Category: Compliance

Friday Roundup

Scrutiny alerts and updates, quotable, and for the reading stack.  It’s all here in the Friday Roundup.

Scrutiny Alerts And Updates

Avon

Yesterday, Avon’s stock dropped approximately 22% to $17.50.  The company disclosed a drop in third quarter sales and weaker than expected earnings.  Avon also disclosed, in pertinent part, the following regarding its long-running FCPA scrutiny:

“As previously reported in our Quarterly Report on Form 10-Q for the period ending June 30, 2013, we made an offer of settlement to the DOJ and the SEC in June 2013 that, among other terms, would have included payment of monetary penalties of approximately $12. Although our offer was rejected by the DOJ and the staff of the SEC, we accrued the amount of our offer in the second quarter of 2013.

In September 2013, the staff of the SEC proposed terms of potential settlement that included monetary penalties of a magnitude significantly greater than our earlier offer. We disagree with the SEC staff’s assumptions and the methodology used in its calculations and believe that monetary penalties at the level proposed by the SEC staff are not warranted. We anticipate that the DOJ also will propose terms of potential settlement, although they have not yet done so and we are unable to predict the timing or terms of any such proposal. If the DOJ’s offer is comparable to the SEC’s offer and if the Company were to enter into settlements with the SEC and the DOJ at such levels, we believe that the Company’s earnings, cash flows, liquidity, financial condition and ongoing business would be materially adversely impacted.

Although we are working to resolve the government investigations through settlement, our discussions are at early stages and at this point we do not know if those efforts will be successful and, if they are, what the timing or terms of any such settlements would be. We expect any such settlements will include civil and/or criminal fines and penalties, and may also include non-monetary remedies, such as oversight requirements and additional remediation and compliance requirements. We may be required to incur significant future costs to comply with the non-monetary terms of any settlements with the SEC and the DOJ. If we are able to reach settlements with the SEC and the DOJ, the Company believes that such settlements are likely to include monetary penalties that would be material to its earnings and cash flows in the relevant fiscal period and could, depending on the amounts of the settlements, materially adversely impact the Company’s liquidity, financial condition and ongoing business.

There can be no assurance that our efforts to reach settlements with the government will be successful.  If we do not reach settlements with the SEC and/or the DOJ, we cannot predict the outcome of any subsequent litigation with the government but such litigation could have a material adverse effect on our earnings, cash flow, liquidity, financial condition and ongoing business.>We have not recorded an additional accrual beyond the amount recorded in the second quarter of 2013 because at this time, in light of the early stages of our discussions of possible settlement terms with the government, the magnitude of the difference between our offer and the amount proposed by the SEC and the absence of a proposal from the DOJ, and our inability to predict whether we will be able to reach settlements with the government, we cannot reasonably estimate the amount of additional loss above the amount accrued to date.

Until these matters are resolved, either through settlement or litigation, we expect to continue to incur costs, primarily professional fees and expenses, which may be significant, in connection with the government investigations. Furthermore, under certain circumstances, we may also be required to advance and/or reimburse significant professional fees and expenses to certain current and former Company employees in connection with these matters.”

In certain respects, Avon’s disclosure was similar to its August disclosure (see here for the prior post) in which it stated “we made an offer of settlement to the DOJ and the SEC that, among other terms, included payment of monetary penalties of approximately $12 [million]. The DOJ and the SEC have rejected the terms of our offer.”

The fact that there is a negotiation and back and forth between the SEC and a company concerning an FCPA settlement number is not unusual, what is a bit unusual is that this back and forth is being aired in public via the company’s SEC filings.

Embraer

Previous posts here and here have profiled Embraer’s FCPA scrutiny.  In an article titled “Plane Maker Embraer Faces Bribery Inquiries,” the Wall Street Journal reports:

“U.S. and Brazilian authorities are investigating whether aircraft maker Embraer SA bribed officials in the Dominican Republic in return for a $90 million contracts to furnish the country’s armed forces with attack planes.”

According to the article, U.S. authorities say they have “evidence – including bank records and e-mails – that they believe shows that Embraer executives had approved a $3.4 million bribe to a Dominican official with influence over military procurement.”

Mead Johnson

Mead Johnson Nutrition Company recently disclosed as follows.

“The company has initiated an internal investigation of, and is voluntarily complying with a Securities and Exchange Commission request for documents relating to, certain business activities of the company’s local subsidiary in China. The company’s investigation is focused on certain expenditures that were made by the subsidiary in connection with the promotion of the company’s products or may have otherwise been made and that may not have complied with company policies and applicable U.S. and/or local laws. The company has retained outside legal counsel to conduct the investigation, which is being overseen by a committee of independent members of the company’s board of directors. At this time, the company is unable to predict the scope, timing or outcome of this ongoing matter or any regulatory or legal actions that may be commenced related to this matter.”

National Geographic

The on-line publication Vocativ recently published an article “Tut-Tut: Did National Geographic Bribe Egypt’s Famed Indiana Jones?”  The article begins as follows.

“This is not your typical story about international bribery. For one thing, it involves mummies. It also involves one of America’s most beloved institutions: National Geographic.  Vocativ has learned that the Justice Department has opened a criminal bribery investigation into the prestigious nonprofit. At issue: Nat Geo’s tangled relationship with Dr. Zahi Hawass, a world-famous Indiana Jones–type figure who for years served as the official gatekeeper to Egypt’s glittering antiquities.  Beginning in 2001 and continuing for a decade, National Geographic paid the archaeologist between $80,000 and $200,000 a year for his expertise. The payments came at a time when the popularity of mummies and pharaohs was helping transform the 125-year-old explorer society into a juggernaut with multiple glossies, a publishing house and a television channel. But they also came as Hawass was still employed by the Egyptian government to oversee the country’s priceless relics.”

According to the article, Hawass also worked with National Geographic competitor, the Discovery Channel.

Although National Geographic is a non-profit entity, the FCPA’s definition of “domestic concern” is “any corporation, partnership, association, joint-stock company, business trust, unincorporated organization, or sole proprietorship …”.

Teva Pharmaceuticals

As noted in this previous post, in August the company disclosed that it “received a subpoena … from the SEC to produce documents
with respect to compliance with the FCPA in Latin America.”  Earlier this week, Teva disclosed as follows.

“Beginning in 2012, Teva received subpoenas and informal document requests from the SEC and the Department of Justice (“DOJ”) to produce documents with respect to compliance with the 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 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 in Russia, certain Eastern European countries, and certain Latin American countries issues that could potentially rise to the level of FCPA violations and/or violations of local law. Teva has brought 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.”

JPMorgan

As highlighted in this previous post, in August JPMorgan’s hiring practices in China came under scrutiny.

The company recently disclosed:

“The Firm has received subpoenas and requests for documents from the SEC’s Division of Enforcement regarding, among other things, hiring practices relating to candidates referred by clients, potential clients and government officials, the Firm’s employment of certain former employees in Hong Kong, its business relationships with certain related clients in the Asia Pacific region and its engagement of consultants in the Asia Pacific region. The Firm has also received a request for documents from the U.S. Department of Justice regarding the same referral hiring practices. The Firm is cooperating with these investigations. Separate inquiries on these or similar topics have been made by other authorities, including authorities in other jurisdictions, and the Firm is responding to those inquiries.”

Quotable

From Attorney General Eric Holder at the Arab Forum on Asset Recovery in Morocco.

“As we’ve all seen – and as President Obama has said – “[t]he struggle against corruption is one of the great struggles of our time.”  Fortunately […] corruption is no longer widely seen as an accepted cost of doing business.  It is no longer tolerated as an unavoidable aspect of government.  On the contrary – it is now generally understood that the consequences of corruption are devastating – eroding trust in public and private institutions, undermining confidence in the fairness of free and open markets, siphoning precious resources at a time when they could hardly be more scarce, and all too often breeding contempt for the rule of law.

[…]

This is why, as Attorney General, I’ve consistently worked to ensure that anticorruption remains a top priority for my colleagues at every level of the United States Department of Justice – within as well as beyond our borders.”

A recent article in Corporate Counsel titled “The Perils of Keeping FCPA Infractions Under Wraps” states:

“Charles Duross, the deputy chief of the U.S. Justice Department’s Foreign Corrupt Practices Act Unit, delivered an ominous message Monday to in-house lawyers at the Association of Corporate Counsel’s Annual Meeting in Los Angeles: Failure to report potential bribery is more perilous than ever.  Duross, who is based in Washington, D.C., said DOJ is handling a “pretty steady stream of cases,” with every major U.S. attorney’s office investigating alleged violations of the FCPA, which prohibits bribery of foreign officials.  “The risk of getting caught . . . is greater today than any point previously,” Duross said. “I think that’s kind of a no-brainer.”  Duross said he isn’t naïve about the calculus companies have to perform when deciding whether to report a potential FCPA infraction to the U.S. government. But if a company makes the disclosure on its own, he noted, the Justice Department stands ready to help.  DOJ can make deferred-prosecution or non-prosecution agreements with businesses—or even decline to pursue any action against them, he said. “It’s a tough one” for companies, Duross said. “No doubt about it.” Self-reporting can be overrated, according to New York-based Morrison & Foerster partner Carl Loewenson Jr., a co-chairman of the firm’s securities litigation, enforcement, and white-collar defense group who also spoke at the ACC event. Making the disclosures is great for business at the DOJ, as well as law firms and accounting offices, he said. But companies that report almost always get some type of a public charge, he noted. “I think that these days there are too many cases in which too many companies are being too reflexive about self-reporting” to the government, Loewenson said. “In some cases, not in all, you can solve these problems yourself.”

Reading Stack

Several spot-on observations in the most recent issue of the always informative FCPA Update from Debevoise & Plimpton concerning the recent Diebold enforcement action (see here and here for prior posts).

“Although there are significant aggravating factors that might explain imposing $48 million in penalties and disgorgement on a company that voluntarily disclosed what are, unfortunately, common improprieties in China, combined with wholly unrelated commercial bribery in Russia, the size of the financial resolution – apart from the substantial burdens of the monitorship – raises questions about future enforcement of the FCPA, as well as the incentives for companies to self-report.

The first noteworthy aspect of this resolution is the enforcement agencies’ decision to use the books and records and internal controls provisions as a vehicle for obtaining monetary relief penalizing purely commercial bribery (40% of the improper payments at issue). While not entirely novel or outside the theoretical reach of those provisions, were the enforcement agencies routinely to investigate issuers in connection with commercial bribery abroad, the “risk-based” calculus of almost all corporate compliance programs would potentially need to be rebalanced.

Second, the total financial aspect of the resolution was 16 times the total value of alleged improper payments. In describing the improper payments, the enforcement agencies aggregated a number of often small payments over five years. When considered alongside the Ralph Lauren enforcement action from earlier this year, the Diebold enforcement action, and in particular its imposition of a monitor, long-considered one of the most burdensome aspects of FCPA settlements, could call into question one common view of the statements relating to gifts and corrupt intent in the November 2012 DOJ/SEC joint Resource Guide to the U.S. Foreign Corrupt Practices Act: namely, that FCPA covered companies should not “sweat the small stuff.”

[…]

“[T]he Diebold enforcement actions revive the pre-guidance confusion about the government’s enforcement priorities and raise significant questions about the value of voluntary disclosure. The confusion, arising from repeated charges related to relatively small expenditures, including, even, $500 for four pairs of shoes provided as gifts to Chinese officials, was part of  the background of frustration with the government’s enforcement of the FCPA that led to publication of the joint DOJ/ SEC Resource Guide.  It has been commonly thought that the Resource Guide’s distinctions between “expensive gifts” and “token[s] of esteem or gratitude” signified at least an implicit recognition by U.S. enforcement agencies that compliance resources would be better allocated to topics other than gifts valued at a few hundred dollars, let alone gifts that individually do not exceed $100 in value. But the Diebold case will raise new questions about the government’s enforcement priorities, questions that will only be amplified by the imposition of a monitor, potentially one of the most disruptive, burdensome, and costly components of FCPA settlement tools, and one that had been in declining use for several years.”

An observant article from The Lawyer titled “Round Table on Cross-Border Disputes – Bandwagons Roll.”  It states:

“Co-operation [between foreign law enforcement regulators] is good.'”  […]  More co-operation between regulators when they are trying to address the same issues is welcome.”  However, co-operation – while praised for attempting to provide consistency – has its drawbacks.  “They all want to impose sanctions for the same conduct.” […]   “It’s common now for a company to finish a US Foreign Corrupt Practices Act or UK Bribery Act investigation  that has taken three years and generated huge fees, to turn around and see a long line of regulators from, say, China or India with their own legal and  political concerns.”

It does not necessarily justify the behavior, but the following article at least puts the behavior in the proper context and highlights why Congress specifically included a facilitation payments exception in the FCPA’s anti-bribery provisions.

“Seventy-five percent of businesses in Vietnam pay bribes to  government agencies on their own volition in order to avoid being stuck in red tape, a World Bank specialist says.  At an anti-corruption conference held in Hanoi Thursday, Soren Davidsen said that sixty-three percent of firms questioned in a survey said they paid the “unofficial fees” to speed up procedures.”

A useful compliance resource here from the U.S. – China Business Council titled “Best Practices for Managing Compliance in China.”

*****

A good weekend to all,

Training The Gatekeepers

To state the obvious, training is an essential component of a Foreign Corrupt Practices Act compliance program.  However, not all FCPA training is equal and before plowing ahead with it a company ought to pause and reflect on the most appropriate way to deliver FCPA training.

The first issue to address is who to include in FCPA training.

Officers, directors, employees in high-risk job functions such as sales and marketing, and third parties are obvious candidates for FCPA training.

Because many instances of FCPA scrutiny arise from seemingly mundane corporate tasks such as securing foreign licenses and permits or interacting with customs and immigrations officials, it is important that company employees who perform these routine tasks are also included in FCPA training.

It is also important to include administrative assistants to many of the above job categories in FCPA training.  While such individuals may not have direct contact with “foreign officials” or have decision-making authority in the company, these individuals are often most familiar with corporate channels of communications and can spot and identify FCPA risk at early stages if properly trained.

The important, yet often over-looked, role assistants play in a company was the focus of this recent article in the Wall Street Journal (“The Most Powerful Person in the Office”).  It stated as follows.

“The schedulers, gatekeepers and caretakers of the corporate world are rarely seen, but they have a profound effect on the daily lives of the executives they serve.  They do everything from booking business trips, ordering anniversary gifts and arranging pet care to attending high-level meetings and deciding who can and can’t meet with their bosses.  The work can be thankless and often comes at a cost to their own personal lives, but these workers wield subtle influence at a company’s highest levels – and no small amount of power.”

While the article was not even remotely about the FCPA – or compliance in general – the above paragraph was spot-on in terms of why assistants who support corporate executives are an important cog in corporate affairs.

And for this reason, an important – yet often over-looked – participant in FCPA training.

SEC Enforcement Official Acknowledges The Underlying Logic Supporting A Compliance Defense

There is an underlying logic to a Foreign Corrupt Practices Act compliance defense.

In “Revisiting a Foreign Corrupt Practices Act Compliance Defense,” I argued, among other things, that a compliance defense will better incentivize corporate compliance and reduce improper conduct.  Compliance is a cost center within business organizations and expenditure of finite resources on FCPA compliance is an investment best sold if it can reduce legal exposure, not merely lessen the impact of legal exposure.

In a recent speech before the Society of Corporate Compliance and Ethics, Stephen Cohen (SEC Associate Director of Enforcement) rightly acknowledged the underlying logic supporting a compliance defense.

In his speech, Cohen “fully appreciated” that the compliance professionals in the room “are on the front lines in the battle to persuade companies to invest” in compliance programs.  (emphasis added).  Elsewhere, Cohen stated:  “So, as you go back to your companies to advocate for more resources and stature, tell your management that they will get much more credit from regulators by demonstrating that misconduct is an outlier in a highly ethical and compliance-driven culture rather than a remedial step after investors suffered losses.”  (emphasis added).

As highlighted in “Revisiting an FCPA Compliance Defense,” at present, the incentives organizations have to adopt FCPA compliance policies and procedures are solely to lessen the impact of legal exposure.  These present incentives thus represent “baby carrots,” when what is needed to better incentivize more robust FCPA compliance are real “carrots.”  An FCPA compliance defense is a real “carrot” that will better incentivize compliance across the business landscape.  Organizations with existing FCPA compliance policies and procedures will be incentivized to make existing programs better.  Likewise, organizations currently without stand-alone FCPA policies and procedures—and statistics indicate there are many—will be incentivized to spend finite resources to implement FCPA compliance policies and procedures.

In short, an FCPA compliance defense will best allow compliance professionals in the FCPA context to – in the words of Cohen – win “the battle to persuade companies to invest” in compliance programs and to “advocate for more resources and stature.”

A few other issues from Cohen’s recent speech.

It contains a curious reference to the Ralph Lauren enforcement action.  As to the general topic that “isolated conduct combined with good compliance and internal controls make it less likely that [the SEC] will bring an action at all,” Cohen stated that a “great example for compliance professionals is the recent non-prosecution agreement with Ralph Lauren.”

This is a curious reference given that the DOJ (as highlighted in this prior post) specifically stated that “[Ralph Lauren – RLC] did not have an anti-corruption program and did not provide any anti-corruption training or oversight with respect to [the relevant subsidiary].”  Likewise, the SEC specifically stated that “RLC’s policies, procedures and training related to anticorruption and the Foreign Corrupt Practices Act (“FCPA”) compliance in place at that time of the misconduct warranted further strengthening to ensure effective compliance with the related laws.”

Yes, both the SEC and DOJ did commend RLC on its compliance remediation, but this goes to the following point Cohen made in his speech.  He stated.

“I  am surprised how infrequently companies try to persuade us at the front end of an investigation that they have a robust compliance culture and record of ethical conduct.  Invariably, the discussion about a company’s compliance program takes place during settlement negotiations in the context of the substantial remediation that the company has undertaken since violations occurred.”

Aside from the above issues, Cohen’s speech did contain a useful section titled “Warning Signs” of value – in the FCPA context and otherwise – to the compliance practitioner.  This section, stated in full, as follows.

“Warning Signs

Where we find fraud, there are often early warning signs that may have suggested a corporate compliance culture that is not meeting appropriate standards.

Pushing the envelope. 

Risk-taking in the area of legal and ethical obligations invariably leads to bad outcomes.  Any company or person prepared to come close to the line when it comes to legal and ethical standards is already on dangerous ground.

Tolerating close-to-the-line behavior sends a terrible message throughout an organization that pushing the envelope is acceptable.

Technical Compliance. 

Be on the lookout for people who are overly technical in their approach to issues of ethics and professional responsibility. Pay particular attention to those who may disparage or diminish the importance of respect for the law and protecting the organization from reputational harm.

Be Skeptical. 

Be skeptical of explanations that don’t add up regardless of who provides them.  If someone explains something to you in a way that you don’t understand, don’t accept it.

In many ways, one of the important lessons of the financial crisis is that highly sophisticated models that can explain away risk but defy common sense shouldn’t be trusted.  We often see people come in and testify that they failed to follow up on their hunches until after it was too late.

Lack of Empowerment. 

Another warning sign is an organization that limits the access of legal and compliance personnel to senior leadership of the company.

These leaders need to hear candidly and regularly from those on the front lines of compliance efforts.  Compliance professionals are not hallway monitors.  Companies that empower these professionals to act as trusted advisors are more likely to stay out of harm’s way.”

This And That

Friday Roundup

Scrutiny alert, potential fallout, act like a cop be treated like a cop, and for the reading stack.  It’s all here in the Friday Roundup.

Scrutiny Alert

Leighton Holdings Limited (an Australia-based holding company with ADRs registered in the U.S.) has been the focus of much recent media attention concerning business conduct in Iraq, Indonesia, Malaysia, as well as other Asian and Middle Eastern countries (see here and here for instance).  In response, the company issued statements here and here.

Potential Fallout?

As noted here, earlier this week South Korea criminally charged “100 people, including senior executives at state-run energy companies, on corruption charges.”  According to the article, “parts suppliers are suspected of bribing officials to accept their products with faked certification.”  Among the companies mentioned is Korea Hydro and Nuclear Power Co.  This company, along with other alleged state-owned or state-controlled energy companies, was mentioned in the 2009 Foreign Corrupt Practices Act enforcement action against Control Components Inc.

Time will tell if the South Korea charges might implicate various part suppliers subject to the FCPA.

Cop-Like

In this recent speech, SEC Chair Mary Jo White stated:

“The SEC is, in very important part, a law enforcement agency, and should be seen by investors to be ‘their cop.’  And, the SEC must continue to be the tough cop because in many cases, particularly when there is no criminal violation, it is the only agency that can play that role.”

White’s comment reminded me of this excellent guest post by Russell Ryan (King & Spalding and previously an Assistant Director of the SEC Enforcement Division) in which he notes, among other things, that “if the SEC’s enforcement role is more like that of a criminal prosecutor than a private plaintiff, why shouldn’t the SEC be held to some of the same procedural and evidentiary burdens of a prosecutor rather than benefitting from the more relaxed standards accorded to private plaintiffs?”

Reading Stack

An interesting Q&A with Andreas Pohlmann (Chief Compliance Officer at SNC-Lavalin Group Inc) including the following spot-on statement.

“[W]e need one global compliance program.  That means that what we are doing at the time being is not establishing a Canadian compliance program, or a North American compliance program, but we are establishing a global compliance program for all of our associates all over the world, and that’s the challenge. To get out a compliance program in Montreal at the headquarters of SNC-Lavalin is still easy. It becomes challenging when we go to the more difficult regions of this world, like Latin and South America, Africa, Eastern Europe and Southeast Asia. We have to get to the hearts and minds of our people and have them live up to our worldwide standards; otherwise, the compliance program would not be credible.”

*****

A good weekend to all.