Friday Roundup
Wal-Mart news, the shadow regulatory state, save the date, checking in on Wynn-Okada, and there’s an app for that.
Wal-Mart News
Yesterday Wal-Mart released its first quarter financial results and stated as follows in its SEC filing.
The Audit Committee of the Company’s Board of Directors (the “Audit Committee”), which is composed solely of independent directors, is conducting an internal investigation into, among other things, alleged violations of the U.S. Foreign Corrupt Practices Act (the “FCPA”) and other alleged crimes or misconduct in connection with foreign subsidiaries including Wal-Mart de México, S.A.B. de C.V. (“Walmex”) and whether prior allegations of such violations and/or misconduct were appropriately handled by the Company. The Audit Committee and the Company have engaged outside counsel from a number of law firms and other advisors who are assisting in the on-going investigation of these matters. The Company is also conducting a voluntary global review of its policies, practices and internal controls for FCPA compliance. The Company is engaged in strengthening its global anti-corruption compliance programs through appropriate remedial anti-corruption measures. In November 2011, the Company voluntarily disclosed that investigative activity to the U.S. Department of Justice (the “DOJ”) and the SEC.
The Company has been informed by the DOJ and the SEC that it is also the subject of their respective investigations into possible violations of the FCPA. The Company is cooperating with the investigations by the DOJ and the SEC. A number of federal and local government agencies in Mexico have also recently initiated investigations of these matters. Walmex is cooperating with the Mexican governmental agencies conducting these investigations. Furthermore, lawsuits relating to the matters under investigation have recently been filed by several of the Company’s shareholders against it, its current directors, certain of its former directors, certain of its current and former officers and certain of Walmex’s current and former officers.
The Company could be exposed to a variety of negative consequences as a result of the matters noted above. There could be one or more enforcement actions in respect of the matters that are the subject of some or all of the ongoing government investigations, and such actions, if brought, may result in judgments, settlements, fines, penalties, injunctions, cease and desist orders or other relief, criminal convictions and/or penalties. The shareholder lawsuits may result in judgments against the Company and its current and former directors and officers named in those proceedings. The Company cannot predict accurately at this time the outcome or impact of the government investigations, the shareholder lawsuits, or its own internal investigation and review. In addition, the Company expects to incur costs in responding to requests for information or subpoenas seeking documents, testimony and other information in connection with the government investigations, in defending the shareholder lawsuits, and in conducting its internal investigation and review, and it cannot predict at this time the ultimate amount of all such costs. These matters may require the involvement of certain members of the Company’s senior management that could impinge on the time they have available to devote to other matters relating to the business. The Company may also see ongoing media and governmental interest in these matters that could impact the perception among certain audiences of its role as a corporate citizen.
The Company is in the early stages of assessing and responding to the governmental investigations, the shareholder lawsuits, and its internal investigation and review are on-going. Although the Company does not presently believe that these matters will have a material adverse effect on its business, given the inherent uncertainties in such situations, the Company can provide no assurance that these matters will not be material to its business in the future.
Wal-Mart stock closed yesterday at $61.68. On Friday April 20th (the day before the New York Times article – see here for the prior post) Wal-Mart stock closed at $62.45. See here for a recent Forbes column titled “Mexican Bribery Gave Me A Chance To Make Money In Wal-Mart” in which the contributor states as follows. “My 30 years of experience in the markets has repeatedly shown to me that whenever a company is accused of violations of FCPA, headlines are always scary, but in the end, the downdraft in the stock invariably becomes a buying opportunity.”
In other Wal-Mart news, as highlighted in this prior post, Elijah Cummings (D-MD), Ranking Member, House Committee on Oversight and Government Reform, and Henry Waxman (D-CA), Ranking Member, House Committee on Energy and Commerce have taken a keen interest in Wal-Mart’s potential FCPA exposure. Yesterday, the Congressmen sent this letter to Wal-Mart CEO Michael Dukes in which they state, among other things, that “we have obtained hundreds of internal documents relating to the Wal-Mart bribery allegations.”
The Shadow Regulatory State
In this previous post, I called for the abolition of non-prosecution and deferred prosecution agreements in the FCPA context. I noted how use of NPAs and DPAs to resolve alleged corporate criminal liability in the FCPA context present two distinct, yet equally problematic public policy issues and highlighted other critiques of NPAs and DPAs as well.
This recent report titled “The Shadow Regulatory State: The Rise of Deferred Prosecution Agreements” by James Copland (Senior Fellow, Manhattan Institute for Policy Research) caught my eye. Copland states as follows.
“… [P]rosecutors’ virtually unchecked powers under DPAs and NPAs threaten our constitutional framework. To be sure, prosecutors are acting upon duly enacted laws, but federal criminal provisions are often vague or ambiguous, and the fact that prosecutors and large corporations alike feel obliged to reach agreement, rather than follow an orderly regulatory process and litigate disagreements in court, denies the judiciary an opportunity to clarify the boundaries of such laws. Instead, the laws come to mean what the prosecutors say they mean—and companies do what the prosecutors say they must. Federal prosecutors are thus assuming the role of judge (interpreting the law) and of legislature (setting broad policy choices about industry conduct), substantially eroding the separation of powers. That such discretion is often delegated to private contractors with sweeping powers—namely, corporate monitors—makes the denial of justice even graver.”
Save the Date
I am pleased to be participating in this June 5th program sponsored by The American Bar Association Criminal Justice Section and the ABA Center for Continuing Legal Education in cooperation with Dorsey & Whitney & LLP, and Pepper Hamilton, LLP. Titled “The New Era of FCPA Enforcement and the Collapse of the Africa Sting Cases: Time to Reevaluate?” the program will “evaluate the impact of Africa Sting cases in view of key New Era trends, calls for FCPA reform, and a reevaluation of the prosecution standards utilized by the DOJ and the SEC in enforcing statutes.” Panelists include DOJ, SEC, and OECD representatives, Stanley Sporkin and noted FCPA practitioners including Greg Andres (former DOJ who testified on behalf of the DOJ at the November 2010 Senate and June 2011 House FCPA hearings).
Wynn-Okada
Remember that Wynn-Okada dispute? (See here, here, here, and here for the prior posts).
Here is an update from Vegas Inc.
There’s An App For That
Click 4 Compliance recently launched “C4C Mobile Compliance Officer App” (see here). In a release (here) the company says the free mobile app “places practical anti-corruption compliance tips (including the FCPA and UK Bribery Act) in the hands of your company’s workforce and partners.”
*****
It’s an FCPA world – a good weekend to all.
Noteworthy
Recently Paul Weiss released “Overview of the Foreign Corrupt Practices Act: A Practical Guide for Businesses” (see here). Nothing noteworthy there as law firms frequently market FCPA services.
Nor are the below snippets from the Paul Weiss guide noteworthy as law firms (and others in FCPA Inc.) frequently use the current aggressive FCPA enforcement environment, the broad interpretations by the enforcement agencies, and the lack of government guidance in marketing efforts.
“Although Congress indicated its intent to exclude certain widespread practices from the scope of the Act, it is often difficult to determine where the lines are to be drawn.”
“In addition to pushing the boundaries of jurisdiction for substantive FCPA charges, U.S. enforcement officials have employed other tools to target international bribery with some link to the United States.”
“U.S. enforcement personnel have interpreted this language [the FCPA’s “obtain or retain business” element] broadly to encompass any business purpose, and thereby to apply to payments made to avoid or reduce customs, income or other taxes, to bypass customs, health, or other inspections, or otherwise to change the enforcement or application of laws or regulations.”
“[I]t is not necessarily easy to identify the dividing line between a permitted facilitating payment and a prohibited bribe …”.
“In addition to the severe penalties that can apply to violations, there are very good reasons why issuers and U.S. companies have committed significant resources to FCPA compliance in recent years. The language of most of the relevant FCPA provisions is broadly phrased and broadly interpreted by the DOJ and SEC. Neither agency has issued regulatory or other material that provides “bright lines” or other clear guidance in interpreting the Act, and very few issues of interpretation have been litigated. By and large, business entities are extremely reluctant to litigate FCPA enforcement cases, and virtually all DOJ and SEC enforcement cases against business entities are settled.”
What is noteworthy about the Paul Weiss guide is it authors.
Mark Mendelsohn is listed as the lead author and the author group also includes Walter Ricciardi and Bruce Searby.
Mendelsohn’s Paul Weiss bio page (here) states as follows. “Prior to joining Paul, Weiss, Mr. Mendelsohn served as the deputy chief of the Fraud Section of the Criminal Division of the United States Department of Justice (DOJ), and is internationally acknowledged and respected as the architect and key enforcement official of DOJ’s modern Foreign Corrupt Practices Act (FCPA) enforcement program. As deputy chief of the Fraud Section from 2005 to 2010, Mr. Mendelsohn was responsible for overseeing all DOJ investigations and prosecutions under the FCPA …”. […] During his tenure administering the DOJ’s FCPA enforcement program, DOJ brought more than 50 prosecutions against corporations for violations of the FCPA and related offenses, resulting in more than $1.5 billion in criminal penalties. During that same period, DOJ brought approximately 80 prosecutions against individuals.”
Ricciardi’s Paul Weiss bio page (here) states as follows. “Prior to joining Paul, Weiss in June 2008, Mr. Ricciardi was the Deputy Director of the SEC’s Division of Enforcement, where he supervised many of the Commission’s most significant investigations related to financial fraud, FCPA, insider trading and broker-dealer and mutual fund compliance issues.
Searby’s Paul Weiss bio page (here) states as follows. “Prior to joining Paul, Weiss, Mr. Searby served as an assistant United States attorney in the Central District of California as a member of the Public Corruption and Civil Rights Section and the Major Frauds Section. While at the U.S. Attorney’s Office, he worked on several cases involving violations of the Foreign Corrupt Practices Act (“FCPA”). Mr. Searby was co-lead counsel on the first case brought under the FCPA in the entertainment industry, in which both defendants were convicted at a jury trial in late 2009.”
Here’s To You Mr. Alderman
I remember the day well. In July 2010, an e-mail appears in my inbox from the U.K. Serious Fraud Office in which I am told that Richard Alderman (Director of the SFO), a reader of FCPA Professor, would like to have a discussion with me about anti-corruption issues. FCPA Professor was then 1 year old and learning of readers the caliber of Mr. Alderman … well, let’s just say that was awesome. Since then, I’ve had the pleasure to visit the SFO’s offices in London and continue the dialogue with Alderman, including through his contributions to this website.
In “A Conversation with Richard Alderman” (here), Alderman responded to approximately thirty detailed questions I submitted covering a broad range of topics and he: (i) compares and contrasts the SFO’s role with the DOJ’s role in enforcing the Foreign Corrupt Practices Act, including the more active and independent role U.K. courts have in reviewing SFO charging decisions; (ii) talks about voluntary disclosure, and the role of non-prosecution and deferred prosecution agreements; (iii) discusses reputational harm, debarment, and reparations; and (iv) talks specifically about the Bribery Act.
In this follow-up after BAE’s settlement, Alderman responsed to six pointed questions I submitted concerning the BAE case and his responses address the following topics. (i) how the U.K. law on double jeopardy significantly affected the SFO’s investigation of BAE and how the “current system [in the U.K.] for dealing with parallel criminal investigations conducted in a number of different countries does not work effectively and needs change;” (ii) whether the U.K. government was faithful to its OECD obligations in its handling of the BAE matter; (iii) criticism of the SFO-BAE plea agreement by the U.K. sentencing judge; and (iv) “shortcomings” in the U.K. system and how Alderman would like a system that “is far more transparent […] that commands public confidence, together with a much stronger role for the judiciary.”
In this guest post, Mr. Alderman discusses engagement with companies and compliance effects in the aftermath of the Bribery Act.
Active engagement was a hallmark of Alderman’s tenure at the SFO – and his willingness to engage with me on topics we occassionaly sparred has been one of the highlights of my young academic career.
So on this, your last day at the SFO, here’s to you Mr. Alderman.
What’s next for Alderman? He told me in a recent e-mail (published with his permission) the following – all the more reason for me to tip my hat to him.
“When I leave here at the end of this week I shall not be going through the revolving door into some well paid job in a legal firm. Nor will I be taking on anything that will bring me into any contact with the SFO. My successor needs to get on with the job himself. What I shall be looking for instead are opportunities to work on anti-corruption initiatives that make a real difference in other countries. This will not be by way of a job or a consultancy. There are very many interesting people in this area that I admire very much and who do so much to fight corruption and the damage it causes. I shall obtain real satisfaction if I can find ways of helping them as I move on.”
A Q&A Regarding FCPA Insurance
Previous posts (here and here) have discussed FCPA insurance. One of the industry participants offering this new product is Marsh (see here for its FCPA Corporate Response).
In this Q&A, Machua Millett (Senior Vice President and General Partner Liability Product Leader at Marsh) answers questions about FCPA Corporate Response as well as other issues presented by FCPA insurance. Prior to joining Marsh, Millett practiced law at Skadden Arps, Bingham McCutchen and Edwards Angell Palmer & Dodge.
Why is FCPA insurance needed? What was your “ah-ha” moment in developing this product?
FCPA investigation costs insurance is needed because existing insurance products were leaving companies and their employees largely unprotected against one of their major potential liabilities in conducting international business. Our “ah-ha” moment came after one too many clients had come to us seeking an insurance solution, and we had to tell them that no comprehensive FCPA investigation costs insurance product existed. So we collaborated with an A-rated insurance company to create and launch a solution.
Describe in detail the product Marsh is offering.
The product, exclusively available through Marsh, is called FCPA Corporate Response. It is an insurance policy that funds investigation costs resulting from any regulatory investigation by any regulator in the world concerning alleged bribery of a government official.
The four main pillars of the policy are the definitions of Investigation Costs, Claim, Insured, and Wrongful Act.
Investigation Costs includes all fees and expenses of attorneys, experts, consultants, accountants, auditors, and any other professionals a company typically hires in the course of conducting or defending itself against an anti-corruption investigation. This definition is significantly broader than most directors and officers liability (D&O) policies, which generally cover only attorneys’ fees. This is not by accident. In our experience, companies caught up in an FCPA investigation incur significant accounting and consulting fees in addition to legal fees, and we wanted all such investigation costs covered by this policy. It is important to note, however, that this policy only covers investigation costs. It does not cover settlements, judgments, damages, wages/salaries, fees of directors/officers/employees, costs of compliance/remedial measures or fines and penalties, (most of which would de deemed uninsurable by insurers, regardless).
Claim includes any civil, criminal, administrative and/or regulatory investigation or inquiry brought by any U.S. or foreign regulator, with the trigger broadly defined to include any written notice of such investigation or inquiry. In addition to this broad claim trigger, the policy also provides pre-claim inquiry coverage for internal investigations. This means that any investigation costs incurred as part of a company’s internal investigation prior to regulatory involvement is covered on a retroactive basis when a company self-reports or a regulatory investigation or inquiry is otherwise initiated.
Insured includes all entities and individuals that might be implicated as part of an FCPA investigation of a company, including all subsidiaries, affiliates, directors, officers, employees, foreign equivalents, consultants, agents and independent contractors. These last three categories are of particular importance, as nearly 80 percent of FCPA investigations arise from the activities of such third-party agents and independent contractors, who are often not treated as insureds under standard D&O policies.
Wrongful Act means: any actual or alleged violation of the FCPA, including criminal bribery allegations and civil recordkeeping allegations; and any actual or alleged violation of any other law, treaty, regulation or act that, but for geography, would also constitute a violation of the FCPA. The definition of Wrongful Act is quite broad in terms of geography, potentially-implicated conduct, and potentially relevant laws. However, it is important to note that the policy’s coverage does not extend to aspects of foreign corruption laws like the U.K. Bribery Act that are broader than the U.S. FCPA. In the case of the UKBA, the two most relevant examples would be the UKBA’s prohibition of commercial bribery and lack of an exception for facilitation payments. Where an investigation under a foreign statute involves both FCPA-type allegations (bribery of a government official) and non-FCPA-type allegations (say commercial bribery), investigation costs would have to be allocated between covered and uncovered aspects of the investigation.
The policy contains only two exclusions, both of which are directed toward the simple idea that a company cannot buy insurance for a burning building. The first exclusion bars coverage for a prior or pending investigation and the second exclusion bars coverage for any matter that was known at a truly corporate level — by the general counsel of the Named Insured — at the time of application for the policy and later develops into a regulatory investigation or inquiry. It is also relevant in this regard to note that just as a company may not buy insurance for a burning building, it may not purchase a burning building and expect coverage under the policy. Although the policy provides automatic coverage for new subsidiaries, coverage only applies to wrongful acts that occurred after the acquisition. Transactional risk insurance products do exist that can be used to mitigate acquisition risks around FCPA issues.
The FCPA contains both anti-bribery provisions and books and records / internal controls provisions. The latter provisions are generic in scope and don’t require foreign conduct to be implicated. Does the product cover the range of circumstances in which the FCPA books and records and internal controls can be implicated?
As mentioned before, FCPA Corporate Response does provide investigation costs coverage for both anti-bribery and books and records and internal controls. Anything that is a violation of the FCPA, or would be but for geography, will trigger the policy’s definition of wrongful act.
One of the reasons for the increase in FCPA enforcement is the increase in corporate voluntary disclosures, an event which often prolongs FCPA scrutiny for many years and results in lucrative professional fees for those involved in the investigation and disclosure. Will FCPA insurance increase the number of corporate voluntary disclosures on the theory that the downside of corporate voluntary disclosures (longer period of scrutiny which leads to higher professional fees) will be covered?
We have had some people comment that the policy seems to create an incentive to self-report, both generally because the company has the investigation costs insurance, but more specifically to trigger coverage for internal investigation costs. While this may be, I find it somewhat hard to believe that the existence of the policy will prevail over other considerations; after all, the policy does not cover FCPA fines, penalties, or remedial measures. However, the policy certainly doesn’t create any disincentive against self-reporting.
Will FCPA insurance lead to more aggressive business conduct in foreign markets?
I don’t think so. Again, the policy does not cover fines and penalties and other costs that we have seen reach the hundreds of million of dollars. The policy covers investigation costs. FCPA Corporate Response is most certainly not meant to be a replacement for a robust FCPA compliance program at a company, but instead is meant to be a compliment or backstop to such a program based on the realization that no compliance program, no matter how robust, can prevent the rogue activities of one employee or independent agent
A Q&A With Claudius Sokenu On “Where Else”
Why do FCPA investigative fees often reach tens of millions of dollars? Why does FCPA scrutiny (from the point of disclosure to the point of resolution – if any) often last two to four years and perhaps longer? In part, it is because of the “where else” question.
The “where else” questions often works as follows. A company voluntarily discloses conduct to the DOJ/SEC that occurred in country x that could implicate the FCPA. Before the DOJ/SEC agree to resolve any enforcement action, the agencies will often ask something to the effect – if the conduct occurred in country x, convince us that similar conduct did not also occur in countries a, b, c, etc. The lawyers on the receiving end of the “where else” question don’t mind being asked because the “where else” question often leads to a world-wide review of their client’s operations around the world.
I first started writing about “where else” in 2009, see here, and most recently wrote about “where else” here. As a former FCPA practitioner I was on the receiving end of the “where else” question and conducted resulting world-wide reviews on behalf of corporate clients.
The “where else” question is asked in nearly every FCPA enforcement action. How does one know? Read the resolution documents. For instance, the Magyar Telekom resolution documents states that the company conducted a “thorough global internal investigation concerning bribery and related misconduct.” The Tenaris resolution documents cites that company’s “voluntary investigation of the Company’s business operations throughout the world.” The Tyson resolution documents state that all of the company’s wholly-owned overseas production facilities were “subjected to rigorous FCPA reviews.” Numerous other examples could also be cited.
Claudius Sokenu is a leading FCPA practitioner at Arnold & Porter (see here). As a former SEC FCPA enforcement attorney, Sokenu has both asked the “where else” question in the context of an FCPA inquiry and has been on the receiving end of the “where else” question as an FCPA practitioner. His views on “where else” first caught my attention in this 2011 interview with The Metropolitan Corporate Counsel and he expands on “where else” in the below Q&A.
What percentage of FCPA enforcement actions that you have been involved in have resulted in the “where else” question being asked?
In my time as a regulator at the Securities and Exchange Commission’s Division of Enforcement and in private practice, the “where else” question has been asked in virtually every single FCPA matter in which I have been involved. I have asked it and it has been asked of me.
Do you believe the “where else” question was appropriate in these instances?
In some instances it was entirely appropriate for the SEC, the Justice Department, and other regulators to ask the “where else” question. In others, however, the allegations did not support a “where else” question and it appeared to be more of a fishing expedition and boiler plate question than a well-reasoned question under the facts. “Where else” is a reasonable and appropriate question when the alleged misconduct appears to be systemic and/or the company under investigation appears to lack the controls necessary to prevent the payment of bribes to foreign government officials. It is not, however, an appropriate question where it is intended to force companies to conduct multi country internal investigations with little more than the uninformed hunch of a government official who has little or no experience in how businesses work around the world.
The “where else” question could logically be asked in any DOJ or SEC investigation regardless of substantive area of law. Do you believe the “where else” question is asked more frequently in FCPA enforcement actions
compared to say antitrust, tax, or environmental enforcement actions? If so, why?
Because the “where else” question is often raised behind closed doors in private conversations between government and counsel, it is difficult to be certain, but yes, I do believe the question is asked more frequently in FCPA enforcement investigations.
This is not entirely unreasonable given the nature of the FCPA. First, the scope of the FCPA’s jurisdiction, by definition and necessarily, covers the entire world. And unlike antitrust laws, for example, which have some extraterritorial application but are primarily concerned with the impact on U.S. markets, the FCPA’s primary focus is on actions occurring abroad. Second, it is not always unreasonable to think that the insufficient (or nonexistent) internal controls that facilitated bribe payments in one country will have the same effect elsewhere. Taking these two factors together, one could reasonably conclude that the FCPA is uniquely amenable to the “where else” question.
That is not to say, of course, that the “where else” question will always be appropriate in the FCPA context or that it will never be relevant elsewhere. For example, a discharge of pollutants in one of a company’s many U.S. plants may very well justify a widespread environmental audit. Expanding the scope of investigation in such a case would depend on whether the discharge was the result of, say, incompetent employees hired under criteria used nationwide, as opposed to a once-in-a-generation weather event. In the former case, a widespread audit would likely be called for, whereas in the latter it likely would not. The fact is, in the FCPA context, the vast majority of cases have resembled the first scenario – i.e., systematic defects whose effects could arise anywhere – and thus broad investigations have often made more sense than localized ones.
Of course, a somewhat more pessimistic reason for the “where else” question’s predominance in the FCPA context would involve the issues that you’ve written about extensively in your papers and on your blog. Namely, a case law scarcity that causes risk-averse corporate defendants to cooperate regardless of the cost, and government agencies who have the mostly unchecked power (and possibly incentive) to exploit a corporation’s position to cobble together the largest possible fine. Overall, I expect both of these possible frameworks are at play.
DOJ or SEC asks the “where else” question in the absence of any meaningful check or judicial oversight. What is the remedy?
If I had been asked a year ago whether there was any meaningful check or judicial oversight with respect to the “where else” question, I would almost certainly have replied that there was not. Given the government’s assorted setbacks in the past year, however — the overturned Lindsay Manufacturing convictions, the O’Shea acquittal, the Africa sting case acquittals and mistrial — it is possible that a potential check is emerging. Until recently, the government’s near-perfect track record has given them the power to unilaterally dictate the terms of a defendant’s “voluntary” cooperation. It stands to reason that once defendants have some hope of a positive outcome at trial, the parties’ negotiating positions will not be so lopsided and a company will be able to resist, without fear of reprisal, an unreasonable demand to expand the investigation.
Another possible remedy, although perhaps a more improbable one, would be a revision not to the FCPA itself, but instead to the agencies’ internal guidelines. This revision would make clear that cooperation credit should not be withheld in situations where the company declines to expand its investigation in the absence of some specific and articulable facts pointing to wrongdoing there. This “reasonable suspicion” language is, of course, less demanding than the probable cause required for a warrant, but it is at least enough to prevent the blind fishing expeditions that happen now.
Both of the above scenarios will likely require another high-profile setback or two, but as we’ve seen over the past year, those are certainly not out of the question anymore.