Category: Guest Posts

Checking In Down Under

Today’s post is from Robert Wyld (Partner, Johnson Winter & Slattery in Sydney).

Wyld is the Australia Expert for FCPA Professor.

*****

This post covers a range of important developments in Australia and the region in the area of foreign bribery policy, investigations and regulation as of September 1, 2015.

Topics covered in this post include:

• Australia – Senate Review into Australia’s Foreign Bribery Laws
• Australia – Securency suppression order lifted, Asian politicians identified
• Australia – books and records and internal controls and BHP Billiton’s Beijing Olympics hospitality program
• Australia – Fraud Against the Commonwealth Report 2015
• Australia – Ernst & Young review of bribery in the mining and metals industries
• Australia – NSW ICAC and “serious corruption”
• New Zealand – Update on Organised Crime and Anti-Corruption Bill

Australia’s Senate Review into Australia’s Foreign Bribery Laws

From July 2015, the Senate Economics Reference Committee commenced its long-publicised review into Australia’s foreign bribery laws.  Submissions have been called from interested parties, to be lodged with the Senate by 24 August 2015.  The Committee is to finalise its report by 1 July 2016.

There are likely to be numerous topics up for review by the Senate.  These include:

• an entire review of section 70 of the Criminal Code (the foreign bribery offence) given we have seen only 2 prosecutions in over 15 years;
• abolishing facilitation payments;
• improving the corporate criminal liability provisions (again because there have been no prosecutions);
• considering the introduction of a deemed corporate liability offence reflecting section 7 of the UK Bribery Act with an “adequate procedures” defence;
• introducing structured Deferred Prosecution Agreements (currently under review);
• reviewing how the existing enforcement agencies work together – AFP or ASIC – and the role of the CDPP;
• creating a books & records and internal controls offence with substantial penalties (under the Corporations Act for ASIC to enforce or the Criminal Code for the AFP to enforce);
• introducing comprehensive whistleblower protections and rewards in the private sector;
• considering the publication of an Australian Foreign Bribery Guidance to business similar to guidance published in the US and the UK;
• reviewing and implementing a national Anti-Corruption Plan, modelled on the UK plan; and
• creating an independent Federal anti-corruption commission.

There appears to be a fundamental fracture in the present system of investigation and enforcement of foreign bribery laws in Australia.  Throughout the 22 submissions lodged with the Senate:

• almost all describe Australia’s foreign bribery enforcement record as weak, poor or ineffectual;
• almost all, bar 2, strongly encourage the abolition of the facilitation payment defence while 1 suggests if the defence remains, clear guidance should be published on payments that are permitted;
• several encourage a complete review of the current investigation and enforcement regime; and
• most submissions note the lack of a whole-of-government approach to targeting foreign bribery, with the result that there is as perception amongst business (and the community more generally) that prosecutions for illegal commercial conduct (foreign bribery) are rare, too hard and complex so just get on with your business, risky though it may be.

In over 15 years, we have seen only two prosecutions for offences under section 70 of the Criminal Code.  The Securency case commenced in July 2011 and most details of it are suppressed in Australia.  The Lifese foreign bribery prosecution commenced in February 2015.  We have seen no corporate criminal liability prosecutions relating to foreign bribery (under sections 12.1 to 12.6 of the Criminal Code).  We have seen no civil prosecutions for false or misleading books and records.  We have seen ASIC spend almost 6 years pursuing former AWB directors and officers for alleged breaches of their duties arising out of the infamous AWB wheat sales to Iraq in the early 2000s, two agreed to fines and a disqualification period (the former Managing Director and Chief Financial Officer), two had their cases discontinued in late 2013 and 2 face trial listed to commence in October 2015.

Why is that? Is the law too difficult to enforce?  There have been no substantive changes to the law so that can hardly be the issue.  Are cases too hard to prove or is the CDPP seeking too high a threshold to prosecute (certainty of success rather than evidence of a reasonable basis to secure a conviction, as the CDPP Prosecution Policy promotes)?  What role should ASIC and the AFP play and how can criminal and civil prosecutions be improved are key areas to review.

The national Fraud & Corruption Centre hosted by the AFP draws upon multi-agency skills and experience, yet still Australia sees or hears little about why there is so little enforcement.  It is time to reassess the overall management of Australia’s national response to fraud, corruption and foreign bribery and to decide if it is important enough for political leadership to dedicate resources to the process consistent with Australia’s international obligations.  We all like to be a Convention signatory but are we prepared to live up to convention obligations?

Australia – Securency Suppression Orders and Foreign Politicians

Annexure A to the CDPP Prosecution Policy states that the Commonwealth Director of Public Prosecutions has issued the following statement:

When deciding whether to prosecute a person for bribing a foreign public official under Division 70 of the Criminal Code, the prosecutor must not be influenced by:

• considerations of national; economic interest;
• the potential effect upon relations with another State; or
• the identity of the natural or legal persons involved.

This statement reflected the terms of Article 5 of the OECD Convention.  There is however, no law in Australia giving effect to this “obligation”.

Australian courts all have statutes or rules that permit the suppression or non-publication of certain facts, information or evidence or the whole or part of a proceeding before the Courts.

In June 2014, the Australian Government through Department of Foreign Affairs & Trade (DFAT) secured suppression orders seeking to protect the identity of various Asian political figures from being named as alleged participants in the Securency bribery scandal in circumstances where those individuals were not charged with any offence.  The DFAT notice informing the Court of its application for a suppression order stated that its purpose was “to prevent damage to Australia’s international relations that may be caused by the publication of material that may damage the reputation of specified individuals who are not the subject of charges in these proceedings.”   Quite why Australia should be concerned to protect the reputation of Asian-based politicians who can well look after their own reputation (and often do by suing for defamation and using national sedition laws to silence critics) is not entirely clear from the judgment (as the key evidence is redacted).

In June 2015, the Court revisited its initial orders on the application of the Australian media.  After hearing debate, the Court’s judgment discharged the initial suppression orders.  While the Court was critical of Wikileaks for publishing the June 2014 orders and the media for inaccurate reporting of the effect of those orders, the Court was not persuaded to maintain the suppression orders.  The Court characterised DFAT’s evidence as “unsourced or second-hand hearsay” and was drafted “at an unsatisfactory high level of vagueness or generality.”   The Court made it clear that the strong public interest in the public knowing about the Securency case and what did or did not happen had to be balanced with countervailing public interest considerations concerning protecting the administration of justice and Australia’s national security – matters that DFAT bore the onus of establishing, which it failed to do.

Article 5 of the OECD Convention is clear – economic interests or the identity of persons is and should not be a relevant consideration.

When individuals may be named in any criminal proceeding, it is for the Court and those persons to deal with it – it should not be the role of Government to come in and seek to protect friendly politicians in the name of “national security” (whatever that means on any particular day).  It is important to remember that to be truly effective, foreign bribery offences need to target not only those responsible for paying the bribe but also those who either directly or indirectly – whether at first instance or second instance or even more remotely – benefited from the bribe.  Seeking to suppress the name of some individual who allegedly ultimately received some benefit from the illegal conduct does not assist foreign Sovereign States in preventing bribery of their public officials The use of suppression orders in circumstances such as these should only be granted in the most exceptional of cases and rarely if ever in foreign bribery cases (given the very high level of public interest in requiring such cases to be public and transparent) so justice is not only done but is seen to be done in the eyes of the public and society generally.

Australia – Books and Records, Internal Controls and BHP Billiton

There is a significant failing in Australia’s laws in relation to foreign bribery – there are no comparable books and records and internal controls offences in Australia as there is under the US FCPA, as enforced with great success by the US SEC.

The FCPA requires issuers (those listed entities or other entities trading in US-listed shares subjected to the FCPA) to make and keep books, records and accounts which, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the entity’s assets.  In addition, issuers must devise and maintain a system of internal accounting controls that assures that transactions are executed and assets are accessed only in accordance with management’s authorisation; are periodically reconciled and recorded so that the entity’s financial statements conform to nominated standards.  Critically, issuers are strictly liable for the failure of any of their owned or controlled foreign affiliates to meet the books and records and internal control standards.

Under the Corporations Act, a corporation is already required to keep written financial records that correctly record and explain its transactions, financial position and performance and which would enable true and fair financial statements to be prepared and must not falsify records or provide false information.  Conduct in contravention of these provisions are offences of strict liability with penalties ranging from fines of up to 200 penalty units (or approximately $34,000 and/or 5 years imprisonment per offence).  A director is liable to a civil penalty if he or she fails to take all reasonable steps to comply or to secure compliance with the record-keeping provisions.

This brings us to BHP Billiton’s hospitality program for the Beijing Olympics in 2000, having been named as a principal sponsor and having secured a contract to mint the medals for those Olympics.  BHP Billiton is a dual listed Australian and UK entity and one of the largest mining corporations in the world.

On 20 May 2015, the US SEC announced that BHP Billiton would be fined an amount of US$25 million for contraventions of the books and records and internal control provisions of the FCPA.  According to the press release issued by the SEC:

An SEC investigation found that BHP Billiton failed to devise and maintain sufficient internal controls over its global hospitality program connected to the company’s sponsorship of the 2008 Summer Olympic Games in Beijing.  BHP Billiton invited 176 government officials and employees of state-owned enterprises to attend the Games at the company’s expense, and ultimately paid for 60 such guests as well as some spouses and others who attended along with them.  Sponsored guests were primarily from countries in Africa and Asia, and they enjoyed three- and four-day hospitality packages that included event tickets, luxury hotel accommodations, and sightseeing excursions valued at $12,000 to $16,000 per package.

“BHP Billiton footed the bill for foreign government officials to attend the Olympics while they were in a position to help the company with its business or regulatory endeavours,” said Andrew Ceresney, Director of the SEC’s Division of Enforcement.  “BHP Billiton recognized that inviting government officials to the Olympics created a heightened risk of violating anti-corruption laws, yet the company failed to implement sufficient internal controls to address that heightened risk.

What is the response from Australia – little to non-existent save for suggestion in the media (The Sydney Morning Herald 9 August 2015) that the AFP was still investigating BHP Billiton in relation to the Beijing Olympics activities.  Certainly there is no suggestion in the media or from ASIC that ASIC is investigating BHP Billiton for any allegedly false or misleading books and records offences arising out of the Beijing Olympics case.  In all probability, the US and Australian authorities accepted that if BHP Billiton was to be punished, the US authorities would do it as the laws in Australia were in all likelihood seen as inadequate.

It is important that a substantial books and records and internal controls offence for foreign bribery must be created and the penalties must be as severe as the underlying primary foreign bribery offence (in section 70.2 of the Criminal Code).  Careful consideration should be given to whether these offences are included in the Corporations Act (to be enforced by ASIC) or in the Criminal Code (to be prosecuted by the CDPP) and wherever they exist, they are properly and robustly enforced.

Australia – Fraud Against the Commonwealth and a national ICAC

Fraud, including corruption (involving an abuse or misuse of public position), is and continues to be an endemic problem for all governments.  There is no reason in principle or practice for the focus on foreign bribery to be at the cost of not addressing national, domestic corruption, however uncomfortable that might be to national politicians and public officials.

There are certain key views about fraud in and affecting the Commonwealth government that have recently been reviewed (Australian Institute of Criminology, Fraud Against the Commonwealth 2010-2013, Canberra, July 2015).

Over the 3 years between 2010 and 2013, there were at least 265,866 incidents of suspected fraud reported by Commonwealth entities.

• Each year, substantially greater numbers of external fraud incidents were detected than suspected internal fraud incidents.
• Fraud involving financial benefits was the most frequently reported category of external fraud.
• Over the 3 years, the number of fraud-related corruption increased substantially from 37 incidents in 2010-2011 to 163 in 2012-2013.
• While the cost of this fraud is hard to quantify and figures may vary, a conservative estimate is approximately $530m over 3 years, with increases from $119m in 2010-2011 to $204m in 2011-2012 to $207m in 2012-2013.
• Over the 3 years, external fraud accounted for $521m while internal fraud amounted to $9.1m or 1.7% of the total reported fraud losses.
• In relation to external fraud:
• risks arise in connection with the provision of new benefits, the introduction of new taxes, procurement practices, government-funded programs and the use of consultants; and
• the relationship between corruption and collusion between external actors and those public servants working within government.

The Resources Management Guide No 201 Preventing, Detecting and Dealing with Fraud, reflecting the 2011 Commonwealth Fraud Control Guidelines, require Commonwealth entities to investigate routine or minor instances of fraud.  More serious instances are usually referred to the AFP.

Who investigates Government fraud at the Commonwealth level?  In the first instance, the relevant entity conducts its own investigation.  If the incident is more serious, the AFP is usually called in pursuant to a referral and if charges arise, they are conducted by the CDPP. More broadly, the Commonwealth Integrity Commissioner, supported by the Australian Commission for Law Enforcement Integrity, is responsible for preventing, detecting and investigating serious and systemic corruption issues in a limited number of prescribed Australian Government law enforcement agencies.

The Criminal Code contains extensive provisions dealing with offences involving Commonwealth public officials which are separate from the foreign bribery offence.  Nevertheless, foreign bribery and corruption (involving public officials and private commercial interests) are but one shade of fraud in a general sense as the public invariably perceive it.  To have proactive anti-corruption commissions at the State level, but nothing at the Commonwealth level is, to say the least, very puzzling.  The public is rightly sceptical of politicians who are the first to cast accusations at opponents for impropriety, yet then duck and weave when anyone suggests a truly independent body be created to review allegations of improper or illegal conduct.  The creation of such a body can only improve the public’s perception of politicians and the political process which ought to place trust, integrity and ethical conduct at the forefront of how our community leaders behave.

Australia – Ernst & Young Fraud, Bribery & Corruption Survey in the Mining and Metals Industry

In August 2015, Ernst & Young published their 2015 report on Managing fraud, bribery and corruption risks in the mining and metals industry.

In the extractive industries, Ernst & Young see two leading developments – an increasing globalisation with multinationals operating across the globe with increasing risk profiles and second, global anti-corruption enforcement on the rise.  These developments are not exclusive to extractive industries.  Based on figures from TRACE International, extractive industries accounted for the highest number of fraud, bribery and corruption enforcement actions for any given industry.

Other important lessons from the report include the following:

• an increased cooperation between international regulators;
• fraud and corruption is seen by corporations as one of the top risks to manage;
• despite increased enforcement and regulation, corporations still take risks, paying cash to win or retain business or misstating financial records;
• facilitation payments remain the norm for many corporations in high risk countries and properly complying with strict recording obligations is patchy.

It is expected legislation will be introduced and supported by all sides of politics and in the words of the NSW Premier, “we want ICAC to get cracking…we want it to continue to hunt down serious and systemic corruption in this state.”

Australia – NSW ICAC and “Serious Corruption”

In August 2015, the New South Wales Government announced its response to the independent review of the function and powers of the NSW Independent Commission Against Corruption (ICAC).  This review was prompted by ICAC’s ultimately unsuccessful and aborted investigation into the conduct of a serving senior Crown Prosecutor and rulings by the High Court of Australia (see Independent Commission Against Corruption v Cunneen [2015] HCA 14 where the Court held that ICAC could not investigate cases in which a private citizen adversely affected the functions of an honest public official) that the investigation was beyond ICAC’s powers.  In the interim, the NSW Government had legislated to validate all of ICAC’s then existing findings and investigations.

The NSW Government will:

• limit ICAC’s jurisdiction to making findings “only in the case of serious corrupt conduct”;
• permit ICAC to investigate the conduct of non-public officials in limited circumstances (such as collusive tendering, fraud in or relation to applications for mining licenses and dishonestly benefiting from the payment of public funds); and
• permit ICAC to examine breaches of donation and lobbying laws

New Zealand – Update on Organised Crime and Anti-Corruption Bill 2015

The Organised Crime and Anti-corruption Legislation Bill is part of the New Zealand Government’s All of Government Response programme to combat serious crime.  The Bill, introduced to Parliament in June 2014, gives law enforcement agencies in New Zealand the power to deal with organised crime and corruption.  The Law and Order Committee reported the Bill back to the Parliament on 4 May 2015 and it is currently awaiting Committee of the whole House stage.

Key new measures introduced by the Bill, relevantly include:

• requiring banks to report all international transfers of $1,000 or more and all physical cash transactions of $10,000 or more to the NZ Police  Financial Intelligence Unit;
• redrafting the money laundering offence to specify that intent to conceal is not required
• introducing new offences to address identity crime, including selling or passing on identity information
• amending the Policing Act 2008 to expressly provide Police with a power to share information with its international counterparts;
• revising the foreign bribery offence, including clarifying the circumstances in which a corporation is liable for foreign bribery;
• increasing penalties for bribery and corruption in the private sector to bring them into line with public sector bribery offences.

Mid-Year Review Of Anti-Corruption Law North Of The 49th Parallel

A guest post  from Mark Morrison (Blake, Cassels & Graydon) the Canada Expert for FCPA Professor, and Blakes attorneys Michael Dixon and James Reid.

*****

This year, Canada has been actively implementing laws aimed at a holistic approach to the fight against corruption. This post discusses some of the new legislation effected by the Canadian Government to compliment Canada’s equivalent of the FCPA, the Corruption of Foreign Public Officials Act (CFPOA), as well as some of the recent enforcement proceedings taking place in Canada so far this year.

New Anti-Corruption Laws

The Integrity Regime – On July 3, 2015, the Government’s principal contracting arm, Public Works and Government Services Canada,  announced the implementation of a new government-wide Integrity Regime for all federal government procurement. The new Regime replaced the Integrity Framework, which was heavily criticized as being unfairly harsh for its lack of due process and failure to account for remedial actions taken by companies subject  to its application. The new Regime has provided some flexibility to ameliorate some of the harshest aspects of the Framework.

Under the Integrity Regime, a supplier is barred from doing business with the Government of Canada for 10 years if it or any board members have been convicted or discharged in the past three years for a range of integrity-related offences in Canada or abroad, including bribery, fraud, bid-rigging, tax evasion, insider trading and money laundering. However, the decade long ban can be cut in half if the supplier shows it has taken action to co-operate with authorities, takes remedial action and enters into an administrative agreement with the Government. While the new regime amounts to a retreat from the integrity rules enacted just last March, in which any prior conviction against a supplier or any of its international affiliates would have earned a 10-year ban with no chance of its reduction, the automatic debarment penalty remains–unlike the U.S. equivalent integrity provisions.

In addition, arguably the most significant improvement to the former Integrity Framework, is that the new Regime eliminates mandatory ineligibility of a supplier for the actions of an affiliate (including a parent company) unless there is evidence that the supplier/potential supplier had involvement in the wrongdoing that led to the conviction of its affiliate.

The Extractive Sector Transparency Measures Act (ESTMA) – ESTMA is Canada’s latest step in the global fight against corruption. The ESTMA, which came into force on June 1, 2015, is designed to complement Canada’s existing anti-corruption regime in the CFPOA by creating greater transparency over payments to a government by the extractive sector. ESTMA’s reporting requirements apply to companies engaged in the development of oil, gas or minerals that are either (a) listed on a Canadian stock exchange or (b) have a place of business in Canada, do business in Canada or have assets in Canada, and which meet certain size thresholds.

Companies subject to the ESTMA are required to report and publically disclose all payments, including taxes, royalties, fees and any other consideration for licenses, permits or concessions in excess of CAD$100,000. The Government has recently published draft guidelines and reporting specifications for public comment. The ESTMA will apply to payments to certain aboriginal governments, subject to a two-year transitional period. Non-compliance with the reporting requirements is an offence. Any director or officer who directed, authorized, assented to, acquiesced in or participated in the non-compliance can also be held personally liable. These offences are subject to a maximum fine of CAD$250,000 for each day that the non-compliance continues.

Recent Enforcement Proceedings

Canadian anti-corruption enforcement has increased from 2014, which did not see any penalties imposed on corporate defendants under the CFPOA. The lack of enforcement in 2014 may have been reflective of the considerable resources and attention that was dedicated by the Royal Canadian Mounted Police (RCMP) to the high profile investigation of Canada’s largest construction and engineering firm.

SNC Lavalin – In February of this year, the RCMP laid corporate corruption and fraud charges against the Quebec based construction and engineering companies of the  SNC Lavalin Group, which stems from the Group’s dealings in Libya between 2001 and 2011. The RCMP investigation has also lead to criminal charges against several former SNC executives.

SNC maintains that any wrongdoing was the act of rogue individuals no longer employed by the company, and has entered a plea of not guilty. Unlike in the United States, Canada does not currently have deferred prosecution agreements, civil settlements, or other formal resolution procedures available outside of a criminal guilty plea. No preliminary hearing dates have been set in relation to the corruption charges against SNC.

In addition, to the Libya allegations, former SNC executives have also been charged in connection with an alleged bribery scandal related to a $1.3 billion hospital project in Montreal, where it has been alleged that former SNC executives funneled money to ex-McGill hospital officials in exchange for the contract. A three week preliminary hearing, which is protected by a publication ban, heard testimony from about 16 people this past March.  No decision on committal for trial has yet been issued.

MagIndustries – The RCMP has obtained a search warrant and is investigating allegations from a whistleblowing accountant at MagIndustries Corporation, that bribes were paid to officials in the Republic of Congo to win approvals tied to a potash mine development. The RCMP believe four top executives with the company, including the CEO, ignored warnings from Canadian financial advisers and signed off on a string of illegal payments to Congolese officials. None of the allegations contained in the search warrant have been tested in court, and the RCMP has not laid any charges to date.

Canadian Senate Expenses Scandal – dominating Canadian media headlines since the recent announcement of the October Federal Election, is the ongoing political scandal concerning the expense claims of certain Canadian senators which began in late 2012. Senators Patrick Brazeau, Mike Duffy, Mac Harb, and Pamela Wallin claimed travel and living allowance expenses which were ineligible. Brazeau, Duffy, and Harb were criminally charged with one count each of fraud and breach of trust. As a result, the Auditor General of Canada examined expense claims made by all the other 116 senators and former senators over a two-year period. In the June 2015 report of the Auditor General, the Auditor General identified thirty senators whose claims were ineligible, and of these, recommended that nine cases be referred for police investigation.

Conclusion

Canada continues to focus on anti-corruption compliance and enforcement by bolstering the legislative tools available to law enforcement and government agencies. Onlookers are intently watching what will come from the high profile cases against SNC and the Canadian senators. As things are looking now, the remainder of 2015 is shaping up to be one of the most active years in Canadian anti-corruption enforcement history.

Carlos Rodriguez: My Dad, My Hero

Lessons Learned As A Foreign Corrupt Practices Act Monitor

Today’s post is from Scott Fredericksen (Partner, Foley & Lardner) and originally appeared in International Trade Law & Regulation, Vol. 21, Issue 3, 2015 (Thomson Reuters).

*****

Not long ago, Foley & Lardner was selected as a monitor for a medical devices company that had been found to have engaged in activities alleged to have violated the FCPA. As the leader of the investigatory team, I did not have the normal advantage of working with a known client with a known business.

Rather, I needed to quickly develop a multi-faceted team that had to quickly get up to speed on the company’s business model, how it conduct business abroad, its distributor arrangements, its compliance program, its internal controls, and its training. In short, I had to set up a compliance review with the kind of probing that one would find in an in-depth financial audit.

The importance compliance lessons learned from Foley’s experience of a corporate monitor are provided below.

General Lessons

As most people who are involved in the compliance area know, establishing the right corporate culture is paramount. The key requirements include ensuring that the company has a culture of respect for compliance, that senior management is firmly behind all compliance efforts, and that there is a strong and well-funded compliance infrastructure that can catch compliance missteps from a variety of angles.

Establishing the appropriate corporate compliance culture requires constant reiteration of the compliance message. Compliance standards must be public and promulgated throughout the company, including through regular placement in company newsletters and on corporate intranets. Compliance policies should be readily accessible to employees and integrated into all aspects of employment, starting with discussions of compliance during the hiring process and references to the policy in employment contracts. Even employee performance reviews can help serve this purpose, by ensuring that employee adherence to compliance standards are part of the evaluation process.

The involvement of senior management is also essential for the development of a corporate culture focused on compliance. Placing a member of senior management in charge of compliance acts as a vital link between the executives and board members responsible for running a company and the employees on the ground who must deal with potential regulatory violations issues on a regular basis. A high-level member of management who is intimately involved in the compliance process also lends legitimacy to the company’s compliance policy and helps firmly establish the tone from the top.

This is not to say that every company needs to have a dedicated chief compliance officer. The establishment of the compliance infrastructure, like all compliance efforts, needs to be a risk-based endeavor, which means that the compliance needs of a smaller company that only operates in a handful of foreign countries may not be the same as those of a large multinational corporation that operates in a number of high-risk environments. It is common in smaller companies for compliance duties to be handled by an employee who has multiple responsibilities, such as the head of the human resources or audit departments. But at all companies, there should be a single person who is responsible for monitoring potential violations, managing due diligence, developing and providing compliance training, answering questions and resolving red flags, and testing the compliance program. This type of compliance ownership, by a person who is free from business pressures to achieve particular outcomes, is essential to ensure that compliance responsibilities are taken seriously. A Corporate Monitor’s Guide to International Regulatory Compliance.

A final issue is the adequacy of funding. Effective compliance requires hiring appropriate compliance personnel, taking time from busy employees for training, the establishment of internal controls and processes to monitor the effectiveness of the program and procedures in place, and periodic revisions to the policies and training materials. Companies should put in place programs that will be supported by commensurate resources. If, for example, a company states that it will perform due diligence on every agent it hires, then it should ensure that it has set aside sufficient resources to carry through on this commitment. Although compliance can be expensive, it pales in comparison to the multimillion dollar fines and high investigatory costs that now accompany even routine violations of U.S. regulations.

Compliance Program Improvements

A thorough and proper risk assessment forms the core of any good compliance program. No compliance program has the luxury of drawing on unlimited resources. Therefore, it is necessary to begin with a sober assessment of the regulatory risks facing the business, including those posed by its corporate profile, business model, types of products sold, areas of operation, use of third parties, degree of government interaction, and other business-profile issues that impact the degree of regulatory risk.

The ways in which to conduct a proper risk assessment vary, but certain principles are universal. Involvement from senior management and employees that understand the company, its business model, and its specific regulatory risk points is essential. The risk assessment must be conducted free of business pressures, without clouded judgment regarding where the highest risks arise. The risk assessment also should take into account all the ways in which outside actors can implicate the company or create regulatory liability, such as agents, distributors, joint venture partners, and other third parties.

Companies also need to update their risk assessments on a regular basis. Corporate expansions, mergers and acquisitions, establishment of new joint ventures, expansions into new countries or product lines, and new distributor arrangements are all activities that can alter the risk profile of a company. Even regulatory developments, such as enactment of broad anticorruption laws such as the UK Bribery Act or the recent ramping up of OFAC sanctions and related enforcement activity, can impact compliance requirements. Not all of these changes, or their impact on compliance efforts, are obvious, which makes a regular reassessment of risk an important compliance function.

After conducting a risk assessment, a company must decide how to allocate its compliance resources. Allocating most resources to identified high-risk areas is important. So, however, is recognizing that the risk even in low-risk areas seldom is zero, and thus deserve some compliance attention as well. A well-structured risk assessment can help balance the distribution of compliance resources.

It also is important to regularly update compliance measures. Compliance standards regularly change, driven not only by changes in the regulatory framework but also the expectation of the regulators. As a result, it is important for a company to remain educated about compliance issues, including through regularly sending compliance personnel to specialized conferences, and following developments that bear on the ever-evolving standards for an acceptable compliance program.

When changes are made, the changes to the compliance program must be appropriately promulgated throughout the company. Depending on the change, this could require anything from company-wide training to a simple email from the company’s chief compliance officer. Regular communications regarding the company’s compliance message serves the dual purposes of keeping the compliance message top-of-mind while also communicating the company’s evolving compliance efforts and its commitment to compliance.

Training Enhancements

Training is an integral part of every compliance program, and serves a function that is much greater than merely communicating information. Done properly, it is an important part of the compliance-related dialogue that helps minimize the risk of violations and while helping to discover violations that already have occurred. It also is a key cog in the central goal of communicating the importance of compliance to the organization.

Although many companies conduct training electronically, including through the use of innovative compliance presentations and on-line quizzes, in-person training remains the gold standard. Company personnel tend to pay more attention to a live presentation, and the presentation can be tailored to the requirements of the audience. Allowing time for discussion not only allows employees the opportunity to ask questions about areas that are unclear, but often reveals areas where further inquiry may be appropriate. Properly presented, in-person training can result in compliance feedback that can be incorporated to improve the overall compliance program.

No matter how training is provided, it cannot be a one-time event. Although all employees should receive initial training upon their hiring, reinforcement of the training on a periodic basis is essential. Annually is a good benchmark that works for most companies.

Finally, companies should make training relevant to the evidence. The training should use as many real-world examples as possible, such as case studies drawn from actual problems confronted by the company in the past, as well as those that are more likely to occur based on the industry and where and how the company does business.

Audits and Compliance Checkups

Compliance as envisioned by the compliance program, and compliance as it actually occurs in the field, often are two very different things. A company that implements rigorous procedures, but then fails to live up to them, often enjoys the worst of two worlds, since its failure to meet its compliance goals would be held against it in any enforcement proceeding. To avoid this possibility, compliance implementation should be monitored by direct observation, by supervision of the program, and by testing the controls.

Some of this testing can be done in the company’s normal internal audit process, and it is important that internal audit employees receive specific compliance training so they understand what to do and why they are doing it. One increasingly common way of ensuring the testing of the controls is to conduct compliance audits. These audits are intended to stress-test compliance procedures by picking high-risk transactions at random to see whether the compliance program is functioning as envisioned. Beyond this, regime-specific audit items can be created, which generally will focus on whether the company is adhering to its internal controls in a given area. They can be conducted by properly trained internal or external auditors.

The tendency at many companies is to conduct audits based upon the ease of conducting them, rather than their utility. This shows up, for example, when companies target their own foreign operations for compliance-related audits, but do not exercise their rights to audit agents or joint venture partners. It also arises when companies do not return to the lessons of their risk assessments to determine the high-risk areas that merit follow-up checks. Unlike financial audits, which tend to concentrate on areas with the highest revenue impact, compliance-based audits often need to focus on areas that may have a small revenue impact but a large compliance risk footprint. Operations in a developing country, for example, may be new and have still-small revenue, yet present an outsized compliance risk.

Agent and Distributor Controls

No compliance program, no matter how well conceived, can perform its job unless the risks posed by third parties are adequately addressed. This is because many enforcement settlements are premised on agency principles, i.e., a determination that parties outside the company were acting on behalf of the principal, thus creating legal liability for the principal.

Dealing with agents, distributors, and other third parties presents unique and interesting challenges. Often companies work with these third parties in foreign countries because they do not understand the business culture or ins-and-outs of doing business in a particular country. Agents help fill this knowledge gap by bringing knowledge of the business environment that the company cannot fill by itself.

But the greater the separation from corporate headquarters, the greater the risk. The dangers of third parties can arise in a host of areas, including for matters handled by customs brokers, distributors, sales agents, political consultants, lobbyists, and other third parties. The consistent use of third parties, even when justified from a business perspective, by itself can be considered a compliance red flag. The oversight of third parties accordingly should be considered in every aspect of the company’s risk assessment, including with regard to the establishment of the relationship (with appropriate contractual protections), training, accounting, ongoing certifications, and even audits.

Due diligence is also a key step when managing third-party risks. Due diligence is a potpourri of tasks that may include interviews, background checks, reviews of databases and publications, consulting third parties to provide reliable local information, using forensic accountants to review books and records to evaluate risk, visiting the office of agents, and other methods of confirming suitability, as the case may be. Once again, the application of risk-based principles will help determine how much due diligence is appropriate for various types of third parties.

At too many companies, third-party compliance oversight begins and ends with due diligence. In other words, the company conducts its third-party due diligence, places the resulting report in its file, and then moves on to conducting the business relationship without much more in the way of oversight. Ongoing review of the relationship, however, is the best way to proceed, including through periodic certifications, ensuring up-to-date training, monitoring any deviations of the relationship from the anticipated course, and the conduct of third-party audits. Due diligence is important, but it is only a limited snapshot of the past. As the relationship evolves, the company’s best source of information about the relationship becomes the data concerning its own relationship with the third party.

“The Most Corrupt Health System Globally Is That in the US. Unfortunately It is Also the Most Influential Medical System”

In response to this recent post, I received the following from an individual who prefers to be called “a fraud investigator from the United Kingdom.”

*****

I was interested to read your points and observations about health care and the foreign official issue. Notwithstanding whether or not employees and physicians connected to state owned or controlled hospitals etc are foreign officials, there is a very real concern, certainly in the UK, that financial interests undermine medical decision making. Indeed there are various studies which appear to prove the effect.

I know from experience there is a resultant detriment to state funds here, so in this context and in the absence of other meaningful regulation of health care corruption, the broad use of “foreign officials” is welcome.

Many people working in my industry recognise that health care presents unique issues with corruption. This may be explained by market forces. For example, if you ‘marketize’ an essential service where the purchasers are entirely reliant on people with financial interests (Physicians) to decide what is best for them, and at the same time patients cannot challenge those people without potentially jeopardizing their own care, it is arguable that such a market cannot ever function effectively, particularly when huge amounts of money are involved.

Health care is also unique in how and why it is utilized. You can walk away from your lawyer, accountant etc if you feel uncomfortable, but you can’t so easily walk away from a Physician who may hold the key to curing you. It follows that you are very unlikely to question or care about their financial interests, particularly when your insurer or the government is paying most of the costs.

Ultimately though, patients not only trust Physicians based on them being people of high public standing, but they also have to trust Physicians if they are to be confident of getting well. It is this inherent trust which is exploited and undermined by financial interests. I think everyone knows fundamentally how wrong it is for payments to be made to Physicians and other health care professionals, the question is how to stop the practices and to cure the underlying cultural cause.

Within the US health care sector there are agencies who use well intentioned laws to prosecute wrongdoing such as under Stark or the Federal Anti-Kickback statute; HHS-OIG and the FBI publicize high profile prosecutions very frequently. However, those efforts appear never ending – presumably because the profits are so great that for many people it is considered worth taking the risk. However, I also know in some parts of the US that businesses are unable to compete for patients on a legitimate basis because all other providers are paying kickbacks to secure business.

My interest and point in contacting you, is one of culture. Health care is an essential need for everyone and the corruption of those services affects all levels of society globally. Unfortunately, the US has suffered so much misconduct in medical practices that it has become almost the norm. For example, the very idea of so called “Patient Recruiters” goes against everything I understand to be reasonable yet they form part of the structure of health care provision in the US.

If you consider – Pharma payments, medical devices such as cardiac implants, CPD coding, patient recruiting, hospital kickbacks, pathology overuse, durable medical equipment and ambulatory care as headline issues (there are many others), you will find the US system is rife with problems. Although nowhere near to the same extent here in the UK, it is clear that in India, Serbia, Greece, China, Russia and many other countries there are massive issues with corruption in health care. However, my view and I suspect that of many others, is the most corrupt health system globally is that in the US, primarily due to conflicts of interest. Unfortunately it is also the most influential medical system.

The corruption is partly explained by the lack of transparency around pricing and proven clinical benefits. For example, I travelled to the US not so long ago and required a common over the counter remedy available in the UK for about 15 dollars. In the US, the same medicine is prescription only and costs $150 dollars plus $150 dollars to see a Physician for the prescription. Fortunately, a colleague had brought some with him as on his last trip he had ended up paying the $300 dollars.

Another example is just looking at all the people wearing physiotherapy aids. I couldn’t quite believe it when I was just walking around a US city, but came to understand that there is big money in prescribing pointless wrist, knee, elbow supports and the like. The reason for these two simple examples is to show that pricing in the US is out of control and that treatments of questionable clinical benefit are routinely offered and accepted.

What I wonder is:

• How much global health care corruption can be accounted for by large corporates which are either directly based or primarily selling in the US (Pharma and device manufacturers in particular)?
• Is the issue in fact that financial practices designed to influence Physicians’ independent decision making have become so commonplace in the US that they are replicated overseas as a matter of course? In other words if usual business practice in the US is on a corrupt basis, and indeed is necessary just to compete with rivals, then when those corporate move into overseas markets the natural tendency must be to use the same methods. This is certainly evident in FCPA cases in China. It would be easy to make a lot more discussion around what happens when US corporate practices are applied in countries with endemic corruption issues.
• Would it be better to have an anti-corruption focus and international agreement specifically targeting designated sectors – health in this case but also perhaps mining, energy and other areas where problems are similar on a global level, are well known about and the market is one which all people are to an extent dependent on?

One final thought/question. Should the US be policing health care overseas under the guise of the “foreign official” enforcement theory or should the US be policing it by redefining how businesses operate in the US as a starting point and then applying those standards overseas?

I will certainly continue to watch developments on your website with interest and thank you for your excellent insights – do keep up the good work.