Friday Roundup
The guidance is coming – the guidance is coming, compliance by the numbers, checking in on Wynn-Okada, industry news, and refreshing candor. It’s all here in the Friday roundup.
Guidance
Since Assistant Attorney General Lanny Breuer announced last November that the DOJ would be issuing FCPA guidance in 2012 (see here for the prior post), approximately 25 years after Congress encouraged the DOJ to issue guidance, FCPA Inc. has been waiting patiently, and too long (see here for the prior post), for such guidance.
There have been whispers that the guidance would be released in October and this recent Wall Street Journal Corruption Currents post by Chris Matthews, citing “people familiar with the matter” confirms those whispers.
Compliance Practices By The Numbers
What percentage of the Fortune 500 have publicly available, stand-alone FCPA compliance policies and procedures? Do the policies and procedures include discussion of the FCPA’s books and records and internal control provisions? How do companies address facilitation payments? What about gift-giving?
Answers can be found in this recent article in Corporate Counsel by Ryan McConnell (Baker & McKenzie), Jay Martin (Baker Hughes) and Paula Bonavides (a University of Houston law student).
Wynn-Okada
Remember Kazuo Okada, the former business partner of Steve Wynn, accused of various FCPA violations by Wynn Resorts earlier this year? Given the nature of Wynn’s investigative report authored by former FBI Director Louie Freeh of Freeh, Sporkin & Sullivan LLP (see this prior post which provides a detailed summary of the report) it is not surprising, as noted in this Reuters article, that Okada has filed a defamation lawsuit in Japan against the casino company and its officials. According to the article, Okada is claiming $140 million in damages and he alleges that Wynn’s actions led to a decline in his company’s stock price, a decline in new business opportunities, and damaged his reputation. As noted in the Reuters article, a Wynn spokesperson said that Okada’s lawsuit is an “attempt to distract” from the real issues facing Okada and his company “as identified in the Freeh Report.”
Industry News
Speaking of Freeh, in addition to his role in the Wynn-Okada dispute, he is also known in FCPA circles for being the monitor in the Daimler FCPA enforcement action. (See here for the prior post).
As noted in this release from Pepper Hamilton LLP, the firm “and the lawyers of Freeh Sporkin & Sullivan, LLP announced the union of the legal talent of the two firms and Pepper Hamilton’s acquisition of Freeh Group International Solutions, LLC.”
Refreshing Candor
FCPA Inc. participants are of course an active group of speakers. But rarely does one find much candor in the discussions. FCPA Inc. participants often filter what they say cognizant of client issues and mindful of what the small world of enforcement agency officials will think of them. I’ve had numerous exchanges with industry participants in which a person says something insightful or provocative. I then offer up the opportunity to publish a guest post on FCPA Professor, and the person declines.
Against this backdrop, this recent transcript of the 2012 Chief Legal Officer Leadership Forum hosted by Argyle Executive Forum is a nice read in that Adam Siegel (the c0-chair of global white collar group at Freshfields Bruckhaus Deringer) speaks with refreshing candor. Siegel (here, a former federal prosecutor) states as follows.
Regarding a compliance defense.
“Well, the U.K. act, even though it’s perceived as being broader and worse than the FCPA, has this wonderful feature to it, which is that a corporation is legally not responsible if it had adopted adequate procedures. It’s a great argument that we can take to the business about why they ought to invest in an appropriate compliance program. It means we’re actually innocent and you’re not begging some 27-year-old – apologies to anyone in the room of that age – to exercise their enormous discretion and give the corporation and shareholders a pass because some rogue employee in Indonesia has decided that they were going to do something to hit their targets this year.”
On the increase in FCPA enforcement.
“In 2005, due to some changes in personnel and some other issues of justice, someone realized that they can use this statute more aggressively. If you think back to 2007, we had a major record in FCPA civil and criminal finds; $150 million. I think people were amazed that in that year that was what the government was able to do. Fast forward to 2010 and you’re at $1.8 billion. I mean, if any of us in this room have a business that has grown at that rate, I think we’d all be very happy and our shareholders would be delighted.”
On the global trend of increased enforcement.
“I think some of it is pressure from globalization. I think a lot of it is looking at the numbers on that chart. I think a lot of the global anti-bribery movement is driven by regulators around the world saying, Okay, a German company just paid $300 million to the U.S. That’s sort of funny to us. Where are we in this? I think there is some international pressure. There is the pressure of raising the bar, but there’s also a very cynical pressure of raising money. We’re in an economic climate today where I don’t think there’s a single government in the world that isn’t struggling to find resource. This area has emerged, again, as a money making center, which is kind of bizarre.”
*****
A good weekend to all.
Friday Roundup
Add a few to the list, take a few off, a word on guest posts, take a deep breath, whose fault is it, once again nobody was charged. It’s all here in the Friday roundup.
Add Another
Most companies bury FCPA disclosures deep in SEC filings. Not so with Nordion Inc. (here – a Canadian based health sciences company with shares traded in the U.S). It took the open and direct route by issuing a release (here) specifically devoted to the topic. The release states as follows.
“[The company] disclosed that it is conducting an internal inquiry and investigation of a foreign supplier and related parties focusing on compliance with the Canadian Corruption of Foreign Public Officials Act (CFPOA) and the U.S. Foreign Corrupt Practices Act (FCPA). Through the Company’s own internal review as part of its CFPOA compliance program, Nordion discovered potential compliance irregularities. As a result, the Company recently commenced an internal investigation of the possible compliance issues. These issues relate to potential improper payments and other related financial irregularities in connection with the supply of materials and services to the Company. The investigation is being conducted by outside legal counsel and external forensic and accounting firms who are experts in such compliance. These external advisors are reporting regularly to a special Committee of the Board constituted to deal with this matter. Nordion has voluntarily contacted the regulatory and enforcement authorities, including the Canadian and U.S. Department of Justice, the Royal Canadian Mounted Police (RCMP), the U.S. Securities and Exchange Commission (SEC) and the Public Prosecution Service of Canada, to provide details of the matter and advise that an internal investigation is underway. The internal investigation is in its early stages and the Company’s external advisors have met with these authorities and will continue to provide reports to them as the investigation progresses.Nordion is committed to the highest standards of integrity and diligence in its business dealings and to the ethical and legally compliant business conduct by its employees, representatives and suppliers. The Company reviews its compliance programs on a regular basis to assess and align them with emerging trends and business practices. Corrupt or fraudulent business conduct is in direct conflict with the Company’s Global Business Practice Standards and corporate policies. The Company will continue to investigate this matter and cooperate with regulatory and enforcement authorities with a view to an expedient resolution.”
By my estimation, in the past four months, approximately twenty companies have become subject to FCPA scrutiny (whether through disclosures or FCPA-related civil complaints). In addition, industry sweeps as to the Hollywood movie industry and retail industry have reportedly been launched. See here for a prior post titled “The Sun Rose, A Dog Barked, and a Company Disclosed FCPA Scrutiny.”
Academi, Inc., formerly known as Xe Services, formerly known as Blackwater was also in the news this week. As noted in this FBI release, pursuant to a deferred prosecution agreement (here) the company admitted to certain facts and agreed to a $7.5 million fine in connection with certain export controls and firearms law violations. As noted in the release, the DPA “also acknowledges and references a $42 million settlement between the company and the Department of State as part of a settlement of violations of the Arms Export Control Act and the International Trafficking in Arms Regulations.” As noted in this previous post, Blackwater has been under investigation for FCPA violations in Iraq (and Sudan as noted in the FBI release). The above DPA specifically states however that “this agreement does not apply to the Foreign Corrupt Practices Act investigation independently under investigation by the DOJ.” As noted in this previous post, Blackwater’s FCPA scrutiny in Iraq inspired Representative Peter Welch to introduce H.R. 5366, the “Overseas Contractor Reform Act,” an impotent debarment bill that passed the House in September 2010 (see here).
There are also developments to report on the other side of the Atlantic as the U.K. Serious Fraud Office announced hereas follows. “The Director of the Serious Fraud Office has decided to open a criminal investigation into allegations concerning GPT and aspects of the conduct of their business in the Kingdom of Saudi Arabia.” As noted in this Bloomberg piece, GPT is a unit of European Aeronautic Defence & Space Co. (EADS), and the investigation involved suspected payments to win a telecommunications deal with Saudi Arabia’s royal family. The Financial Times stated that the “Serious Fraud Office’s criminal inquiry is a step-change for the agency after it said in March that it was happy with an internal investigation the company was conducting.”
Although he is no longer in Congress, former Representative Todd Tiahrt is probably delighted by this news. See here for the prior post.
Take a Few Off
Huntsman Corporation recently disclosed as follows in a SEC filing (here).
“During the third quarter of 2010, we completed an internal investigation of the operations of Petro Araldite Pvt. Ltd. (“PAPL”), our majority owned joint venture in India. PAPL manufactures base liquid resins, base solid resins and formulated products in India. The investigation initially focused on allegations of illegal disposal of hazardous waste and waste water discharge and related reporting irregularities. Based upon preliminary findings, the investigation was expanded to include a review of the production and off-book sales of certain products and waste products. The investigation included the legality under Indian law and U.S. law, including the U.S. Foreign Corrupt Practices Act, of certain payments made by employees of the joint venture to government officials in India. Records at the facility covering nine months in 2009 and early 2010 show that less than $11,000 in payments were made to officials for that period; in addition, payments in unknown amounts may have been made by individuals from the facility in previous years. […] Also in May 2010, we voluntarily contacted the U.S. Securities and Exchange Commission (“SEC”) and the U.S. Department of Justice (“DOJ”) to advise them of our investigation and that we intend to cooperate fully with each of them. We met with the SEC and the DOJ in October 2010 to discuss this matter and we continue to cooperate with these agencies. Steps have been taken to halt all known illegal or improper activity, including the termination of employment of management employees as appropriate. In May 2012, the SEC and DOJ notified us that they would not recommend any enforcement action be taken against our Company in this matter.”
Since August 2010 (see here for the prior post), I have proposed that when a company voluntarily discloses an FCPA internal investigation to the DOJ and the SEC, and when the DOJ and/or SEC decline enforcement, the DOJ and/or the SEC should publicly state, in a thorough and transparent manner, the facts the company disclosed to the agencies and why the agencies declined enforcement on those facts.
In the meantime, we can only speculate as to why the enforcement agencies did not bring an enforcement action against Hunstman. Of note, in the DOJ’s written declination responses after the June 2011 House hearing (see here), the DOJ stated that it has declined matters when, among other circumstances, “the improper payments involved minimal funds compared to the overall business revenue.”
As noted in this previous post, in April Hercules Offshore disclosed as follows. “On April 4, 2011, the Company received a subpoena issued by the Securities and Exchange Commission (“SEC”) requesting the delivery of certain documents to the SEC in connection with its investigation into possible violations of the securities laws, including possible violations of the Foreign Corrupt Practices Act (“FCPA”) in certain international jurisdictions where the Company conducts operations. The Company was also notified by the Department of Justice (“DOJ”) on April 5, 2011, that certain of the Company’s activities were under review by the DOJ. On April 24, 2012, the Company received a letter from the DOJ notifying the Company that the DOJ has closed its inquiry into the Company regarding possible violations of the FCPA and does not intend to pursue enforcement action against the Company. The DOJ indicated that its decision to close the matter was based on, among other factors, the thorough investigation conducted by the Company’s special counsel and the Company’s compliance program. The Company, through the Audit Committee of the Board of Directors, intends to continue to cooperate with the SEC in its investigation. At this time, it is not possible to predict the outcome of the SEC’s investigation, the expenses the Company will incur associated with this matter, or the impact on the price of the Company’s common stock or other securities as a result of this investigation.”
Earlier this week, the company updated its disclosure as follows. “On August 7, 2012, Hercules Offshore, Inc. (the “Company”) received a letter from the Securities and Exchange Commission (“SEC”) notifying the Company that the SEC staff has completed its investigation into the Company regarding possible violations of the Foreign Corrupt Practices Act (“FCPA”) and does not intend to pursue enforcement action against the Company. As previously disclosed, the Company was notified by the SEC and the Department of Justice (“DOJ”) in April 2011, that certain of the Company’s activities were under review by the SEC and DOJ with respect to possible violations of the FCPA in certain international jurisdictions where the Company conducts operations. The Company previously disclosed that it received a letter from the DOJ on April 24, 2012, notifying the Company that the DOJ has closed its inquiry into the Company regarding possible violations of the FCPA and does not intend to pursue enforcement action against the Company. The DOJ noted that it terminated its investigation ‘…based on a number of factors, including, but not limited to, the thorough investigation undertaken by Hercules and the steps that Hercules has taken in the past and continues to take to enhance its compliance program, including efforts to ensure compliance with the FCPA.’ As a result of the termination by the SEC and the prior termination by the DOJ, there are no open FCPA investigations against the Company.”
As evident from the disclosures, unlike Huntsman, the FCPA scrutiny of Hercules was not based on a voluntary disclosure, but inquiries from the SEC and DOJ. Whether this represents a declination or a dud is the question.
Guest Posts
Part of the mission of FCPA Professor is to facilitate a forum for discussion and analysis of FCPA and related issues among FCPA practitioners, business and compliance professionals, scholars and students, and other interested persons. Given this mission, I frequently publish guest posts (see here for approximately 60 such posts). In publishing guest posts, it should not be assumed in all cases that I agree in whole or in part with the content of such posts. Rather, providing the forum for delivery into the marketplace of ideas is what I hope to facilitate and I encourage all who want to make their voice heard on the issues to consider submitting a guest post.
A Deep Breath
The FCPA is a unique statute, with unique and difficult to manage risks.
Nevertheless , it was refreshing to see this piece by Pamela Marple (Chabourne & Park – here) in the NACD Director Advisory titled “The FCPA: A New Bear in the Woods?” Marple begins as follows. “Over the past five years, the Foreign Corrupt Practices Act has solidified itself as an industry brimming with expert forums, company departments and substantial news coverage. Is this statute really the bear in the woods some say it is?” Marple states as follows. “The existence of the FCPA industry (and professionals who are available to conduct internal investigations at a high price) does not mean that this reaction is what is always required. What is required first and foremost is reasonable judgment exercised by directors and professionals who seek both compliance and solutions—without assuming a bear is present at every turn.”
As I previously commented (here) to Corporate Board Member, corporate directors need to keep a proper perspective. There’s a whole industry out there that’s trying to sell the steroids version of FCPA compliance. But directors should not get their undies in a bundle over this. This is an issue, just like any other risk area, that directors need to have on their radar screen. Corporate directors should not panic when it comes to FCPA compliance.
Whose Fault is It?
Do FCPA violations occur because companies subject to the law go into foreign markets intent on engaging in bribery or because the companies are confronted by corrupt foreign officials seeking to line their own pockets?
Circumstances vary of course, but this recent article in the African Globe includes comments from human rights lawyer and Senior Advocate of Nigeria Femi Falana who focused on the former. The article stated as follows. “In order to cover up the involvement of western governments and corporations in the promotion of corruption, terrorism and drug abuse in Africa, the impression is often created by top public officials of some foreign governments that Africans are the most corrupt people in the world,” Falana observed noting that only last week, the US Secretary of State, Mrs. Hillary Clinton, kicked off her 11-day tour of some African states in Senegal by condemning corruption in Africa and urging African leaders to fight it in order to get good governance in the continent. He said it was also the kernel of President Barack Obama’s message to Africans when he made a brief stopover in Ghana three years ago. “While we do not condone corruption, it is high time the Obama administration was told to stop blaming the victims of grand corruption promoted and fuelled by western countries led by Switzerland, France, United Kingdom and United States,” Falana said.”
Nobody Was Charged
A recent New York Times article (here) once again raises the issue of why few corporate fraud enforcement actions result in individual charges. The article states as follows. “The Justice Department has collected $8.6 billion over the last three years, more than in any similar period in history, but relatively few prosecutions of individuals have come from the biggest settlements.”
A reason?
In the FCPA context, I submit and stated during my 2010 Senate testimony (here), involves the quality of the corporate enforcement action. Given the prevalence of NPAs and DPAs in the FCPA context and the ease in which DOJ offers these alternative resolution vehicles to companies subject to an FCPA inquiry, companies often agree to enter into such resolution vehicles regardless of the DOJ’s legal theories or the existence of valid and legitimate defenses. It is simply easier, more cost efficient, and more certain for a company to agree to a NPA or DPA than it is to be criminally indicted and mount a valid legal defense even if the DOJ theory of prosecution is questionable. (See here for my scholarship “The Facade of FCPA Enforcement). Individuals, on the other hand, face a deprivation of personal liberty, and are more likely to force the DOJ to satisfy its high burden of proof as to all FCPA elements.
A telling statistic?
As noted in this prior post, since alternative resolution vehicles were first used in the FCPA context (December 2004) there have been 61 “core” corporate DOJ FCPA enforcement actions. 47 of the 61 ”core” corporate DOJ FCPA enforcement actions (77%) have been resolved via an NPA (19 instances) or a DPA (28 instances). In these 47 “core” corporate DOJ FCPA enforcement actions, only 7 enforcement actions (15%) have resulted in any individual FCPA criminal charges against company employees. In other words, when the DOJ resolves an FCPA enforcement action via a NPA or DPA, there is only a 15% likelihood that individual criminal charges will be filed against any company employee or those affiliated with the company. [Note: the above statistics were calculated in Sept. 2011]
For previous posts on this very same issue see here.
*****
A good weekend to all.
A Law Much Broader Than Its Name Suggests
The Foreign Corrupt Practices Act is a law much broader than its name suggests. Many FCPA enforcement actions are not foreign in nature and many do not involve allegations of corruption. In the words of the late Gary Coleman – “whatcha talkin bout” (see here).
What I am talking about is the FCPA’s books and records and internal control provisions.
During Congressional investigation, deliberation and consideration of the foreign corporate payments problem in the mid-1970’s, Congress was surprised to learn that existing corporate record-keeping and internal control provisions were deficient to fully capture the domestic and foreign corporate payments that surfaced. The following exchange between Senator Proxmire, Roderick Hills (Chairman, SEC) and Stanley Sporkin (Director of Enforcement, SEC) during a 1976 hearing is instructive.
Senator Proxmire: “[Y]ou stress the fact that … the corporate abuses were accompanied by false or inadequate corporate books and records and that most of the cases involved illegal or improper domestic and foreign payments. Does such falsification of corporate books and records constitute a violation of SEC’s laws or regulations and do they constitute criminal violations?
Hills: I can’t say in all cases.
Sporkin: There is no provision that prohibits just what you stated.
Sporkin: There is no provision that provides, with respect to the kinds of companies we are talking about, that that could be a violation of law.
Senator Proxmire: Well, then, it would seem to me that maybe we ought to consider, as the legislative body for our Government, making it a violation of the law.”
Although the SEC wanted no part in enforcing what would become the FCPA’s anti-bribery provisions, the SEC insisted that any legislation directly addressing foreign corporate payments be supplemented by books and records and internal control provisions. Chairman Hills stated as follows. “I admit that [the provisions make] for dull reading, but these proposals will provide the teeth to assure that problems of this nature are brought to appropriate levels of corporate management and recorded in a manner that makes it far easier for us to discover them.”
Even with the enforcement agencies aggressive and broad theories regarding the FCPA’s anti-bribery provisions, the provisions nevertheless are (as a matter of law) narrowed by elements such as “foreign official” and “obtain or retain business.”
Not so, with the FCPA’s books and records and internal control provisions. They are among the most generic substantive legal provisions one can find and state as follows.
Issuers shall –
(A) make and keep books, records, and accounts, which, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the issuer [the books and records provisions]; and
(B) devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that – (i) transactions are executed in accordance with management’s general or specific authorization; (ii) transactions are recorded as necessary (I) to permit preparation of financial statements in conformity with generally accepted accounting principles or any other criteria applicable to such statements, and (II) to maintain accountability for assets; (iii) access to assets is permitted only in accordance with management’s general or specific authorization; and (iv) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences [the internal control provisions].”
As evident from these provisions, enforcement actions can result where the conduct at issue is not foreign and in the absence of corruption allegations.
Case in point are two recent FCPA enforcement actions that you likely never heard about because they are what I have called “non-FCPA FCPA enforcement.”
Recently, the U.S. Attorneys Office (E.D.N.Y.) announced (here) a criminal complaint against FalconStor Software, Inc. alleging that the company conspired to pay more than $300,000 in bribes to executives of J.P. Morgan Chase Bank, N.A. to obtain over $12 million in electronic storage licencing contracts. FalconStor was also charged with conspiring to falsify its corporate books and records to cover up the bribery scheme. According to the DOJ, “the bribes, including the grants of the stock options and restricted shares, were recognized in FalconStor’s books and records, but were falsely recorded as “compensation to an advisor” or as “employment bonuses.” The SEC also brought an action against FalconStar (see here) charging, among other things, violations of the FCPA’s books and records and internal control provisions. In its complaint (here) the SEC alleged, among other things, that the grants of restricted stock and options to various recipients in the bribe scheme were inaccurately characterized on the company’s books and records as consultant or advisor payments for bona fide services, when in fact no bona fide services were provided. The SEC also alleged that several of the expenses were disguised as compensation expenses on the company’s books and records and that other expenses of many of the bribes were reflected on books and records as sales promotion expenses and entertainment expenses.
Another instance of a recent FCPA enforcement action you likely heard little about was against Gold Standard Mining Corp. and certain of its executives. As noted in this SEC release, the SEC alleged that, between 2009 and 2011, Gold Standard filed numerous reports about its purported Russian gold mining operations that were materially false and misleading in various respects. Among other things, Gold Standard represented that it had acquired a Russian gold mining company known as Ross Zoloto Co., Ltd. (“Ross Zoloto”), but did not inform investors that it had agreed to allow the prior owner of Ross Zoloto to keep profits from existing operations or of issues surrounding Russian government registration or approval of the business combination. Among other things, in the complaint (here) SEC alleged as follows. “Gold Standard failed to devise and maintain a system of internal accounting controls. For example, Gold Standard did not have a means to verify the amount of gold produced; it did not have a means to determine the costs of producing the gold that was sold; it did not maintain records of inventory; it did not have independent access to Ross Zoloto’s bank statements and transactions; and it did not have a method for accessing the Russian accounting system used by Ross Zoloto or to close the books quarterly and create trial balances. It did not have copies of accounting policies or methods used to create the Russian accounting records to enable any U.S. accountants it retained to be able to convert the Russian accounting records accurately into financial statements in conformance with GAAP. As the chief executive officer of Gold Standard, Zachos knowingly or recklessly failed to implement a system of internal controls at Gold Standard…”.
Such instances of non-FCPA FCPA enforcement actions as noted above (and numerous other examples could be cited as well) raise the question – do companies view the FCPA books and records and internal control provisions holistically or through the narrow window of foreign operations and anti-bribery risk assessment? Do companies with a low FCPA bribery risk profile nevertheless provide training and adequate compliance resources to purely domestic FCPA books and records and internal control issues? If not, why not? Is too much focus in the FCPA space devoted to foreign corrupt practices and not enough focus on the more generic books and records and internal control provisions?
After all, the FCPA is a law much broader than its name suggests.
The Silver Lining
No company invites or welcomes a Foreign Corrupt Practices Act investigation or FCPA scrutiny. Timely, costly, distracting, you name it, it’s all there.
Yet, in my experience conducting many FCPA investigations during my practice career, I was always struck that, at the end of the process (whether that process ended with a voluntary disclosure and enforcement action or no disclosure but the company internally implementing remedial measures), company executives came to appreciate (or at least more easily accept) what was learned during the process.
It’s the silver lining of FCPA investigations and scrutiny.
Company executives involved in or advised of the investigation learn more about the company’s business in foreign countries, how the company operates in foreign countries (whether through agents, distributors, etc.), the people who run the business units and make the key decisions, who supervises these people, and whether effective internal controls are in place. During the stress and strain of the process, company executives (assuming they themselves are not culpable) grow closer and develop a deeper trust of each other. The company’s committment to FCPA compliance (and compliance in general) grows stronger and given the motivation to improve, the company may try new things, such as aligning executive and managerial compensation more closely to compliance metrics, and/or rewarding rank and file employees for compliance-related achievements.
You ask, what prevents company executives from doing these things even if the company is not under FCPA scrutiny? The answer of course is nothing, except perhaps the plain and practical realities of the business world.
I was reminded of the FCPA’s silver lining in connection with Wal-Mart. Regardless of whether Wal-Mart’s alleged conduct violated the FCPA (see here for the prior post), Wal-Mart is clearly in the early stages of a timely, costly, and distracting process (see here for its June 1st quarterly filing).
More to the point, during a June 1st investor conference call, the following exchange occurred between a Raymond James & Associates analyst and Wal-Mart CEO Michael Dukes.
BUDD BUGATCH, ANALYST, RAYMOND JAMES & ASSOCIATES: “… I’m going to step into the FCPA issue, if I can … I think the investment community’s already voted that it’s not really an issue from our standpoint, in terms of financial issues, but it’s obviously a big one reputationally and a big one that you had to deal with from a standpoint of the media and all of that … Which really, we think, are probably unfair because of a lot of good things that Walmart has been involved in over the last decade and continues to be involved in. How do you use this opportunity? How do you think about it? I know [Jeff Gearhart, executive vice president, general counsel] has got to think about it from protecting the Company and that’s what that outside investigation is. But Mike, you have to think about it from a standpoint of transparency, and how do you lift this up and then show the entire world how you handle this situation and crisis, which has come to the Company and not at your desire, but from just those events that have transpired?
MICHAEL DUKE: “One thing that’s clear is that we will be a better company because of this. Sometimes when there’s a situation, like this, you can treat it as a challenge or create an opportunity. And frankly, you can see we’re already taking this as an opportunity to be a better company. And so even the focus on doing business the right way, and the initiatives of outreach to communities is something we’re just going to be — you might say just doubling the efforts to be a better company in everything that we do. And frankly, I think it will just lead to long-term being a better company serving communities and serving customers. So yes, a short-term challenge; long-term, it creates us a greater opportunity to be even better.”
*****
The above exchange also furthers the observable point that investors generally care very little about a company’s potential FCPA exposure. Sure, there may be initial investor reaction (such as a 5% – 10% drop in the company’s stock price) when a company discloses or is otherwise reported to be under FCPA scrutiny, but that dip tends to be very temporary as investors come to realize that doomsday scenarios are often overblown. (See here for the prior post regarding Wal-Mart’s stock price – since the post approximately two weeks ago, the company’s stock price has trended even higher).
Even as to the most dramatic stock price drop I am aware of because of FCPA scrutiny (see here for the 2010 post regarding SciClone Pharmaceuticals and its 30+% stock price drop upon disclosing FCPA scrutiny) the company’s stock soon recovered the lost value and began trading, and still trades, at a higher price.
Friday Roundup
Distributor due diligence, a double dose of say what, news from the World Bank, and an FCPA-related sentence reduced. It’s all here in the Friday roundup.
Distributor Due Diligence
David Simon and Alex Kramer (Foley & Lardner – here and here) recently authored “Here’s How U.S. Companies Can Practically Manage FCPA Risks That Come With Global Distribution Networks” in Bloomberg BNA, Prevention of Corporate Liability, Current Report.
The authors note as follows. “While in some areas of the law selling a product to a distributor may insulate a company from liability, the same cannot be said for the FCPA. When a distributor purchases a product, title technically shifts, but if the distributor is seen as acting as a representative of the company whose goods it sells in foreign countries, and that distributor engages in bribery of foreign officials, FCPA liability may very well attach to the company. Consequently, companies need to be careful when working with distributors to ensure they do not engage in corrupt conduct that may wind up costing a company millions in fines and penalties and investigation and defense costs.”
The article next states as follows. “Many companies employ vast distributor networks, sometimes including hundreds, if not thousands, of distributors around the world. Many distributors are more like customers than agents; they merely purchase a product and resell it to others, often in conjunction with other products purchased from other manufacturers. Is it really practical and necessary to conduct full FCPA due diligence on every one of those distributors? Do the U.S. companies in these situations even have the leverage to insist on FCPA representations and warranties in the written agreements, to demand audit rights, and to require certifications by and training of these distributors? The question thus arises whether U.S. companies are faced with a difficult choice either to accept substantial FCPA risk or to devote disproportionate resources to running an FCPA compliance program that fully vets all distributors. We think the answer to this question is ‘‘no’’ and that there is a practical way to minimize the FCPA risk associated with a global distributor network without devoting an unreasonable and disproportionate amount of resources to compliance.”
The practical way?
The authors suggest as follows. “We recommend that companies following a risk-based approach take this risk analysis a step further and focus on the nature of their relationships with their distributors. The goal should be to determine which distributors are the most likely to qualify as agents, for whose acts the company can be held responsible. Think about this as a continuum of risk. On the low-risk end are distributors that are nothing more than resellers with little actual affiliation with the supplier company. On the high-risk end are distributors who are very closely tied to the supplier company, who effectively represent the company in the market and end up looking more like a quasisubsidiary than a customer. […] Once a company segregates the high-risk distributors that likely qualify as agents and potentially subject the company to FCPA liability from those that are mere resellers and pose little FCPA risk, FCPA compliance procedures can be tailored appropriately. For those distributors that qualify as ‘‘agents’’ and also pose FCPA risk, full FCPA due diligence, certifications, training, and contract language are imperative. For those that do not, more limited compliance measures that reflect the risk adjusted potential liability are perfectly appropriate.”
Say What? (1)
A recent op-ed in the Minneapolis Star-Tribune (here) was titled “Good Companies Don’t Bribe. Period.”
Say what?
To be sure, certain Foreign Corrupt Practices Act enforcement actions are based on allegations that executive management or the board was involved in or condoned the improper conduct at issue. For this type of FCPA enforcement action, the title of the article is indeed spot-on. However, this type of FCPA enforcement action is not typical. As noted in this prior post, there are several companies that I call the “World’s Most Ethical FCPA Violators.” These are companies who have earned designation as one of the “World’s Most Ethical Companies” by Ethisphere yet still, during the same general time period, have resolved an FCPA enforcement action or are otherwise the subject of FCPA scrutiny. Companies on this list include: General Electric, Statoil, Deere & Company, Hewlett-Packard, Rockwell Automation, AstraZeneca, Novo Nordisk, and Sempra Energy. For more, see this article from Corporate Crime Reporter titled “World’s Most Ethical Companies and the FCPA.” See also this prior post discussing W.W. Grainger’s recent FCPA disclosure and noting that the company is consistently ranked as one of the “world’s most admired companies” by Forbes.
Say What? (2)
This recent post on the FCPA Blog states as follows. “There’s a reason why you don’t see many of the biggest U.S.-based government contractors on the FCPA top ten list […]. Not that they didn’t struggle with compliance during the early years of enforcement, but they moved quickly to update their compliance and ethics programs once they saw the tide of FCPA enforcement turning. Then they moved on.”
Say what?
Here is the list of the largest contractors in the government market based on an analysis of government procurement data during fiscal 2010. Seven of the companies in the top twenty-one have, in the past few years, resolved FCPA (or related) enforcement actions or are otherwise the subject of FCPA scrutiny: Raytheon, H-P, KBR, Dyncorp, ITT Corp., IBM, and BAE.
The “U.S.-based” and “FCPA top ten list” qualifiers were apparently chosen carefully in the FCPA Blog post.
World Bank News
Earlier this week, the World Bank announced (here) publication “for the first time a set of decisions issued by the World Bank Group’s Sanctions boards in cases of alleged fraud and corruption.” World Bank Managing Director Sri Mulyani Indrawati stated as follows. “The World Bank Group takes a hard line against corruption, and we believe that greater transparency must be part of that effort. By publishing Sanctions Board decisions, we are making all parties involved in the sanctions process more accountable. This move should deepen the deterrent effect of debarments and enhance the educational value of the Sanctions Board’s findings.”
The Sanctions Board decisions can be found here.
Antoine’s FCPA-Related Sentence Reduced
This recent post provided a Haiti Teleco roundup. As noted in the prior post, the Haiti Teleco case (minus the manufactured and now former Africa Sting case) is the largest in FCPA history in terms of defendants charged – 13. Among the group of defendants were three “foreign officials” charged with non-FCPA offenses including Robert Antoine, the former director of international affairs at Haiti Teleco who pleaded guilty in March 2010 to conspiracy to commit money laundering. In June 2010, he was sentenced to 48 months in prison.
As Samuel Rubenfeld (Wall Street Journal Corruption Currents) noted in this recent post, Antoine, “who testified twice at trial on behalf of prosecutors in foreign bribery cases had [his] four-year prison sentence reduced to 18 months, and he will soon be out of prison.”
*****
A good weekend to all.