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.
Business Effects
Previous posts have explored the FCPA’s long tentacles (here), collateral civil litigation resulting from FCPA scrutiny or enforcement actions (here and here), how FCPA scrutiny can impact mergers (here), how FCPA scrutiny can impact the cost of capital (here), and numerous prior posts have highlighted professional fees and expenses in connection with FCPA inquiries.
In short, failure to comply with the FCPA has real business effects in addition to any ultimate fine and penalty amount announced on resolution day. This post summarizes several recent business effects associated with FCPA scrutiny.
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As previously indicated in this Wall Street Journal Corruption Currents post by Samuel Rubenfeld, S&P recently cut its debt rating on Avon Products Inc. Among the reasons cited for the downgrade was “expenses related to the ongoing investigation under the Foreign Corrupt Practices Act.” (See here). As noted in this recent New York Times White Collar Watch piece by Professor Peter Henning, professional fees and expenses incured by Avon in connection with its internal FCPA review have approached $250 million – and there hasn’t even yet been an enforcement action. Over the past three years and doing the math, Avon has spent approximately $225,000 per day on its FCPA inquiry. One can debate whether such expenses (as well as the other business effects noted in this post) should happen or are truly necessary, but the point remains such effects are happening.
Sticking with the investigative fees issue, Weaterford International recently stated in its March 15th annual report (here) that since disclosure of its FCPA scrutiny (as well as Iraq Oil for Food and OFAC scrutiny) it has “incurred $123 million for legal and professional fees in connection with complying with and conducting” the on-going investigations. According to the company, “this amount excludes the costs [the company has] incurred to augment and improve our compliance function.”
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Diebold, which disclosed FCPA issues in July 2010 (see here), stated in March 14th proxy solicitation materials (here) that the cash bonus of Thomas Swidarski (President and CEO) was reduced by the Compensation Committee. According to the materials, the Committee concluded that “given the CEO’s ultimate responsibility for the oversight of the company, as a result of the impact to the company of the global FCPA investigation it was appropriate that Mr. Swidarski’s cash bonus be reduced.” Nevertheless the materials indicate that Swidarski did receive a $1 million cash bonus (on top of his other compensation) … but it could have been more. Another component of the proxy materials that caught my eye was discussion of the Board Special Committee set up to oversee the “global FCPA review.” The materials note as follows. “This committee met in person or telephonically seven times in 2011.
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In other disclosure news, Dun & Bradstreet (the world’s leading source of commercial information and insight on businesses) announced earlier this week (see here) that it “has been reviewing certain allegations that local employees may have violated the Foreign Corrupt Practices Act and certain other laws in our China operations. D&B is cooperating with the local Chinese investigation, and has voluntarily reported these matters to the U.S. Department of Justice and the U.S. Securities and Exchange Commission.”
D&B’s FCPA disclosure was contained in the same release in which the company stated it “has temporarily suspended its Shanghai Roadway D&B Marketing Services Co Ltd. operations in China, pending an investigation into allegations that its data collection practices may violate local Chinese consumer data privacy laws.”
D&B’s FCPA disclosure marks the third time in the last four weeks that a company has newly disclosed FCPA scrutiny.
FCPA Inc. And The Business Of Bribery
On March 2nd, the Indiana International & Comparative Law Review will present its annual symposium titled “Recent Developments in the War on Corruption: The U.S. Foreign Corrupt Practices Act and Beyond” (see here for more information). The event, to be held at Indiana University Robert H. McKinney School of Law in Indianapolis, features panels of U.S. and international scholars and practitioners and I am pleased to be participating. CLE credits are available for the event and I hope FCPA Professor readers in the Indianapolis area and region are able to attend.
The title of my talk (and work in progress) is “FCPA Inc. and the Business of Bribery.”
This new era of FCPA enforcement has meant many things, including the emergence of “a thriving and lucrative anti-bribery complex.” (See here from Forbes). The Wall Street Journal Law Blog has asked (here) whether the FCPA is “just a full-employment act for the private bar?” Others have noted (see here “Scare The Crap Out Of Them” that those in the industry “vastly overstate the risk that the FCPA brings to companies” and that “the degree to which the industry that has popped up around the FCPA has an inherent interest in puffing up the underlying risk creates at the least an apparent bias”). The Wall Street Journal has noted (here) that “from this wellhead of anxiety, a gusher of compliance lawyers, trainers and FCPA navigators has flowed.”
Even back in 2008, this Washington Post article titled “Cashing in On Corruption” observed, among other things as follows: “FCPA business is booming, a welcome growth area for Washington law offices …”; “sharing in the bonanza [are] accounting firms, forensic computer specialists and a growing army of compliance consultants.” The Post piece concludes with this “… don’t think law firms aren’t playing off those fears by aggressively marketing their services as investigators, risk mitigators and compliance counselors” and the article notes that “the result is [a] sudden flood of labor-intensive legal work for both partners and associates, particularly in the local offices of big international firms.”
Others have noted (see here) as follows. “It is getting pretty crowded these days out in the Anti-Corruption Compliance space. There are more and more companies, consultants, software providers and other entities offering to provide the right mix of information and data needed to support a due diligence review of a third-party, joint venture partner or acquisition target. These companies, consultants and investigators are at the infancy of this new and sophisticated industry. Just look on the Internet for information and you will be overwhelmed.”
What does this all mean? What events contributed to these market conditions? Are these market conditions short-term or long term? Which people contributed to these market conditions and what are they doing now?
“FCPA Inc. and the Business of Bribery” will categorize the participants in this “new and sophisticated industry” which includes: law firms; accounting firms; compliance and consulting companies; insurance companies; conference and training providers; and document retention and translation companies among others. How does one measure the growth and profitability of the FCPA market? There are a few publicly traded companies in FCPA Inc., but the vast majority are not.
This project will analyze the services each industry participant provides and how industry participants market their services. Do market participants engage in fear-based marketing? For instance, how often is the Siemens FCPA enforcement action (the largest in terms of fines and penalties in FCPA history – $800 million) used in marketing materials? Do marketing materials inflate the number of FCPA enforcement actions? For instance, and sticking with Siemens, is that 20 enforcement actions (DOJ enforcement action against Siemens AG, Siemens Argentina, Siemens Bangladesh and Siemens Argentina as well as DOJ enforcement actions against 8 individuals; SEC enforcement action against Siemens AG as well as SEC enforcement actions against 7 individuals) or 1 enforcement action based on the same core set of facts? Is the Africa Sting case 22 enforcement actions or 1 enforcement action based on the same set of facts? How one answers this basic question matters in analyzing the number of FCPA enforcement actions and the number of FCPA enforcement actions is a key marketing tool.
How do industry participants in the same sector seek to differentiate their services to establish a niche? Do law firms tout having former DOJ or SEC FCPA enforcement attorneys as part of their FCPA practice group?
Do participants in the FCPA compliance industry promise more than they can deliver given that pre-existing FCPA compliance policies and procedures – while perhaps lessening the impact of FCPA exposure – do not reduce FCPA exposure?
How has FCPA Inc. impacted, both positively and negatively, FCPA enforcement and FCPA compliance? For instance, is one reason for the increase in FCPA enforcement the result of the industry itself?
“FCPA Inc. and the Business of Bribery” is very much in its early stages and I would value input from readers as to additional issues worthy of exploring. I can be reached at mjkoehle@butler.edu or you can leave a comment on this post below.
Aon – Was It “Close To The Line”?
“The [DOJ] focuses its enforcement actions where the allegations of criminal conduct are clear, egregious and fall squarely within the FCPA.”
“… No one has raised a single example of a prosecution or enforcement action which was remotely close to the line.”
“The DOJ is not prosecuting companies where the entity engaged in something less than willful criminal conduct.”
The above statements were made by Greg Andres (DOJ) at the June 2011 House FCPA hearing. See here for the prior post on the hearing. As discussed in this prior post, in certain respects Andres has been the DOJ’s voice on FCPA enforcement and reform issues (he also testified on behalf of the DOJ at the November 2010 Senate FCPA Hearing). Yesterday, Peter Lattman of the New York Times reported here that Andres is set to join Davis Polk & Wardwell.
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In December 2011, Aon Corporation resolved an FCPA enforcement action (see here for the prior post). The DOJ component of the enforcement action involved a $1.8 million fine via a non-prosecution agreement. The NPA (here) stated that the DOJ would not criminally prosecute Aon Corporation or its subsidiaries for any crimes “related to Aon’s knowing violation of the anti-bribery, books and records, and internal control provisions of the FCPA … arising from and related to the making of improper payments to government officials in Costa Rica in order to assist Aon in obtaining and retaining business …”.
The conduct at issue involved Aon Limited (a subsidiary of Aon Corporation based in and organized under the laws of the U.K.) and focused on Costa Rica. There is no fact, suggestion or implication in the NPA that Aon knew of, participated in, or authorized the conduct at issue. The only factual mention of Aon in the NPA is that Aon Limited “reported financially through a series of intermediary entities into its U.S.-based issuer parent, Aon Corporation” and elsewhere that “the books and records of Aon Limited were consolidated into those of Aon Corporation.”
Aon Limited’s conduct focused on its relationship with Costa Rica’s state-owned insurance company (INS) and a training and education fund (established by a company Aon Limited acquired in 1997 from its brokerage commissions) to sponsor training and education trips for INS officials. Aon Limited also contributed to the fund by allocating a portion of its brokerage commissions to the fund. According to the NPA, Aon Limited also managed a second training account that was funded by premiums paid by INS.
The NPA states that Aon Limited used these funds to pay for third-party services during education and training trips and that “these services often included travel related expenses, such as airfare and hotel accommodations, as well as conference fees, meals, and other related expenses for INS officials and their relatives.”
The NPA states that many of these trips included a business-related component, but that “a significant portion of the funds expended on the trips were used for the personal benefit of the officials and their wives.” The NPA further states that a “substantial number of the trips” were in connection with conferences and seminars, but in tourist destinations.
That, in terms of a general summary, is what the DOJ’s FCPA enforcement action against Aon Corporation was all about.
Was it close to the line?
During the June 2011 House FCPA Hearing, Representative John Conyers (D-MI) asked for examples of overcriminalization of the FCPA.” A summer reading list for Representative Conyers was discussed here and the Aon Corporation enforcement action ought to be included as well.
Off-Target, On-Target
Off-Target
Ever have one of those situations when you read something multiple times and it still does not make sense?
Earlier this week, CtW Investment Group (here) called on Siemens to end its relationship with the U.S. Chamber of Commerce because the Chamber “has engaged in an expensive campaign to undermine” the FCPA. William Patterson, Executive Director of the CtW Investment Group stated that Siemens “association with the Chamber and its efforts to rollback the FCPA […] undermines the considerable sums Siemens has invested in compliance.” In a letter (here) to Siemens’ President and Chairman of the Supervisory Board, Patterson stated as follows. “The significant investments [Siemens] has undertaken to overhaul its compliance mechanisms and restore its reputation, however, are undermined by Siemens’ continued membership and support of the U.S. Chamber of Commerce, which for the past year has waged an expensive lobbying campaign to weaken the FCPA.”
I have no idea if Siemens, as an organization, is in favor of FCPA reform and/or whether it has specifically contributed to the Chamber’s FCPA reform efforts.
However, let’s assume that Siemens is in favor of an FCPA compliance defense (one of the FCPA reform proposals being considered). How is this position “undermined” by the considerable sums Siemens has invested in compliance? As I note in my forthcoming scholarship “Revisiting an Foreign Corrupt Practices Act Compliance Defense” (see here), even the DOJ recognizes that Siemens has “set a high standard for multi-national companies to follow” and that the company has 600 full-time compliance personnel, its Anti-Corruption Toolkit was designed by industry leaders, and its has 100-plus compliance systems controls in high-risk jurisdictions.
It is precisely because of these above factors that Siemens (and other companies that make similar compliance investments) should be in favor of a FCPA compliance defense!
As Patterson’s letter states, “[T]here is likely no other company in the world today that has recently devoted as many corporate resources to anticorruption compliance than Siemens. […] On the flip side, there is likely no other company in the world that facts as many negative reputational consequences should its compliance efforts fail …”. [Attribution in the letter would have been appropriate, here is what I said in an October 10, 2011 post titled “Siemens and an FCPA Compliance” – “[T]here is likely no other company in the world today that has devoted as many corporate resources, with the assistance of industry experts, to compliance than Siemens. On the flip side, there is likely no other company in the world today that faces as many negative consequences should its compliance efforts fail than Siemens.”]
The letter also states as follows. “In October 2010, ironically the same month the Organization for Economic Cooperation and Development (OECD) published a report praising enforcement of the FCPA, the Chamber released ‘Restoring Balance” a brief criticizing ‘an active FCPA enforcement environment.” As noted in this prior post, while the OECD loudly praised the U.S. for its “high level” of enforcement, the OECD actually criticized and questioned many of the policies and enforcement theories which yield the “high level” of enforcement.
On-Target
The FCPA Blog (here) recently highlighted a 2008 transcript from the Albert Stanley case. In it, Judge Keith Ellison (S.D. Tex.) stated as follows in an exchange with a DOJ attorney: “I know it’s a growth industry, isn’t it, the Foreign Corrupt Practices Act? It’s keeping a lot of white collar lawyers busy; is that fair?”
Also on the FCPA Blog, Jan Handzlik (counsel to Lindsey Manufacturing and Keith Lindsey – see here for the prior post discussing Judge Matz’s order vacating the convictions and dismissing the indictment due to prosecutorial misconduct ) commented (here) on the O’Shea acquittal this week and stated as follows. “It’s much more challenging for the government when defendants persist in asserting their innocence.”
Nathan Vardi writes for Forbes. Among his prior works is “The Bribery Racket” (here) a piece that certainly got people talking. In this new piece titled “The FCPA Fiasco: Pressure Tactics In Corruption Cases Backfiring,” Vardi states as follows. “[T]he last decade the federal government has greatly increased its FCPA enforcement, threatening to bring an indictment against any company that does not cooperate and act harshly if companies don’t voluntarily report any potential sins. This game has been cheered on by lawyers and accountants, even journalists, who benefitted immensely from the expensive internal investigations companies initiate to deal with this new reality.” […] But you can’t have 150 FCPA investigations and dozens of companies essentially admitting to corrupting behavior, resulting in billions of dollars of fines, penalties, and legal and accounting fees, without eventually holding individuals accountable for the alleged violation of U.S. law. And those individuals have much stronger incentives to fight those charges in court, especially now with evidence mounting that the government’s legal argument in many FCPA cases is weak and flawed.”
Finally, in this piece, Miller & Chevalier attorneys Kathryn Atkinson, James Tillen, and Marc Bohn had this to say after noting several recent DOJ FCPA setbacks. “We are also optimistic that the events of 2011 may lead to a healthier level of engagement on substantive issues in the context of settlement-heavy FCPA enforcement. In recent years, not only have most matters been settled, but some have settled with little debate over (or public discussion of) the application of the statutory elements to the facts. In an adversarial system, however, these debates are essential. Each side must be prepared to challenge the other’s view of the facts, and their relevance under the law, and to have its own view challenged as well. When this system breaks down, the substantive dialogue is lost. It is likely the shortage of this substantive dialogue, more than actual ambiguity in the statute itself, that has given rise to recent discussions at conferences, in the media and online, and in Congress expressing frustrations about a lack of clarity in FCPA enforcement. A vigorous exploration of substantive issues in the context of our adversarial system should provide some relief from these frustrations and lead us to more effective and efficient prevention and deterrence.”
I wrote about many of the same issues in 2010 in “The Facade of FCPA Enforcement” (see here).
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A good weekend to all.