international regions—LatAm (Argentina, Brazil, Central America, Chile, Mexico), Asia (China, India, Japan), and EMEA (Africa, Canada, U.K.).

[…]

Fifth, in Fiscal 2014 the company began the process of planning for and appointing teams of compliance monitors in all of its International retail markets. These monitors are known as Continuous Improvement Teams because of their mission to regularly review the company’s retail operations and assist the business in maintaining compliance with local laws and policies. In this respect, these international teams are intended to implement best practices that the company has learned in its U.S. retail operations, where similar compliance monitoring teams have functioned for several years.”

[…]

Improved Training

Anti-corruption remains a key focus for compliance training in all markets. Walmart’s anti-corruption training is designed to develop awareness and understanding of the relevant standards of conduct for associates and agents who interact directly or indirectly with government officials on the company’s behalf, among other topics. The training teaches the principles and processes embodied in the company’s Global Anti-Corruption Policy and anti-corruption procedures.

Between December 2011 and January 2014, the company delivered anti-corruption training to more than 100,000 attendees from all levels of the company around the world, including key senior executives and officers who interact directly or indirectly with government officials. This training was conducted in the local language where appropriate. This training was delivered in a number of ways, including via a computer-based learning module to provide consistent and effective anti-corruption training to a broader audience of more than 45,000 associates; in-person procedure and practical scenario training to more than 16,000 associates; in-person general FCPA awareness training in all markets to over 15,000 associates and ad hoc, and risk-based market-specific training to over 28,000 associates. In addition to training its own associates, Walmart has begun to provide training to certain third-party intermediaries and business partners.

The anti-corruption training provided over the last two years provides a solid foundation for an ongoing training regimen. The company will continue providing anti-corruption training in the fiscal year ending January 31, 2015 (“Fiscal 2015”) with the launch of an enhanced global anti-corruption training and communication program. This program was created in Fiscal 2014 to further define risk-based target audiences and design both global and market-specific training and communication plans and requirements.”

[…]

Policies and Processes

“Walmart’s Global Anti-Corruption Policy is part of the foundation for the company’s anti-corruption compliance program. Consistent with anti-corruption laws around the world, Walmart’s Global Anti-Corruption Policy prohibits anyone acting on behalf of the company from offering, giving or receiving anything of value to or from any person, including any government official, in order to improperly influence any act or decision or to otherwise gain an improper benefit for the company.  The Global Anti-Corruption Policy prohibits “facilitating payments” and also clarifies that any associate or third party who violates the policy will be subject to disciplinary measures up to and including termination and, where appropriate, referral of the matter to relevant law enforcement authorities.

In Fiscal 2014, Walmart continued to develop and enhance its market-specific anti-corruption procedures tied to this global policy. Among other issues, these enhancements related to:

• Assessments of anti-corruption compliance risks;

• Due diligence on third parties who interact with government officials;

• Processes and anti-corruption-related contractual provisions for engaging third parties and business partners;

• Business expenditures (e.g., meals, travel, entertainment, and gifts) involving government officials;

• Charitable contributions and donations;

• Acquisition or lease of property from government officials and agencies
• Government inspections and any associated fines or penalties;

• Memberships and sponsorships;

• Training;

• Record-keeping; and

• Reporting and investigating allegations of violations relating to integrity.

Over the year, Walmart also continued to evaluate and improve the financial controls in its International retail markets using a team of internal personnel and external consultants. For example, during the year the company installed or amended financial controls for non-merchandise disbursements, employee expense reimbursements, and the sale of gift cards. To increase global and market-level knowledge of the company’s financial controls, the company established corporate-level and in-market communications tools that reported on the progress of the financial control enhancement project. Walmart also improved its in-market and corporate monitoring and reporting, including key control reporting, self-assessments, and certifications, to evaluate the effectiveness of its enhanced financial controls.

As Walmart’s business grows and the risk landscape changes, the company will continue to assess and improve its financial controls and global anti-corruption program.”

[…]

Systems

A.  Third-Party Due Diligence

Third parties who interact with the government (including agents, consultants, and distributors) (collectively “TPIs”) could present potential compliance risks to international businesses. In Fiscal 2014 Walmart implemented a technology solution across all the company’s international retail markets to screen TPIs for anti-corruption and other compliance risks by collecting information on TPIs and comparing it with information from various databases. These databases help to expose some potential relationships between TPIs and foreign governments, identify whether the TPI has been subjected to certain government sanctions, and reveal adverse media stories about the TPI. The company also provided relevant associates in each market’s anti-corruption team with in-person training on the use of the tool.

B. Licenses and Permits

To systematize tracking of the company’s licenses and permits, the company selected a technology tool to manage licenses and permits in all markets and began the initial rollout of this system in four retail markets.

C. Compliance Monitoring

The company also began deploying an electronic tool for capturing monitoring data and tracking remediation of compliance issues identified by the company’s compliance monitors. The initial phase of the tool was installed in all of Walmart’s International retail markets, with a plan to deploy additional functionality in Fiscal 2015.”