Deferred Prosecution Agreements – Page 27

Orthofix International Resolves Enforcement Action Based On The Conduct Of Its Mexican Subsidiary

Earlier this week, Orthofix International N.V. (“Orthofix”), a limited liability orthopedic medical device company formed under the law of Netherlands Antilles with administrative offices in Lewisville, Texas and common stock traded on Nasdaq, agreed to resolve DOJ and SEC FCPA enforcement actions. The conduct at issue focuses on Promeca S.A. de C.V., a wholly-owned subsidiary of Orthofix headquartered in Mexico City. According to the SEC, “during the relevant time period, Promeca was subject to Orthofix’s control, including the implementation of internal controls at Promeca” and the “financial results of Promeca were a component of the consolidated financial statements included in Orthofix’s filings with the SEC.’

Total fines and penalties in the Orthofix enforcement action were approximately $7.4 million ($2.2 million via a DOJ deferred prosecution agreement, and $5.2 million via a settled SEC civil complaint).

DOJ

The DOJ enforcement action involved a criminal information against Orthofix resolved through a deferred prosecution agreement.

The specifics of the DOJ’s case against Orthofix are not known at this time as the Eastern District of Texas, where a criminal information has been filed, has a standing order that criminal informations remain sealed until a plea is entered in open court. Nevertheless, Orthofix did file the deferred prosecution agreement as an exhibit (see here) to its recent SEC filing. The DPA indicates that the information concerns one count of violating the FCPA’s internal control provisions.

The term of the DPA is three years and it states that the DOJ entered into the agreement based on the following factors: “(a) following reports of bribery by [Promeca] employees … Orthofix made a timely and voluntary disclosure to the Department and the United States Securities and Exchange Commission (“SEC”) about potential misconduct; (b) Orthofix conducted an investigation concerning bribery and related misconduct; (c) Orthofix reported its findings to the Department and the SEC; (d) the extent of the conduct; (e) Orthofix undertook remedial measures, including the implementation of an enhanced compliance program, and agreed to undertake further remedial measures, as may be necessary under [the DPA]; and (f) Orthofix agreed to continue to cooperate with the Department in any ongoing investigation of the conduct of Orthofix’s current and former employees, agents, consultants, contractors, subcontractors, and subsidiaries relating to violations of the FCPA.”

Pursuant to the DPA, the advisory Sentencing Guidelines range for the conduct at issue was $2.22 – $4.44 million. The DPA states as follows. “Orthofix and the DOJ agree that this fine is appropriate given the nature and extent of Orthofix’s cooperation in this matter and the remediation undertaken by Orthofix.” Of note, the guidelines calculation indicate that “an individual within high-level personnel condoned or was willfully ignorant of the offense.” Although a compliance monitor was not required pursuant to the DPA, Orthofix did agree that it will report to the DOJ annually during the term of the DPA regarding remediation and implementation of the compliance measures required under the DPA.

As is customary in FCPA DPA’s, Orthofix agreed not to make any public statement contradicting its acceptance of responsibility for the conduct at issue in the DPA.

SEC

The SEC’s settled civil complaint (here) against Orthofix alleges, in summary fashion, as follows.

“This matter involves violations of the books and records and internal controls provisions of the FCPA by Orthofix, an orthopedic medical device company. From 2003 to 2010, [Promeca], repeatedly paid bribes totaling approximately $317,000 to Mexican officials in order to obtain and retain sales contracts from Instituto Mexicano del Seguro Social (“IMSS”) [here], the Mexican government-owned healthcare and social services institution. Promeca employees referred to these payments as ‘chocolates.’ These improper payments, falsely recorded on the company’s books as cash advances to Promeca executives or training and promotions expenses, generated approximately $8.7 million in gross revenues for Orthofix and resulted in illicit net profits of about $4.9 million.”

According to the SEC, Promeca sold Orthofix’s products to government and private hospitals in Mexico and “approximately 60% of Promeca’s revenues came from IMSS, the Mexican government-0wned medical care and social services provider.”

Under the heading “bribery scheme” the complaint alleges as follows.

“From at least 2003 to 2007, … Promeca, regularly paid bribes to IMSS hospital employees in the form of cash and/or gifts, in order to secure sales contracts from IMSS hospitals. The bribe amounts, referred to internally at Promeca as ‘chocolates,’ ranged from 5% to 10% of the collected sales for the hospital in question. In order to obtain cash for the illicit payments, Promeca executives wrote checks to themselves, which they justified as cash advances. They later submitted falsified receipts for imaginary expenses including meals and new car tires, which were accounted for in Promeca’s books and records. As the bribes increased, it became difficult for Promeca executives to invent new receipts to justify the advances. Eventually, the bribes became too large, forcing the Promeca executives to devise another justification methodology, and hence they began falsely accounting for the payments as promotional and training expenses. Because of the bribery scheme, Promeca’s training and promotional expenses were significantly over budget. In one instance, Orthofix launched an inquiry into these expenses, but did not control them. In 2008, IMSS began purchasing medical products under a new national tender system, where a special IMSS committee, rather than the individual hospitals, selected the winning bidder who would cover IMSS nationally. Promeca then established a new system of bribery to ensure that it was awarded the business under the national tender system. To achieve this, Promeca made payments to three front companies, which were controlled by certain IMSS officials. Promeca won the national tenders for 2008 and 2009 and paid the front companies 5% and 3%, respectively, of the collected sales from those tenders. The front companies concealed these bribes by submitting false invoices, characterizing them as training and other promotional expenses that Promeca never received. Promeca falsely recorded the bribes on its books as payments for training courses, meetings and congresses, and promotional costs. In addition, between 2003 and 2010, Promeca expended approximately $80,050 on gifts and travel packages, some of which were intended to corruptly influence IMSS employees in order to retain their business. The various gifts included vacation packages, televisions, laptops, appliances, and in one case, the lease of a Volkswagen Jetta. These payments were falsely accounted for in Promeca’s books and records as promotional and training expenses. In all, the improper payments, totaling about $317,000, generated approximately $8.7 million in gross revenues and resulted in illicit net profits to Orthofix of about $4.9 million.”

Under the heading, “Orthofix’s Remedial Measures to Prevent Corrupt Payments” the complaint states as follows.

“Prior to the discovery of the bribery schemes, Orthofix did not have an effective FCPA compliance policy or FCPA-related training. Although Orthofix disseminated some code of ethics and anti-bribery training to Promeca, the materials were only in English, and it was unlikely that Promeca employees understood them as most Promeca employees spoke minimal English. [For a recent FCPAmericas post on this issue, see here]. Additionally, even though Promeca’s training and promotional expenses, that included the improper payments, were often over budget, Orthofix did very little to investigate or diminish the excessive spending. Upon discovery of the bribe payments through a Promeca executive, Orthofix immediately self-reported the matter to the Commission staff, and conducted an internal investigation. Orthofix also implemented significant remedial measures. Specifically, it terminated the Promeca executives that orchestrated the bribery scheme, wound up Promeca’s operations, enhanced its overall FCPA compliance program with mandatory annual FCPA training for all employees and third-party agents, expanded internal audit functions, and implemented other internal control measures.”

Based on the above allegations, the SEC complaint charges violations of the FCPA’s books and records and internal controls provisions. The SEC complaint states as follows. “Orthofix’s subsidiary characterized their payments to IMSS as cash advances or training and promotional expenses even though those payments were used as bribes. Orthofix’s books and records did not reflect the true nature of those payments. Orthofix failed to implement adequate internal controls to prevent the bribery or to ensure that transaction were properly recorded. Orthofix failed to implement an FCPA compliance and training program commensurate with the extent of its international operations and particularly its ownership of Promeca, a subsidiary that had substantial sales to government-owned enterprises. Further, even though Orthofix knew that Promeca’s training and promotional expenses were often over budget, it did nothing to act on the red flag.”

As stated in the SEC’s release (here), Orthofix consented to a final judgment ordering it to pay $4,983,644 in disgorgement and more than $242,000 in prejudgment interest. As noted in the release, the final judgment would permanently enjoin the company from violating the books and records and internal control provisions of the FCPA and Orthofix also agreed to certain undertakings, including monitoring its FCPA compliance program and reporting back to the SEC for a two-year period.

In the release, Kara Brockmeyer (Chief of the SEC’s FCPA Unit) stated as follows. “Once bribery has been likened to a box of chocolates, you know a corruptive culture has permeated your business. Orthofix’s lax oversight allowed its subsidiary to illicitly spend more than $300,000 to sweeten the deals with Mexican officials.”

Perhaps the most notable aspect of the Orthofix enforcement action is that neither the DOJ or SEC charged the company with FCPA anti-bribery violations despite allegations that, given the enforcement agencies’ theories, have typically resulted in such violations.

Peter Spivack (Hogan Lovells – here) represented Orthofix.

UK Bribery Act – Year One

Today’s post is from Robert Amaee (former Head of Anti-Corruption and Head of Proceeds of Crime at the UK Serious Fraud Office and currently of counsel at Covington & Burling – see here). Amaee is the United Kingdom Expert for FCPA Professor.

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UK Bribery Act – Year One

The UK Serious Fraud Office is yet to take enforcement action under the UK Bribery Act (“Bribery Act”). This is hardly a surprise to those familiar with the demands of an investigation into complex economic crime. The type of bribery cases that the SFO is duty bound to investigate and prosecute are precisely those that involve a heavy commitment of resource and time. The SFO is reported to currently spend an average of three and a half years and £1.5 million ($2.25 million) investigating each bribery case. These are not the Munir Patel type of bribery prosecutions that are typically handled by the UK Crown Prosecution Service (“CPS”).

Some commentators had set unrealistic expectations for the speed at which enforcement actions would appear, predicting a swift procession of dawn raids and arrests. This sense of anticipation and the inevitable anti-climax may well, at least in part, explain the findings of recent surveys, including a poll conducted by Deloitte. The poll found that fewer than one in ten of the 1200 compliance professionals polled expressed any concern about the possibility of a Bribery Act enforcement action being brought against their organisation. There appears to be little to fear from the SFO for the vast majority of those polled. In spite of the undoubted challenges that confront the SFO in the year ahead, it is important for companies and senior individuals to guard against complacency.

In the year since the Bribery Act came into force, David Green CB QC has taken over as Director of the SFO and the UK government has made tangible strides towards the adoption of a UK version of the US Deferred Prosecution Agreement (“DPA”). The new director will have little choice but to continue the SFO’s policy of guiding, assisting and engaging with responsible corporates and senior individuals, but there is no doubt that he will instil a more hard edged prosecutorial approach at the SFO than has been the case in the past. Green is a seasoned barrister who has defended and prosecuted serious economic crime cases during his 25 year career at the criminal bar. He also has prior experience of leading two prosecutions agencies. He was appointed the first director of the Revenue and Customs Prosecutions Office (“RCPO”) in April 2005, and served as director of the CPS Central Fraud Group from January 2010 until his return to the bar in April 2011.

Green began his four year term at the SFO on 23 April 2012. Since then, he has started to articulate his plans for the SFO in interviews with the Financial Times and most recently in a keynote address he delivered at an anti-corruption conference held in London on 26 June. At the conference, Green described this as a “challenging but exciting time” for the SFO. In a likely reference to the Tchenguiz case, he accepted that some of the recent “trenchant” criticism of the SFO has been justified, but stated that the SFO was “here to stay.” He warned against the “dilution” of the SFO brand by chasing “eye-catching quick results or taking short cuts” and said that he will not “sacrifice solid prosecutorial demands for easy headlines.” Green will focus the SFO’s “blood and treasures” on only the “most important cases *** that undermine confidence in UK Plc. and the City of London” and those that “undermine a level playing field.” He said that the SFO would not pursue cases of “crooks overcharging” but would look to use its “unique set up and capabilities to do what others cannot do.”

Green made no reference to the CPS Inspectorate-led review of the SFO that is currently underway, but explained that he has set about re-organising the SFO into four operational divisions; two dedicated to bribery and two to fraud. He is in the process of recruiting four senior civil servants into the “divisional head” roles. In addition, he is seeking to appoint a General Counsel to “shape and critique” cases, and a “Specialist Advisor” to “sharpen cases” and advise him on DPAs and civil settlements. Green made it clear that he is looking to bring external expertise into the organisation. He said that he wants to “foster and encourage a revolving door between private practice and the SFO” and extended an invitation to members of the junior bar, solicitors, investigators and accountants to join the SFO, either on a permanent basis or on secondment.

Green reiterated his support for the introduction of a UK DPA mechanism, stating that prosecutors should have “access to the broadest possible range of prosecutorial tools” so that they are not “outdone by the opposition.” He talked about strengthening his intelligence unit and made it clear that he would welcome a debate on whether UK whistle-blowers should be financially rewarded. He would like to “extend the reach” of the SFO and “encourage and increase self-reporting.” He expressed the view that the “advantages of self-reporting need to be articulated” so that companies are “inclined” to self-report. While he cannot give guarantees, he said that “self-reporting is a strong factor in deciding whether to prosecute or not.” If a prosecution is not in the public interest he said that the SFO is “likely to seek a civil settlement.” It is clear that the civil recovery mechanism, afforded by the UK Proceeds of Crime Act 2002, will continue to play a major role in future SFO enforcement actions.

Anti-corruption enforcement remains a priority for Green’s SFO which will continue to bring cases under the old UK bribery laws as well as the Bribery Act. Green confirmed that the SFO is currently handling four self-referrals and that eleven further cases are “being developed.” He said that most of these involve allegations of corruption. In relation to the Bribery Act, Green expressed his desire to bring cases that would help clarify the boundaries of the “adequate procedures” defence. In respect of the term “carries on business or part of a business in the UK” he warned that, in any court case, the SFO would “argue against an overly technical interpretation.”

The SFO’s priorities in relation to enforcement under the Bribery Act will become clearer in the year ahead. However, companies must not expect early answers on some of the thornier issues under the Bribery Act, such as the extent of the UK’s jurisdiction over non-UK companies; the extremities of third party liability; and the borderline between acceptable corporate hospitality and a prosecutable bribe. The SFO is likely to begin enforcement under the Bribery Act by seeking prosecutions or settlements in cases where there is clear criminal culpability, before it ventures on to tackle cases that test the boundaries of the Bribery Act. As we await further clarity from the UK, the recent US Department of Justice declination in the Morgan Stanley case provides companies with valuable insights into considerations that can successfully persuade a prosecutor not to prosecute. The relevance of this guidance to an assessment of the adequacy of a company’s policies and controls in the context of the Bribery Act will not be lost on readers of this publication. The DoJ is set to provide further assistance to us all when it launches its much anticipated FCPA guidance. This is expected in the next few weeks.

Data Systems & Solutions LLC Resolves FCPA Enforcement Action

Earlier this week, Data Systems & Solutions LLC (“DS&S”), a wholly-owned subsidiary of Rolls Royce Holdings and based in Reston Virginia, resolved a DOJ FCPA enforcement action. The total fine was $8.82 million.

DS&S’s business includes the design, installation, and maintenance of instrumentation and controls systems at nuclear power plants, fossil fuel power plants, and other critical infrastructure facilities. According to the information, “DS&S’s instrumentation and controls business customers included state-owned nuclear power plants in Eastern Europe.” The charged conduct focuses on DS&S’s business with Ignalina Nuclear Power Plant (“INPP”) described as a “state-owned nuclear power plant in Lithuania and an ‘agency’ and ‘instrumentality’ of a foreign government, as that term is used in the FCPA.” For more on INPP, see its website here.

According to the charging documents, payments were made by DS&S to various INPP employees primarily through subcontractors. The INPP employees are described as follows. Official 1 (the Deputy Head of the Instrumentation & Controls Department at INPP with influence over the award of contracts); Official 2 (the Head of Instrumentation & Controls Department at INPP with influence over the award of contracts); Official 3 (the Director General at INPP with influence over the award of contracts); Official 4 (the Head of International Projects Department at INPP with influence over the award of contracts); and Official A (the lead software engineer at INPP with influence over the award of contracts). All officials are alleged to “foreign officials as that term is used in the FCPA.”

The DOJ enforcement action involved a criminal information (here) against DS&S resolved through a deferred prosecution agreement (here).

Criminal Information

The information charges conspiracy to violate the FCPA’s anti-bribery provisions and one substantive FCPA anti-bribery violation. As to the conspiracy charge, the information alleges that between 1999 to 2004, DS&S and others conspired to “obtain and retain contracts for DS&S from INPP to design, install, and maintain INPP’s instrumentation and controls systems through the promise and payment of bribes to foreign officials employed by INPP.”

According to the information, DS&S would and did attempt to conceal the payments to foreign officials by using Subcontractor A Subcontractor B and Subcontractor C (an alleged U.S. shell company) to funnel bribes from DS&S to INPP officials. The information further alleges that: (i) “Subcontractor A would and did pay bribes to INPP officials on behalf of DS&S by issuing tens of thousands of dollars in checks to INPP officials for deposit into the officials’ bank accounts in the United States”; (ii) DS&S “would and did pay INPP employees who were also employed by Subcontractor B significantly above-market rates for services performed by Subcontractor B in connection with DS&S contracts with INPP in exchange for the INPP employees’ support for the award of contracts to DS&S” and in a manner designed to allow those employees to avoid taxes on the payments from DS&S; (iii) DS&S “would and did provide gifts, travel, and entertainment to employees of INPP in exchange for those foreign officials’ agreements to help DS&S secure contracts with INPP. The travel alleged includes trips to Florida and Hawaii and gifts alleged include a Cartier watch.

Executive A (vice president of marketing and business development at DS&S during the relevant time period responsible for marketing and business development efforts in connection with DS&S’s nuclear services, including power plant customers in Eastern Europe) is alleged to have engaged in a variety of the improper conduct.

DPA

The DOJ’s charges against DS&S were resolved via a deferred prosecution agreement. Pursuant to the DPA, DS&S admitted, accepted and acknowledged that it is responsible for the acts of its officers, directors, employees, and agents as charged in the information.

The term of the DPA is two years and it states that the DOJ entered into the agreement based on the following factors: “(a) following the receipt of subpoenas in connection with the government’s investigation, DS&S initiated an internal investigation and provided real-time reports and updates of its investigation into the conduct described in the Information; (b) DS&S’s cooperation has been extraordinary, including conducting an extensive, thorough, and swift internal investigation; providing to the Department searchable databases of documents downloaded from servers, computers, laptops, and other electronic devices; collecting, analyzing, and organizing voluminous evidence and information to provide to the Department in a comprehensive report; and responding promptly and fully to the Department’s requests; (c) DS&S has engaged in extensive remediation, including terminating the officers and employees responsible for the corrupt payments; dissolving the joint venture and reorganizing and integrating the Company as a subsidiary with a more rigorous compliance program; enhancing its due diligence protocol for third-party agents and subcontractors, including CEO review and approval of the retention of any agent or subcontractor; strengthening its ethics policies, including the appointment of a Company Ethics Representative who reports directly to the CEO and provides regulator reports to the Members Committee at each Committee meeting; providing FCPA training for all agents and subcontractors; and establishing heightened review of most foreign transactions; (d) DS&S has committed to continue to enhance its compliance program and internal controls …; and (e) DS&S has agreed to continue to cooperate with the Department in any ongoing investigation of the conduct of DS&S and its officers, directors, employees, agents and subcontractors relating to violations of the FCPA.

Pursuant to the DPA, the advisory Sentencing Guidelines range for the conduct at issue was $12.6 – $25.2 million. The DPA states as follows. “DS&S agrees to pay a monetary penalty in the amount of $8,820,000, an approximately thirty-percent reduction off the bottom of the fine range […] DS&S and the Department agree that this fine is appropriate given the facts and circumstances of this case, including the nature and extent of DS&S’s extraordinary cooperation and extensive remediation in this matter.”

Pursuant to the DPA, DS&S agreed to report to the DOJ “periodically, at no less than twelve-month intervals during the two-year term, regarding remediation and implementation of the compliance program and internal controls, policies, and procedures” described in an attachment to the DPA. As is customary in FCPA DPA’s, DS&S agreed that it shall not make any public statement contradicting its acceptance of responsibility.

See here for the DOJ’s release. Given the allegation in the information that INPP officials received payments into their bank accounts in the U.S., it will be interesting to see whether the INPP officials are charged with non-FCPA offenses. Such a U.S. nexus was used to prosecute certain of the “foreign officials” in the Haiti Teleco enforcement action (see here for a summary of those actions) as well as the Siriwan’s in connection with the Green matter (see here for the prior post).

Carl Rauh (Hogan Lovells – here) represented DS&S.

U.K. Opens Consultation Period On Deferred Prosecution Agreements, Yet Rejects Non-Prosecution Agreements

Yesterday’s post concerned the United Kingdom and we stay across the pond for today’s post as well. Previous posts (here, here and here) have discussed the movement in the U.K. to adopt deferred prosecution agreements (DPAs).

Recently the U.K. Ministry of Justice announced (here) the opening of a consultation process concerning DPAs. The consultation period is open until August 9th and the MoJ states that its “ambition [in proposing DPAs] is to ensure that a higher proportion of economic crime is identified, investigated and dealt with. DPAs are a tool that seeks to achieve these goals whilst being transparent, clear and consistent.”

In a supplemental consultation paper, Crispin Blunt (Parliamentary Under-Secretary of State) and Edward Garnier QC (H.M. Solictor General) write a foreward that states, among other things, as follows.

“The obstacles [to prosecuting white collar crime] are familiar. Investigations and trials are forbiddingly long, expensive and complicated – particularly where offences occur across multiple jurisdictions. Identifying wrongdoing in hidden, specialist or technical fields often depends on commercial organisations cooperating or whistleblowers coming forward, but organisations have little incentive to self-report. Law enforcement agencies complain that they have a relatively narrow range of tools available to identify and bring corporate offenders to justice. In modern corporations, where responsibility for decision-making is distributed quite widely, it is very difficult to prove criminal liability, which depends on establishing that the ‘directing mind and will’ of an organisation was at fault. The consequence of all of this has been too few organisations held to account for their crimes, and too many victims waiting in vain for restitution.”

“… [W]e need to look again at the range of tools open to prosecutors when dealing with certain types of economic crime. We believe that deferred prosecution agreements (DPA), on which we are consulting in this paper, can make a valuable contribution to efforts to identify and address corporate economic crime. A DPA would sit alongside existing means of tackling crime, criminal prosecution and civil proceedings. Under its terms, a prosecutor would lay but would not immediately proceed with criminal charges against a company pending successful compliance with tough requirements such as financial penalties, restitution for victims, confiscation of the profits of wrongdoing and measures to prevent future offending.”

“DPAs would be a fair and pragmatic approach to tackling a serious problem and would need to be used judiciously. Where the alleged wrongdoing is most serious, or the public interest would otherwise require it, a criminal prosecution would continue to be the most appropriate course of action. As DPAs would be sanctioned by judges, the judiciary would be able to block DPAs which they do not think would serve the interests of justice, for example where prosecution would be the appropriate response. Entering into a DPA will be voluntary both for companies accused of wrongdoing and for prosecutors.”

“DPAs would contribute to a just outcome, enabling prosecutors to secure penalties for and the surrendering of the proceeds of wrongdoing, and providing benefits for victims in a way that is sanctioned by a judge, without the uncertainty, expense, complexity or length of a full criminal trial. They also enable commercial organisations to be held to account – but without unfairly affecting employees, customers, pensioners, suppliers and investors who were not involved in the behaviour that is being penalised. The process will be transparent; as DPAs will be public, the public will always know what wrongdoing has taken place, and the penalty that has been paid.”

“Our ambition is to ensure that a higher proportion of economic crime is identified, investigated and dealt with. DPAs are a tool that seeks to achieve these goals whilst being transparent, clear and consistent. We hope that you will consider our proposals carefully to help ensure that they are sensible, proportionate and will make a genuine difference when they are introduced.”

An entire section of the consultation paper is devoted to the U.S. approach and it states among other things as follows.

“[Non-prosecution agreements] NPAs and DPAs have been successfully adopted in a variety of circumstances. […] The availability of NPAs and DPAs, coupled with the risk of prosecution, incentivizes commercial organizations to cooperate with investigations, reducing the likelihood of a trial and of a criminal conviction. In general, once a commercial organization comes to the attention of authorities in the U.S., it is common for the organization to conduct its own internal investigation, and to submit a report to the prosecutor setting out its conclusions. […] The use of DPAs and NPAs therefore supports an existing culture of self-reporting of serious economic crimes in the U.S. […] Neither NPAs nor DPAs have a statutory basis, relying instead on the United States Attorney’s manual, Principles of Federal Prosecution of Business Organisations, which sets out the circumstances in which they are appropriate and the factors to consider when investigating, charging, and discussing an agreement with respect to corporate crimes. […] There has been increasing scrutiny of the use of NPAs and DPAs as an enforcement tool, with concerns over the lack of transparency around the factors that determine whether the DOJ grants a NPA or DPA, and that they inappropriately excuse criminal behavior. The DOJ has sought to address these criticisms and has continued to use these agreements to conclude a variety of investigations.”

The consultation paper section on the U.S. then discusses NPAs and how there is no judicial oversight of these agreements and, even as to DPAs, how little judicial scrutiny and review there is of these agreements.

The consultation paper section on the U.S. then contains a few sentences that should be of great interest to U.S. policy makers. The section states as follows. “In practice the extent of judicial involvement generally appears to be limited in the U.S. model, and despite the effectiveness of the process, is unlikely to be at a level suitable for the U.K.’s constitutional arrangements.” Elsewhere, the section states as follows. “Despite the effectiveness of the U.S. model, the lack of judicial oversight is likely to make it unsuitable for the constitutional arrangements and legal traditions in England and Wales. We have concluded that [NPAs] are not suitable for this jurisdiction due to their markedly lesser degree of transparency, including the absence of judicial oversight.”

Kudos to the U.K. for rejecting NPAs – a resolution vehicle that was used to resolve four corporate FCPA enforcement actions in 2011 and four corporate enforcement actions in 2010.

[For more on the use of NPAs and DPAs to resolve FCPA enforcement actions and how use of these resolution vehicles have contributed to a “facade of enforcement” see here – my scholarship titled “The Facade of FCPA Enforcement”]

Even so, it is clear from the consultation paper that the U.K. proposed model for DPAs is inspired by the U.S. model. Yet from the consultation paper proposal, even though the U.K. proposes to adopt DPAs, it is clear that U.S. style DPAs is not the goal. Among other things, the consultation paper states as follows as to transparency. “Public confidence in the justice system is vital. The public need to have confidence that a prosecutor is not entering into a ‘cosy deal’ with a commercial organisation ‘behind closed doors’. We therefore believe that there should be judicial involvement from an early stage whereby the proposed DPA is considered at a preliminary hearing before it returns for final judicial approval.”

Should the U.K. adopt DPAs they would be used, as the consultation paper makes clear, in a variety of cases, not just Bribery Act cases. The same is true in the U.S. DPAs (and NPAs) are not just used to resolve FCPA enforcement actions, although their most frequent use is in FCPA enforcement actions. (See here from Gibson Dunn – FCPA enforcement actions comprised approximately 40% of DOJ NPAs or DPAs in 2011; here from Gibson Dunn – FCPA enforcement actions comprised approximately 50% of DOJ NPAs or DPAs in 2010).

My concern with U.K. adoption of DPAs in the Bribery Act context is the same as when I originally voiced it in this October 2011 post.

Why does a law with an adequate procedures defense require the third option of a deferred prosecution agreement – the first two options being prosecute vs. not prosecute? If a corporate has adequate procedures, but an isolated act of bribery nevertheless occurs within its organization, the corporate presumably would not face prosecution under the Bribery Act. Seems like a reasonable result. In other words, no need for the third option in such a case. On the other hand, if a corporate does not have adequate procedures (i.e. has no committment to anti-bribery compliance) and an act of bribery occurs within its organization, it presumably would face prosecution under the Bribery Act. Seems like a reasonable result. Does a third option really need to be created for corporates who do not implement adequate procedures?

Even the MoJ consultation paper recognizes that the Bribery Act is different from other U.K. economic crime laws. For instance, the executive summary portion of the paper states as follows. “Options for dealing with offending by commercial organisations are currently limited and the number of outcomes each year, through both criminal and civil proceedings, is relatively low. In part, this is because of difficulties with the law of corporate criminal liability, which does not reflect the 21st commercial organization. It is also because offending in the area of economic crime is becoming increasingly sophisticated. As the size of commercial organizations and the reach of their interests grow, so too do the difficulties of identifying criminal activity and of prosecution at a national level for what can often be wrongdoing across a number of jurisdictions. This calls for increasingly close working with international law enforcement agencies. Although the creation under the Bribery Act 2010 of criminal liability for a commercial organisation that fails to prevent bribery is a notable improvement and although prosecuting agencies are taking more pro-active approaches in identifying and investigating serious economic crime, more needs to be done.” (emphasis added).

Likewise, elsewhere the consultation paper states as follows. “[The U.K.] law of corporate criminal liability poses some problems. Under the current law, in order to obtain a conviction a prosecutor must show that the ‘directing mind and will’ of the commercial organisation had the necessary fault element or ‘mens rea’ for the offence. However, this is often difficult to prove, especially in increasingly large and more sophisticated modern commercial organisations. While the new offence in connection with the failure of a commercial organisation to prevent bribery under section 7 of the Bribery Act 2010 will help, more needs to be done, especially in relation to other types of economic offending.” (emphasis added).

In short, the consultation paper recognizes that the Bribery Act is cut from a different cloth compared to other U.K. economic crime laws, but it fails to see how this key distinction ought to disfavor, not favor, use of DPAs to resolve Bribery Act cases.

For more on this recent U.K. development, see here from Debevoise & Plimpton (discussion included within its FCPA Update), here from Skadden, here from Bryan Cave, and here from DLA Piper.

Friday Roundup

Wal-Mart news, the shadow regulatory state, save the date, checking in on Wynn-Okada, and there’s an app for that.

Wal-Mart News

Yesterday Wal-Mart released its first quarter financial results and stated as follows in its SEC filing.

The Audit Committee of the Company’s Board of Directors (the “Audit Committee”), which is composed solely of independent directors, is conducting an internal investigation into, among other things, alleged violations of the U.S. Foreign Corrupt Practices Act (the “FCPA”) and other alleged crimes or misconduct in connection with foreign subsidiaries including Wal-Mart de México, S.A.B. de C.V. (“Walmex”) and whether prior allegations of such violations and/or misconduct were appropriately handled by the Company. The Audit Committee and the Company have engaged outside counsel from a number of law firms and other advisors who are assisting in the on-going investigation of these matters. The Company is also conducting a voluntary global review of its policies, practices and internal controls for FCPA compliance. The Company is engaged in strengthening its global anti-corruption compliance programs through appropriate remedial anti-corruption measures. In November 2011, the Company voluntarily disclosed that investigative activity to the U.S. Department of Justice (the “DOJ”) and the SEC.

The Company has been informed by the DOJ and the SEC that it is also the subject of their respective investigations into possible violations of the FCPA. The Company is cooperating with the investigations by the DOJ and the SEC. A number of federal and local government agencies in Mexico have also recently initiated investigations of these matters. Walmex is cooperating with the Mexican governmental agencies conducting these investigations. Furthermore, lawsuits relating to the matters under investigation have recently been filed by several of the Company’s shareholders against it, its current directors, certain of its former directors, certain of its current and former officers and certain of Walmex’s current and former officers.

The Company could be exposed to a variety of negative consequences as a result of the matters noted above. There could be one or more enforcement actions in respect of the matters that are the subject of some or all of the ongoing government investigations, and such actions, if brought, may result in judgments, settlements, fines, penalties, injunctions, cease and desist orders or other relief, criminal convictions and/or penalties. The shareholder lawsuits may result in judgments against the Company and its current and former directors and officers named in those proceedings. The Company cannot predict accurately at this time the outcome or impact of the government investigations, the shareholder lawsuits, or its own internal investigation and review. In addition, the Company expects to incur costs in responding to requests for information or subpoenas seeking documents, testimony and other information in connection with the government investigations, in defending the shareholder lawsuits, and in conducting its internal investigation and review, and it cannot predict at this time the ultimate amount of all such costs. These matters may require the involvement of certain members of the Company’s senior management that could impinge on the time they have available to devote to other matters relating to the business. The Company may also see ongoing media and governmental interest in these matters that could impact the perception among certain audiences of its role as a corporate citizen.

The Company is in the early stages of assessing and responding to the governmental investigations, the shareholder lawsuits, and its internal investigation and review are on-going. Although the Company does not presently believe that these matters will have a material adverse effect on its business, given the inherent uncertainties in such situations, the Company can provide no assurance that these matters will not be material to its business in the future.

Wal-Mart stock closed yesterday at $61.68. On Friday April 20th (the day before the New York Times article – see here for the prior post) Wal-Mart stock closed at $62.45. See here for a recent Forbes column titled “Mexican Bribery Gave Me A Chance To Make Money In Wal-Mart” in which the contributor states as follows. “My 30 years of experience in the markets has repeatedly shown to me that whenever a company is accused of violations of FCPA, headlines are always scary, but in the end, the downdraft in the stock invariably becomes a buying opportunity.”

In other Wal-Mart news, as highlighted in this prior post, Elijah Cummings (D-MD), Ranking Member, House Committee on Oversight and Government Reform, and Henry Waxman (D-CA), Ranking Member, House Committee on Energy and Commerce have taken a keen interest in Wal-Mart’s potential FCPA exposure. Yesterday, the Congressmen sent this letter to Wal-Mart CEO Michael Dukes in which they state, among other things, that “we have obtained hundreds of internal documents relating to the Wal-Mart bribery allegations.”

The Shadow Regulatory State

In this previous post, I called for the abolition of non-prosecution and deferred prosecution agreements in the FCPA context. I noted how use of NPAs and DPAs to resolve alleged corporate criminal liability in the FCPA context present two distinct, yet equally problematic public policy issues and highlighted other critiques of NPAs and DPAs as well.

This recent report titled “The Shadow Regulatory State: The Rise of Deferred Prosecution Agreements” by James Copland (Senior Fellow, Manhattan Institute for Policy Research) caught my eye. Copland states as follows.

“… [P]rosecutors’ virtually unchecked powers under DPAs and NPAs threaten our constitutional framework. To be sure, prosecutors are acting upon duly enacted laws, but federal criminal provisions are often vague or ambiguous, and the fact that prosecutors and large corporations alike feel obliged to reach agreement, rather than follow an orderly regulatory process and litigate disagreements in court, denies the judiciary an opportunity to clarify the boundaries of such laws. Instead, the laws come to mean what the prosecutors say they mean—and companies do what the prosecutors say they must. Federal prosecutors are thus assuming the role of judge (interpreting the law) and of legislature (setting broad policy choices about industry conduct), substantially eroding the separation of powers. That such discretion is often delegated to private contractors with sweeping powers—namely, corporate monitors—makes the denial of justice even graver.”

Save the Date

I am pleased to be participating in this June 5th program sponsored by The American Bar Association Criminal Justice Section and the ABA Center for Continuing Legal Education in cooperation with Dorsey & Whitney & LLP, and Pepper Hamilton, LLP. Titled “The New Era of FCPA Enforcement and the Collapse of the Africa Sting Cases: Time to Reevaluate?” the program will “evaluate the impact of Africa Sting cases in view of key New Era trends, calls for FCPA reform, and a reevaluation of the prosecution standards utilized by the DOJ and the SEC in enforcing statutes.” Panelists include DOJ, SEC, and OECD representatives, Stanley Sporkin and noted FCPA practitioners including Greg Andres (former DOJ who testified on behalf of the DOJ at the November 2010 Senate and June 2011 House FCPA hearings).

Wynn-Okada

Remember that Wynn-Okada dispute? (See here, here, here, and here for the prior posts).

Here is an update from Vegas Inc.

There’s An App For That

Click 4 Compliance recently launched “C4C Mobile Compliance Officer App” (see here). In a release (here) the company says the free mobile app “places practical anti-corruption compliance tips (including the FCPA and UK Bribery Act) in the hands of your company’s workforce and partners.”