Across the pond, the big picture, ripple, a muddy mess, to FCPA Inc., scrutiny alert, silly and erroneous, misleading, ISO 37001 related, and for the reading stack.
It’s all here in the Friday roundup.
Across the Pond
In this recent speech, David Green (Director of the U.K. Serious Fraud Office) said the U.K. Bribery Act is “regarded as a gold standard internationally” and, as further proof that so-called enforcement competition does exist, he stated:
GSK announces verdict in China, the silly season, interesting read, Alibaba, and get it right! It’s all here in the Friday roundup.
GSK Verdict in China
Earlier today, GlaxoSmithKline announced:
“[T]he Changsha Intermediate People’s Court in Hunan Province, China ruled that GSK China Investment Co. Ltd (GSKCI) has, according to Chinese law, offered money or property to non-government personnel in order to obtain improper commercial gains, and been found guilty of bribing non-government personnel. The verdict follows investigations initiated by China’s Ministry of Public Security in June 2013. As a result of the Court’s verdict, GSKCI will pay a fine of £297 million [approximately $490 million USD] to the Chinese government. […] The illegal activities of GSKCI are a clear breach of GSK’s governance and compliance procedures; and are wholly contrary to the values and standards expected from GSK employees. GSK has published a statement of apology to the Chinese government and its people on its website (www.gsk-china.com). GSK has co-operated fully with the authorities and has taken steps to comprehensively rectify the issues identified at the operations of GSKCI. This includes fundamentally changing the incentive program for its salesforces (decoupling sales targets from compensation); significantly reducing and changing engagement activities with healthcare professionals; and expanding processes for review and monitoring of invoicing and payments. GSK Chief Executive Officer, Sir Andrew Witty said: “Reaching a conclusion in the investigation of our Chinese business is important, but this has been a deeply disappointing matter for GSK. We have and will continue to learn from this. GSK has been in China for close to a hundred years and we remain fully committed to the country and its people. We will continue to expand access to innovative medicines and vaccines to improve their health and well-being. We will also continue to invest directly in the country to support the government’s health care reform agenda and long-term plans for economic growth.”
For more, see here from the BBC.
“The court gave GSK’s former head of Chinese operations, Mark Reilly, a suspended three-year prison sentence and he is set to be deported. Other GSK executives have also been given suspended jail sentences. The guilty verdict was delivered after a one-day trial at a court in Changsha, according to the Xinhua news agency.”
The GSK penalty was described as the biggest fine in Chinese history. The $490 million fine is also believed to be one of the largest bribery/corruption fines ever. For instance, a $490 million settlement would rank third on the top ten list of FCPA settlements.
Perhaps the most interesting aspect of the GSK development is reference in the company’s release to the charges involving “non-government personnel.” In the U.S., it is a prominent enforcement theory that employees of various state-run health care systems – including in China – are “foreign officials” under the FCPA. (See here).
Another interesting aspect of the GSK development – and one foreshadowed in this 2013 post – is how the Chinese verdict will impact GSK’s scrutiny in its home country (United Kingdom). As highlighted in the post, the U.K. has a unique double jeopardy principle and, as explained by former SFO Director Richard Alderman, the U.K. “double jeopardy law looks at the facts in issue in the other jurisdiction and not the precise offense. Our law does not allow someone to be prosecuted here in relation to a set of facts if that person has been in jeopardy of a conviction in relation to those facts in another jurisdiction.”
GSK remains under investigation for conduct outside of China as well.
The U.S. does not have a similar double jeopardy principle, relevant to the extent GSK has shares listed on a U.S. exchange and its conduct in China and elsewhere has been under FCPA scrutiny.
As indicated in the prior post, GSK’s scrutiny – and now liability – in China makes for an interesting case study in enforcement competition.
The Silly Season
Offensive use of the FCPA to accomplish a business objective or advance a litigating position is an observable trend highlighted in my article “Foreign Corrupt Practices Act Ripples.” As noted here, the FCPA has also been used offensively to score (or at least attempt to score) political points.
The election season is upon us and during this “silly season” perhaps the silliest use of the FCPA ever is happening – not once – but twice.
As noted in this article:
“Michigan Democrat Gary Peters profited from a French oil company [Total S.A.] that admitted to bribing Iranian officials for access to their oil fields. […] The Peters campaign did not return requests for comment about whether he was aware of the bribery scandal. […] Republican Senate nominee Terri Lynn Land called on him to divest from the company, but the three-term congressman refused. […] “Gary Peters will do anything to make a dollar and say anything to win an election,” Land spokesman Heather Swift said in a statement. “The more Michigan voters learn about Gary Peters the more they know they can’t trust him to put Michigan first.”
Silly. And there is more.
As noted in this separate article from the same source:
“Sen. Jeanne Shaheen has invested tens of thousands of dollars in a French oil company that admitted to bribing Iranian officials. […] Shaheen’s family owns between $50,000 and $100,000 of stock in Total S.A., the fourth-largest oil company in the world, through a mutual fund.”
Two scoops of silly.
And now for some facts.
Per the DOJ/SEC’s own allegations in the 2013 Total FCPA enforcement action, the vast majority of the alleged improper conduct took place between 1995 and 1997 (that is 17 to 19 years ago). So old was the conduct giving rise to the Total enforcement action, that the DOJ made the unusual statement in the resolution document that “evidentiary challenges” were present for both parties given that “most of the underlying conduct occurred in the 1990s and early 2000s.”
Interesting Read
Speaking of those FCPA ripples, Hyperdynamics Corporation has been under FCPA scrutiny since 2013 and its recent annual report makes for an interesting read as to the wide-ranging business effects of FCPA scrutiny. Among other things, the company disclosed approximately $7.5 million in the prior FY for legal and other professional fees associated with its FCPA scrutiny. Not all issuers disclose pre-enforcement action professional fees and expenses, so when a company does, it provides an interesting data-point.
Chinese Issuers
I began writing about Chinese companies and the FCPA in this 2008 article at the beginning of the trend of Chinese companies listing shares on U.S. exchanges. This 2009 post returned to the issue and noted that with the IPO market showing signs of life again, and with foreign companies increasingly turning to U.S. capital markets, and with many of these companies doing business in FCPA high-risk countries, the number of FCPA enforcement actions against foreign issuers is likely to increase. That, of course, has turned out to be true.
Today, of course, is the IPO of Chinese company Alibaba, expected to be largest U.S. IPO ever. The company’s business model does not exactly rank high in terms of FCPA risk, but recall that the FCPA has always been a law much broader than its name suggests because of the books and records and internal control provisions.
Even as to the anti-bribery provisions, it is at least worth noting, as highlighted in this recent New York Times article:
“Alibaba’s [recent acquisition of a company] provides an example of how the rapid growth of the private sector is also benefiting the country’s political elite, the so-called princelings, or relatives of high-ranking officials. […] Although Alibaba declined to comment for this article, citing regulatory restrictions on public statements ahead of a public offering, the company has said it relies on the market — not political connections — to drive its business. “To those outsiders who stress companies’ various ‘backgrounds,’ we didn’t have them before, we don’t have them now, and in the future we won’t need them!” the company said in a statement in July after a report that several investment companies tied to the sons and grandsons of senior Communist Party leaders owned stakes in Alibaba, including New Horizon Capital, whose founders include the son of former Prime Minister Wen Jiabao.”
As noted in the article, over the past year JPMorgan and several other financial services companies have come under FCPA scrutiny for alleged relationships with princelings.
Get It Right!
It’s a basic issue.
If you are writing about the Foreign Corrupt Practices as a paid journalist you have an obligation to get it right and engage in due diligence before hitting the publish button.
This Corporate Counsel article states:
“It’s already been a big year for enforcement activity under the U.S. Foreign Corrupt Practices Act. In the first half of 2014 alone, the U.S. Department of Justice and the U.S. Securities and Exchange Commission initiated 15 actions against companies alleged to have violated the international corruption law.”
For the record, in the first half of 2014, there have been three corporate FCPA enforcement actions: HP, Alcoa and Marubeni.
*****
A good weekend to all.
Richard Alderman is the former Director of the United Kingdom Serious Fraud Office (“SFO”). Since leaving the SFO in April 2012, Alderman has remained active in anti-corruption projects.
In this Q&A, Alderman discusses certain of these projects and offers insight on the following issues: the current international enforcement climate including multi-jurisdictional issues; voluntary disclosure; DPAs; and a compliance defense.
*****
In April 2012, you left the SFO. What have you been doing since?
I have been working with some international institutions and NGOs dealing with anti-corruption on the front line. This is what I wanted to do because I had met a number of individuals who inspired me. Recent examples are the Convention on Business Integrity in Nigeria and an initiative by the Egyptian Junior Business Association aimed at the vibrant SME sector in Egypt. I have also had the privilege of meeting individuals involved in the radical transformation of the procurement practices of Moscow City Council.
How do you see the current international corruption enforcement scene?
We have moved on from where we were a few years ago when there were only a few states that took action in these cases. Examples of issues now are-
In current enforcement era, multiple sovereigns may have jurisdiction over the same alleged conduct. What issues do you see regarding multi-jurisdictional enforcement?
This is becoming a key issue. I prepared a detailed report for the UNCAC conference in Panama in November 2013 that covered these and other issues.
Companies are undoubtedly at risk here. If we look at violations first, different states can prosecute for the same violation. The company’s only protection is the principle of double jeopardy but this is interpreted in different ways in different states. For example it is not an issue for the US because the US does not recognise foreign convictions and acquittals for this purpose.
This will become a particular issue when one of the enforcing states is the demand state. Why should such a state be prevented from taking action in its own courts because of a resolution elsewhere? We can expect national sovereignty issues.
Companies can also seek to exclude a state with a wide concept of double jeopardy by reaching a settlement with another state and then pleading double jeopardy in the first state. I have seen this.
The issue also arises with asset forfeiture. I do not understand how multiple states can confiscate the same asset or profit. Once the money has been paid to law enforcement somewhere then any further disgorgement is actually a criminal fine.
What about global settlements?
I am very much in favour of these. I know from my own experience that they are very difficult to bring about. The international mechanisms in Article 47 of UNCAC and Article 4(3) of the OECD Convention should be used to discuss how the different enforcing states should work together and how a global settlement should be structured. Neither mechanism has yet been used for this purpose but they are available. Enforcing states will be nervous but these mechanisms will be vital as more and more states start to enforce the law.
Do the recent Libor settlements have any implications for global settlements in corruption cases?
These settlements have been very remarkable. A UK prosecutor cannot however enter into such an agreement if there are criminal pleas in the UK. This is because the senior judge in the Innospec case said that it was wrong for the SFO to discuss the penalty to be paid by the company even if the penalty was subject to the overall approval of the court.
One consequence of the new UK DPA system is that the UK enforcing authority can enter into these discussions if what is being discussed is a DPA rather than a traditional prosecution. It will be up to the judge to decide if this is the right way forward.
The result is that UK prosecuting authorities will not be able to participate in global settlements in the future unless there is a DPA approved by the court. I see this as an issue that will be increasingly important in the UK.
Do you still favour corporate self-reporting of conduct that could implicate bribery and corruption laws?
Yes. I remain a keen supporter of self-reporting. This has however become more difficult for companies. There are two main reasons. These are-
Should companies carry out their own investigations when alerted to alleged instances of improper conduct?
My experience is that major global companies take these allegations very seriously and want to see what happened. There is an issue about whether the company should self-report immediately or whether it should carry out some preliminary work to satisfy itself that there is something in the allegation. The expectations of enforcing authorities can vary here. My view has always been that the company should be satisfied first that there is something that requires detailed investigation.
I am in favour of companies carrying out their own investigations with agreement from the enforcing state about scope, milestones and regular updates. I know that some enforcing states will also want to carry out their own independent investigation. I understand the reasons for this but it means that the authority is spending its scarce resource on a case where the company is willing to cooperate and not on the more difficult cases where the company has no intention of self-reporting and cooperating. As I see it there is too little action by enforcing authorities in finding such companies and dealing with them.
Recently the U.K. adopted DPAs. How do you feel about DPAs and what are the issues as you see them? What issues do you see regarding DPAs?
I have always been in favour of DPAs as one tool available to prosecutors. My experience was that the UK was in a poor position in global cases with international resolutions with the traditional criminal justice tools. I saw two main advantages of DPAs. These are-
I know that the FCPA Professor has expressed considerable public opposition to DPAs. I agree that they need to be transparent and that the judges have to be fully involved. I also agree that we still need to see the traditional full prosecution with debarment in suitable cases. This could be where the company is systemically corrupt and has no intention of abandoning corruption. I want to see more of these cases being pursued by enforcing states.
The full prosecution should be part of the toolkit of the prosecutor. There should be other tools for other types of case. It is notable that the only states that have made a sustained attack on corporate corruption over the years have either not used traditional prosecution or have used it sparingly and have also used alternatives. This is significant although it seems to me to be insufficiently appreciated.
Should corporate compliance be a defence to a bribery or corruption offense or merely mitigate the potential fine and penalty amount?
I remain in favour of the compliance defence. The Bribery Act offence is an excellent model in this area. I have seen how much impact this had on companies and the scale of the improvement made in their anti-corruption work. There are a number of other states that have compliance as a defence.
There is however an issue that is going to be increasingly relevant in those states that have compliance as a defence. The public wants to see the offence produce results in terms of criminal convictions. So far there do not appear to be any in the states with a compliance defence. There will be a question about whether compliance as a defence is right or whether the US approach with compliance as mitigation is to be preferred because of the results achieved. We can expect a lot more on this. It may be one of the issues to be considered in the recently announced UK review of the effectiveness of the enforcing institutions.
You have talked publicly about sanctions and incentives for companies as it relates to bribery and corruption offenses. Can you elaborate on this issue?
Alternatives to traditional prosecution together with self-reporting and cooperation are important incentives in the area of violations. There is though a wider issue that is not sufficiently recognised and discussed. This is whether there should be more general incentives to companies that have brought about an excellent standard of anti-corruption compliance.
There was a Recommendation by the OECD in 2009 encouraging states to look at public procurement, licenses, aid funding and export credits as a way of recognising companies with the highest standards of anti-corruption. There has been little progress on this although a few states have introduced some initiatives.
I am very much in favour of this. For example the citizens of a state will benefit if a company that meets very high standards is successful in a public procurement exercise and companies with a poor anti-corruption approach are not. If those companies with a poor record decide that they have to reform then that is a benefit to everyone.
I see this as one of the key issues in anti-corruption that will become increasingly prominent in the coming years. It has great potential to make a difference.
GlaxoSmithKline’s (GSK) scrutiny in China – by the Chinese government – dominated the headlines in July (see here for a prior post).
Shortly thereafter, many began to question the motivations of the Chinese government in investigating GSK and several other multinational pharmaceutical companies operating in China. Did the Chinese government have pure motivations? Or was there something else going on as the scrutiny was occurring at the same general time the Chinese government was seeking price concessions from multinational pharma companies in an effort to make healthcare more affordable for its citizens
See here from Bloomberg, here from Reuters.
The general issue gained plenty of traction in the blogosphere and editorial pages.
See here (“The decision of the Chinese government to act against Glaxo is likely motivated by a desire to make a strategic example of an international pharma company in China”).
See here (“With national healthcare expenses expected to reach $1 trillion annually by the end of the decade, China is looking for ways to reduce costs. The country’s National Development and Reform Commission has targeted the drug pricing policies of GSK, Merck, Novartis, Baxter, Astellas Pharma and almost 60 other international drug manufacturers for investigation. […] Growing drug costs in China thus appear to have provided the Chinese government with the motivation to institute and “go public” with the GSK investigation, as well widening the probe into other pharmaceutical companies.
See here (“Still to be seen, however, is what’s motivating the crackdown. Drug makers have faced increasing pressure by Beijing to cut prices and share intellectual property, but neither aim should be accomplished through prosecuting bribery.”)
If GSK and other foreign firms operating in China did indeed violate Chinese law, should the real motivations of the Chinese government in investigating GSK and other companies even matter? What if the motivations of the Chinese government are less than pure?
Bringing the question home, if a company subject to the FCPA violates the law, should the real motivations of the U.S. government in bringing an enforcement action even matter? Are the motivations of our government always pure when it comes to FCPA enforcement? After all, the lack of FCPA anti-bribery charges against Siemens and BAE was hardly pure. The DOJ’s sentencing memorandum in those cases make clear that the settlements were structured in such a way as to avoid debarment issues for the company (and for the U.S. government). That is hardly a pure motivation for enforcing a law.
The mysterious end to the James Giffen enforcement action (see here for the prior post) – in which he asserted a public authority defense and that his actions were undertaken with the knowledge and approval of the highest levels of U.S. government – was hardly pure.
Impure motives are improve motives whether the impurity leads to lax enforcement or aggressive enforcement.
And certainly the U.S. is not alone. When the U.K. Serious Fraud Office dropped its investigation of BAE concerning business conduct in Saudi Arabia because the Saudis allegedly threatened to cease cooperation on terrorism issues, that was not a pure motive.
The interesting thing is this. With increased competition among nations in enforcing anti-bribery laws (an issue frequently discussed on these pages – see here instance), we can expect to see more motives being questioned.
This makes it all the more important – as I highlighted several years ago – in “The Facade of FCPA Enforcement” that we get things right here in the U.S. when it comes to FCPA enforcement.
But then again, this is not merely an enforcement issue.
Let’s not forget that the real reason the U.S. ended up with the Foreign Corrupt Practices Act in 1977 was not exactly pure.
Sure, one will find certain statements in the legislative history to support the notion that what motivated Congress to enact the FCPA was so-called post-Watergate morality. However, as detailed in “The Story of the Foreign Corrupt Practices Act,” the main motivation of Congress in enacting the FCPA was clearly foreign policy.
Senator Frank Church, an FCPA leader, was clear in opening initial hearings as to the so-called foreign corporate payments in May 1975. He stated.
“For what we are concerned with is not a question of private or public morality. What concerns us here is a major issue of foreign policy for the United States. […] It is time to treat the issue for what it is: a serious foreign policy problem.”
In chairing another Congressional hearing in 1975, Senator Church likewise stated: “I have focused on the foreign policy aspects of this issue because that is the chief concern of my subcommittee.”
Representative Solarz, who emerged as an FCPA leader in the House, stated:
“What is in fact at stake is the foreign policy and national interest of the United States. It is clearly in our interest to put a stop to these pernicious practices. […] We simply cannot permit activity which so damages U.S. foreign policy.”
Representative Moss stated:
“Business practices of these corporations abroad often impact directly on U.S. foreign policy. Disclosures have shown that United Brands dealings with the Honduran Government and Lockheed’s relationship with the Dutch Crown, Italian political parties, and former key leaders of the ruling Japanese party had an impact as great as the Department of State might have had. Surely the public expects more than to have foreign policy made in the board rooms of United Brands or Lockheed. Not only is a publicly owned corporation unaccountable to the public when it uses its assets to bribe foreign governmental officials, but also it is unaccountable to its shareholders, the ones to whom the assets belong.”
In short, Congressional leaders wanted foreign governments and foreign political parties accountable and answerable to the U.S. government itself, not to private enterprise because of the bribe payments. This was not a pure or altruistic reason for enacting the FCPA, it was a power play tied directly to foreign policy.
Should motivations matter?
