New Wal-Mart Details Emerge
Last week the New York Times ran a front-page story (here) regarding Wal-Mart and its FCPA scrutiny. The story did not receive nearly the attention of the April New York Times story (see here for the prior post), but the recent article includes new details relevant to Wal-Mart’s potential FCPA scrutiny.
And no, I am not talking about the unsurprising fact that Wal-Mart’s scrutiny has expanded beyond Mexico to also include China, India and Brazil. (See here for the prior post discussing how this was likely to happen).
Rather, the new details suggest that Wal-Mart’s internal review is less of a knee-jerk reaction upon learning of the New York Times April story, but more an instance of the company pro-actively seeking to understand its FCPA risk, notwithstanding whatever may have occurred within the company in 2005 and 2006 upon learning of potentially problematic payments in Mexico.
According to the recent Times article, Wal-Mart’s internal review began in Spring 2011 when Jeffrey Gearhart (Wal-Mart’s general counsel) learned of an FCPA enforcement action against Tyson Foods (like Wal-Mart, a company headquartered in Arkansas – see here for the prior post discussing the Tyson enforcement action). According to the Times article, “the audit began in Mexico, China and Brazil, the countries Wal-Mart executives considered the most likely source of problems” and Wal-Mart hired KPMG and Greenberg Traurig to conduct the audit. The Times article notes that “in July 2011” the firms “had identified significant weaknesses in all three subsidiaries.”
The Times article next rightly states as follows. “The audit was uncovering the kinds of problems and oversights that plague many global corporations.”
The Times article notes that Wal-Mart has spent $99 million on its FCPA review in the past nine months.
To learn more about Wal-Mart’s potential FCPA scrutiny and what it says about this current era of FCPA enforcement, see my article “Foreign Corrupt Practices Act Enforcement As Seen Through Wal-Mart’s Potential Exposure.”
A Wide-Ranging Interview
The FCPA Report is an online publication that contains articles on a variety of FCPA topics to assist lawyers in relevant practice areas, in-house counsel, and risk and compliance managers stay ahead of the curve. It launched this June and features thematic sourced and researched by primarily lawyers, as well as contributed articles by experts in the field, interviews with leading figures, and reports on important developments. It is available to subscribers and trial subscribers at www.fcpareport.com.
I was pleased to do a telephone interview with the FCPA Report in mid-August. Today’s post sends you to the wide-ranging Q&A previously published, in two parts, in the FCPA Report and linked to here with permission.
Topics covered in the Q&A include the following: statute of limitations, judicial scrutiny, the duration of FCPA scrutiny, voluntary disclosure, Wal-Mart’s FCPA scrutiny, facilitation payments, obtain or retain business, foreign official, corporate fines, victims issues, a private right of action, FCPA Inc. and the revolving door, the three buckets of FCPA financial exposure and Foreign Corrupt Practices Act reform.
Friday Roundup
The sting may be over but it effects are not, Orthofix information unsealed, checking in on Wal-Mart, a pipeline report, a safe assumption, and the alternative reality. It’s all here in the Friday roundup.
The manufactured Africa Sting case may be over, but it effects are still being felt.
Allied Defense Group (“ADG”) employed Mark Frederick Morales, one of the individuals charged in the case. The company stated in its recent quarterly filing (here) as follows.
“In February and March, 2012, the DOJ dismissed charges against all individuals indicted in the FCPA sting operation, including the former employee of MECAR USA. Since this time, the Company’s FCPA counsel has had several discussions with the DOJ and SEC regarding the agencies’ respective inquiries. Based upon these discussions, it appears likely that resolution of these inquiries will involve a payment by the Company to at least one of these government agencies in connection with at least one transaction involving the former employee of Mecar USA. At this point, the amount of this payment is undeterminable.”
As noted in this previous post, in January 2010, ADG agreed to be acquired by Chemring Group PLC.
Another publicly traded company that employed an Africa Sting defendant, Amaro Goncalves, is Smith & Wesson. The company disclosed in its most recent quarterly filing (here) as follows.
“On February 21, 2012, the DOJ filed a motion to dismiss with prejudice the indictments of the remaining defendants who are pending trial, including our former Vice President-Sales, International & U.S. Law Enforcement. On February 24, 2012, the district court granted the motion to dismiss. We cannot predict, however, when the investigation will be completed or its final outcome. There could be additional indictments of our company, our officers, or our employees. If the DOJ determines that we violated FCPA laws, we may face sanctions, including significant civil and criminal penalties. In addition, we could be prevented from bidding on domestic military and government contracts and could risk debarment by the U.S. Department of State. We also face increased legal expenses and could see an increase in the cost of doing international business. We could also see private civil litigation arising as a result of the outcome of the investigation. In addition, responding to the investigation may divert the time and attention of our management from normal business operations. Regardless of the outcome of the investigation, the publicity surrounding the investigation and the potential risks associated with the investigation could negatively impact the perception of our company by investors, customers, and others.”
Even though the individual Africa Sting cases are over, the case provided a point of entry into several companies and an entire industry and its effects are still being felt as demonstrated by the above disclosures.
Orthofix
This previous post discussed the July enforcement action against Orthofix International. As noted in the post, the specifics of the DOJ’s allegations were not known as the information against Orthofix was filed under seal. The information (here) was recently unsealed. In summary fashion, the DOJ alleged as follows under the heading “corrupt conduct.” “From [2003 through March 2010], with the knowledge of Orthofix Executive A [a citizen of Peru and legal permanent resident in the U.S. who was a senior manager of Orthofix Inc. (an indirectly wholly owned subsidiary) and responsible for sales operations in Latin America], Promeca [an entity incorporated and headquartered in Mexico and an indirectly wholly owned subsidiary of Orthofix International] and its employees paid approximately $300,000 to Mexican officials, in return for agreements with IMSS and its hospitals to purchase millions of dollars in Orthofix International products.”
IMSS is a social service agency of the Mexican government that provided public services to Mexican workers and their families and the Mexican Officials identified in the information are as follows.
Mexican Official 1 – a deputy administrator of Magdelena de las Salinas (a hospital in Mexico City that IMSS owned and controlled)
Mexican Official 2 – the purchasing director of Magdelena de las Salinas
Mexican Official 3 – the purchasing director of Lomas Verdes (a hospital in the State of Mexico that IMSS owned and controlled)
Mexican Official 4 – a sub-director of IMSS
According to the information, “Executive A knew of the payments and things of value [provided to the Mexican Officials] but failed to stop the scheme or report the scheme to Orthofix Interntional or Orthofix’s Inc.’s compliance department.”
Under the heading “Internal Controls” the information alleges, among other things, as follows. “Orthofix International,which grew its direct distribution footprint in part by purchasing existing companies, often in high-risk markets, failed to engage in any serious form of corruption-related diligence before it purchased Promeca. Although Orthofix International promulgated its own anti-corruption policy, that policy was neither translated into Spanish nor implemented at Promeca. Orthofix International failed to provide any FCPA-related traning to many of its personnel, including Executive A. Orthofix also failed to train Promeca personnel for years on the FCPA, to test regularly or audit particular transactions, or to ensure that subsidiary maintained controls sufficient to detect, deter or prevent illicit payments to government officials.”
The information charges one count of violating the FCPA’s internal control provisions.
Checking In On Wal-Mart
During the media feeding frenzy after the New York Times 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.
During its second quarter earnings call (see here for the transcript) Wal-Mart executives stated as follows. “Within core corporate, we incurred approximately $34 million in expenses related to third-party advisors reviewing matters involving the Foreign Corrupt Practices Act and we expect these expenses to continue through the rest of the year.” Later in the call, the following was said. “We also expect to incur approximately $35 to $40 million in expenses for the review of matters relating to the Foreign Corrupt Practices Act during each of the remaining quarters for this fiscal year.”
In other news, on the civil litigation front, as noted in this Reuters article “an Indiana union pension fund that owns shares in Wal-Mart Stores Inc has sued the company to gain access to thousands of internal documents related to allegations that a Wal-Mart subsidiary bribed Mexican government officials.” According to the report, the lawsuit, filed in Delaware’s Chancery Court, alleges the “company had made a ‘woefully deficient’ production of documents following an earlier out-of-court demand and that hat documents were produced were ‘so heavily redacted,’ or blacked out, they were nearly worthless.”
Turning to Capital Hill, several prior posts have chronicled efforts by Representative Elijah Cummings and Henry Waxman to conduct a shadow investigation of Wal-Mart in the aftermath of the New York Times article (see here for the previous post). As indicated in this recent press release and this recent letter the lawmakers are growing impatient. In pertinent part, the letter to Wal-Mart CEO Michael Duke stated as follows.
“We are writing to give you a final opportunity to respond to our requests for information about allegations that your company violated the Foreign Corrupt Practices Act. Although you have stated on multiple occasions that you intend to cooperate with our investigation, you have failed to provide the documents we requested, and you continue to deny us access to key witnesses. Your actions are preventing us from assessing the thoroughness of your internal investigation and from identifying potential remedial actions.
During the course of our investigation, we have learned that Wal-Mart’s concerns about potential violations of the Foreign Corrupt Practices Act are not limited to operations in Mexico, but are global in nature. Your outside counsel informed us that, before allegations of bribery in Mexico became public, Wal-Mart retained attorneys to conduct a broad review of the company’s anti-corruption policies. This review identified five “first tier” countries “where risk was the greatest.” Wal-Mart then conducted a worldwide assessment of the company’s anti-corruption policies, culminating in a series of recommendations and policy changes based on those findings.
In addition, we have obtained internal company documents, including internal audit reports, from other sources suggesting that Wal-Mart may have had compliance issues relating not only to bribery, but also to “questionable financial behavior” including tax evasion and money laundering in Mexico.”
Pipeline Report
Add NCR Corporation and Expro International to the list of companies under FCPA scrutiny.
NCR
Global technology company NCR Corp. recently disclosed here as follows.
This previous post regarding the recent Pfizer enforcement action raised the following question(s).
Does anyone truly believe that the only reason Chinese doctors prescribed Pfizer products was because under the “point programs” the physician would receive a tea set? Does anyone truly believe that the only reason Czech doctors prescribed Pfizer products was because the company sponsored educational weekend took place at an Austrian ski resort? Does anyone truly believe that the only reason Pakistani doctors offered Wyeth nutritional products to new mothers was because the company provided office equipment to the physicians?
The questions were asked in the context of disgorgement remedies, but can also be asked in the context of product safety. One can safely assume that if the enforcement agencies had any evidence to suggest that the products at issue jeopardized public safety, the enforcement agencies would have alleged such facts, as they occasionally do in FCPA enforcement actions (see Innospec for instance).
The absence of such allegations make this recent article by Online Pharmacy Safety foolishly speculative. The article states as follows.
“[The conduct at issue in the enforcement action] puts the safety of consumers at risk. If large companies are able to bribe their way to getting more business, and anticipate government officials to turn a blind eye, the wrong products could be getting into the hands of consumers worldwide. The Pfizer products approved by foreign governments and prescribed by doctors may not have been the best product available, which could endanger consumers. Doctors put selfishness at the expense of patients, and the company was putting profits ahead of its public safety.”
Harvey Silverglate (author of Three Felonies a Day: How the Feds Target the Innocent) hit the ball out of the park with this recent Wall Street Jouranl op-ed. Referring to the recent Gibson Guitar Lacey Act enforcement action and how the resolution documents muzzle the company (as is typical in FCPA NPAs and DPAs), Silverglate wrote as follows.
“Through these and myriad other techniques, federal investigator and prosecutors create an alternative reality that favors their own institutional interests, regardless of the truth or of justce. All citizens and companies become subject to the Justice Department’s essentially unfettered power. Remedying this problem cannot be left to the victims of this governmental extortion, because their risks are too high if they fight; nor will their lawyers likely blow the whistle, since the bar makes a tidy living by playing the game. It is up to the rest of civil society to let the Justice Department emperor know that we see he is not wearing clothes.”
*****
A good weekend to all.
The Former CFO Of RAE Systems Speaks
How often have you heard the former Chief Financial Officer of a company that recently resolved a Foreign Corrupt Practices Act enforcement action speak on camera regarding his experience and that of the company?
The answer is probably never.
That is what makes this recent video of Randall Gausman, the former CFO of RAE System, interesting and instructive. If I were a corporate board member, I would make it required viewing for the CFO to best demonstrate how FCPA scrutiny can be burdensome and distracting to the company.
First, a bit of background.
As discussed in this prior post, in December 2010 RAE System (a San-Jose, California publicly-traded company and “a leading global provider of rapidly deployable connected, intelligent gas detection systems” resolved parallel DOJ and SEC FCPA enforcement actions. The conduct at issue concerned “improper benefits corruptly paid by employees of two joint ventures majority owned and controlled by RAE Systems to foreign officials of departments, agencies, and instrumentalities” of the Chinese government. In connection with the SEC enforcement action, the then Chief of the SEC’s FCPA Unit stated as follows. “RAE Systems develops products to detect harmful emissions, yet it did not have adequate measures in place to detect and root out internal wrongdoing. Companies that fail to respond to red flags can be held liable for the acts of their joint venture partners.”
Back to the video which was recorded by the Markkula Center for Applied Ethics at Santa Clara University (here).
In the video, Gausman speaks of discovery of the problem giving rise to the enforcement action and the company’s internal investigation and voluntary disclosure. Gausman also tells how the company’s FCPA scrutiny came to derail his other jobs duties and, at approximately six minutes of the video, Gausman describes a falling out with the company’s CEO that raises a host of questions.
Of note, Gausman also explains how the company’s pre-enforcement action professional fees and expenses (approximately $4.2 million) exceeded the combined fine and penalty amount ($2.95 million) it paid to resolve the enforcement action. This has become common when a company is the subject of FCPA scrutiny.
[The above video, as well as several others, are included on the FCPA Profesor YouTube channel – here]
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