Friday Roundup
Scrutiny alerts, coming clean, coming off a monitor, and for the reading stack. It’s all here in the Friday roundup.
Scrutiny Alerts
Hyperdynamics
This previous post, regarding the arrest and charging of Frederic Cilins for obstruction of justice in connection with an ongoing investigation into whether a mining company paid bribes to win lucrative mining rights in the Republic of Guinea, highlighted that while Cillins has been associated with BSG Resources, the charging documents make clear that BSG is not the sole focus of the U.S. investigation.
Earlier this week, Houston-based Hyperdynamics Corporation issued this release. It states:
“[On] September 2013 [the company] received a subpoena from the United States Department of Justice (DOJ) requesting that the Company produce documents relating to its business in Guinea. In 2006, a Production Sharing Contract was signed by the Company and the government of Guinea granting rights to an oil and gas concession offshore Guinea. The Company understands that the DOJ is investigating whether Hyperdynamics’ activities in obtaining and retaining the concession rights and its relationships with charitable organizations potentially violate the U.S. Foreign Corrupt Practices Act or U.S. anti-money laundering statutes. The Company has retained legal counsel to represent it in this matter and is cooperating fully with the government. The Company is unable to predict when the investigation will be completed, what outcome may result and what costs the Company will incur in the course of the investigation.”
On the day of Hyperdynamics disclosure, the company’s stock fell approximately 15%. As sure as the sun rises, a few days later, not one but two, plaintiffs firm issued releases (here and here) announcing an “investigation.”
Vinci
As noted in this article, “French prosecutors have opened a preliminary enquiry into allegations that a subsidiary of construction firm Vinci bribed officials in Russia […] to win the contract for a toll motorway linking Moscow to Saint Petersburg.” Vinci has American Depository Receipts that are traded on a U.S. exchange.
Coming Clean
This previous post highlighted the employee amnesty program created by SNC-Lavalin (a Canada-based engineering and construction company
mired in a bribery and corruption scandal concerning projects in Bangladesh and certain countries in Africa). The company recently announced as follows.
“A total of 32 employees made amnesty requests. While no new information of a material nature was revealed, the information the Company received did confirm its previous assessment of corruption risks.”
The release also highlights other compliance enhancements and policies and procedures the company has implemented.
Coming Off a Monitor
In August 2010, Alliance One International resolved an FCPA enforcement concerning conduct in Kyrgyzstan and Thailand by agreeing to pay approximately $9.5 million (see here for the prior post). Even though Alliance One’s entire exposure was based, not on anything it did, but rather successor liability theories and even though the enforcement action was the product of a voluntary disclosure, the non-prosecution agreement required the company to engage a corporate monitor for a three-year period.
In this recent release Alliance One stated:
“On September 30, 2013, the Company fulfilled its obligations under its settlement agreements, including the successful and on-time completion of its compliance monitorship. On May 7, 2013, the Monitor filed his third and final of his required reports with the DOJ and the SEC. In the third report, the Monitor evaluated the long-term sustainability of the Company’s compliance program, in addition to risk-based themes and the implementation of recommendations from previous years. The Monitor concluded the third report by certifying that the Company’s Compliance Program, including its policies and procedures, is reasonably designed and implemented to detect and prevent violations of anti-corruption laws within the Company. The final report also states that all recommendations of the Monitor have been fully implemented by the Company. As per the schedule set forth in the aforementioned settlement agreements, the monitorship formally ended on time on September 30, 2013, and without any extensions of that date by the Monitor, the DOJ or the SEC.”
In the release, Alliance One President and CEO J. Pieter Sikkel stated:
“Over the past three years we have built a world-class compliance program supported by strengthened systems, policies, procedures and controls that address a variety of compliance areas. While the completion of the monitorship is an important milestone, our strong commitment to operating ethically and compliantly will continue indefinitely.”
Joe Warin (Gibson, Dunn & Crutcher) was the monitor. See here for a previous post concerning an article Warin and his colleagues wrote titled ““Somebody’s Watching Me: FCPA Monitorships and How They Can Work Better.”
Reading Stack
Much has been written in connection with GlaxoSmithKline in China about the arrest and detention of Peter Humphrey and his wife based on accusations in the course of background checks performed by their Shanghai-based firm ChinaWhys.
In a similar instance, this recent article in Barron’s profiles the plight of Canadian stock analyst Kun Huang has been locked up in China for more than a year for exposing alleged improper conduct concerning Silvercorp Metals. According to the article, “Canadian authorities have opened a bribery probe based on [Huang’s] allegations.”
*****
A good weekend to all.
What’s On Your Mind?
In this month’s installment of the monthly feature, I reached out to academic colleagues who write in the Foreign Corrupt Practices Act space and posed the question – “what’s on your mind.” Set forth below are the responses.
Joseph Yockey (Iowa)
The current state of anti-corruption compliance calls to mind classic Dickens: it’s the best of times, it’s the worst of times.
On one hand, there continue to be exciting compliance developments in the private sector. This includes everything from the emergence of new technologies, like automated customs systems that cut out corrupt middlemen, to new corporate governance strategies, like the appointment of FCPA-specific compliance officers. I’m confident that these strategies aren’t just window dressing. They already seem to be making compliance easier and rates of bribery lower.
On the other hand, though, there’s a nagging sense that something is missing. The downside of relying on private innovation in compliance is that it is just that: private. Unlike the FCPA’s early days, when public-private collaboration was seen as vital to shaping anti-corruption policy, today the state’s focus remains largely set on enforcement. Enforcement is important, but the FCPA is ultimately meant to play a protective role. It is meant to level the global playing field and combat the social harms of corruption.
When understood in this way, it becomes clear that federal anti-corruption efforts need to go beyond enforcement to include cooperation with the many well-meaning firms that are already making important progress in the area of compliance. Part of this cooperation might include talking with market actors about the challenges they face on the ground so that enforcement efforts can evolve to fit the dynamic environments in which these firms often operate. It might also include taking a broader view of the supply and demand sides of bribery by stepping up efforts to collaborate with foreign officials and NGOs to find ways to reduce the overall frequency of bribe demands.
In any case, my research will continue to expand on my belief that federal authorities must do much more than wield a big enforcement stick. They must commit to getting their hands dirty to root out the systemic causes of corruption at home and abroad. They must commit to meaningfully help firms craft compliance programs that are responsive rather than reactionary. They must fully embrace the fact that the FCPA serves both a punitive and a protective function.
Until they do, I fear the FCPA will continue to bear the patina of a failed regulatory experiment.
Dean Paul McGreal (Dayton)
Just before writing this post, I submitted a course proposal to teach my Corporate Compliance and Ethics elective again in Spring 2014. So, naturally, my mind is occupied by thoughts of leniency or amnesty for business organizations that have an effective compliance and ethics program. Unlike the UK Bribery Act 2010, the United States Foreign Corrupt Practices Act does not provide an affirmative defense for an effective compliance and ethics program. An organization facing FCPA charges, then, can only benefit from its compliance and ethics program in other ways.
First, an organization could receive leniency, up to and including declination, for an effective compliance and ethics program. Of course, this option is a matter of prosecutorial discretion, leaving it to the government’s judgment whether the organization did everything it could to prevent the bribery, and so was the victim of a rogue employee. Making matters worse, it is difficult to determine when such leniency has occurred, what effect the organization’s compliance and ethics program had in particular cases, or what aspects of the program merited the leniency. Practitioners must sift press releases, deferred and non-prosecution agreements, and luncheon speeches to infer guidance. This murky state of affairs does not adequately arm compliance and ethics officers to do their best for their organizations.
Second, an organization could receive credit under the organizational sentencing guidelines for an effective compliance and ethics program. This only happens, however, if an organization is convicted and sentenced, and the court reduces the culpability score on that basis. This lucky organization will still be fined, and the conviction itself will likely harm the organization’s reputation and ability to do business. This route is largely academic, though, as organizations almost uniformly settle FCPA cases.
Third, creative defendants can resuscitate an argument for judicial recognition of a compliance defense. Several years ago, a litigant argued that federal criminal vicarious liability is properly interpreted to include such a defense. The Second Circuit rejected this position, and the argument has not been asserted recently.
In the end, a compliance defense must await congressional action. This issue, however, is not on the current legislative agenda, leaving organizations without that additional incentive for the foreseeable future.
Juliet Sorensen (Northwestern)
The Fifth Conference of States Parties to the United Nations Convention Against Corruption will take place in Panama City in November. With more than 150 signatories, the UNCAC aims to further anti-corruption efforts by requiring criminalization, asset forfeiture, mutual legal assistance and technical training in areas related to corruption and graft. However, the UNCAC is only as strong as its signatories. How many signatories have implemented laws required by the UNCAC? How many of those are enforcing those laws? Meaningful compliance with the provisions of the UNCAC is but one important topic that should be addressed in Panama City in November.
Friday Roundup
Interesting, hardly a smoking gun, law enforcement ought not be a competition, quotable, and for the reading stack. It’s all here in the Friday roundup.
Interesting
An interesting study (here) from Michael Klausner (Nancy and Charles Munger Professor of Business and Professor of Law at Stanford Law School) and Jason Hegland (Project Manager for Stanford Securities Litigation Analytics). Using a “universe of SEC enforcement actions involving nationally listed firms for violation of disclosure-related rules—fraud, books and records and internal control rules” from 2000 to the present, the authors found, among other things, that only 7 percent of corporate SEC enforcement actions involved no individual defendants.
Such a finding stands in stark contrast to corporate SEC Foreign Corrupt Practices Act enforcement actions. As noted in this previous post, since 2008 approximately 80% of corporate SEC FCPA enforcement actions have not (at least yet) resulted in any SEC charges against company employees. This figure is likely to climb when I re-calculate the statistic to account for 2013 FCPA enforcement. To date, the SEC has brought four corporate FCPA enforcement and none have resulted (at least yet) in any SEC charges against company employees.
Kudos to Klausner and Hegland for the quality of their data and using the “core” approach. The authors state:
“We define a “case” in a specific way in order to organize the data. A case, as we use the term, is a set of one or more enforcement actions against a company and/or its executives and/or third parties such as accountants or underwriters for the same misstatement that led to a violation. Thus, if the SEC brings an action against ABC Co and one or more separate actions against ABC Co.’s executives and its outside auditor, all for a misstatement in ABC Co.’s 2012 financial statements, we consider all those separate actions as one “case.””
This is consistent with the “core” approach I use to keep my FCPA statistics. (See here for the prior post). The “core” approach is also what the DOJ uses (see here for the prior post). However, many in FCPA Inc. use other creative counting methods to measure FCPA enforcement and related issues. This is a huge quality of data issue and completely muddies the conversational waters on many FCPA issues.
Hardly a Smoking Gun
Reuters and other media outlets have carried forward Chinese state media reports as follows. “A Chinese police investigation into drugmaker GlaxoSmithKline has discovered that alleged bribery of doctors in China was coordinated by the British company and was not the work of individual employees.”
The smoking gun?
Apparently GSK “had set goals for annual sales growth as high as 25 percent. That rate was 7 to 8 percentage points above the average growth rate for the industry” [according to one of GSK’s detained executives] and “GSK implemented salary policies based on sales volumes and such goals could not be achieved without “dubious corporate behavior.”
That is hardly a smoking gun.
Competition
At times it seems like there is a new “global arms race” to see which country can bring the most enforcement actions for the largest dollar value. Competition is generally good, but law enforcement ought not be a competition where quantity of enforcement becomes more important than quality of enforcement. Evidence of the former can be found in the following.
In this recent speech David Green (Director of the U.K. Serious Fraud Office) stated as follows.
“When it comes to prosecutions of corporates, the SFO’s performance is often compared unfavourably to that of US prosecutors. The key reason for this is the much higher bar that we in the SFO face in proving corporate criminal liability. Currently, in order to prove corporate liability, we have to prove that the controlling mind of the corporate was complicit in the relevant criminality.”
In other respects, Green’s speech reads like a political stump speech, not that of a high-profile law enforcement official.
This article in the South China Morning Post titled “Beijing Weighing Large Fines Against GlaxoSmithKline quotes from the China Ministry of Public Security website which states: “We should learn from the practice of other countries in imposing astronomical fines.”
Quotable
From Jonathan Weil’s Bloomberg View column:
“In the U.S., companies hire powerful people’s children all the time for reasons beyond their obvious skill set. (Chelsea Clinton working at a hedge fund?) And they don’t just bother with the kids — they hire the powerful people themselves. (Do you think Larry Summers got a high-paying job at the hedge fund D.E. Shaw because of his skills as a trader?)
If the feds are going to target wheel-greasing in China — where it can be difficult to get business done without bribing somebody — does this mean we need a Domestic Corrupt Practices Act, too? In Colorado, JPMorgan used to employ Chris Romer as a banker. His father, Roy Romer, was the state’s governor for 12 years. Did that help Chris Romer get hired? It couldn’t have hurt. Do we need a law against this? Of course not.
There are certain facts of life that aren’t worth bringing in the FBI to check out. When rich people with teenage children give millions of dollars to elite universities, there’s a good chance they want special attention from the admissions office for their kids, if not an outright guarantee they will get in. And when owners of companies hire senators’ kids for internships, they probably would like to meet the parents someday.
Perhaps what JPMorgan did in China was worse. We don’t know yet. But let’s not get ahead of ourselves. The decision of whether to hire someone often has less to do with that person’s qualifications than it does with who they are. Life isn’t fair — not in the U.S. and not in China.”
Reading Stack
From Thomas Gorman (Dorsey & Whitney), “The New FCPA Guide: A Road Map to Crafting an Effective Compliance Defense.”
A client alert from Paul Hastings, “Preparing for Shareholder Lawsuits When Dealing with Foreign Corrupt Practices Act Investigations.”
*****
A good weekend to all.
What’s On Your Mind?
The dog days of summer. A time for reflection, a time to think.
I posed the question “what’s on your mind” to the following FCPA practitioners and below are their responses.
Philip Rohlik (Debevoise & Plimpton – Hong Kong)
“While I have been working on Asian related FCPA matters for more than seven years, I moved to the region two years ago. Living here and interacting with local employees in situations other than investigations has given me a different perspective of the cost and difficulties associated with compliance.
Facilitating payments and transnational legal regimes that seek to bar them are on my mind. While it is correct and easy to say that ethical multinational corporations should not give in to the petty extortion that characterizes facilitation payments, the issue is not so simple when looked at from the reality of an employee in a high-risk jurisdiction — the kind of employee who recently asked me for advice on “how do I make the police go away?” when they visit the second or third week of every month (about the time their last month’s paycheck runs out). It is easy for a compliance officer or lawyer who encounters random government officials on his or her way to or from the airport to make full use of the ICC’s Resist handbook. Local (and, let’s face it, not that well paid) employees who must deal with specific officials on a regular basis are in a different situation especially if they have no desire to test the limits of “imminent physical harm.”
When laws impose vicarious or respondeat superior liability, situations to which the law applies should not be determined from the abstract perspective of a corporation but from the realities faced by the company’s employees. Is the fight against corruption really furthered by having zero tolerance policies for facilitation payments at the corporate level, but local employees very rationally believing that such grand pronouncements leave them in a situation that will either (i) make their life very difficult or (ii) force them to circumvent internal controls in order to make the payment (thereby creating a potential mechanism for more nefarious payments)? In this respect, the U.S. law that exempts facilitating payments from the anti-bribery provisions of the FCPA may be less anachronistic than it is often made out to be.
Also often on my mind is third party due diligence. Right now, one of our concerns is attending to our clients’ needs for right-sizing third party due diligence. Businesses are concerned that the continued lack of clarity from regulators as to the required steps results in excessive cost and a misallocation of compliance resources. While some third parties deserve thorough diligence, how much diligence is due other third-parties? Is a basic questionnaire and (the often-not-inexpensive) outsourcing of a public records check sufficient? What if such checks are almost always inconclusive in countries with limited public records? Do they just become inefficient box ticking? We are actively working with both clients as well as due diligence firms providing cloud-based and world-wide investigative services to help get these costs under control. Among the solutions we are working on are greater use of in-house information. If there are adequate internal controls on the evaluation of in-house experience with a third party, we believe that the greater use of on-hand information to evaluate third parties can be a real cost-saver. Doing so would free up resources for other compliance tasks as well as improve the client’s bottom line.”
John Rupp (Covington & Burling – London)
“As we continue to struggle on behalf of clients with demands for bribes, large and small, by government officials in a depressing number of countries, I have become ever more convinced that a new approach to the campaign against bribery – in particular, by western countries – is needed. The approach that western countries have taken thus far to the bribery of foreign government officials is to punish the bribe giver. The premise appears to be that international companies, including those subject to the US Foreign Corrupt Practices Act and the UK Bribery Act 2010, rather like bribing foreign government officials, seeing it as a convenient way to win business without having to compete fairly with other companies operating in the same space.
A completely different picture emerges, of course, when one spends a good part of each working day developing strategies to enable clients to operate in countries where official corruption is endemic. The international company employee who wakes up in the morning, steadies himself or herself in the mirror and then looks forward to winning business through bribery is an exceedingly rare bird in my experience. Overwhelming, the reflected image of the vast majority of employees of international companies grappling with bribery demands is of consternation – how does one continue to operate in Country X when everyone on the government payroll in the country is demanding a bribe for everything?
A fully developed, and maximally effective, anti-bribery program by a western country would involve, I believe, much more attention than has been paid in the past to assisting international companies when they are confronting demands for bribes by foreign government officials. The US State and Commerce Departments, UK and German Foreign Ministries, World Bank – and many others – should put much more emphasis in the future than they have in the past on assisting companies fend off official demands for bribes. In many, many cases, they have the resources – and the leverage – to do so.
I’m not suggesting that western countries consider repealing statutes punishing the bribery of foreign government officials. What I am suggesting is that they balance that approach with an equally concerted effort to deal with the demand side of the bribery equation.“
Thomas Fox (Solo Practitioner, Founder and Editor of the FCPA Compliance and Ethics Blog)
“The Securities and Exchange Commission (SEC) is investigating JPMorgan Chase regarding its hiring practices in China. It appears that JP Morgan Chase hired children of Chinese government officials or heads of state owned enterprises. While such hirings do not violate the FCPA per se, they do raise red flags. The FCPA Professor was quoted in the New York Times, “While the hire of a son or daughter itself is not illegal, red flags would be raised if the person hired was not qualified for the position, or, for example, if a firm never received business before and then lo and behold, the hire brought in business.” Such a hire may be a FCPA noteworthy event if the timing of the alleged hiring is closely connected to important business victories and awards of government business.
While the questions of corrupt intent will be paramount I think that this episode emphasizes the continuing key concept of the three most important things in any FCPA compliance program; that being: Document, Document, Document. If your compliance program does not document its successes there is simply no evidence that it has succeeded. In addition to providing to your company support to put forward to the DOJ, it is the only manner in which to gauge the overall effectiveness of your compliance program. To negate corrupt intent, JP Morgan Chase will have to dis-link any hiring with the obtaining of business. It will be the documentary efforts of the company in answering this query that may well decide the question of whether the SEC will consider the matter a FCPA violation or not.”
Is Trust Prudent And Reasonable?
This new era of Foreign Corrupt Practices Act enforcement has resulted in many things, including FCPA Inc. marketing and selling the latest solution, software, or other strategy to purportedly achieve FCPA compliance. This previous post noted:
“Annual FCPA training, annual FCPA certifications, databases full of customers with government ownership, an automated process for this and that, periodic FCPA compliance reminders, FCPA compliance as an agenda item on each meeting, etc. All of these are considered best practices, but the question is asked – is too much FCPA compliance actually a net negative?”
This recent article “Trust: The Unwritten Contract in Corporate Governance” by David Larcker (the Morgan Stanley Director of the Center for Leadership Development and Research at the Stanford Graduate School of Business and senior faculty member at the Rock Center for Corporate Governance at Stanford University) and Brian Tayan (a researcher with Stanford’s Center for Leadership Development and Research) caught my eye.
The authors ask:
“Companies spend tens of millions of dollars annually on incentive compensation, director salaries, audit fees, internal auditors, and compliance efforts to satisfy a long list of rules, regulations, and procedures imposed by legislators and the market. Would corporate governance improve if companies instead had fewer controls. Would shareholders be better off if organizations instead demonstrated more trust in employees and executives?”
The authors state:
“Once established, a high-trust governance system allows for the reduction or elimination of many of the costs, controls, and procedures that characterize today’s governance systems. […] “[C]ompanies could eliminate many of the bureaucratic checks and controls that are often implemented to prevent and detect legal or regulatory violations. Instead, employees would self monitor, with line-managers responsible for reporting inadvertent legal or regulatory missteps to higher level executives.” […] “High-trust settings are characterized by lower bureaucracy, simpler procedures, and higher productivity. Would shareholders be better off if companies had fewer formal corporate governance requirements and instead devoted greater effort to fostering trust?”
Applied to the FCPA context, would FCPA compliance be better achieved if companies had fewer formal internal controls and instead devoted greater effort to fostering trust within a business organization?
Would such an approach even satisfy an issuer’s obligations under the FCPA’s internal controls provisions which require that issuers devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that transactions are properly authorized, recorded, and accounted for by the issuer?
The FCPA defines “reasonable assurances” as “such level of detail and degree of assurance as would satisfy prudent officials in the conduct of their own affairs.”
Relevant legislative history from 1988 when this definition was added to the FCPA states:
“The prudent [person] qualification [was adopted] in order to clarify that the current standard does not connote an unrealistic degree of exactitude or precision. The concept of reasonableness of necessity contemplates the weighing of a number of relevant factors, including the costs of compliance.”
The only substantive judicial decision concerning the FCPA’s internal controls provisions (SEC v. World-Wide Coin – see here for the prior post) states:
“The concept of ‘reasonable assurances contained in [the internal controls provision] recognizes that the costs of internal controls should not exceed the benefits expected to be delivered.”
Beyond this legal authority, in FCPA guidance issued in 1981, the SEC stated:
“The [FCPA] does not mandate any particular kind of internal controls system. The test is whether a system, taken as a whole, reasonably meets the statute’s specified objectives. ‘Reasonableness,’ a familiar legal concept, depends on an evaluation of all the facts and circumstances.” […] Private sector decisions implementing these statutory objectives are business decisions. And, reasonable business decisions should be afforded deference. This means that the issuer need not always select the best or the most effective control measure. However, the one selected must be reasonable under all the circumstances.”
Likewise in the 2012 FCPA Guidance the DOJ and SEC stated:
“Like the ‘reasonable detail’ requirement in the books and records provision, the Act defines ‘reasonable assurances’ as ‘such level of detail and degree of assurance as would satisfy prudent officials in the conduct of their own affairs.’”
“The Act does not specify a particular set of controls that companies are required to implement. Rather, the internal controls provision gives companies the flexibility to develop and maintain a system of controls that is appropriate to their particular needs and circumstances.”
Imagine a situation in which an issuer becomes the subject of FCPA scrutiny based on the conduct of a foreign country manager or sales representative.
During a meeting with the DOJ and SEC, the enforcement attorneys ask company counsel what internal controls existed as relevant to the country manager or sales representative.
Company counsel responds – “we trusted” him or her. This would likely cause the enforcement attorneys to laugh out loud.
However, the relevant legal question is – was trust prudent and reasonable?