Entertainment Industry Archives

Friday Roundup

By Mike Koehler on January 23, 2015 in Double Standard, Enforcement Agency Policy, Enforcement Agency Speeches, Entertainment Industry, Nortek Inc., Sony Corp., Trade Barriers and Distortions, Transparency International

Scrutiny alerts, quotable, and for the reading stack. It’s all here in the Friday roundup.

Scrutiny Alerts

Nortek

Nortek Inc. recently disclosed:

“As part of our routine internal audit activities, Nortek, Inc. (the “Company” or “we”) discovered certain questionable hospitality, gift and payment practices, and other expenses at the Company’s subsidiary, Linear Electronics (Shenzhen) Co. Ltd. (“Linear China”), which are inconsistent with the Company’s policies and raise concerns under the U.S. Foreign Corrupt Practices Act (“FCPA”) and perhaps under other applicable anti-corruption laws. The Company initiated an internal investigation into these practices and payments with the assistance of outside counsel. On January 7, 2015 and January 8, 2015, respectively, we voluntarily contacted the United States Securities and Exchange Commission (“SEC”) and the United States Department of Justice (“DOJ”) to advise both agencies of our internal investigation. The Company intends to cooperate with any SEC or DOJ investigation into these matters. The Company takes these matters very seriously and is committed to conducting its business in compliance with all applicable laws. Based on information known at this time, we currently believe that the amount of the questionable expenses and payments is not material with respect to the Company’s financial condition or results of operations. However, at this time, we are unable to predict, what, if any, action may be taken by the DOJ or SEC or any penalties or remedial measures these agencies may seek, but intend to cooperate with both agencies. Any determination that our operations or activities are not in compliance with existing laws or regulations could result in the imposition of fines, civil and criminal penalties, and equitable remedies, including disgorgement or injunctive relief. Nortek’s Linear China location manufactures products primarily for our Security and Control Solutions Segment and does not sell products to third parties.”

Sony

Last week’s Friday Roundup highlighted the FCPA scrutiny of Sony and other Hollywood film studies in China.

In this article, Bloomberg reports:

“Sony Corp.’s entertainment unit investigated its Indian operations for possible legal violations including bidding fraud and kickbacks, according to internal e-mails released by hackers, highlighting challenges the company has faced in the country. Sony enlisted Ernst & Young to look into its businesses in the country and uncovered potential evidence of wrongdoing, according to the e-mails. In one case, investigators found that a joint venture between Sony and Discovery Communications Inc. (DISCA) may have engaged in fraudulent bids, kickbacks and excessive handouts to government officials …”

According to the article, there are various “areas of concern” including: “potential gifts and entertainment of Indian government officials” such as providing tickets to IPL cricket matches to public servants, as well as laptop bags that were requested as gifts for government officials during the Diwali festival.”

Related to the entertainment industry, this recent Wall Street Journal article “Media Giants Look Far Afield for New TV Audience” is an interesting read (with FCPA goggles on) as it describes how various U.S. companies are expanding abroad.

Transparency International

Transparency International (TI) is usually the one scrutinizing, not being scrutinized. However, this Corporate Crime Reporter article highlights Siemens’ recent $3 million dollar donation to TI. The article quotes a “TI insider, who asked not to be identified for fear of retaliation” as follows.

“This really shows that Transparency International is not as pure as people think. Transparency International’s own policy forbids accepting money from corrupt companies. Period. Even though the Siemens bribery scandal broke in 2006, the company is still being investigated in more than 20 countries — in Europe, Asia, the Americas, Africa and the Middle East. All over the world, Siemens is still under suspicion.”

“Its reputation is the most valuable asset that Transparency International has. But its management has made the choice that taking $3 million from Siemens to support its $70 million international budget is worth the risk of damaging its reputation. That’s less than 5 percent of TI’s budget. Is this really worth it?”

“How can anyone trust TI? The world’s leading anti-corruption NGO is now taking money from one of the world’s worst corporate criminals. People need to start asking the question.”

Quotable

In this recent speech, Deputy Assistant Attorney General Sung-Hee Suh spoke “about the Criminal Division’s white-collar criminal enforcement priorities now and in the coming year.” Among other things, Suh stated:

“The prosecution of individuals—including corporate executives—for criminal wrongdoing continues to be a high priority for the department. That is not to say that we will be looking to charge individuals to the exclusion of corporations. However, corporations do not act criminally, but for the actions of individuals. And, the Criminal Division intends to prosecute those individuals, whether they are sitting on a sales desk or in a corporate suite. It is within this framework that we are also seeking to reshape the conversation about corporate cooperation to some extent. Corporations too often overlook a key consideration that the department has long expressed in our Principles of Federal Prosecution, which guide our prosecutorial decisions: That is a corporation’s willingness to cooperate in the investigation of its culpable executives. Of course, corporations—like individuals—are not required to cooperate. A corporation may make a business or strategic decision not to cooperate. However, if a corporation does elect to cooperate with the department, it should be mindful of the fact that the department does not view voluntary disclosure as true cooperation, if the company avoids identifying the individuals who are criminally responsible for the corporate misconduct. Even the identification of culpable individuals is not true cooperation, if the company intentionally fails to locate and provide facts and evidence at their disposal that implicate those individuals. The Criminal Division will be looking long and hard at corporations who purport to cooperate, but fail to provide timely and full information about the criminal misconduct of their executives. In the past year, the Criminal Division has demonstrated its continued commitment to the prosecution of individual wrongdoers in the corporate context. I will highlight a few examples. On the FCPA front, since 2009, we have convicted 50 individuals in FCPA and FCPA-related cases, and resolved criminal cases against 59 companies with penalties and forfeiture of almost $4 billion. Within the last two years alone, we have charged, resolved by plea, or unsealed cases against 26 individuals, and 14 corporations have resolved FCPA violations with combined penalties and forfeiture of more than $1.6 billion. As just one example, the department unsealed charges against the former co-CEOs and general counsel of PetroTiger Ltd., a BVI oil and gas company with offices in New Jersey, for allegedly paying bribes to an official in Colombia in exchange for assistance in securing approval for an oil services contract worth $39 million. The general counsel and one of the CEOs already pleaded guilty to bribery and fraud charges, and the other former CEO is headed for trial. This case was brought to the attention of the department through voluntary disclosure by PetroTiger, which cooperated with the department’s investigation. Notably, no charges of any kind were filed against PetroTiger. An example on the flip side is the Alstom case, an FCPA investigation stemming from a widespread scheme involving tens of millions of dollars in bribes spanning the globe, including Indonesia, Saudi Arabia, Egypt, and the Bahamas. When the Criminal Division learned of the misconduct and launched an investigation, Alstom opted not to cooperate at the outset. What ensued was an extensive multi-tool investigation involving recordings, interviews, subpoenas, MLAT requests, the use of cooperating witnesses, and more. As of today, four individual Alstom executives have been charged; three of them have pleaded guilty; Alstom’s consortium partner, Marubeni, was charged and pleaded guilty; and Alstom pleaded guilty and agreed to pay a record $772 million fine. And that only accounts for the charges in the United States. As I have said, we want corporations to cooperate, and will provide appropriate incentives. But, we will not rely exclusively upon corporate cooperation to make our cases against the individual wrongdoers.

[…]

To do these complex, international investigations, we are increasingly coordinating with domestic and foreign regulators and law enforcement counterparts, some of whom are on this panel today. In working with our foreign counterparts, we have developed growing sophistication and experience in a variety of areas, including analyzing foreign data privacy laws and corporations’ claims that overseas documents cannot be provided to investigators in the United States. We are also building and relying upon on our relationships with our foreign counterparts to gather evidence, locate individuals overseas, conduct parallel investigations of similar conduct, and, when appropriate, coordinate the timing and scope of resolutions. Yes, just as we are coordinating our investigations, we are likewise willing to coordinate our resolutions, including accounting for the corporate monetary penalties paid in other jurisdictions when appropriate. This is all to say that you should expect to see these meaningful, multinational investigations and prosecutions of corporations and individuals to continue.”

*****

These pages have frequently highlighted how the root cause of bribery and corruption is often foreign trade barriers and distortions.

Jeremy Douglas (who leads the United Nation’s regional Office on Drugs and Crime for Southeast Asia and the Pacific) was thus spot-on in this recent Q&A.

“Q: How do western companies get themselves into trouble in the region?

A: … What we see in the region is that bureaucracies and government structures tend to be highly personalized. People are ensconced in key positions i.e. government procurement positions, or people in the position to give government contracts, let’s say building a power plant. [These officials] are in powerful positions to ease up administrative procedures and accelerate red tape and issue licenses. So companies can be drawn into scenarios where they are paying facilitation fees or their intermediaries are paying facilitation fees. [Much of] Southeast Asia doesn’t have a lot of the regulatory structure–the checks and balances you have in the [U.S. or Canada] so companies come in and run into very powerful persons in those structures, and they know if they can influence these officials, they can get what they need to win business.”

Reading Stack

The Corporate Crime Reporter previews a new book, Unaccountable: How Elite Power Brokers Corrupt our Finances, Freedom, and Security written by Professor Janine Wedel. Professor Wedel states:

“Transparency International pioneered the corruption index in the early 1990s. They rank countries from most corrupt to the least corrupt. And they are based on public perception – perception of business people and experts from outside the country. They come up with these numbers that are attractive to the press. And it has put Transparency International on the map. They are simple minded surveys. But they don’t really mean a lot. The idea of corruption in these surveys is simple bribery — cash changing hands. It’s the proverbial cash in the piano or the freezer. Corruption is reduced to bribery. In fact, today’s most savvy power brokers are engaged in a kind of corruption that is much more subtle and more difficult to detect. Today’s most corrupt players, at least in the West, don’t need this quid pro quo corruption. They are far beyond that. That’s for the little players. That’s for the small fry. That’s a key point of Unaccountable.”

*****

This Op-Ed about Chinese law enforcement (in the corruption space and otherwise) states: “China’s leaders must realize that even the perception that they are targeting foreign businesses disproportionately can create great harm.” Against this backdrop, is the following fact. 8 of the top 10 FCPA enforcement actions (in terms of settlement amounts) have been against foreign companies and are often based on sparse jurisdictional allegations.

*****

From the Singapore Corrupt Practices Investigation Bureau

“Public Officers Rejecting Bribe Offers

Singapore enjoys a good international standing for having a clean and efficient civil service. While this is reflected by the low number of public servants being prosecuted for corruption offences, another evidence of the clean public sector is the significant number of public officers who take pride in discharging their duties and say “no” to bribes when put to the test.”

The post then provides several examples.

*****

A good weekend to all.

Friday Roundup

By Mike Koehler on January 16, 2015 in Asset Recovery, Entertainment Industry, FBI, Foreign Official, Internal Controls, Joseph Sigelman, Lions Gate Entertainment Corp, Mario Roberto Zelaya Rojas, Root Causes, Sony Corp., Voluntary Disclosure

Hollywood film studios, more FBI agents, asset recovery, quotable, and for the reading stack. It’s all here in the Friday roundup.

Hollywood Film Studios

A recent Wall Street Journal article went in-depth regarding the FCPA scrutiny of Hollywood film studios doing business in China. According to the article, Sony received a subpoena from the SEC in June 2013 regarding possible violations of the U.S. Foreign Corrupt Practices Act. The article states:

“The SEC’s questions to Sony dealt primarily with potential bribery related to the release of “Resident Evil: Afterlife” in China in 2010, according to email communication between Sony’s in-house and outside legal counsel. A Sony-led investigation that followed the SEC subpoena examined the company’s distribution efforts more broadly, the emails show. The subpoena indicates an escalation of an inquiry that began in 2012 when the SEC requested that every major studio voluntarily provide information about their movie-distribution practices in China, a request that was publicly reported at the time. However the SEC’s specific concerns weren’t disclosed nor was it previously known that the agency had stepped up its probe with a subpoena. Sony documents show that the SEC refers to its probe as “In the Matter of Lions Gate Entertainment Corp,” indicating that the rival Hollywood studio behind “The Hunger Games” has been asked questions as well.”

Many FCPA enforcement actions have, as a root cause, a foreign trade barrier or distortion. This appears to be true in the case of the Hollywood film studios. As stated in the article, the companies ran into “China’s quota and censorship systems to secure distribution for their films in that country.” According to the article:

“Hollywood studios are barred from distributing films on their own in China, but instead work with the state-owned China Film Group to secure one of the 34 highly coveted spots offered each year for imported movies. [Third party distribution firms] help studios navigate the bureaucracy.”

More FBI Agents

The Wall Street Journal reports:

“The Federal Bureau of Investigation’s foreign corruption program will more than triple the number of agents focused on overseas bribery this year to more than 30 from around 10, according to bureau officials. The agents will focus on both sides of corruption, hunting down executives that pay off foreign officials, while also helping other nations recoup funds stolen by corrupt leaders. The FBI usually can’t directly arrest corrupt foreign leaders, but at the request of foreign law enforcement the bureau can help locate funds stolen by kleptocrats. […] “With the growing global economy and the growing nature of international commerce with globalization of more companies and economies, it’s creating more opportunities for the potential of FCPA and corruption,” said Joseph Campbell, assistant director of the bureau’s criminal division, in an interview. The newly assigned agents will work out of field offices in New York, Washington, D.C., San Francisco, Los Angeles, Miami and Boston, with backup from forensic analysts and other specialists in headquarters, which is also located in the capital. Currently, the bureau’s foreign anti-corruption field agents are managed out of a field office in Washington, D.C. and split their time while pursuing other white collar crimes, bureau officials said.”

Asset Recovery

As part of its Kleptocracy Asset Recovery Initiative, the DOJ recently announced the filing of a “civil forfeiture complaint seeking the forfeiture of nine properties worth approximately $1,528,000 that were allegedly purchased with funds traceable to a $2 million bribe paid by a Honduran information-technology company to the former Executive Director of the Honduran Institute of Social Security.”

According to the DOJ:

“From 2010 to 2014, Dr. Mario Roberto Zelaya Rojas, 46, of Tegucigalpa, Honduras, served as the Executive Director of the Honduran Institute of Social Security (HISS), a Honduran Government agency that provides social security services, including workers’ compensation, retirement, maternity, and death benefits. According to allegations in the forfeiture complaint, Zelaya solicited and accepted $2.08 million in bribes from Compania De Servicios Multiples, S. de R. L. (COSEM) in exchange for prioritizing and expediting payments owed to COSEM under a $19 million contract with HISS. Zelaya also allegedly instructed COSEM to make bribe payments to two members of the Board of Directors of HISS charged with overseeing the COSEM contract. To conceal the illicit payments, COSEM allegedly sent the bribes through its affiliate company, CA Technologies. As further alleged in the complaint, the bribe proceeds were then laundered into the United States and used by Zelaya and his brother, Carlos Alberto Zelaya Rojas, to acquire real estate in the New Orleans area. Certain properties were titled in the name of companies nominally controlled by Zelaya’s brother in an effort to conceal the illicit source of the funds as well as the beneficial owner. The current action seeks forfeiture of nine properties acquired with the proceeds of Zelaya’s alleged bribery scheme.”

In the DOJ’s release, Assistant Attorney General Leslie Caldwell stated:

“Our action today highlights how the Criminal Division’s Kleptocracy Initiative, with our network of law enforcement partners around the globe, will trace and recover the ill-gotten gains of corrupt officials. Criminals should make no mistake: the United States is not a safe haven for the proceeds of your crimes. If you hide or invest your stolen money here, we will use all the legal tools we have to find it and seize it.”

Quotable

In this Global Investigations Review article, Timothy Dickinson (Paul Hastings and a veteran of the FCPA bar) states:

“Ten years ago, I would have been happy to bet anyone a doughnut that I could accurately define what a foreign official is. Now, with various court definitions and a lack of clarity from the DoJ, I fear I might actually lose my doughnut.”

In this piece about the SEC’s internal controls enforcement theories, Michael Shepard (Hogan Lovells) states:

“Beneath the surface of these developments [the increased use of the internal controls provisions] is a disconnect about what the internal controls provisions actually require. The government — and especially the SEC — has settled on an interpretation of the internal controls provision that is at odds with the understanding of many in-house finance professionals about what internal controls are intended to address. Ask corporate finance professionals about internal controls at their companies and you will likely get an answer about processes designed to protect the company’s assets at a level that would materially impact the company’s financial statements. Ask your friendly neighborhood SEC investigator about internal controls and you will instead get inquiries about the exponentially smaller level of amounts of money that would be enough to influence a low-paid public official in a poor third-world country. Not only is the SEC looking at controls on a more microscopic level, but its predilection to pursue internal controls charges sometimes seems based on an interpretation of the FCPA that borders on strict liability. Circumstantial evidence of a bribery violation — such as evidence that some money may have left the company without proper authorization or accounting records — translates for the SEC into proof that the company’s controls were inadequate. Statutory elements of reasonableness and scienter get short shrift in a world in which the SEC aggressively pushes internal controls charges, and the vast majority of companies remain predisposed to settle.”

Reading Stack

Paul Barrett at Bloomberg BusinessWeek goes in-depth about the FCPA charges pending against Joseph Sigelman in an article titled “Does This Man Look Like a Felon to You?”

From the New Yorker, “Can Corruption Be Erradicated?”

“[C]orruption has always permeated so many fields of human endeavor that it may be not a corruption of anything—but, rather, a regrettable feature of our natural condition. Accountable government is an ideal, to be sure. It may also be an aberration.”

[O]ur conceptual vocabulary for understanding [corruption], let alone combatting it, remains conspicuously meagre. The very term “corruption” is so inclusive as to be almost meaningless, encompassing bribery, nepotism, bid-rigging, embezzlement, extortion, vote-buying, price-fixing, protection rackets, and a hundred other varieties of fraud.”

From Bloomberg BNA “As FCPA Complexity Increase, Corporate Interest in Self-Disclosure Wanes.”

*****

A good weekend to all.

Friday Roundup

By Mike Koehler on February 21, 2014 in ALSTOM, China, Deferred Prosecution Agreements, Entertainment Industry, FCPA Inc., Financial Services Industry, Fine / Penalty Issues, Investigative Fees, Knut Hammarskjold, Lyondellbasell Industries, Mead Johnson, Non-Prosecution Agreement, PetroTiger, Princelings, SEC, Trade Barriers and Distortions, Wal-Mart

Wal-Mart’s FCPA expenses, scrutiny alerts and updates, quotable, February 21st, further to the conversation, and for the reading stack. It’s all here in the Friday roundup.

Wal-Mart’s FCPA Expenses

For over a year now, I have been tracking Wal-Mart’s pre-enforcement action professional fees and expenses and calculating what Wal-Mart is spending per working day on its FCPA scrutiny and exposure. (See here for the prior post with embedded links to others). Here is what Wal-Mart executives said yesterday in its earnings conference call for the fourth quarter of FY 2014.

“Core corporate expenses [for the fourth quarter of FY 2014] increased 5.8 percent. FCPA and compliance-related expenses were approximately $58 million, which was below our guidance of $75 to $80 million for the quarter. Approximately $38 million of these expenses represented costs incurred for the ongoing inquiries and investigations, while the remaining $20 million was related to our global compliance program and organizational enhancements.”

[…]

“Corporate & support expenses [for the fiscal year 2014] increased 24.1 percent for the full year, primarily from our investments in leverage services and Global eCommerce. Core corporate expenses, which included $282 million in charges related to FCPA matters, increased 15.6 percent. Approximately $173 million of these expenses represented costs incurred for the ongoing inquiries and investigations, while the remaining $109 million was related to our global compliance program and organizational enhancements.”

[…]

“During the first quarter of this year, we will begin to anniversary the increased costs we’ve incurred for FCPA matters, including compliance program enhancements and the ongoing investigations. These costs will remain in the Corporate and Support area, and we anticipate expenses to be between $200 million and $240 million for the year. [for the fiscal year 2015]

You add it up, and here is what you get.

FY 2013 = $157 million (approximately $$604,000 per working day)

FY 2014 = $282 million (approximately $1.1 million per working day)

FY 2015 = $200 – $240 million (anticipated)

As Wal-Mart’s FCPA scrutiny will once again demonstrate, settlement amounts in an actual FCPA enforcement action are often only a relatively minor component of the overall financial consequences that can result from corporate FCPA scrutiny.

Pre-enforcement action professional fees and expenses are typically the largest (in many cases to a degree of 3, 5, 10 or higher than settlement amounts). For instance, the total of the above pre-enforcement action professional fees and expenses and estimates is approximately $659 million. A $659 million FCPA settlement amount would be second of all-time.

That pre-enforcement action professional fees and expenses are typically the most expensive aspect of FCPA scrutiny is a fact. However it must nevertheless be asked whether FCPA scrutiny has turned into a boondoggle for many involved. Using just Wal-Mart and Avon’s pre-enforcement professional fees and expenses results in FCPA Inc. being over a billion dollar industry!

Is Wal-Mart’s conduct for which it is under scrutiny in violation of the FCPA? Does it even matter? See my article “Foreign Corrupt Practices Act Enforcement As Seen Through Wal-Mart’s Potential Exposure.”

Scrutiny Alerts and Updates

Knut Hammarskjold

Earlier this week, the DOJ announced that Knut Hammarskjold “pleaded guilty today for his role in a scheme to pay bribes to foreign government officials and to defraud PetroTiger.” According to the release, Hammarskjold pleading guilty “to an information charging one count of conspiracy to violate the Foreign Corrupt Practices Act (FCPA) and to commit wire fraud and is scheduled for sentencing on May 16, 2014.” Despite the DOJ’s announcement, the docket for Hammarskjold’s case does not contain the plea agreement or related documents. For a comprehensive summary of the DOJ’s charges against Kammarskjold and co-defendants Joseph Sigelman and Gregory Weisman, see this prior post. As noted in the previous post, Weisman has also pleaded guilty and the charges against Sigelman remain pending.

Mead Johnson

As highlighted in this previous Friday Roundup, last year Mead Johnson Nutritional Company disclosed an internal investigation related to business practices in China. Thus, contrary to certain reports Mead Johnson’s FCPA scrutiny is not “new,” but earlier this week, the company updated its disclosure as follows.

“Following an SEC request for documents relating to certain business activities of the Company’s local subsidiary in China, the Company is continuing an internal investigation of such business activities. The Company’s investigation is focused on certain expenditures that were made in connection with the promotion of the Company’s products or may have otherwise been made. Certain of such expenditures were made in violation of Company policies and may have been made in violation of applicable U.S. and/or local laws, including the U.S. Foreign Corrupt Practices Act (the “FCPA”). The investigation is being conducted by outside legal counsel and overseen by a committee of independent members of the Company’s board of directors. The status and results of the investigation are being discussed with the SEC and other governmental authorities. 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.”

Lyondellbasell

As highlighted in this 2010 post, in connection with a bankruptcy proceeding, Lyondellbasell’s disclosed as follows.

“We have identified an agreement related to a project in Kazakhstan under which a payment was made in late 2008 that raises compliance concerns under the U.S. Foreign Corrupt Practices Act (the “FCPA”).

Yesterday the company disclosed:

“We previously reported that we had identified, and voluntarily disclosed to the U.S. Department of Justice, an agreement related to a former project in Kazakhstan under which a payment was made that raised compliance concerns under the U.S. Foreign Corrupt Practices Act (the “FCPA”). In January 2014, the U.S. Department of Justice advised the Company that it had closed its investigation into this matter. No fine or penalty was assessed.”

In the minds of some, this is a declination. I beg to differ – see here.

Baxter International

The company recently disclosed as follows.

“The company was the recipient of an inquiry from the U.S. Department of Justice (DOJ) and the SEC that was part of a broader review of industry practices for compliance with the U.S. Foreign Corrupt Practices Act. In January 2014, the company was notified by both the DOJ and the SEC that their respective investigations were closed as to Baxter without any further action taken by either agency.”

For a previous post regarding Baxter, see here.

Alstom

Bloomberg reports:

“Alstom SA, the French maker of trains and power equipment, will be charged in the U.K. over bribery allegations after a five-year investigation, according to two people with knowledge of the case. The Serious Fraud Office may ask the attorney general to approve charges in the coming weeks, a standard requirement for the agency to prosecute some offenses, according to the people, who asked not to be identified because the case is private. […] The SFO said in 2011 it suspected that Alstom gave money to companies that acted as “bogus consultants” to bribe overseas officials for contracts from 2004 to 2010, according to court papers at the time.”

If Alstom does face criminal charges in the U.K., the charges are unlikely to fall under the U.K. Bribery Act as the law went effective in July 2011 and is forward-looking only. As highlighted in previous posts (see here for instance) in 2013 the DOJ brought charges against four individuals associated with Alstom concerning alleged conduct in Indonesia.

Quotable

In this recent Chicago Tribune article, Tom Pritzker (Chairman and Chief Executive Officer of The Pritzker Organization, LLC – the principal financial and investment advisor to various Pritzker family business interests) reportedly stated as follows at a recent Chicago Council on Global Affairs event:

“The way that [FCPA] enforcement is working out of Washington strikes all of us in American business as arbitrary. It’s a revenue-generating mechanism for Washington, and that makes it additionally difficult in terms of how you figure out how to navigate emerging markets.”

February 21st

Today is a notable day in FCPA history (see this prior post).

I am grateful that I – and this website – have played a role in these events.

Further to the Conversation I

As frequently highlighted on these pages (see here for instance), trade barriers and distortions are often the root causes of bribery and a reduction in bribery will not be achieved without a reduction in trade barriers and distortions.

Simply put, trade barriers and distortions create bureaucracy.

Bureaucracy creates points of contact with foreign officials.

Points of contact with foreign officials create discretion.

Discretion creates the opportunity for a foreign official to misuse their position by making demand bribes.

This recent Wall Street Journal article highlights China’s “quota system” for foreign-films. As the article states:

“[34 is] maximum number of foreign titles the Chinese government allows into its nation’s theaters every year, a quota in place to try to protect China’s own nascent movie business. Hollywood studios have wondered when that number might be boosted—the last time was in February 2012, when Vice President Joe Biden announced a deal increasing the quota to the current 34 titles, from 20.”

Perhaps you’ve heard that various film companies are under FCPA scrutiny concerning business practices in China. (See here).

Further to the Conversation II

Whether it’s a federal court judge stating that a pending federal criminal case is “not window dressing” nor is the court “a potted plant” in concluding that a federal court does indeed have supervisory authority over the DPA process (see here for the prior post) or whether it’s a federal court judge criticizing various common aspects of corporate criminal law enforcement, including DPAs, as “both technically and morally suspect” (see here for the prior post) – there is an important conversation taking place concerning how the DOJ resolves alleged instance of corporate criminal liability.

Further to this conversation, the Better Markets, Inc. (a group that advocates for greater transparency, accountability, and oversight in the financial system) recently filed this complaint for declaratory and injunctive relief against the DOJ and Attorney General Eric Holder. While the complaint reads more like a policy paper than a complaint, it nevertheless calls the $13 billion settlement between the DOJ and JPMorgan a “mere contract” and alleges in pertinent part:

“Yet, this contract was the product of negotiations conducted entirely in secret behind closed doors, in significant part by the Attorney General personally, who directly negotiated with the CEO of JP Morgan Chase, the bank’s “chief negotiator.” No one other than those involved in those secret negotiations has any idea what JP Morgan Chase really did or got for its $13 billion because there was no judicial review or proceeding at all regarding this historic and unprecedented settlement. However, it is known that JP Morgan Chase’s $13 billion did result in almost complete nondisclosure by the DOJ regarding JP Morgan Chase’s massive alleged illegal conduct.

Thus, the Executive Branch, through DOJ, acted as investigator, prosecutor, judge, jury, sentencer, and collector, without any review or approval of its unilateral and largely secret actions. The DOJ assumed this all-encompassing role even though the settlement amount is the largest with a single entity in the 237 year history of the United States and even though it provides civil immunity for years of illegal conduct by a private entity related to an historic financial crash that has cause economic wreckage affecting virtually every single American. The Executive Branch simply does not have the unilateral power or authority to do so by entering a mere contract with the private entity without any constitutional checks and balances.”

The complaint seeks a declaration that, among other things,

“the DOJ violated the separation of powers doctrine by unilaterally finalizing the $13 billion Agreement without seeking judicial review and approval”

“the DOJ acted in excess of its statutory authority by unilaterally finalizing the $13 billion Agreement without seeking judicial review and approval”

“the DOJ acted arbitrarily and capriciously by unilaterally finalizing the $13 billion Agreement without seeking judicial review and approval.”

I agree with Professor Peter Henning who recently stated in his New York Times Dealbook column:

“The lawsuit faces substantial hurdles that make it unlikely to succeed. As a general matter, private parties do not have standing to challenge a decision by the government to settle a case. The Justice Department has broad discretion in how it chooses to exercise its authority, and courts rarely intervene to scrutinize a decision unless there is evidence involving improper discrimination.

Nevertheless, the frustration expressed by Better Markets about the process for determining what JPMorgan should have paid to resolve multiple investigations is fair.”

Reading Stack

For more on princelings and the hiring practices of certain financial institutions in China, see here from Bloomberg.

A dandy article here from Jon Eisenberg (K&L Gates) titled “Brother Can You Spare $8.9 Billion? Making Sense of SEC Civil Money Penalties.” In pertinent part, the article is about:

“Other than negotiations about the wording of settlement documents, agreeing to the amount of the money penalty is often the last barrier to resolution. And it’s one of the most frustrating because the amounts proposed may appear untethered to any principle or precedent.

In an effort to provide more clarity on SEC money penalties, we look at four sources that should inform the negotiations about those penalties: first, the explosive growth in the SEC’s authority to impose civil money penalties; second, the relevant statutory language since the SEC’s authority to impose civil money penalties comes from and is limited by Congress; third, two recent D.C. Circuit decisions making clear that there are meaningful limits on the Commission’s discretion in assessing money penalties; and fourth, the outcome in recent cases before SEC administrative law judges in which the amount of the penalties was contested.”

The article is not FCPA specific, but very much FCPA relevant, particularly given the SEC’s increased interest in resolving corporate FCPA enforcement actions via administrative actions. In short, Eisenberg’s article is excellent. Read it.

*****

A good weekend to all.

Friday Roundup

By Mike Koehler on March 1, 2013 in China, Compliance, Disclosure Issues, Entertainment Industry, FCPA Investigative Costs, FCPA Jurisprudence, FCPA Statistics, Goldman Sachs, Industry Sweeps, Jurisdiction, Kimco Realty, Materiality, Prosecutorial Common Law, Wal-Mart

Hits and misses, does it really need to cost this much, the Wal-Mart effect, survey says, Senate hearing quotable, while they’re at it, checking in on Hollywood and Goldman too, spot on, and some refreshing words. It’s all here in the Friday roundup.

Hits and Misses

I read pretty much everything churned out by FCPA Inc., including the flood of recent client alerts concerning the Straub and Steffen decisions. (See here and here for previous posts summarizing the decisions). Many of these alerts are good and informative (for instance, see here from Debevoise & Plimpton). However, some of these alerts are just plain wrong.

The headline of one alert was “District Court Decision Limits the Extraterritorial Reach of the FCPA.” The headline of another alert was “Court Sets Limits on Extraterritorial FCPA Reach; Dismisses Case Against Foreign Siemens Executive.”

Neither the Straub nor Steffen decisions concerned extraterritorial application of the FCPA. In fact, there is no extraterritorial reach of the FCPA as to foreign actors. Yes, the FCPA was amended in 1998 to provide for alternative “nationality” jurisdiction (i.e. extraterritorial jurisdiction) over U.S. persons (both legal and natural), however, 78dd-1(g) and 78dd-2(i) are strictly limited to U.S. persons.

Rather, the Straub decision concerned the scope of territorial jurisdiction under 78dd-1(a), specifically the meaning of “use of the mails or any means or instrumentality of interstate commerce …”.

The Steffen decision did not even reach this issue as the judge found the initial threshold issue of personal jurisdiction lacking.

Wal-Mart’s FCPA Scrutiny Expenses Mount

During the media feeding frenzy after the New York Times April 2012 Wal-Mart article (see here for the prior post), I had the pleasure to appear on Eliot Spitzer’s Viewpoint program on Current TV. At the end of the segment, after the substantive issues were discussed, Spitzer offered that he has several contacts in the FCPA bar and that, regardless of the substantive issues involved in Wal-Mart’s FCPA scrutiny or the ultimate outcome, lots of lawyers were poised to make lots of money.

Spitzer of course was right.

Wal-Mart recently stated (here) that it has incurred “$157 million of professional fees and expenses related to the ongoing” FCPA matter during its last fiscal year and that it expect to incur an additional “$40 to $45 million for the first quarter of fiscal 2014.” During Wal-Mart’s recent earnings conference call, a company executive stated as follows. “On FCPA, we continue to work closely with anticorruption compliance experts to review and to assess our programs and help us implement concrete steps for each particular market. In the various markets, these experts have spent tens of thousands of hours on anti-corruption support and training. We remain committed to follow all laws and regulations in the markets where we operate.”

The $157 million Wal-Mart spent in the last FY equates to approximately $604,000 in professional fees and expenses per working day.

I observed in this March 2011 articles as follows.

“This new era of enforcement has resulted in wasteful overcompliance, companies viewing every foreign business partner with irrational suspicion, and companies deploying teams of lawyers and specialists around the world spending millions to uncover every potential questionable or unethical $100 corporate payment. This new era of enforcement has proven lucrative to many segments of the legal, accounting, and compliance industries and the status quo would, from their perspective, seem desirable.”

The question again ought to be asked – does it really need to cost this much or has FCPA scrutiny turned into a boondoggle for many involved? For more on this issue, see my article “Big, Bold, and Bizarre: The Foreign Corrupt Practices Act Enters a New Era.”

While minor compared to Wal-Mart’s FCPA professional fees and expenses, Beam Inc. recently disclosed here that in 2012 the company spent approximately $4.2 million for “legal, forensic accounting, and other fees related to our internal investigation into Foreign Corrupt Practices Act compliance in our India operations.”

Wal-Mart Effect

Switching gears, but sticking with Wal-Mart related issues, this May 2012 post highlighted a potential “Wal-Mart effect.” In short, the point was that Wal-Mart is clearly not the only company subject to the FCPA that needs licenses, permits and the like when doing business in Mexico. I predicted that Wal-Mart’s potential FCPA exposure would cause sleepless nights for many company executives doing business in Mexico and the general region. The post then discussed statements made during a Kimco Realty Corporation earnings call in May 2012 concerning its properties in Mexico.

Earlier this week, Kimco Realty stated in an SEC filing as follows.

“On January 28, 2013, the Company received a subpoena from the Enforcement Division of the SEC in connection with an investigation, In the Matter of Wal-Mart Stores, Inc. (FW-3678), that the SEC Staff is currently conducting with respect to possible violations of the Foreign Corrupt Practices Act. The Company is responding to the subpoena and intends to cooperate fully with the SEC in this matter. The Company has also been notified that the U.S. Department of Justice (“DOJ”) is conducting a parallel investigation, and the Company expects that it will cooperate with the DOJ investigation. At this point, we are unable to predict the duration, scope or result of the SEC or DOJ investigation.”

Survey Says

The annual Litigation Trends and Survey report by Fulbright & Jaworski is always a good read. This year’s report (see here to download) surveyed 392 “senior corporate counsel” (275 in the U.S., 100 in the U.K. and 17 in other jurisdictions) on a wide-range of litigation and related matters. The following were FCPA or related survey results.

“Companies that have retained outside counsel to assist with a corruption or bribery investigation in the past 12 months (including, but not limited to, FCPA in U.S. and equivalent in U.K.”

9% of U.S. respondents answered “yes”; 18% of U.K. respondents answered “yes.” As noted, “U.S. figures [2010-2012] have remained relatively stable.”

“Companies that have engaged in due diligence for bribery or corruption (including FCPA matters) relating to a merger, acquisition or other business transactions with a foreign country in the past 12 months.”

18% of U.S. respondents answered “yes”; 26% of U.K. respondents answered “yes.” As noted, “more companies this year have engaged outside counsel in due diligence for corruption or bribery investigations due to business transactions with entities based in a foreign country.”

As to the due diligence figures, in the abstract these figures do not mean much, unless one knows how many responding companies actually engaged in foreign acquisitions or other business combinations.

The last survey result in the report perhaps speaks best to the over-hyped nature of the U.K. Bribery Act.

“Has your company changed the way it operates due to the emergence of anti-bribery legislation outside the U.S., such as U.K. Bribery Act 2010?”

78% of U.S. respondents answered “no” and 63% of U.K. respondents answered “no.”

Senate Hearing Quotable

Senator Elizabeth Warren (D-MA) had some quotable moments (here) during a recent Senate Banking hearing. The hearing concerned financial regulation, not the FCPA. Nevertheless, some of the issues have some overlap to FCPA enforcement – including how settlement policies in regulatory enforcement actions create conditions in which there is “not much incentive to follow the law” and how “too big to fail” perhaps means “too big for trial.”

Disclosure Issues

This recent Wall Street Journal CFO Journal post notes as follows.

“Securities and Exchange Commissioner Troy Paredes called for a complete review of the information companies disclose to investors, amid concerns that investors suffer from “disclosure overload” that could hamper their ability to gauge the importance of the data. “What we need is a top-to-bottom review of our disclosure regime,” Mr. Paredes said at the Practising Law Institute’s annual “SEC Speaks” conference in Washington, D.C. on Friday.”

While they’re at it, the SEC should take a look at its absurd position that all payments in violation of the FCPA, no matter how small the payment and no matter how large the company, are “qualitatively material.” For instance, as noted in this previous post concerning comments made by enforcement officials at a conference I chaired, an SEC official suggested that the concept of materiality itself has two “sub-concepts”: (i) quantitative materiality (something that impacts a company’s financial statements) and (ii) qualitative materiality. While conceding that very few improper payments are “quantitatively material” and while recognizing that “qualitative materiality” is a “complicated gray area,” the SEC officials nevertheless said that all bribes can be considered qualitatively material because they may “automatically trigger a books and records violation.” For formal SEC guidance on this issue, see here.

Checking In

Hollywood Industry Sweep

From the New York Times regarding the on-going scrutiny of Hollywood movie studios in China.

“Last March, word reached several studios of a confidential inquiry by the Securities and Exchange Commissionand the Justice Department into possible violations of the Foreign Corrupt Practices Act by people or companies involved in the China film trade. Since then, executives and their advisers have been waiting for some public sign of the scope or focus of the government’s interest. So far, there has been none. But official silence has not kept the investigation from casting a chill over dealings between Hollywood and China.”

Goldman

From the Wall Street Journal regarding the on-going scrutiny of Goldman’s dealings with Libya’s sovereign wealth fund.

“Libya’s sovereign-wealth fund said it is cooperating with the U.S. Securities and Exchange Commission in its ongoing investigation into Goldman Sachs Group Inc. over the securities firm’s dealings with the fund when Col. Moammar Gadhafi was in power. […] People close to the Libyan investment fund said officials have authorized some former fund executives to give testimony to the SEC. The officials also agreed to provide documents and other data to U.S. regulators about the fund’s ties to Goldman, these people said.”

Spot On

Two recent Q&A’s on Law360 caught my eye. The question was “what is an important issue or case relevant to your practice area and why.”

Neil Eggleston (Kirkland & Ellis) stated as follows.

“We are beginning to see the development of case law in the FCPA area, which I believe is good for the process. Most of these cases have been settled. When that occurs, defendants have little incentive to refuse to agree to novel Department of Justice theories of prosecution or jurisdiction, so long as the penalty is acceptable. The department then cites its prior settlement as precedent when settling later ones. But no court approved the earlier settlement, and the prior settlement should have no precedential value in favor of the DOJ in later settlements. As the DOJ increases its prosecution of individuals, we will see many more trials, which will give rise to courts, not the DOJ, interpreting the statute.”

For more on these issues, see my article “The Facade of FCPA Enforcement” and this previous guest post on “prosecutorial common law.”

Richard Marmaro (Skadden) answered the same question as follows.

“An issue of importance in the white collar area is the issue of prosecutorial misconduct, and appropriate remedies for prosecutors who intentionally conceal evidence, intimidate witnesses, or otherwise compromise or impact a defendant’s right to a fair trial. I have seen firsthand in several of my cases shocking misconduct, which has gone undisciplined by the U.S. Department of Justice. I have been fortunate enough to expose this misconduct, and have had cases dismissed as a result. Indeed, over the last decade, there have been several dismissals nationwide at trial or reversals on appeal based on willful misconduct by government lawyers. Despite these judicial findings, however, the Justice Department’s record of disciplining misbehaving prosecutors is shockingly inadequate. I don’t know of any prosecutor that has been terminated based on a judicial finding of intentional misconduct. In addition, I believe that only two prosecutors have received any discipline at all (both in the Stevens case). In my view, the failure to sanction prosecutors who have been found by judges to have committed misconduct sends the wrong signal to defendants, the public and the vast majority of prosecutors who do their jobs honestly every day.”

For more, see this previous post titled “Should There Be A Difference?”

Refreshing Words

Every now and then it is refreshing to read some common sense words about FCPA compliance and risk assessment. Such as this recent post from the Trace blog.

“Remember, perfection is neither possible nor necessary. When devising a compliance plan, it’s important to remind oneself of the big picture. A company need not break the bank to have a compliance program that follows accepted best practices. As discussed below, there are various ways that good compliance can be affordable. And companies are not responsible for developing full-proof compliance programs; they only need to develop programs proportionate to the risk they face, with the understanding that no program will completely eliminate all risk from the equation. Unlike in other areas of business, when it comes to compliance, being in the middle of the pack is okay.”

*****

A good weekend to all.

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