Friday Roundup
Hits and misses, does it really need to cost this much, the Wal-Mart effect, survey says, Senate hearing quotable, while they’re at it, checking in on Hollywood and Goldman too, spot on, and some refreshing words. It’s all here in the Friday roundup.
Hits and Misses
I read pretty much everything churned out by FCPA Inc., including the flood of recent client alerts concerning the Straub and Steffen decisions. (See here and here for previous posts summarizing the decisions). Many of these alerts are good and informative (for instance, see here from Debevoise & Plimpton). However, some of these alerts are just plain wrong.
The headline of one alert was “District Court Decision Limits the Extraterritorial Reach of the FCPA.” The headline of another alert was “Court Sets Limits on Extraterritorial FCPA Reach; Dismisses Case Against Foreign Siemens Executive.”
Neither the Straub nor Steffen decisions concerned extraterritorial application of the FCPA. In fact, there is no extraterritorial reach of the FCPA as to foreign actors. Yes, the FCPA was amended in 1998 to provide for alternative “nationality” jurisdiction (i.e. extraterritorial jurisdiction) over U.S. persons (both legal and natural), however, 78dd-1(g) and 78dd-2(i) are strictly limited to U.S. persons.
Rather, the Straub decision concerned the scope of territorial jurisdiction under 78dd-1(a), specifically the meaning of “use of the mails or any means or instrumentality of interstate commerce …”.
The Steffen decision did not even reach this issue as the judge found the initial threshold issue of personal jurisdiction lacking.
Wal-Mart’s FCPA Scrutiny Expenses Mount
During the media feeding frenzy after the New York Times April 2012 Wal-Mart article (see here for the prior post), I had the pleasure to appear on Eliot Spitzer’s Viewpoint program on Current TV. At the end of the segment, after the substantive issues were discussed, Spitzer offered that he has several contacts in the FCPA bar and that, regardless of the substantive issues involved in Wal-Mart’s FCPA scrutiny or the ultimate outcome, lots of lawyers were poised to make lots of money.
Spitzer of course was right.
Wal-Mart recently stated (here) that it has incurred “$157 million of professional fees and expenses related to the ongoing” FCPA matter during its last fiscal year and that it expect to incur an additional “$40 to $45 million for the first quarter of fiscal 2014.” During Wal-Mart’s recent earnings conference call, a company executive stated as follows. “On FCPA, we continue to work closely with anticorruption compliance experts to review and to assess our programs and help us implement concrete steps for each particular market. In the various markets, these experts have spent tens of thousands of hours on anti-corruption support and training. We remain committed to follow all laws and regulations in the markets where we operate.”
The $157 million Wal-Mart spent in the last FY equates to approximately $604,000 in professional fees and expenses per working day.
I observed in this March 2011 articles as follows.
“This new era of enforcement has resulted in wasteful overcompliance, companies viewing every foreign business partner with irrational suspicion, and companies deploying teams of lawyers and specialists around the world spending millions to uncover every potential questionable or unethical $100 corporate payment. This new era of enforcement has proven lucrative to many segments of the legal, accounting, and compliance industries and the status quo would, from their perspective, seem desirable.”
The question again ought to be asked – does it really need to cost this much or has FCPA scrutiny turned into a boondoggle for many involved? For more on this issue, see my article “Big, Bold, and Bizarre: The Foreign Corrupt Practices Act Enters a New Era.”
While minor compared to Wal-Mart’s FCPA professional fees and expenses, Beam Inc. recently disclosed here that in 2012 the company spent approximately $4.2 million for “legal, forensic accounting, and other fees related to our internal investigation into Foreign Corrupt Practices Act compliance in our India operations.”
Wal-Mart Effect
Switching gears, but sticking with Wal-Mart related issues, this May 2012 post highlighted a potential “Wal-Mart effect.” In short, the point was that Wal-Mart is clearly not the only company subject to the FCPA that needs licenses, permits and the like when doing business in Mexico. I predicted that Wal-Mart’s potential FCPA exposure would cause sleepless nights for many company executives doing business in Mexico and the general region. The post then discussed statements made during a Kimco Realty Corporation earnings call in May 2012 concerning its properties in Mexico.
Earlier this week, Kimco Realty stated in an SEC filing as follows.
“On January 28, 2013, the Company received a subpoena from the Enforcement Division of the SEC in connection with an investigation, In the Matter of Wal-Mart Stores, Inc. (FW-3678), that the SEC Staff is currently conducting with respect to possible violations of the Foreign Corrupt Practices Act. The Company is responding to the subpoena and intends to cooperate fully with the SEC in this matter. The Company has also been notified that the U.S. Department of Justice (“DOJ”) is conducting a parallel investigation, and the Company expects that it will cooperate with the DOJ investigation. At this point, we are unable to predict the duration, scope or result of the SEC or DOJ investigation.”
Survey Says
The annual Litigation Trends and Survey report by Fulbright & Jaworski is always a good read. This year’s report (see here to download) surveyed 392 “senior corporate counsel” (275 in the U.S., 100 in the U.K. and 17 in other jurisdictions) on a wide-range of litigation and related matters. The following were FCPA or related survey results.
“Companies that have retained outside counsel to assist with a corruption or bribery investigation in the past 12 months (including, but not limited to, FCPA in U.S. and equivalent in U.K.”
- 9% of U.S. respondents answered “yes”; 18% of U.K. respondents answered “yes.” As noted, “U.S. figures [2010-2012] have remained relatively stable.”
“Companies that have engaged in due diligence for bribery or corruption (including FCPA matters) relating to a merger, acquisition or other business transactions with a foreign country in the past 12 months.”
- 18% of U.S. respondents answered “yes”; 26% of U.K. respondents answered “yes.” As noted, “more companies this year have engaged outside counsel in due diligence for corruption or bribery investigations due to business transactions with entities based in a foreign country.”
As to the due diligence figures, in the abstract these figures do not mean much, unless one knows how many responding companies actually engaged in foreign acquisitions or other business combinations.
The last survey result in the report perhaps speaks best to the over-hyped nature of the U.K. Bribery Act.
“Has your company changed the way it operates due to the emergence of anti-bribery legislation outside the U.S., such as U.K. Bribery Act 2010?”
- 78% of U.S. respondents answered “no” and 63% of U.K. respondents answered “no.”
Senate Hearing Quotable
Senator Elizabeth Warren (D-MA) had some quotable moments (here) during a recent Senate Banking hearing. The hearing concerned financial regulation, not the FCPA. Nevertheless, some of the issues have some overlap to FCPA enforcement – including how settlement policies in regulatory enforcement actions create conditions in which there is “not much incentive to follow the law” and how “too big to fail” perhaps means “too big for trial.”
Disclosure Issues
This recent Wall Street Journal CFO Journal post notes as follows.
“Securities and Exchange Commissioner Troy Paredes called for a complete review of the information companies disclose to investors, amid concerns that investors suffer from “disclosure overload” that could hamper their ability to gauge the importance of the data. “What we need is a top-to-bottom review of our disclosure regime,” Mr. Paredes said at the Practising Law Institute’s annual “SEC Speaks” conference in Washington, D.C. on Friday.”
While they’re at it, the SEC should take a look at its absurd position that all payments in violation of the FCPA, no matter how small the payment and no matter how large the company, are “qualitatively material.” For instance, as noted in this previous post concerning comments made by enforcement officials at a conference I chaired, an SEC official suggested that the concept of materiality itself has two “sub-concepts”: (i) quantitative materiality (something that impacts a company’s financial statements) and (ii) qualitative materiality. While conceding that very few improper payments are “quantitatively material” and while recognizing that “qualitative materiality” is a “complicated gray area,” the SEC officials nevertheless said that all bribes can be considered qualitatively material because they may “automatically trigger a books and records violation.” For formal SEC guidance on this issue, see here.
Checking In
Hollywood Industry Sweep
From the New York Times regarding the on-going scrutiny of Hollywood movie studios in China.
“Last March, word reached several studios of a confidential inquiry by the Securities and Exchange Commissionand the Justice Department into possible violations of the Foreign Corrupt Practices Act by people or companies involved in the China film trade. Since then, executives and their advisers have been waiting for some public sign of the scope or focus of the government’s interest. So far, there has been none. But official silence has not kept the investigation from casting a chill over dealings between Hollywood and China.”
Goldman
From the Wall Street Journal regarding the on-going scrutiny of Goldman’s dealings with Libya’s sovereign wealth fund.
“Libya’s sovereign-wealth fund said it is cooperating with the U.S. Securities and Exchange Commission in its ongoing investigation into Goldman Sachs Group Inc. over the securities firm’s dealings with the fund when Col. Moammar Gadhafi was in power. […] People close to the Libyan investment fund said officials have authorized some former fund executives to give testimony to the SEC. The officials also agreed to provide documents and other data to U.S. regulators about the fund’s ties to Goldman, these people said.”
Spot On
Two recent Q&A’s on Law360 caught my eye. The question was “what is an important issue or case relevant to your practice area and why.”
Neil Eggleston (Kirkland & Ellis) stated as follows.
“We are beginning to see the development of case law in the FCPA area, which I believe is good for the process. Most of these cases have been settled. When that occurs, defendants have little incentive to refuse to agree to novel Department of Justice theories of prosecution or jurisdiction, so long as the penalty is acceptable. The department then cites its prior settlement as precedent when settling later ones. But no court approved the earlier settlement, and the prior settlement should have no precedential value in favor of the DOJ in later settlements. As the DOJ increases its prosecution of individuals, we will see many more trials, which will give rise to courts, not the DOJ, interpreting the statute.”
For more on these issues, see my article “The Facade of FCPA Enforcement” and this previous guest post on “prosecutorial common law.”
Richard Marmaro (Skadden) answered the same question as follows.
“An issue of importance in the white collar area is the issue of prosecutorial misconduct, and appropriate remedies for prosecutors who intentionally conceal evidence, intimidate witnesses, or otherwise compromise or impact a defendant’s right to a fair trial. I have seen firsthand in several of my cases shocking misconduct, which has gone undisciplined by the U.S. Department of Justice. I have been fortunate enough to expose this misconduct, and have had cases dismissed as a result. Indeed, over the last decade, there have been several dismissals nationwide at trial or reversals on appeal based on willful misconduct by government lawyers. Despite these judicial findings, however, the Justice Department’s record of disciplining misbehaving prosecutors is shockingly inadequate. I don’t know of any prosecutor that has been terminated based on a judicial finding of intentional misconduct. In addition, I believe that only two prosecutors have received any discipline at all (both in the Stevens case). In my view, the failure to sanction prosecutors who have been found by judges to have committed misconduct sends the wrong signal to defendants, the public and the vast majority of prosecutors who do their jobs honestly every day.”
For more, see this previous post titled “Should There Be A Difference?”
Refreshing Words
Every now and then it is refreshing to read some common sense words about FCPA compliance and risk assessment. Such as this recent post from the Trace blog.
“Remember, perfection is neither possible nor necessary. When devising a compliance plan, it’s important to remind oneself of the big picture. A company need not break the bank to have a compliance program that follows accepted best practices. As discussed below, there are various ways that good compliance can be affordable. And companies are not responsible for developing full-proof compliance programs; they only need to develop programs proportionate to the risk they face, with the understanding that no program will completely eliminate all risk from the equation. Unlike in other areas of business, when it comes to compliance, being in the middle of the pack is okay.”
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A good weekend to all.
Friday Roundup
From the SEC Chairman, Congress is capable, adding to the list, scrutiny alerts, and for the reading stack. It’s all here in the Friday Roundup.
From the SEC Chairman
SEC Chairman Elisse Walter stated as follows earlier this week (see here) in opening a Foreign Bribery and Corruption Training Conference for law enforcement officials from around the world.
“[W]e have found that corrupt practices by a registered company are generally indicators of larger problems within the business – problems with the potential to harm that business’s shareholder-owners. Bribery and other corrupt practices may result in accounting fraud and falsified disclosures where shareholders are not getting an accurate picture of a company’s finances in their regulatory filings. Bribery means losing control of – or deliberately falsifying – books and records. Often, key executives or board members are kept in the dark, limiting their ability to make informed decisions about the company’s business. Obviously, engaging in corrupt practices means weakening or circumventing internal control mechanisms, leaving a company less able to detect and end not just corruption but other questionable practices. A company that has lost its moral compass is in grave danger of losing its competitive roadmap, as well – while shareholders are kept in the dark.”
Congress Is Capable
Well, at least as to certain issues.
Such as introducing and passing laws that expressly describe state-owned entities (“SOEs”). In reading my historical account of the FCPA’s legislative history, “The Story of the Foreign Corrupt Practices Act” or my “foreign official” declaration here, you will learn that despite being aware of SOEs, despite exhibiting a capability for drafting a definition that expressly included SOEs in other bills, and despite being provided a more precise way to describe SOEs, Congress chose not to include such definitions or concepts in S. 305, the bill that ultimately became the FCPA in December 1977.
This prior post highlighted Congress’s capability in capturing SOEs in Dodd-Frank Section 1504 and along comes another example which demonstrates that Congress is capable of legislating as to SOEs. Recently, H.R.491 – the Global Online Freedom Act of 2013 was introduced in the House. The purpose of the bill is “To prevent United States businesses from cooperating with repressive governments in transforming the Internet into a tool of censorship and surveillance, to fulfill the responsibility of the United States Government to promote freedom of expression on the Internet, to restore public confidence in the integrity of United States businesses, and for other purposes.”
The bill defines “foreign official” as follows.
The term ‘foreign official’ means– (A) any officer or employee of a foreign government or of any department; and (B) any person acting in an official capacity for or on behalf of, or acting under color of law with the knowledge of, any such government or such department, agency, state-owned enterprise, or instrumentality.” (emphasis added).
It is a basic premise of statutory construction that Congress is presumed not to use redundant or superfluous language. Granted, H.R.491 is not yet law, but let’s assume it becomes law as introduced. If instrumentality includes SOEs (as the enforcement agencies maintain), then Congress will violate this legislative maxim by using redundant or superfluous language in H.R. 491.
Adding To The List
The Heritage Foundation recently published (here) a speech by Peter Hansen titled “Unleashing the U.S. Investor in Africa: A Critique of U.S. Policy Toward the Continent.” Hansen critiqued U.S. government thinking about African development, including Ambassador statements that it is important to raise incentives for overly “cautious” U.S. companies to invest in Africa. Hansen stated that this “mistaken assumption” assumed that “mainstream U.S. companies will be motivated more by the prospect of higher rewards than by the diminishment of risks.” He noted that this view is not just wrong, but counterproductive and stated as follows.
“The problem with Africa is not a lack of attractive prospects, but rather Africa’s risk profile. With few exceptions, sensible U.S. direct investors (that is, those who run projects, not just take portfolio positions) have steered clear of Africa for the simple reason that Africa’s risks often exceed their risk tolerance. The African market has been left largely to non-Americans, to the unsophisticated seekers of El Dorado, and to a legion of “chancers” who seek sweetheart deals with no money down. The resulting tales of woe coming out of Africa, due largely to poor investment planning or thwarted get-rich-quick schemes, serve wrongly to tarnish Africa’s reputation. By exclusively raising incentives and failing to reduce risks, Ambassador Carson’s approach simply encourages those already prone to failure, without inspiring broad-spectrum investment by serious U.S. companies. Such bedrock U.S. firms do not need higher incentives. Africa already presents high-return opportunities. What serious U.S. firms need instead is for Africa’s risks to be reduced. Rewards that cannot be obtained are, after all, just mirages. The easiest way for the U.S. government to reduce risks for U.S. investors in Africa is to provide them with legal protection. The basic legal tools for protecting U.S. investors are double tax treaties (DTTs), often called double tax agreements (DTAs) and bilateral investment treaties (BITs).”
Query whether an FCPA compliance defense should be added to this list? See here to download my article “Revisiting a Foreign Corrupt Practices Act Compliance Defense.”
Scrutiny Alerts and Updates
This previous post highlighted the scrutiny Brookfield Asset Management (a Toronto based global asset management company with shares traded on the NYSE) was facing in Brazil concerning allegations that its subsidiary paid bribes to win construction permits. As the Wall Street Journal recently reported (here), Sao Paulo, Brazil prosecutors filed civil charges against the company’s Brazilian subsidiary, two of its top executives and a former employee. The prosecutor is quoted in the WSJ as saying that “Brookfield has created a high system of bribery in order to obtain approval for its projects quickly and with irregularities.” A spokesman for the company stated as follows. “These are unproven allegations made by a former employee. We don’t believe Brookfield did anything wrong and we are cooperating with authorities.”
This previous post highlighted scrutiny of EADS subsidiary, GPT Special Management Systems in the U.K. The Financial Times recently reported here that the FBI is also probing corruption allegations against GPT “relating to a contract in Saudi Arabia.” The article states as follows. “The FBI has interviewed a witness and taken possession of documents in connection with allegations that GPT bribed Saudi military officials with luxury cars and made £11.5m of unexplained payments – some via the US – to bank accounts in the Cayman Islands.”
This recent Reuters article reports that Italian police arrested the head of defense group Finmeccanica SpA (Giuseppe Orsi) on a warrant alleging that he paid bribes to win an Indian contract. According to the report, Prosecutors accuse Orsi of paying bribes to intermediaries to secure the sale of 12 helicopters in a 560 million euro ($749 million) deal when he was head of the group’s AgustaWestland unit. Finmeccanica, which is approximately 30% owned by the Italian government, has ADRs registered with the SEC and AgustaWestland does extensive business in the U.S. (see here), including with the U.S. government. According to this Wall Street Journal article, Italian prosecutors are also “investigating [Finmeccanica] on suspicion that it engaged in corrupt activities to win various types of contracts in Latin America, Asia, and at home.”
This recent Bloomberg article reports that “Eni SpA Chief Executive Officer Paolo Scaroni is being investigated for alleged corruption in an Italian probe of contracts obtained by its oil services company, Saipem SpA, in Algeria.” Eni has ADRs registered with the SEC. In 2010, Eni resolved (see here) an SEC FCPA enforcement action concerning Bonny Island, Nigeria conduct. In resolving the action, Eni consented to the entry of a court order permanently enjoining it from violating the FCPA’s books and record and internal controls provisions.
NCR Corporation stated in a recent release here, in pertinent part, as follows concerning its FCPA scrutiny.
“Update regarding OFAC and FCPA Investigations
The Company and the Special Committee of the Company’s Board of Directors have each completed their respective internal investigations regarding the anonymous allegations received from a purported whistleblower regarding certain aspects of the Company’s business practices in China, the Middle East and Africa. The principal allegations relate to the Company’s compliance with the Foreign Corrupt Practices Act (“FCPA”) and federal regulations that prohibit U.S. persons from engaging in certain activities in Syria.
[…]
The Company has made a presentation to the staff of the Securities and Exchange Commission(“SEC”) and the U.S. Department of Justice (“DOJ”) providing the facts known to the Company related to the whistleblower’s FCPA allegations, and advising the government that many of these allegations were unsubstantiated. The Company’s investigations of the whistleblower’s FCPA allegations identified a few opportunities to strengthen the Company’s comprehensive FCPA compliance program, and remediation measures were proposed and are being implemented. As previously disclosed, the Company is responding to a subpoena of the SEC and requests of the DOJ for documents and information related to the FCPA, including matters related to the whistleblower’s FCPA allegations.”
Investigating the purported whistleblower’s allegations has been a costly exercise for NCR. In a recent earnings conference call, company CFO Bob Fishman stated that the “overall cost” has been approximately $4.8 million.
Reading Stack
See here for the New York Times DealBook writeup of oral arguments in SEC v. Citigroup – an appeal which focuses of Judge Jed Rakoff’s concerns about common SEC settlements terms, including neither admith nor deny.
FCPA enforcement statistics are over-hyped for compliance assessments says Ryan McConnell (Morgan Lewis) in this Corporate Counsel article. In this Corporate Counsel article, McConnell and his co-author compare 2012 to 2011 numbers in terms of facilitation payments data found in corporate policies.
The three types of employees one encounters when conducting FCPA training – here from Alexandra Wrage (President, Trace International).
If for no other reason, because of the picture associated with this recent post on thebriberyact.com.
*****
A good weekend to all.
The Problem – And Solution – Regarding Foreign Outside Counsel Fees
Today’s post is from Zachary Cregar, a 2007 graduate of Duquesne Law School.
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The Problem – And Solution – Regarding Foreign Outside Counsel Fees
As foreign corruption prosecutions increase globally, corruption schemes commensurately grow ever more sophisticated. Payments have evolved from proverbial cash-stuffed suitcases to complex schemes involving third-party intermediaries, cloaking bribes as payments for legitimate services. Among third-parties, lawyers offer the most effective method of hiding bribes, and their potential for such is overlooked. This has been brought to light in the recent allegations against Wal-Mart. Fortunately there is a solution to this inevitably proliferating problem. A foreign outside counsel expense management program should be utilized by all companies engaging foreign outside counsel. The benefit is two-fold: prevention and detection of foreign corrupt payments, and material reductions in outside counsel legal expenditures.
The Problem
There should be no mistaking the fact a payment made to a law firm that in turn bribes a foreign official can be a violation of the Foreign Corrupt Practices Act and its major counter-part, the UK Anti-Bribery Act. Bribes paid through foreign outside counsel present a unique risk to detection. By the very nature of the profession, bills for legal services are often cryptic to those without specific legal training, experience with specific practice specialties, or familiarity with local jurisdictional nuances.
There are several likely scenarios in which foreign legal professionals can be used as corruption subterfuge. Consider the following; an American company hires outside counsel in a foreign country, where an employee or stakeholder of that firm is a foreign official, and is directly paid bribes under the guise of “legal fees.” Corporate compliance “know your customer” programs, in a general sense, are designed to identify these individuals and flag them to avoid improper payments.
The second and more problematic scenario lies where foreign outside counsel is used as a third-party intermediary. Here, foreign outside counsel submits invoices with bogus fees or expenses, and payments on those fees or expenses are passed on as bribes to foreign officials. An even more concerning and probative subset of this scenario lies where foreign outside counsel excessively bills for legal services legitimately performed, and skims the extra off the top to pay bribes to foreign officials. Because of the difficulty in detection, corporate anti-corruption compliance programs are unprepared to detect such risks.
Wal-Mart’s Alleged Foreign Counsel Problem
In an April 2012 exposé of Wal-Mart’s alleged foreign corruption, New York Times author David Barstow detailed how several outside lawyers retained by Wal-Mart in Mexico were used to pay nearly $8.5 million in bribes to local officials in order to expedite store expansions. Four days after the Times story broke, Wal-Mart stock dropped five percent. To-date, Wal-Mart has spent approximately ninety-nine million dollars to conduct forensic investigations of the alleged bribery.
The Times article explained how a substantial portion of the alleged bribes were paid through two attorneys acting as “gestores,” a Mexican term for quasi-lobbyist middle-men paid to carry out bribes of government officials. Over the course of several years, an executive for Wal-Mart de Mexico, Sergio Cicero Zapata, utilized two Mexican lawyers to deliver cash-stuffed envelopes to local government officials. These attorney-gestores allegedly paid off all levels of local officials to expedite, inter alia, store zoning, code and environmental issues. In fact, nearly half of all alleged bribes paid in Wal-Mart’s Mexican corruption scheme were paid through the two outside lawyers, who were in turn paid tens of thousands per permit facilitated.
Wal-Mart’s compliance regime allegedly failed to detect these payments. After word spread internally of the alleged bribes, an in-house investigative team was sent to Mexico – with the specific directive to investigate these allegations – and failed to adequately reveal the outside lawyers’ roles in the corruption scheme. It was not until Mr. Cicero’s allegations were made public that an investigative team, composed of outside counsel and auditors, independently revealed the scope of what had taken place.
A forensic recreation revealed that the Mexican lawyers handed cash over to foreign officials, and then submitted invoices to Wal-Mart with “brief, vaguely worded descriptions of their services.” The Wal-Mart de Mexico officials involved in the scheme then completed the purification of lawyer’s bribes by paying the invoices and recording them as legal fees in the company books. Because the records for these two outside lawyers were coveted secretively by just a few individuals, the subsequent team encountered strong resistance to obtaining the legal billing records. When finally obtained, the records did not look anything like legitimate legal invoices.
If true, the recent corruption allegations against Wal-Mart should erase any doubts about the importance of having a systematic foreign legal bill oversight process. In a sense, Wal-Mart de Mexico’s outside counsel bribery scheme was rudimentary. Yet the scheme evaded not only the company’s anti-corruption compliance program, but also the initial in-house investigation specifically directed to reveal this suspected program.
Pursuit of compliance policies that check for red flags and financial irregularities will have extreme difficulty in detecting the scenario, discussed supra, where outside counsel bills excessively for legitimate legal services and directs the skimmed proceeds to foreign officials. Yet this is where one of the most critical anti-bribery problems lies. Necessary compliance systems currently in place fail to reach sufficiency in this respect.
Increased Foreign Outside Counsel Spending, Increased Risk
As if the confluence of increased enforcement of global anti-corruption statutes and increasingly sophisticated corruptions schemes do not pose a serious enough risk to corporate due diligence, there are indications that U.S.-based corporations’ spending on and engagement of foreign outside counsel is on the rise. Without increased supervision of the influx of payments to foreign outside counsel, the risk of those funds finding their way into the hands of corrupt foreign officials also increases.
The Solution – Foreign Outside Counsel Expense Management Program
Companies seeking to proactively detect and prevent foreign outside counsel corruption schemes must put into place checks and balances to limit the authority of insiders’ use of foreign outside counsel, and to continually monitor counsel. Five concrete steps are immediately available. In abbreviated fashion, the steps are as follows:
1) Gatekeepers – Companies should specifically designate outside counsel gatekeepers. These employees must be granted authority to vet foreign outside counsel, and approve use of each foreign firm. With a list of approved and vetted firms in hand, gatekeepers can deny requests for use of lawyers that deviate from approved law firm panels. Retention of outside counsel must fit within specified protocols, based on type of legal work to be performed, and necessity of utilization of a firm. This is a basic protection against employees who seek to misappropriate corporate funds for legal work as a cover for foreign bribery.
2) Guidelines & Protocols – Companies should adopt explicit billing and case-handling protocols by which all foreign outside counsel law firms must abide. Guidelines are an expectation of how the firms will handle legal matters, and requires them to adhere to widely accepted ethical billing practices. Guidelines should also specifically require electronic billing of invoices and indicate that bills will be audited pre-payment and/or post-payment. Foremost for FCPA purposes, guidelines send the message to company employees and foreign law firms that legal bills are monitored by legally trained individuals capable of detecting financial irregularities.[i]
3) Electronic Billing – Outside counsel, whether domestic or international, must be required to submit legal bills electronically. Electronic legal billing software is obtainable as a service without the need for software development, and can accommodate international legal billing submissions. Electronic legal billing provides for greater adherence to FCPA record-keeping requirements, and allows for greater auditing and metrics analysis.
4) Auditing – Legal professionals familiar with the legal systems and cultural nuances of foreign jurisdictions should be utilized to review legal bills to determine reasonableness, appropriateness, and legitimacy thereof. Among other things, auditors can determine whether excessive time was billed, whether those who billed for work actually performed the work, or whether the work billed was actually performed. Again, a great deal of web-based software and services exist as ready-made platforms for legal bill auditing. Auditors can be located anywhere in the world.
5) Metrics Analysis – Finally, companies should employ legal professionals to analyze metrics and analytics derived from the electronic billing data. While legal bill auditing can make determinations about whether each legal task was reasonable or legitimate, corrupt payments can also be detected on a meta-scale. Compilations of large sets of data make possible quantification of firms’ costs-per case, effective rates, and firm-by-firm or regional comparisons. Irregularities suggesting bribes may be detected by looking at overall statistics that otherwise would remain invisible.
For some companies, all of the above tasks may be handled by one individual. For larger companies with substantial international legal operations, an in-house team may be required. And still there are other options; many insurers and third-party claim administrators already have similar domestic systems in place. The technology required is widely available, easily accessible and customizable to every company’s needs.
Conclusion
Steep anti-bribery pitfalls call for extraordinary preventative measures. Without foreign outside counsel management and auditing programs, companies may pay later in FCPA penalties and excessive legal bills. The allegations against Wal-Mart likely signal that a shift to using law firms in more complicated and covert bribery schemes is already underway. Companies must have a check against individuals seeking to stay a step ahead of compliance programs. While companies do not have the financial capabilities to proactively confront every conceivable FCPA risk, the scale of a foreign legal expense management program need only be relative to the scale of the engagement of international outside counsel. The relatively small expenditures required to put these programs in place can reduce some of the largest liabilities faced by companies. In a time of rising foreign legal expenditures and corruption threats, a little reassurance can go a long way.
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The views expressed in the above post are my own and do not reflect those of any past or present employer or client. I may be contacted at zdcregar@gmail.com.
The Guidance Press Conference
The Foreign Corrupt Practices Act guidance (here) released yesterday by the DOJ and SEC was a year long effort, no doubt subject to multiple revisions and review, and was highly scripted.
Not so with the press conference yesterday by Assistant Attorney General Lanny Breuer and SEC Enforcement Division Director Robert Khuzami. This post highlights certain of the comments made by Breuer and Khuzami at the press conference and contains a few comments of my own.
Breuer began the conference by noting that the guidance represents the “most comprehensive effort ever [by the DOJ] to explain [its] approach to enforcement as to a particular statute.” He said that the DOJ strives to be “transparent” in this area and wants everyone to “understand why we prosecute cases as vigorously as we do and why we make our charging decisions.”
Khuzami added that the guidance should “clear up some myths about the types of conduct that get prosecuted.”
In response to a question whether the Chamber of Commerce should be satisfied with the guidance, Breuer stated that he called former Attorney General Michael Mukasey [who has lobbied on behalf of the Chamber for FCPA reform) prior to the conference and that the guidance reflects the Chamber’s suggestion for various hypotheticals. Breuer said that “any fair-minded person” should see the guidance as a “substantial step forward in transparency in a very real way.”
Breuer was asked specifically about an FCPA compliance defense and said such a defense would be “dangerous and antithetical to the way [the DOJ] pursues criminal justice cases.” Breuer stated that such a defense “runs the risk of a race to the bottom” and that there “can’t be an absolute defense.”
As to declinations and the inclusion in the guidance of various generic examples of apparent enforcement agency declinations, Breuer stated that the enforcement agencies “tried to provide clarity as to how [they] use [their] discretion” and that the guidance tries to give reader sa “fair sense of how we evaluate the cases.” Khuzami added that the declination “numbers are not really that important” but the principles behind the declinations are and that “companies can mold behavior” based on the declination examples given.
From my perspective, one of the more important statements made during the press conference was when Khuzami and Breuer spoke about how companies should spend compliance dollars.
In reference to the various hypotheticals in the guidance concerning travel and entertainment, Khuzami said that he heard from companies that they were spending compliance dollars to guard against these issues, that companies were spending a huge amount of resources on such issues and that such a focus was taking dollars away from compliance efforts as to high risk activity. Khuzami said that this was an argument he and Breuer have heard and that this argument “makes perfect sense.” Khuzami said that he was “interested in companies spending compliance dollars in the most sensible way” and he hoped that the guidance and the hypotheticals provided would help companies as to where they can “minimize investment and where they can maximize it.” Breuer added that the DOJ wants compliance programs “to address real matters of concern.”
One can interpret Khuzami’s and Breuer’s remarks on this topic as they like, but my interpretation was that they were saying that part of the reason why companies have such a high level of FCPA anxiety is not necessarily because of the FCPA or its enforcement, but rather the marketing and commentary by certain segments of FCPA Inc. If that was their intent and purpose, I agree.
Breuer next was asked whether the guidance will put an end to the Chamber’s concerns surrounding the FCPA and its enforcement. He said that “like with everything in life there is a process” and that the Chamber will probably want ongoing discussions about the FCPA and its enforcement and that the DOJ “welcomes that discussion.” Breuer said that the guidance was likely not “complete closure” as to various concerns regarding FCPA issues. Khuzami added that he “expects further commentary and proposal and expression of dissatisfaction” but that this “is the nature of the business we are in and an important part of the process.”
As to “foreign official” and the lack of a bright-line rule in the guidance, Khuzami said that they declined to draw a bright line because control of an enterprise can occur in different ways and that there are “many indirect ways of ownership and control.” Breuer did say that the guidance acknowledges that it is unlikely that less than 50% control will result in an enterprise being considered an instrumentality, but that there might “specific factors” that may make such an enterprise an instrumentality.
To those who are inclined to believe that the guidance represents anything new, Breuer said that the guidance “does not represent a change in policy” but it “gives others a window and greater guidance” as to the enforcement agencies policies. Khuzami agreed and said that Breuer’s comment was “absolutely right.” Khuzami said that the “real value [of the guidance] is its clarity and transparency” and that the guidance is a unique opportunity “to communicate directly with the regulated community.” He said that this opportunity does not always exist and that companies often receive information that is delivered and deciphered through counsel. Khuzami said that the real “value of the guidance is that [corporate] officials can put this on their desk and read it, understand it directly and not through others.” He said that this is the “great value” of the guidance. I agree and previously stated (here) that the guidance collects in one document information that was previously scattered and that in this way the guidance has substantial value and is easily accessible to anyone.
Breuer was next asked whether the enforcement agencies plan to update the guidance over time or whether it represents a one-time publication. Breuer stated that “for the foreseeable future” the guidance is it. He said that the public needs to be realistic as to the roles the DOJ has and that by devoting time to the guidance prosecutors were not spending time prosecuting cases. Khuzami added that rather than a “second-edition” that the guidance may be clarified over time through speeches or other commentary.
Friday Roundup
Strange things tend to happen on Halloween, does your foreign local counsel present FCPA risk, insights from the boardroom, checking in on the Wynn-Okada battle royale, tobacco companies in the Middle East, a hat tip, and unmasked. It’s all here in the Friday roundup.
Halloween Hearing Date
Strange things tend to happen on Halloween. Thus, it is fitting that U.S. District Court Judge Keith Ellison (S.D. Tex.) has set October 31st as the hearing date for the motion to dismiss in the SECs FCPA enforcement action against Mark Jackson and James Ruehlen. See here for a prior post linking to the briefs and arguments. How strange is this? It is believed that the last time the SEC stood before a federal court judge to defend its FCPA enforcement theories was in 2002. As noted in this previous post, the SEC lost that case.
Foreign Counsel Risk
A company engages foreign local counsel to help it accomplish a business objective. The company pays thousands of dollars in legal bills to the counsel without probably giving much thought to Foreign Corrupt Practices Act risk.
In this recent article in the Duquesne Business Law Journal, Zachary Cregar (Liberty Mutual Insurance Group, Senior Litigation Auditor) sets forth the need to include foreign legal counsel due diligence and audits within an FCPA compliance program.
Cregar concludes the article as follows. “Foreign outside counsel supervision and legal bill auditing is not only a successful method of detecting corrupt payments, but it pays dividends beyond the realm of FCPA compliance. Cost savings from discovered billing irregularities will likely justify the cost of the program itself. While companies’ bottom lines are impacted by over-billing or fraudulent legal invoices, the financial stakes grow ever higher within the purview of the FCPA. Corporate anti-corruption and due diligence policies may be helpful in reducing hefty FCPA violation penalties after the fact. However, only vigorous, real-time auditing and detection of corrupt payments at the onset will avoid foreign corruption from even occurring.”
Current instances of FCPA scrutiny which involve, at least in part, questions regarding foreign legal counsel include Wal-Mart’s conduct in Mexico and Las Vegas Sands conduct in Macau.
Insights From the Boardroom
PwC’s Annual Corporate Director Survey, “Insights from the Boardroom 2012,” is available for download here. It contains a few FCPA / bribery / corruption related statistics.
Which of the following has your company done in response to the 2011 SEC whistleblower rules? 43% of respondents indicated that their companies have expanded the role of internal audit for bribery and corruption compliance and 11% of respondents indicated that their companies scheduled more board discussions regarding bribery and corruption.
I argue in “Revisiting a Foreign Corrupt Practices Act Compliance Defense” here that, among other reasons, the FCPA should be amended to include a compliance defense because such a defense will better incentivize corporate compliance and thus reduce improper conduct. I state that organizations with existing FCPA compliance policies and procedures will be incentivized to make existing programs better and that organizations currently without stand-alone FCPA policies and procedures (and statistics indicate there are many) will be incentivized to spend finite resources to implement compliance policies and procedures.
Imagine the FCPA is amended in 2012 to include a compliance defense. What would the numbers in PwC’s 2013 survey look like if respondents asked “which of the following has your company done in response to the FCPA compliance defense amendment.” I can only speculate as to the exact numbers, but I am confident in saying that more than 43% of respondents would indicate that their companies expanded the role of internal audit for bribery and corruption compliance and that more than 11% of respondents would indicate that their companies scheduled more board discussions regarding bribery and corruption.
Another question in the survey was the following. Indicate if you would like your board to devote more time in the upcoming year to considering the following matters? As to bribery and corruption concerns, 2% said yes, much more time and focus than in the past; 20% said yes, but not a great increase from the past; 75% said no, a change is unnecessary; and 3% said no, decrease our time and focus— we spend too much time on this.
The PwC survery occurred this past summer and was based on responses of 860 public company directors (70% of whom serve on the board of companies with more than $1 billion in annual revenue).
Wynn-Okada
As noted in this previous summary post, it is one of the strangest instances of FCPA scrutiny one can imagine. A corporate board member accuses the company of conduct that could implicate the FCPA, which then causes the SEC to open an inquiry, which then results in the company accusing the board member of separate and distinct conduct that could implicate the FCPA.
Its the Wynn-Okada battle royale.
Earlier this week Kazuo Okada (President of Aruze USA, Inc. – Aruze is the largest stockholder of Wynn Resorts with current ownership of approximately 20% of the outstanding shares) released this letter to Wynn’s shareholders concerning various corporate governance changes.
The letter states, under the heading “Suspicious $135 million donation to the University of Macau Development Foundation” as follows.
“In April 2011, the Board met, discussed, and approved a pledge by Wynn Macau, Limited (“Wynn Macau”), a subsidiary of the Company, to donate HK$1 billion (roughly $135 million) to the University of Macau Development Foundation, at a time when Wynn Macau was seeking local government approval to develop a third casino. This donation is suspicious for a number of reasons, including its enormous size, the fact that the 10-year term of the pledge matches precisely the length of the casino license Wynn Resorts was seeking, and the fact that the lead trustee of the University of Macau Development Foundation also has a position in the Macau government which enables him to influence the issuance of gaming licenses. Mr. Okada questioned and objected to the donation and was ultimately the sole director to vote against it. Mr. Okada has noted that “I am at a complete loss as to the business justification for the donation, other than that it was an attempt to curry favor with those that have ultimate authority for issuing gaming licenses.” Following the April 2011 board meeting, pursuant to his rights as a director of the Company and in furtherance of his fiduciary duties to stockholders of the Company, Mr. Okada, sought to further investigate the Wynn Macau donation and requested additional information from Wynn Resorts concerning the donation and related matters. When the Company refused to provide the information, Mr. Okada took legal action and was vindicated by a court order requiring Wynn Resorts to comply with Mr. Okada’s reasonable requests. As Mr. Okada feared, the questionable Wynn Macau donation has already spawned at least four stockholder lawsuits against the Company and investigations by both the United States Securities and Exchange Commission (for possible violations of law including the Foreign Corrupt Practices Act) and the Nevada Gaming Board. Not only is this enormous financial commitment a drain on the Company’s coffers, but now Wynn Resorts stockholders will be saddled with the added costs associated with responding to the regulatory investigations and lawsuits. If the results of these investigations and lawsuits include the development of facts regarding legally questionable practices by the Company, stockholders will be at still further risk.”
In response, Wynn Resorts issued this statement which states as follows. ““Aruze has not been a stockholder of Wynn Resorts, Limited since February 18, 2012 when its shares were redeemed by the Wynn Board after a lengthy, third-party investigation uncovered prima facie evidence of improper conduct under the Foreign Corrupt Practices Act by Mr. Okada, Universal Entertainment and Aruze in their dealings with Philippine officials. This most recent filing is a regrettable attempt to divert attention from the issues facing Mr. Okada and Aruze. Given the fact that Aruze was ejected seven months ago as a Wynn shareholder based on conduct unacceptable for a gaming licensee, it has absolutely no rights as a shareholder to nominate directors and its invalid nominations have been rejected on this basis.”
Tobacco Companies in the Middle East
An interesting article (here) from the Saudi Gazette.
The article states as follows. “In most countries, public smoking is banned. Taxes on the sale of cigarettes and other tobacco related products are high, and labeling on cigarette packs is often very graphic and clear: Smoking kills! From the United States to Australia, governments are clamping down on tobacco companies with regulations to throttle consumption and it seems to be working. And so, tobacco companies have to seek other markets. The Middle East is fertile ground as anti-smoking legislation is weak at best, and a fast growing birthrate means a higher number of potential smokers. As a result, big tobacco companies quickly established regional headquarters for the GCC market in the UAE and set to work.” The article then describes how a source tells of companies reaching out to “area [government] officials to lessen any impact on tobacco sales.”
As noted in this prior post, in August 2010, U.S. tobacco companies Alliance One International and Universal Corporation resolved FCPA enforcement actions.
Hat Tip
A hat tip to Christopher Matthews, Samuel Rubenfeld and others associated with the Wall Street Journal’s Corruption Currents page on their two-year anniversary. Corruption Currents (here) is a daily read for me and should be for anyone interested in FCPA and related topics.
Who is that Masked Man?
A small town Midwesterner who saw the world and became interested in a law is who. Thanks to Tom Fox (FCPA Compliance and Ethics Blog) for the opportunity to tell my story. See here for the Q&A.
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A good weekend to all.