Friday Roundup
Another acknowledgment of the logic, whistleblower statistics, a guilty plea, and for the reading stack. It’s all here in the Friday roundup.
Another Acknowledgment of the Logic
Previous posts here and here have highlighted recent speeches by top SEC officials in which they acknowledge the underlying logic supporting a compliance defense. Deputy Attorney General James Cole did the same in this recent speech before a bank compliance officer crowd.
“At the Department of Justice, we know that compliance officers within financial institutions, and the lawyers, bankers, and others who work with them, are the first line of defense against abuse within these institutions. Compliance officers are critical to protecting both a bank’s reputation and its bottom line. They’re essential when it comes to preventing criminal activity – and if that effort is not entirely successful, detecting and reporting such conduct. It is not an exaggeration to say that compliance is fundamental to protecting the security of our financial institutions and is essential to the integrity of our entire financial system. Despite, and in some ways because of, this crucial role, I know that working in compliance is often difficult. Compliance is seldom thought of as a ‘money-maker’ for any bank, and it may be challenging to get sufficient resources and authority to do the job well. To some, compliance may not seem to fit within the culture of a fast-moving, cutting-edge institution. And at times, certain business units or managers may seem downright hostile toward the compliance function. We at the Department of Justice understand this reality. And we appreciate that, despite these challenges, you and your colleagues are fully committed to helping protect the integrity of your institutions and our financial system.”
[…]
The notion that compliance must be firmly embedded in a corporation’s culture has been raised before, including at this conference, by many government officials. You’ve heard a great deal about the importance of ‘tone at the top.’ Indeed, companies regularly argue during negotiations that they have taken various steps to set the right tone at the highest levels of their institutions. But based on what we have seen, we cannot help but feel that the message is not getting through often enough or clearly enough. Despite years of admonitions by government officials that compliance must be an important part of a corporation’s culture, we continue to see significant violations of law at banks, inadequate compliance programs, and missed opportunities to prevent and detect crimes.”
In “Revisiting a Foreign Corrupt Practices Act Compliance Defense,” I argue, among other things, that a compliance defense will better incentivize corporate compliance and reduce improper conduct. Compliance is a cost center within business organizations and expenditure of finite resources on FCPA compliance is an investment best sold if it can reduce legal exposure, not merely lessen the impact of legal exposure.
In short, an FCPA compliance defense will best allow compliance professionals in the FCPA context to – in the words of Cole – “get sufficient resources and authority to do the job well.”
Will the DOJ and SEC ever be capable of realizing that a compliance defense is a race to the top, not a race to the bottom? (See here for the prior post). Will the DOJ and SEC ever have the courage to realize that a compliance defense can best help the enforcement agencies accomplish its laudable goals? (See here for the prior post).
Whistleblower Statistics
The Dodd-Frank Act enacted in July 2010 contained whistleblower provisions applicable to all securities law violations including the Foreign Corrupt Practices Act. In this prior post from July 2010, I predicted that the new whistleblower provisions would have a negligible impact on FCPA enforcement. As noted in this prior post, my prediction was an outlier (so it seemed) compared to the flurry of law firm client alerts that predicted that the whistleblower provisions would have a significant impact on FCPA enforcement. So anxious was FCPA Inc. for a marketing opportunity to sell its compliance services, some even called the generic whistleblower provision the FCPA’s “new” whistleblower provisions.
So far, there have not been any whistleblower awards in connection with FCPA enforcement actions. Given that enforcement actions (from point of first disclosure to resolution) typically take between 2-4 years, it still may be too early to effectively analyze the impact of the whistleblower provisions on FCPA enforcement.
Whatever your view, I previously noted that the best part of the new whistleblower provisions were that its impact on FCPA enforcement can be monitored and analyzed because the SEC is required to submit annual reports to Congress. Recently, the SEC released (here) its annual report for FY2013.
Of the 3,238 whisteblower tips received by the SEC in FY2013, 4.6% (149) related to the FCPA. As noted in this similar post from last year, of the 3,001 whisteblower tips received by the SEC in FY2012, 3.8% (115) related to the FCPA. In FY2011 (a partial reporting year) 3.9% of the 334 tips received by the SEC related to the FCPA.
Yes, there will be in the future a whistleblower award made in the context of an FCPA enforcement action. Yes, there will be much ink spilled on this occasion and wild predictions about this “new trend.” Yet, I stand by my prediction – now 3.5 years old, that Dodd-Frank’s whistleblower provisions will have a negligible impact on FCPA enforcement.
“Foreign Official” Pleads Guilty
Earlier this week, the DOJ announced that Maria Gonzalez, the alleged “foreign official” at the center of the FCPA enforcement actions against individuals associated with broker-dealer Direct Access Partners LLC, pleaded guilty to “conspiring to violate the Travel Act and to commit money laundering, as well as substantive counts of these offenses.” Gonzalez (V.P. of Finance / Executive Manager of Finance and Funds Administration at Bandes – an alleged state-run economic development bank in Venezuela) is to be sentenced on August 15, 2014.
As noted in the DOJ’s release:
“Previously, three former employees of the Broker-Dealer – Ernesto Lujan, Jose Alejandro Hurtado, and Tomas Alberto Clarke Bethancourt – each pleaded guilty in New York federal court to conspiring to violate the Foreign Corrupt Practices Act (FCPA), to violate the Travel Act and to commit money laundering, as well as substantive counts of these offenses, relating, among other things, to the scheme involving bribe payments to Gonzalez. Sentencing for Lujan and Clarke is scheduled for Feb. 11, 2014, before U.S. District Judge Paul G. Gardephe. Hurtado is scheduled for sentencing before U.S. District Judge Harold Baer Jr. on March 6, 2014.”
Reading Stack
An interesting read from a Vietnam media source regarding the notion that – just like in tango – it takes two in a bribery scheme and that many instances of bribery are the result of harassment by foreign officials and extortion-like demands. When passing the FCPA in 1977, Congress fully recognized and understood this reality and that is why it did not seek to capture facilitation payments in the FCPA. (See here for more reading).
*****
A good weekend to all.
“The Tide Of History Has Turned And Is Now On Our Side”
Employing much of the same lofty rhetoric former Assistant Attorney General Lanny Breuer frequently used to describe the DOJ’s Foreign Corrupt Practices Act enforcement efforts (see here for my prior article), Deputy Attorney General James Cole delivered this speech yesterday before an FCPA audience.
This post contains excerpts of Cole’s speech as well as certain commentary.
*****
As to the DOJ’s general fight against corruption, Cole stated:
“[C]orruption is no less harmful when it is perpetrated abroad. In many ways, the consequences of public corruption can be even more severe in developing countries. In the U.S., we have a long history of democratic and economic stability. In nascent democracies, however, public corruption can undermine the very existence of the types of democratic institutions that we take for granted. The fruits of corruption can help prop up autocratic and oppressive rulers. In emerging economies, corruption can stifle the economic development that would lift people out of poverty, improve infrastructure, and better people’s lives. And as the beneficiaries of the blessings of a stable democracy and a robust economy, we, as Americans, have an obligation to ensure that our corporations– and their officers, directors, and employees– are not undermining the promise of democracy and economic development in other parts of the world by paying bribes. But make no mistake, fighting public corruption abroad is also good for the U.S. at home. Just because we do not feel the repercussions of foreign corruption– the hospitals left unbuilt, the roads still unpaved, the medicine undelivered– as personally or as immediately as the citizens of those countries, it does not mean that corruption abroad does not affect us in real and tangible ways. In today’s global economy, the negative effects of corruption inevitably flow back to the United States. Corruption contributes to economic crises that destabilize the global financial system, opens borders for terrorists to cross, it raises the price of the goods we buy, and costs American jobs because American companies are denied the ability to compete in an open and fair marketplace. We all eventually suffer the negative impact of transnational corruption. Given that the stakes are so high, it should be no surprise that the Department of Justice is every bit as committed to fighting corruption abroad as it is to fighting corruption at home. […] [Using the FCPA, the Department helps ensure that U.S. companies and individuals, as well as foreign companies and individuals where appropriate, are held accountable when they pay bribes to foreign government officials in order to get business.”
As to the FCPA’s legislative history, Cole stated:
“[L]et us take a moment to consider the origins of the FCPA. The FCPA has its roots in one of the most notorious domestic corruption events in recent times: the Watergate scandal. Obviously,Watergate had a tremendous impact on our domestic politics and governmental institutions. But Congress realized that the problems uncovered during the Watergate investigation did not stop at our borders. Indeed, in the aftermath of Watergate, our colleagues at the SEC discovered that more than 400 U.S. companies had paid hundreds of millions of dollars in bribes to foreign government officials to secure business overseas. In enacting the FCPA, Congress recognized the harm that foreign bribery causes to both our domestic interests and foreign interests. Congress recognized that foreign bribery had tarnished the image of U.S. businesses, impaired public confidence in the financial integrity of U.S. companies, and had hampered the functioning of markets, resulting in market inefficiencies, market instability, sub-standard products and services, and an unfair playing field. Clearly, outlawing foreign bribery was the right thing to do. But that does not mean it was the easy thing to do. From the beginning, there was a vocal chorus of critics who claimed that taking a stand against foreign bribery would harm American businesses, put U.S. companies at a competitive disadvantage, and cost American jobs, because foreign bribery was “just how business is done overseas.” But that didn’t make paying bribes right, and it didn’t mean that we should tolerate it. As Americans, we have a long history of taking the right path, not the expedient one. And we expect more from ourselves–and our institutions– than pursuing the path of least resistance. And, frankly, throughout our history, that philosophy has proven to be right.”
For a more complete – and accurate – description of the FCPA’s legislative history, see “The Story of the Foreign Corrupt Practices Act.”
As to the “current fight against foreign bribery,” Cole stated:
“In the nearly 36 years since the passage of the FCPA, the modern world has begun to embrace our fight against foreign bribery and to follow our lead. From the 1999 OECD Anti-Bribery Convention to the 2005 UN Convention Against Corruption, from the Council of Europe’s Group of States Against Corruption to the Organization of American States’ Inter-American Convention Against Corruption,a common legal standard has emerged over the last 36 years that rejects the notion that bribery in international business transactions is lawful, much less inevitable. It is true that this common standard has emerged slowly, and that at times it has faced challenges, but the tide of history has turned and is now on our side.”
U.S. federal court judges of course live in the “modern world” and when the DOJ’s FCPA enforcement efforts have been subjected to judicial scrutiny, “embrace” is not one word that immediately comes to mind. See here for the article “What Percentage of DOJ FCPA Losses Is Acceptable?” The short version is as follows.
- “This appears to be the end of a long and sad chapter in the annals of white collar criminal enforcement.”
- The instances of misconduct were so varied and occurred over such a long period of time “that they add up to an unusual and extreme picture of a prosecution gone badly awry.”
- ‘‘The problem here is that the principal witness against [the FCPA defendant] . . . knows almost nothing.” […] [The DOJ] shouldn’t
indict people on stuff [they] can’t prove.”
As to enforcement statistics and resources, Cole stated:
“I am proud to say that the United States, and DOJ in particular, has played a leadership role in this global effort to combat transnational bribery. I have seen this firsthand in my nearly three years as Deputy Attorney General. Since I took office in January 2011, the Department has reached 27 corporate resolutions and publicly announced that 28 individuals have been charged with FCPA and FCPA-related violations. This is a remarkable record. Those corporate cases resulted in penalties of $785 million and there is more to come. These results are the product of the skill, hard work, and determination of our talented prosecutors in the Criminal Division’s FCPA Unit, working in tandem with federal prosecutors across the country at many of the 94 U.S. Attorney’s Offices. Working with our partners like the FBI, the Department of Homeland Security, the Department of Commerce, the SEC, and IRS-Criminal Investigations, we have made enforcement of the FCPA a priority. Together, we are pursuing more cases than ever before, and we are using allof the investigative tools available to us from subpoenas to search warrants, from body wires to wiretaps.”
As to the FCPA Guidance, Cole stated:
“Now, despite this impressive enforcement record, there is always room for improvement. Many thoughtful people — from the OECD lead examiners who conducted our Phase 3 examination, to the media, to many of you in this room — have provided valuable feedback on our efforts. Based on that feedback, we have made adjustments and come up with some new innovations. For example, at this very conference one year ago, we announced the publication of the Resource Guide to the U.S. Foreign Corrupt Practices Act. The Guide had its origins in suggestions made during the OECD Phase 3 examination. The lead examiners determined that the U.S. could do a better job in explaining the way that we understood the FCPA and our enforcement policies, and we, along with our SEC colleagues, committed to doing that. Along the way, we made sure to listen to and take into account your comments and concerns. We reached out to the business community, to civil society, to compliance professionals, and to the legal community. We heard your concerns, took to heart your suggestions, and incorporated many of them into the Guide. And, if the public reaction to the Guide is any indication, I think we did so fairly successfully.”
See here for what is believed to be the most extensive collection of commentary concerning the FCPA Guidance.
As to compliance, voluntary disclosure, and cooperation, Cole stated:
“But the Guide was not the end. We continue to engage with the business and legal communities, and continue to find ways to communicate with them about how we interpret the FCPA, what they can do to prevent violations, and what they should do if they discover that a violation has occurred. Believe me when I say that FCPA enforcement is not a game of “gotcha.” We prefer prevention to prosecution and we want companies to successfully recognize and resist demands for bribes and to comply with the law. But we understand that even the best compliance program will not prevent every violation of the FCPA. So when a violation does occur, we frankly expect you to tell us about it and cooperate in investigating it. And one of the questions we’ve repeatedly heard over the years is: “What is the benefit of voluntary disclosure and cooperation?” We fully understand that companies will act in their own best interest. So we have sought to incentivize companies with tangible benefits for their voluntary disclosure and cooperation– beyond the reductions already built into the Sentencing Guidelines. Such benefits have taken the form of declinations like that in the Morgan Stanley case [see here for the post “Stop Drinking the Kool-Aid” regarding Morgan Stanley’s so-called declination], resolutions short of a guilty plea like deferred prosecution agreements and non-prosecution agreements, and allowing companies to self-report their remediation efforts instead of being subject to the oversight of a corporate monitor. We have also, in appropriate cases, supported reduced penalties below those suggested by the Sentencing Guidelines. Because your role in the enforcement of the FCPA is vital to its success, I want to assure you that we are committed to demonstrating the benefits of your working cooperatively with us. But, this does not mean that we will blindly accept the conclusions of internal investigations. To the contrary, we will continue to actively pursue our own investigations in order to pressure test the results of your internal investigations and be able to identify those companies that are truly cooperating. It also does not mean that companies that claim to be cooperating, but that are, in fact, engaging in gamesmanship, will reap such benefits. Indeed, just as it is important to reward true voluntary disclosures and actual cooperation, it is critical that we hold companies accountable when they choose to conceal misconduct, obstruct investigations, and attempt to mislead investigators. For those companies, there will be serious consequences. Put simply, we want to work with you, and we will continue our efforts to provide tangible benefits to reward you for doing so. But we will also be unrelenting in holding you accountable if you choose not to do so. This is a two-way street, and you can be sure that your choices regarding cooperation, either way, will have real consequences.”
Indeed, Trials Are Important … And Telling As Well
Three cheers for SEC Chair Mary Jo White’s recent speech titled “The Importance of Trials to the Law and Public Accountability.”
Under the heading, “why trials are important,” White stated that “simply put, [trials] put our system of justice […] on display for all to see.” She stated as follows.
“The public airing of facts, literally in open court, creates accountability for both defendants and the government. How we resolve disputes and how we decide the guilt or innocence of an accused are the true measure of our democracy. Thomas Jefferson once said that he considered ‘trial by jury as the only anchor ever yet imagined by man, by which a government can be held to the principles of its constitution.'”
In the speech, White agreed that trials are the “‘crown jewel’ of our system of justice” and she focused on two “of the more important roles that trials play in our administration of justice: how they foster development of the law, and perhaps even more importantly how they create public accountability for both defendants and the government through the public airing of charges and evidence.”
As to the former, White stated that “trials allow for more thoughtful and nuanced interpretations of the law in a way that settlements and summary judgments cannot.”
As to the later, White agreed with the following statement. “The death of trials would … remove a source of disciplined information about matters of public significance. … It would mean the end of an irreplaceable public forum and would mean that more of the legal order would proceed behind closed doors. And it would deprive us, as American citizens, of an important source of knowledge about ourselves and key issues of public concern.”
White talked about the “near-sacred nature of the courtroom,” how “litigants are required to meet their burden of proof, and where there is up-close-and-personal accountability for whatever the trial is about,” how trials are where “victims and witnesses have the chance to tell their stories and where the public can hear the facts set forth in open court,” and how trials provide a place for “public closure on hotly disputed facts and legal issues.”
As White stated, “by the end of the trial, the full scope of the misconduct is laid before the fact-finder to decide guilt or innocence, liability or no liability.”
As to criminal trials, White, a former DOJ prosecutor, stated that the “scarcity of criminal trials means that the public does not often enough have this kind of public airing and adjudication that trials uniquely provide.”
Although White’s speech was general in nature, the topics addressed are relevant to Foreign Corrupt Practices Act enforcement and I completely agree with White, trials are indeed important.
In “The Facade of FCPA Enforcement,” under the heading “why the facade of FCPA enforcement matters,” I observed.
“As a matter of general jurisprudence, it is troubling when any area of law largely develops outside of the judicial process. The judicial process facilitates the thoughtful presentation of opposing views, mitigating facts and circumstances, and potential defenses in an adversarial proceeding culminating in an impartial decision-maker weighing the facts and applying the law in rendering a decision in a transparent manner. These fundamental hallmarks are largely missing in FCPA enforcement. Rather, the enforcement agencies, occupying positions of advocate, judge, and rule-maker, induce settlement through the “carrots” and “sticks” they possess even though many of the enforcement theories leading to these resolutions are untested and dubious, and in some case in direct conflict with the FCPA’s statutory provisions. The end result is resolution vehicles that do not facilitate the thoughtful presentation of opposing views, mitigating facts and circumstances, potential defenses, or testing of legal theories. Yet, these resolution vehicles largely define the FCPA. When the parameters of any law develop through such an opaque process, public confidence in that law, as well as the rule of law, suffers.”
The irony of course is that – notwithstanding White’s sensible statements – the SEC has never been put to its burden of proof in a corporate FCPA enforcement. The reasons are largely due to SEC enforcement policies that pre-date White’s tenure at the SEC, but policies that she continues to champion – namely the SEC’s neither admit nor deny settlement policy (notwithstanding its recent tweak) and the SEC’s more recent use of non-prosecution and deferred prosecution agreements.
As to the later, when the SEC announced its intention to use NPAs and DPAs, I called the development (see here for the prior post) a blow to those who prefer government law enforcement agencies to enforce a law in an open, transparent matter and in the context of an adversary proceeding … in other words the very same things White championed in her recent speech.
The further irony of course from White’s recent speech is that when the SEC has been put to its burden of proof in individual FCPA enforcement actions, the SEC has an overall losing record. (See this prior post detailing the instances).
The importance of trials and the issues addressed in White’s speech are of course also relevant to the DOJ’s overall losing record when put to its burden of proof in FCPA enforcement actions. (See here for “What Percentage of DOJ FCPA Losses Is Acceptable?”). And of course White’s comments about “behind closed doors” and how trials “allow for more thoughtful and nuanced interpretations of the law in a way that settlements” cannot is even more important to the DOJ’s enforcement of the FCPA given its prevalent use of NPAs and DPAs.
As I’ve offered a number of times in the FCPA context, success in enforcing a law, whether in the corporate context or individual context, is best measured by instances in which an enforcement agency is actually put to its burden of proof in an adversarial proceeding.
Thanks to White’s recent speech, we have been reminded of that.
*****
Much like this prior post in which a high-ranking SEC official acknowledged the underlying logic supporting a compliance defense, White did the same thing in this October speech before a broker-dealer compliance audience. In pertinent part, White stated:
“Your work is extremely important to us as well as to investors because you are positioned to prevent infractions from happening in the first place, rather than coming to our attention only after harm has been done.” […] “[W]e rely on you. We rely on you because as much as we strive to be everywhere we can be, our resources are limited and always stretched.”
Elsewhere, White stated that a question the SEC often asks is whether compliance professionals are “empowered by your firms to do what you need to do?” […] “We want to encourage companies to give you the recognition that you deserve, the resources that you need and the authority that your role demands, so you can succeed and, as a result, our markets are safe and can succeed.” […] “[W]e seek to promote the role of compliance and ensure that the firms recognize and acknowledge the importance we place on your role.”
For why these statements acknowledge the underlying logic supporting a compliance defense, see “Revisiting a Foreign Corrupt Practices Act Compliance Defense.”
Friday Roundup
Scrutiny alerts and updates, quotable, and for the reading stack. It’s all here in the Friday Roundup.
Scrutiny Alerts And Updates
Avon
Yesterday, Avon’s stock dropped approximately 22% to $17.50. The company disclosed a drop in third quarter sales and weaker than expected earnings. Avon also disclosed, in pertinent part, the following regarding its long-running FCPA scrutiny:
“As previously reported in our Quarterly Report on Form 10-Q for the period ending June 30, 2013, we made an offer of settlement to the DOJ and the SEC in June 2013 that, among other terms, would have included payment of monetary penalties of approximately $12. Although our offer was rejected by the DOJ and the staff of the SEC, we accrued the amount of our offer in the second quarter of 2013.
In September 2013, the staff of the SEC proposed terms of potential settlement that included monetary penalties of a magnitude significantly greater than our earlier offer. We disagree with the SEC staff’s assumptions and the methodology used in its calculations and believe that monetary penalties at the level proposed by the SEC staff are not warranted. We anticipate that the DOJ also will propose terms of potential settlement, although they have not yet done so and we are unable to predict the timing or terms of any such proposal. If the DOJ’s offer is comparable to the SEC’s offer and if the Company were to enter into settlements with the SEC and the DOJ at such levels, we believe that the Company’s earnings, cash flows, liquidity, financial condition and ongoing business would be materially adversely impacted.
Although we are working to resolve the government investigations through settlement, our discussions are at early stages and at this point we do not know if those efforts will be successful and, if they are, what the timing or terms of any such settlements would be. We expect any such settlements will include civil and/or criminal fines and penalties, and may also include non-monetary remedies, such as oversight requirements and additional remediation and compliance requirements. We may be required to incur significant future costs to comply with the non-monetary terms of any settlements with the SEC and the DOJ. If we are able to reach settlements with the SEC and the DOJ, the Company believes that such settlements are likely to include monetary penalties that would be material to its earnings and cash flows in the relevant fiscal period and could, depending on the amounts of the settlements, materially adversely impact the Company’s liquidity, financial condition and ongoing business.
There can be no assurance that our efforts to reach settlements with the government will be successful. If we do not reach settlements with the SEC and/or the DOJ, we cannot predict the outcome of any subsequent litigation with the government but such litigation could have a material adverse effect on our earnings, cash flow, liquidity, financial condition and ongoing business.>We have not recorded an additional accrual beyond the amount recorded in the second quarter of 2013 because at this time, in light of the early stages of our discussions of possible settlement terms with the government, the magnitude of the difference between our offer and the amount proposed by the SEC and the absence of a proposal from the DOJ, and our inability to predict whether we will be able to reach settlements with the government, we cannot reasonably estimate the amount of additional loss above the amount accrued to date.
Until these matters are resolved, either through settlement or litigation, we expect to continue to incur costs, primarily professional fees and expenses, which may be significant, in connection with the government investigations. Furthermore, under certain circumstances, we may also be required to advance and/or reimburse significant professional fees and expenses to certain current and former Company employees in connection with these matters.”
In certain respects, Avon’s disclosure was similar to its August disclosure (see here for the prior post) in which it stated “we made an offer of settlement to the DOJ and the SEC that, among other terms, included payment of monetary penalties of approximately $12 [million]. The DOJ and the SEC have rejected the terms of our offer.”
The fact that there is a negotiation and back and forth between the SEC and a company concerning an FCPA settlement number is not unusual, what is a bit unusual is that this back and forth is being aired in public via the company’s SEC filings.
Embraer
Previous posts here and here have profiled Embraer’s FCPA scrutiny. In an article titled “Plane Maker Embraer Faces Bribery Inquiries,” the Wall Street Journal reports:
“U.S. and Brazilian authorities are investigating whether aircraft maker Embraer SA bribed officials in the Dominican Republic in return for a $90 million contracts to furnish the country’s armed forces with attack planes.”
According to the article, U.S. authorities say they have “evidence – including bank records and e-mails – that they believe shows that Embraer executives had approved a $3.4 million bribe to a Dominican official with influence over military procurement.”
Mead Johnson
Mead Johnson Nutrition Company recently disclosed as follows.
“The company has initiated an internal investigation of, and is voluntarily complying with a Securities and Exchange Commission request for documents relating to, certain business activities of the company’s local subsidiary in China. The company’s investigation is focused on certain expenditures that were made by the subsidiary in connection with the promotion of the company’s products or may have otherwise been made and that may not have complied with company policies and applicable U.S. and/or local laws. The company has retained outside legal counsel to conduct the investigation, which is being overseen by a committee of independent members of the company’s board of directors. At this time, the company is unable to predict the scope, timing or outcome of this ongoing matter or any regulatory or legal actions that may be commenced related to this matter.”
National Geographic
The on-line publication Vocativ recently published an article “Tut-Tut: Did National Geographic Bribe Egypt’s Famed Indiana Jones?” The article begins as follows.
“This is not your typical story about international bribery. For one thing, it involves mummies. It also involves one of America’s most beloved institutions: National Geographic. Vocativ has learned that the Justice Department has opened a criminal bribery investigation into the prestigious nonprofit. At issue: Nat Geo’s tangled relationship with Dr. Zahi Hawass, a world-famous Indiana Jones–type figure who for years served as the official gatekeeper to Egypt’s glittering antiquities. Beginning in 2001 and continuing for a decade, National Geographic paid the archaeologist between $80,000 and $200,000 a year for his expertise. The payments came at a time when the popularity of mummies and pharaohs was helping transform the 125-year-old explorer society into a juggernaut with multiple glossies, a publishing house and a television channel. But they also came as Hawass was still employed by the Egyptian government to oversee the country’s priceless relics.”
According to the article, Hawass also worked with National Geographic competitor, the Discovery Channel.
Although National Geographic is a non-profit entity, the FCPA’s definition of “domestic concern” is “any corporation, partnership, association, joint-stock company, business trust, unincorporated organization, or sole proprietorship …”.
Teva Pharmaceuticals
As noted in this previous post, in August the company disclosed that it “received a subpoena … from the SEC to produce documents
with respect to compliance with the FCPA in Latin America.” Earlier this week, Teva disclosed as follows.
“Beginning in 2012, Teva received subpoenas and informal document requests from the SEC and the Department of Justice (“DOJ”) to produce documents with respect to compliance with the Foreign Corrupt Practices Act (the “FCPA”) in certain countries. Teva has provided and will continue to provide documents and other information to the SEC and the DOJ, and is cooperating with the government in their investigations of these matters. Teva is also conducting a voluntary investigation into certain business practices that may have FCPA implications and has engaged independent counsel to assist in its investigation. In the course of its investigation, which is continuing, Teva has identified in Russia, certain Eastern European countries, and certain Latin American countries issues that could potentially rise to the level of FCPA violations and/or violations of local law. Teva has brought these issues to the attention of the SEC and the DOJ. No conclusion can be drawn at this time as to any likely outcomes in these matters.”
JPMorgan
As highlighted in this previous post, in August JPMorgan’s hiring practices in China came under scrutiny.
The company recently disclosed:
“The Firm has received subpoenas and requests for documents from the SEC’s Division of Enforcement regarding, among other things, hiring practices relating to candidates referred by clients, potential clients and government officials, the Firm’s employment of certain former employees in Hong Kong, its business relationships with certain related clients in the Asia Pacific region and its engagement of consultants in the Asia Pacific region. The Firm has also received a request for documents from the U.S. Department of Justice regarding the same referral hiring practices. The Firm is cooperating with these investigations. Separate inquiries on these or similar topics have been made by other authorities, including authorities in other jurisdictions, and the Firm is responding to those inquiries.”
Quotable
From Attorney General Eric Holder at the Arab Forum on Asset Recovery in Morocco.
“As we’ve all seen – and as President Obama has said – “[t]he struggle against corruption is one of the great struggles of our time.” Fortunately […] corruption is no longer widely seen as an accepted cost of doing business. It is no longer tolerated as an unavoidable aspect of government. On the contrary – it is now generally understood that the consequences of corruption are devastating – eroding trust in public and private institutions, undermining confidence in the fairness of free and open markets, siphoning precious resources at a time when they could hardly be more scarce, and all too often breeding contempt for the rule of law.
[…]
This is why, as Attorney General, I’ve consistently worked to ensure that anticorruption remains a top priority for my colleagues at every level of the United States Department of Justice – within as well as beyond our borders.”
A recent article in Corporate Counsel titled “The Perils of Keeping FCPA Infractions Under Wraps” states:
“Charles Duross, the deputy chief of the U.S. Justice Department’s Foreign Corrupt Practices Act Unit, delivered an ominous message Monday to in-house lawyers at the Association of Corporate Counsel’s Annual Meeting in Los Angeles: Failure to report potential bribery is more perilous than ever. Duross, who is based in Washington, D.C., said DOJ is handling a “pretty steady stream of cases,” with every major U.S. attorney’s office investigating alleged violations of the FCPA, which prohibits bribery of foreign officials. “The risk of getting caught . . . is greater today than any point previously,” Duross said. “I think that’s kind of a no-brainer.” Duross said he isn’t naïve about the calculus companies have to perform when deciding whether to report a potential FCPA infraction to the U.S. government. But if a company makes the disclosure on its own, he noted, the Justice Department stands ready to help. DOJ can make deferred-prosecution or non-prosecution agreements with businesses—or even decline to pursue any action against them, he said. “It’s a tough one” for companies, Duross said. “No doubt about it.” Self-reporting can be overrated, according to New York-based Morrison & Foerster partner Carl Loewenson Jr., a co-chairman of the firm’s securities litigation, enforcement, and white-collar defense group who also spoke at the ACC event. Making the disclosures is great for business at the DOJ, as well as law firms and accounting offices, he said. But companies that report almost always get some type of a public charge, he noted. “I think that these days there are too many cases in which too many companies are being too reflexive about self-reporting” to the government, Loewenson said. “In some cases, not in all, you can solve these problems yourself.”
Reading Stack
Several spot-on observations in the most recent issue of the always informative FCPA Update from Debevoise & Plimpton concerning the recent Diebold enforcement action (see here and here for prior posts).
“Although there are significant aggravating factors that might explain imposing $48 million in penalties and disgorgement on a company that voluntarily disclosed what are, unfortunately, common improprieties in China, combined with wholly unrelated commercial bribery in Russia, the size of the financial resolution – apart from the substantial burdens of the monitorship – raises questions about future enforcement of the FCPA, as well as the incentives for companies to self-report.
The first noteworthy aspect of this resolution is the enforcement agencies’ decision to use the books and records and internal controls provisions as a vehicle for obtaining monetary relief penalizing purely commercial bribery (40% of the improper payments at issue). While not entirely novel or outside the theoretical reach of those provisions, were the enforcement agencies routinely to investigate issuers in connection with commercial bribery abroad, the “risk-based” calculus of almost all corporate compliance programs would potentially need to be rebalanced.
Second, the total financial aspect of the resolution was 16 times the total value of alleged improper payments. In describing the improper payments, the enforcement agencies aggregated a number of often small payments over five years. When considered alongside the Ralph Lauren enforcement action from earlier this year, the Diebold enforcement action, and in particular its imposition of a monitor, long-considered one of the most burdensome aspects of FCPA settlements, could call into question one common view of the statements relating to gifts and corrupt intent in the November 2012 DOJ/SEC joint Resource Guide to the U.S. Foreign Corrupt Practices Act: namely, that FCPA covered companies should not “sweat the small stuff.”
[…]
“[T]he Diebold enforcement actions revive the pre-guidance confusion about the government’s enforcement priorities and raise significant questions about the value of voluntary disclosure. The confusion, arising from repeated charges related to relatively small expenditures, including, even, $500 for four pairs of shoes provided as gifts to Chinese officials, was part of the background of frustration with the government’s enforcement of the FCPA that led to publication of the joint DOJ/ SEC Resource Guide. It has been commonly thought that the Resource Guide’s distinctions between “expensive gifts” and “token[s] of esteem or gratitude” signified at least an implicit recognition by U.S. enforcement agencies that compliance resources would be better allocated to topics other than gifts valued at a few hundred dollars, let alone gifts that individually do not exceed $100 in value. But the Diebold case will raise new questions about the government’s enforcement priorities, questions that will only be amplified by the imposition of a monitor, potentially one of the most disruptive, burdensome, and costly components of FCPA settlement tools, and one that had been in declining use for several years.”
An observant article from The Lawyer titled “Round Table on Cross-Border Disputes – Bandwagons Roll.” It states:
“Co-operation [between foreign law enforcement regulators] is good.'” […] More co-operation between regulators when they are trying to address the same issues is welcome.” However, co-operation – while praised for attempting to provide consistency – has its drawbacks. “They all want to impose sanctions for the same conduct.” […] “It’s common now for a company to finish a US Foreign Corrupt Practices Act or UK Bribery Act investigation that has taken three years and generated huge fees, to turn around and see a long line of regulators from, say, China or India with their own legal and political concerns.”
It does not necessarily justify the behavior, but the following article at least puts the behavior in the proper context and highlights why Congress specifically included a facilitation payments exception in the FCPA’s anti-bribery provisions.
“Seventy-five percent of businesses in Vietnam pay bribes to government agencies on their own volition in order to avoid being stuck in red tape, a World Bank specialist says. At an anti-corruption conference held in Hanoi Thursday, Soren Davidsen said that sixty-three percent of firms questioned in a survey said they paid the “unofficial fees” to speed up procedures.”
A useful compliance resource here from the U.S. – China Business Council titled “Best Practices for Managing Compliance in China.”
*****
A good weekend to all,
Across The Pond
Posts last week largely focused on two Foreign Corrupt Practices Act enforcement actions (see here, here and here).
This post goes across the pond to check in on three U.K. developments.
First, a recent Serious Fraud Office (“SFO”) pre-Bribery Act enforcement action against Smith & Ouzman Ltd. and related individuals, second recent speeches by SFO officials, and third the start of criminal trials against various former top-level executives of News Corp.’s News of the World publication.
SFO Flexes Its Pre-Bribery Act Muscle
The U.K. Bribery Act went live on July 1, 2011 and its provisions are forward looking only (this is the most obvious reason why there has yet been a FCPA-like Bribery Act enforcement). However, the SFO recently flexed its muscles in an enforcement action concerning conduct pre-dating the Bribery Act.
Last week, the SFO announced that “Smith & Ouzman Limited [a U.K. based printing company specialising in security documents such as ballot papers], two of its directors, an employee and one agent have been charged by the Serious Fraud Office with offences of corruptly agreeing to make payments totaling nearly half a million pounds, contrary to section 1 Prevention of Corruption Act 1906.”
According to the SFO release:
“The individuals, all British nationals, are:
Chris Smith – the former Chairman of Smith and Ouzman Limited
Nick Smith – the Sales and Marketing Director of Smith and Ouzman Limited
Tim Forrester – the International Sales Manager for Smith and Ouzman Limited
Abdirahman Omar – an agent for Smith and Ouzman Limited
The alleged offences are said to have taken place between November 2006 and December 2010 and relate to transactions in Mauritania, Ghana, Somaliland and Kenya.”
SFO Director David Green On Self-Reporting
This October 2012 post highlighted an SFO release detailing “revised policies” concerning, among other things, corporate self-reporting.
Last week, SFO Director released this statement concerning self-reporting.
“It is now a year since I changed the published SFO guidance on self-reporting by corporates. The guidance I inherited contained an implied presumption that self-reported misconduct would be dealt with by civil settlement rather than prosecution. I took the view that no prosecutor should appear to offer such a guarantee in advance. As a prosecutor, you can never anticipate what set of facts and conduct might be next in through the door. I took the guidance back to the historic position agreed with the Director of Public Prosecutions: that we would apply the full code test for crown prosecutors to self-reported criminality. In other words, we ask (after our own investigation): is there sufficient evidence to prosecute, and if so, is a prosecution in the public interest? The SFO’s message is carefully expressed and nuanced. Assume the evidential sufficiency test is passed. If a company made a genuine self-report to us (that is, told us something we did not already know and did so in an open- handed, unspun way), in circumstances where they were willing to cooperate in a full investigation and to take steps to prevent recurrence, then in those circumstances it is difficult to see that the public interest would require a prosecution of the corporate. Some parts of the blogosphere seem to have difficulty with this, writing that it means self-reporters will be prosecuted. It means no such thing.”
As to Green’s comment about the blogosphere, the prior post stated. “For the most part, although much ink is likely to be spilled by FCPA Inc. / Bribery Act Inc. in the coming days, the SFO’s “revised policies” are a yawner.”
Back to Green’s statement.
“Some corporate lawyers complain that the new approach (actually, the principled, established approach) creates “uncertainty”. I disagree: and I think that when they say “certainty” it is code for “guarantee”. For the avoidance of doubt, the SFO continues to receive self-reports, and I anticipate the numbers will only rise as Deferred Prosecution Agreements (DPAs) bed in next year. So why should a company self-report instances of suspected criminal misconduct to the SFO?
(i) A self-report at the very least mitigates the chances of a corporate being prosecuted. It opens up the possibility of civil recovery or a DPA; (ii) There is the moral and reputational imperative: it is the right thing to do and it demonstrates that the corporate is serious about behaving ethically; (iii) If the corporate chooses to bury the misconduct rather than self-report, the risk of discovery is unquantifiable. There are so many potential channels leading to exposure: whistle-blowers; disgruntled counterparties; cheated competing companies; other Criminal Justice agencies in the UK; overseas agencies in communication with SFO; and the SFO’s own developing intelligence capability, to name but a few;(iv) If criminality is buried and then discovered by any of the above routes, the penalty paid by the corporate in terms of shareholder outrage, counterparty and competitor distrust, reputational damage, regulatory action and possible prosecution, is surely disproportionate; (v) Last but not least, burying such information is likely to involve criminal offences related to money laundering under sections 327-9 of the Proceeds of Crime Act.
There are, I suggest, very powerful arguments in favour of self-reporting. Once the decision to self-report has been made by the corporate, then the question of timing arises. Common sense suggests that an initial report of suspected criminality should be made to the SFO as soon as it is discovered. This surely protects the company against the SFO finding out by other means whilst the company investigates further. The corporate can then investigate in depth and report back to the SFO. The SFO will carry out its own assessment with possible use of S2A powers (in the case of bribery), and, if justified, the opening of a criminal investigation and the exercise of S2 powers. One argument I have heard against self-reporting is that the SFO does not prosecute corporates, because it is said to be too difficult in our jurisdiction. Certainly I am used to unfavourable comparisons being made of the SFO with US prosecutors in this area of activity. The reason is simple: a US prosecutor uses the respondeat superior principle: a corporate is vicariously liable for the acts of its managers and employees.”
There is another simple reason for the disparity between U.S. and U.K. “prosecutions” for bribery and corruption offenses. Simply put, the U.S. has the option of a non-prosecution or deferred prosecution agreement. At present, the U.K. does not have these options, although it is close to utilizing DPAs. As even the OECD has observed (see here) “it seems quite clear that [NPAs and DPAs] is one of the reasons for the impressive FCPA enforcement record in the U.S.” I’ve long viewed the U.K.’s desire to use DPAs as a public relations tactic to catch up in the enforcement competition game (see here).
Back to Green’s statement.
“In English law, the test for corporate criminal liability requires proof that the “controlling mind” of the company (ie, board level senior management) was complicit in the relevant criminality. Absent emails, or a cooperating witness, that is never an easy thing to show. An answer to this would be to extend the principle contained in S7 of the Bribery Act 2010, which creates the corporate offence of a company failing to prevent bribery by its employees, with a statutory defence of adequate procedures. The reach of the section could easily be extended to cover not just bribery but acts of fraud by employees.
I have heard objections to such a change:- (a) That this would be punishing mere corporate negligence (to which I say, it would be about improving bad corporate culture). (b) That prosecution of the corporate adds nothing to the prosecution of the guilty individuals (I am not proposing that a corporate should face prosecution in every case- far from it. But there will be cases where it is right and just that failure to prevent certain types of conduct should result in the corporate being marked with a criminal conviction). (c) That it would simply punish the shareholders (shareholders, particularly large institutional shareholders, should be vigilant about where they invest and how the corporate in which they invest behaves).
I would argue that prosecution of a corporate would be appropriate where, for example, the company profited from fraud by its employees; where a particular illegal practice was common and tolerated in a particular sector; where deterrence was needed in a sector; or where a company has brought in a compliance regime but senior management had failed to ensure enforcement of that regime. Such a change would also cure a problem inherent in the DPA regime. If prosecution of a corporate is currently difficult, why should a corporate agree to enter a DPA at all? DPA’s represent a very useful addition to the prosecutors’ toolbox for use in appropriate circumstances. They avoid the collateral damage caused by a full blown prosecution of a corporate. They are not a panacea. But the problem I have highlighted (which admittedly will not necessarily arise in every case) needs to be addressed. I think it comes to this: if the public interest demands more corporate prosecutions, then this change would help make that happen.”
In a separate speech before the World Bribery and Corruption Compliance Forum in London, Alun Milford (General Counsel of the SFO) touched upon many of the same issues Green discussed.
Among other things, Milford talked about the “Bribery Act industry” and I took note of Milford’s following statement given my often expressed view that an FCPA compliance defense can better incentivize corporate conduct and further advance the objectives of the FCPA. Milford stated that “the Bribery Act [which contains an adequate procedures defense] has led to a significant amount of work in developing stronger, more ethical corporate cultures.”
Former News Corp. Exec Trials
In July 2011, worldwide media attention was focused on News Corp (see here).
The conduct at issue had many prongs, including various privacy issues. One prong concerned allegations that News Corp’s News of the World publication paid up to five U.K. police officers to obtain information that better allowed it to write juicy stories. Thus began News Corp.’s FCPA-like scrutiny and since then the original point of inquiry has – as is typical – expanded to include other conduct.
As to the alleged U.K. payments at issue, focus turned to the old “who knew what and when did they know it” question. Several individuals associated with News of the World were criminally charged, including for conduct implicating the alleged bribery prong of News Corp’s scrutiny.
Two individual charged were Rebekah Brooks, the former editor of News of the World and Andy Coulson, another former News of the World editor. The criminal trial of these individuals, along with others, began this week in London.
What happens in these trials concerning the bribery offenses will not determine the outcome of any potential News Corp. FCPA enforcement action. But you can bet that the DOJ and SEC will be interested in the ultimate outcome. In short, if there is a judicial finding that Brooks and/or Coulson or other high-level executives in London authorized or otherwise knew of the alleged improper payments, this will likely be a factor in how the DOJ and SEC ultimately resolve any potential enforcement action and how News Corp.’s overall culpability score may be calculated under the advisory Sentencing Guidelines.
For more on the trials and individuals involved see here, here, here and here.