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.
Friday Roundup
Another “foreign official” challenge is denied, the DOJ’s FCPA door continues to revolve, and one DOJ official is probably glad he is off the hot seat … it’s all here in the Friday roundup.
O’Shea “Foreign Official” Challenge Denied
The remaining “foreign official” challenge of 2011 (brought by John Joseph O’Shea in his case pending in the Southern District of Texas) has been denied. (See here for the previous post including links to the briefing on the issue). Without issuing a written decision, Judge Lynn Hughes (S.D. Tex.) denied O’Shea’s motion to dismiss the indictment based on O’Shea’s argument that employees of Comision Federal de Electricidad (“CFE”), a Mexican utility and the same entity that was at issue in the Lindsey Manufacturing “foreign official” challenge, are not “foreign officials” under the FCPA.
O’Shea’s “foreign official” challenge was the fifth such challenge in FCPA history and the second (Nguyen / Nexus Technologies being the other) to end without a written decision. The other three challenges Haiti Teleco related case (here), Lindsey Manufacturing (here) and Carson et al. (here) resulted in written decisions.
Revolving Door
Hank Walther, the former Assistant Chief of the DOJ’s FCPA Unit (and most recently the former Deputy Chief of the DOJ’s Health Care Fraud Unit) recently joined the law firm Jones Day as a partner. Walther joins a long-list of former DOJ FCPA enforcement attorneys who will now be providing FCPA defense and compliance services in the private sector. In a release (here) Greg Shumaker (Partner-In-Charge of Jones Day’s Washington office) said as follows. “Hank Walther brings a wealth of experience and insight from his years in government. The unique perspective he has gained from prosecuting hundreds of health care fraud and FCPA cases on behalf of the federal government will add tremendously to our Corporate Criminal Investigations Practice. We’re delighted he’s chosen Jones Day for his return to the private sector.”
I agree that Walther likely has unique insight and perspectives from his years of enforcing the FCPA. I also believe that DOJ enforcement attorneys who aggressively enforce a niche law have the potential ability to increase private-sector demand for their post-government services. That is why I continue to believe it is in the public interest (recognizing the niched nature of both the DOJ and SEC FCPA units) that all FCPA enforcement attorneys should be prohibited when leaving the government from providing FCPA defense or compliance services for a five-year time period. For additional reading see this piece I co-authored.
Off The Hot Seat
Lisa Brennan (Main Justice) reports (here) that Greg Andres (a former Deputy Assistant Attorney General in the Fraud Section) is returning to the U.S. Attorneys Office – Eastern District of New York. In certain respects, during the past year, Andres was the DOJ’s voice on FCPA enforcement and reform issues. Andres testified on behalf of the DOJ at the November 2010 Senate FCPA hearing (see here and here for more) as well as the June 2011 House Hearing (see here for more).
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A good weekend to all.