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Friday Roundup

The problem with NPAs and DPAs, how does your product go to market in China, media coverage in China, victory, scrutiny alerts and updates, and for the reading stack.  It’s all here in the Friday roundup.

The Problem With NPAs and DPAs

I’ve long called for the abolition of NPAs and DPAs in the FCPA context as part of a two-pronged reform approach (see here among other posts).  As highlighted here among other posts, NPAs and DPAs are problematic across a wide spectrum and the agreements often contain meaningless or senseless language.

This recent Wall Street Journal Law Blog post titled “5 Things Companies Agree to But Can’t Deliver On in DPAs” is a worthy read. It begins:

“FCPA lawyers have a love-hate relationship with deferred-prosecution agreements,” said Laurence Urgenson, a partner at Mayer Brown. “We need them to get around the collateral consequences of prosecutions…but there is language in the agreements that drives us crazy.” Mr. Urgenson said the agreements originated with settlements prosecutors would reach with individuals, often children, placing certain requirements on them as a condition for the charges eventually being dropped. But many of those requirements make no sense in a settlement with a company; Mr. Urgenson picked out some of his favorites.”

How Does Your Product Go To Market In China?

Returning to issues discussed in this 2011 post and this 2011 post, this recent article in Food Navigator – Asia (not my typical source of FCPA material) states as follows concerning practices in China:

“One currently emerging trend is how companies are apparently becoming more comfortable to talk openly about measures they are taking to avoid gaining approvals and still move their products to market.  Indeed, four companies outlined to us the agreements they had made with Chinese distributors to deliver their products to locations near to China and then leave the local partners to navigate their movement into the People’s Republic.  Most likely, this would be done in cahoots with ministry officials in deals that would involve sweeteners and other transactions.  ‘Once we’ve delivered the product, it isn’t our problem what our partner decides to do with it,’ an executive at a U.S.-based multinational told us in Hong Kong.  ‘It’s not the cost of approvals that concerns us, it’s the time,” a mid-market manufacturer, also from the U.S., told us.  “It is important for us that we hit China right now.’  Not all the companies we talked to about this were from America, but the fact that two were was surprising.  This is not least because business practices there are governed by the FCPA …  […]  What is surprising to us is not the fact that these practices exist at all, it is how U.S. businesses in particular have now become comfortable enough to openly brief the press about their part in this trend.”

That makes two of us that are surprised!

Media Coverage in China

This prior 2012 post titled “All the News That Fit? To Print” highlighted the practice of paying journalists for media coverage in China.  Related to the general issue is this recent New York Times article which describes how “journalists who worked for a business news website under investigation in Shanghai have described a scheme of extorting Chinese companies, which were pressed to pay in return for the production of flattering articles or the burying of damaging ones.”

Victory

In this prior post I exposed how the DOJ and SEC literally re-wrote the FCPA statute in the November 2012 issued FCPA Guidance. The post highlighted the difference – even a first year law student would be expected to see – between what the FCPA actually says and the version of the FCPA in the Guidance.

Set forth below is the text of the FCPA regarding the “obtain or retain business” element.

   ”anything of value to

         any foreign official for purposes of

(A) (i) influencing any act or decision of such foreign official in his official capacity, (ii) inducing such foreign official to do or omit to do any act in violation of the lawful duty of such official, or (iii) securing any improper advantage; or

(B) inducing such foreign official to use his influence with a foreign government or instrumentality thereof to affect or influence any act or decision of such government or instrumentality,

         in order to assist such issuer in obtaining or retaining business for or with, or directing business to, any person;

Set forth below is how the text of the FCPA was [originally] portrayed in the FCPA Guidance.

   “anything of value to

         any foreign official for purposes of

(A) (i) influencing any act or decision of such foreign official in his official capacity, (ii) inducing such foreign official to do or omit to do any act in violation of the lawful duty of such official, or (iii) securing any improper advantage; or

(B) inducing such foreign official to use his influence with a foreign government or instrumentality thereof to affect or influence any act or decision of such government or instrumentality, in order to assist such issuer in obtaining or retaining business for or with, or directing business to, any person;

Recently, I received an interesting e-mail from a reader who was confused by my prior post because the FCPA Guidance does not portray the FCPA as suggested in my original post.  The reader was right!  That’s because the DOJ/SEC changed the version of the FCPA originally set forth in the Guidance to its proper form.  To prove that the original FCPA Guidance literally re-wrote the FCPA, here is the version of the FCPA that originally appeared in the FCPA Guidance which relevant portions highlighted.

Subtle yes, but sometimes victory occurs in the shadows.

Scrutiny Alerts and Updates

HP Russia

Related to the April 2014 DOJ enforcement action against HP related entities (see here for the prior post), the DOJ announced yesterday that HP Russia formally pleaded guilty.

As stated in the DOJ release

“In a brazen violation of the FCPA, Hewlett Packard’s Russia subsidiary used millions of dollars in bribes from a secret slush fund to secure a lucrative government contract,” said Principal Deputy Assistant Attorney General Marshall Miller.  “Even more troubling was that the government contract up for sale was with Russia’s top prosecutor’s office.   Tech companies, like all companies, must compete on a level playing field, not resort to secret books and sham transactions to hide millions of dollars in bribes.  The Criminal Division has been at the forefront of this fight because when corruption takes hold overseas, American companies and the rule of law are harmed.  Today’s conviction and sentencing are important steps in our ongoing efforts to hold accountable those who corrupt the international marketplace.”

“Today’s conviction and sentence of HP Russia demonstrates that the United States Attorney’s Office is dedicated to aggressively prosecuting all forms of corporate fraud that touch our district, wherever they may occur,” said U.S. Attorney Melinda Haag.  “HP’s cooperation during the investigation is what we expect of major corporate leaders facing the challenges of doing business around the world.”

“For more than a decade HP Russia business executives participated in an elaborate scheme that involved paying bribes to government officials in exchange for large contracts,” said Assistant Director in Charge of the FBI’s Washington Field Office Andrew McCabe. “There is no place for bribery in any business model or corporate culture.  Along with the Department of Justice, the IRS and international law enforcement partners, the FBI is committed to investigating corrupt backroom deals that threaten our global commerce.”

Image Sensing Systems

Earlier this week, the company issued the following release:

“Image Sensing Systems, Inc. today announced that the DOJ has closed its inquiry into the Company in connection with the previously disclosed investigation of potential violations of the FCPA citing the Company’s voluntary disclosure, thorough investigation, cooperation and voluntary enhancements to its compliance program.  The SEC earlier notified the Company that it had closed its investigation under the FCPA without recommending enforcement action. Kris Tufto, Image Sensing Systems chief executive officer, commented, “We are very pleased to conclude the DOJ and SEC investigations without further action.  From the very beginning, we have voluntarily cooperated with the authorities and have worked diligently to implement measures to enhance our internal controls and compliance efforts. We understand that those efforts have been recognized and that the resolution of the investigation reflects this cooperation.”  As previously reported by Image Sensing Systems, it had learned in early 2013 that Polish authorities were conducting an investigation into alleged violations of Polish law by two employees of Image Sensing Systems Europe Limited SP.Z.O.O., its Polish subsidiary, who had been charged with criminal violations of certain laws related to a project in Poland. A special subcommittee of the audit committee of the board of directors immediately engaged outside counsel to conduct an internal investigation.  Image Sensing Systems voluntarily disclosed the matter to the DOJ and the SEC, and it has cooperated fully with those agencies in connection with their review.”

Alstom

Regarding the previously announced U.K. criminal charges against Alstom (see here for the prior post), the U.K. Serious Fraud Office recently released this charge sheet detailing the charges in connection with alleged conduct in India, Poland and Tunisia.

Reading Stack

A very interesting read from the New York TimesForeign Powers By Influence at Think Tanks.”  The article begins as follows.

“More than a dozen prominent Washington research groups have received tens of millions of dollars from foreign governments in recent years while pushing United States government officials to adopt policies that often reflect the donors’ priorities, an investigation by The New York Times has found. The money is increasingly transforming the once-staid think-tank world into a muscular arm of foreign governments’ lobbying in Washington.”

Forbes asks – is it “silly season” in China?  What is perhaps silly is the advice highlighted in the article to negotiate the regulatory minefield:

“[B]uild a network. ‘Involve some powerful local Chinese partners in some peripheral areas in order to build a political foundation. I don’t necessarily recommend an overall partnership, since they would be better off with a well-placed approach in specific areas. Have a partnership in marketing or R&D and develop a perception that you are working closely with Chinese firms, but in reality you will not give away anything that is sensitive.”

This is probably only going to increase a company’s risk because of the FCPA’s third-party payment provisions.

*****

A good weekend to all.

 

HP Enforcement Action – Where To Begin?

Where to begin?

That is the question when analyzing last week’s $108 million Foreign Corrupt Practices Act enforcement action against HP and related entities.  (See here).

Should the title of this post have been “The FCPA’s Free-For-All Continues”?

Should the title have been “HP = Hocus Pocus” (as in look what the enforcement agencies pulled out their hats this time)?

Should the title have been “Warning In-House and Compliance Professionals:  This Post Will Induce Mental Anguish”?

Unable to arrive at the best specific title for this post, I simply picked the generic “Where to Begin?”

In short, if the HP enforcement action does not leave you troubled as to various aspects of FCPA enforcement you: (i) may not be well-versed in actual FCPA legal authority; (ii) don’t care about the rule of law; or (iii) somehow derive satisfaction from government required transfers of shareholder money to the U.S. treasury regardless of theory.

Least there be any misunderstanding, let me begin this post by stating that the enforcement actions against HP Poland, HP Russia and HP Mexico allege bad conduct by certain individuals –  a “small fraction of HP’s global workforce” to use the exact words of the DOJ. As to that “small fraction,” those individuals should be held accountable for their actions by relevant law enforcement authorities.

However, as to the actual defendants charged in the enforcement actions – HP Russia, HP Poland and HP Mexico in the DOJ actions – and HP in the SEC administrative proceeding – there are actual legal elements that must be met and there is also prior enforcement agency guidance that ought to be followed.  The entire credibility and legitimacy of the DOJ and SEC’s FCPA enforcement programs depend on these two basics points.

For instance, in what is believed to be an FCPA first, the DOJ charged two non-issuers (HP-Russia and HP-Poland) with substantive violations of the FCPA’s books and records and internal controls provisions – provisions which only apply to issuers.   This is concerning in and of itself.

Yet the resulting landscape from the HP enforcement action is of more concern and it should induce mental anguish for many for the following reasons.

Issuers have an obligation under the FCPA to “devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that,” among other things, transactions are executed in accordance with management’s general or specific authorization.  Failure to adopt such internal controls is a violation of law.

Conversely, and here is where the “hocus pocus” part comes in, if an issuer does adopt such internal controls and a “small fraction” of employees at certain foreign subsidiaries engage in covert means to willfully circumvent those internal controls, well, that is a violation of law as well in the eyes of the enforcement agencies.

The DOJ’s and SEC’s own allegations paint a picture of HP establishing, particularly given the time periods relevant to the enforcement actions, a system of internal accounting controls sufficient to provide reasonable assurances as to the conduct at issue. yet being a victim of the willful and deceptive conduct of a “small fraction” of employees who designed covert means to circumvent HP’s internal controls.

For instance, as to HP Poland, the criminal information alleges, in pertinent part as to the relevant time period (2006 to 2010):

“At all times relevant to this Information, HP policies prohibited corruption, self-dealing, and other misconduct.  HP’s Standards of Business Conduct (“SBC”) in effect during the relevant time period specified company rules and regulations governing legal and ethical practices, preparation of accurate books and records, contracting, and approvals and engagements of third parties.  The SBC applied to all HP Co. business divisions and subsidiaries, including HP Poland.  HP Poland employees, including HP Poland Executive, received mandatory SBC training annually, among other training.”

“The SBC manuals specifically referenced the FCPA, and prohibited, among other items, bribes, corrupt practices, ‘side letter,’ ‘off-the-books’ arrangements,’ and ‘other express or implied agreements outside standard HP contracting processes.’  The SBC manuals in effect during this period further instructed employees of HP that they were not to ‘commit [the relevant HP business] to undertake any performance, payment or other obligation unless [the employee was] authorized under the appropriate HP [business] delegation of authority policies,’ and further required accurate accounting records and proper finance practices.”

Notwithstanding these controls, the information alleges that an HP Poland Executive caused falsification of HP’s books and records and circumvented HP existing internal controls.  Among other things, the information alleges that the gifts to the Polish Official “violated HP internal controls relating to gift-giving, and were not properly reflected in HP’s books and records.”  The information alleges that the HP Poland Executive “willfully circumvented HP’s internal controls, and falsified corporate books and records relied on by HP’s officers and external auditors to authorize transactions and prepare HP’s consolidated financial statements.”  The information alleges that HP Poland Executive devised covert means – such as communicating through anonymous e-mail accounts and prepaid mobile telephones – in connection with his bribery scheme.  The information even alleges that the HP Poland Executive and the Polish Official drove around in vehicles in “remote locations” and “would type messages in a text file, passing the computer between themselves.” According to the information, “communications were made in this fashion to avoid possible audio recording of the discussions by hidden devices, and to circumvent HP’s internal controls.”

Nevertheless, the DOJ alleges:

“Although HP had certain anti-corruption policies and controls in place during the relevant time period, those policies and controls were not adequate to prevent the conduct described herein and were insufficiently implemented at HP Poland.”

As discussed in this prior post, what is the source for this dramatic conclusory allegation?  Nothing more than ipse dixit and subjective say-so.

The same holds true for the DOJ’s allegations concerning HP Mexico.  The non-prosecution agreement contains the same two substantive allegations concerning HP’s internal controls set forth above relevant to HP Poland, plus the following as to the relevant time period (2006 to 2009):

“HP’s policies permitted legitimate commission payments to channel partners.  These policies required that the recipient of commissions enter into a written channel partner contract with an addendum permitting the payment of commissions be pre-approved, subjected to due diligence, and registered in HP’s partner system.  HP Mexico’s policy also required channel partner commissions to follow an approval matrix, with commissions exceeding a particular percentage of the transaction’s total volume regarding additional approvals.”

Notwithstanding these controls, the information alleges that certain HP Mexico sales managers on one deal deceived HP.  The NPA states:

“[The Consultant at issue] was not an approved HP Mexico channel partner and had not entered into a written channel partner agreement as required by HP’s internal controls and policies.  In circumvention of these internal controls and policies, HP Mexico executives pursuing the BTO Deal arranged for another entity (“Intermediary”), which was already an approved HP Mexico channel partner, to join in the transaction.  HP Mexico’s sales managers arranged for the Intermediary to receive commissions from HP Mexico and then pass those monies along to Consultant, after deducting a portion as a fee. Although Intermediary played no role in negotiating the BTO Deal, HP Mexico executives recorded Intermediary as the deal partner in its internal tracking system.”

“By arranging payments to be made through the Intermediary to Consultant, HP Mexico was able to circumvent HP’s policies requiring pre-approval of channel partners and written agreement for third-party payments.  HP Mexico further circumvented HP’s controls by failing to identify the role of Intermediary in the BTO Deal …  In addition, HP Mexico’s books and records falsely reflected that the Intermediary was the deal partner and principal recipient of the commission on the BTO Deal, which ultimately caused certain HP books and records to be falsified.”

Nevertheless, the DOJ alleges:

“Although HP had certain anti-corruption policies and controls in place during the relevant period, those policies and controls were not adequate to prevent the conduct described herein and were insufficiently implemented at HP Mexico.  This allowed HP Mexico to circumvent HP’s internal accounting controls and falsify its books and records as described herein.”

What is the source for this dramatic conclusory allegation?  Nothing more than ipse dixit and subjective say-so.

The same holds true for the DOJ’s allegations concerning HP Russia.  The information contains the same two substantive allegations concerning HP’s internal controls set forth above relevant to HP Poland and HP Mexico, plus the following as to the relevant time period (2000 to 2007).

“HP’s policies placed restrictions and due diligence requirements on contracts with third parties, including ‘HP customers, channel partners, suppliers, other business partners or outside parties.’  They required credit checks and approvals for certain third parties, and required the preparation of ‘Subcontractor Qualification Worksheets’ and ‘Pre-Bid Risk Identification & Assessment Questionnaires’ that related to qualifications and financial capabilities of certain third parties.  Among other due diligence requirements, the policies required telephonic interview of certain third parties regarding experience, references, checks to determine whether the third party had the capacity and geographic coverage for the project, and an overall evaluation of doubts, reservations, and ‘risks/weaknesses’ of the third party.”

“HP’s Solution Opportunity Approval and Review (‘SOAR’) process applies to all service-related projects valued at greater than $500,000 anywhere in the world, including Russia.  Among other things, the SOAR process was designed to provide HP’s senior company management visibility into pricing, discounts, and profit margins for transactions.  It required review of relationships with third parties, including scope of work, contract terms, qualifications, and necessity of services.  Business, legal, finance, credit, tax, and other units participated in the SOAR review.  No services-related transaction greater than $500,000 could proceed without SOAR approval.”

“Pursuant to the Sarbanes-Oxley Act of 2002, HP management was required to certify the accuracy of HP’s financial statements and the adequacy of its related internal controls to develop those statements.  In supporting these certifications, HP executive management required senior and regional management of HP’s business units to sign sub-certifications certifying that HP’s financial statements were accurate and that their internal controls provided assurances that transactions were properly authorized and recorded, and assets were safeguarded from improper use.”

Notwithstanding these controls, the information alleges that five HP Russia employees deceived HP.  For instance, the information specifically alleges that the individuals created a secret slush fund and to “execute and hide the scheme … willfully circumvented existing internal controls, and falsified corporate books and records relied upon by HP officers and external auditors to authorize the transaction and prepare HP’s consolidated financial statements.”

According to the information, the slush fund “was concealed in the project’s financials” and “HP Russia maintained two sets of project pricing records:  off-the-books versions, known only to the conspirators, which identified slush fund recipients, and sanitized versions of the same documents which were provided to HP credit, finance, and legal officers outside of HP Russia.”

According to the information, “one example of an off-the-books document was an encrypted, password-protected spreadsheet” which contained different information than the “on-the-books version.”  According to the information, a Pricing Worksheet “provided to management outside of HP Russia omit[ed] all references to the slush fund payments, instead inflating hardware prices to create margin for the payments.”

In addition, the information alleges “concealment of [the] slush fund during SOAR Review.”  According to the information, “in early August 2003, HP management in Europe pressed HP Russia to begin the SOAR process for the GPO contract so that it could be executed.  In circumvention of company policy, however, HP Russia Executive 1 had already [signed the relevant contract and executed it] with no authorization and no power of attorney.”

According to the information, “the HP credit officer assigned to the SOAR review initially denied credit approval to proceed with the contract …”.  The information then alleges that the HP Russia Manager provided false information to the HP Credit Officer. The information further alleges that when the HP Credit Officer asked other questions regarding the relevant transaction, the HP Russia Manager provided other false information.

Regarding an actual SOAR meeting in 2003, the information alleges that the day before this meeting, the HP Russia Manager emailed relevant management with false information and thereafter provided additional false information to the HP Credit Officer in connection with relevant transaction.

According to the information, when it came time for the HP Russia Executive to certify the accuracy of the company’s financial statements and adequacy of internal controls pursuant to SOX, the HP Russia Executive falsely certified the requested information and that such certification was relied upon by other HP managers.

According to the information, members of the Russian conspiracy “structured bribe payments to individuals associated with [the Russian government] through a “off-the-books contract” and specifically alleges as follows:

“In circumvention of HP internal controls, including third party due diligence requirements and prohibitions against ‘side letters,’ ‘off-the-books’ arrangements, or other express or implied agreements outside standard HP contracting process,’ HP Russia never disclosed the existence of the [off-the-books contract] to internal or external auditors or management outside of HP Russia, and conduct no due diligence of [the relevant entity]”

The information alleges that the purpose of the conspiracy was to “conceal[] and disguise[] the payments by falsifying HP Russia’s and HP’s books and records; and evading and failing to implement internal controls meant to detect and deter such payments.”  Specifically, the information alleges:

“HP Russia, through its executives and employees, together with others, knowingly and deliberately failed to implement internal accounting controls and circumvented existing internal accounting controls designed to detect and prevent such improper conduct.  HP Russia entered into off-the-books contracts, maintained two sets of accounting records, failed to conduct appropriate due diligence of third parties, concealed the existence of third-party relationship from HP management, executed contracts without authorization, and made misrepresentations to HP audit, compliance, credit and legal officers.”

Among other things, the information alleges that HP Russia employees  “avoided controls over third-party vendors and off-the-books contracts,” “created and used certain mechanisms for making and concealing payments to third parties,” and “secretly executed certain contracts without proper authority.”

Nevertheless, the DOJ alleges:

“While the SBC prohibited corrupt payments, required due diligence of third-parties, and included other control requirements to maintain accountability for assets, the policies were not adequate to detect and prevent the misconduct described herein, and in practice certain HP business divisions and subsidiaries failed to implement and enforce the policies consistently, and on occasion circumvented or disregard the policies entirely.”

What is the source for this dramatic conclusory allegation?  Nothing more than ipse dixit and subjective say-so.

Unlike the DOJ enforcement actions (in which HP was not an actual defendant but merely guaranteed payment of fine and penalty amounts and had compliance obligations imposed upon it), in the SEC’s enforcement action HP is the sole defendant (technically a respondent since the enforcement action was an administrative proceeding not subjected to one ounce of judicial scrutiny).  The SEC’s action is based on the same HP Poland, HP Russia, and HP Mexico conduct alleged in the DOJ enforcement actions.

Prior to the stating the SEC’s conclusory statement as it relates to HP itself, it is useful to review the DOJ’s allegations HP-specific allegations because there is little logical consistency between those allegations and the SEC’s conclusory statement.

Again, the DOJ alleged that HP:

  • Had existing FCPA and related policies and procedures in place and that all relevant employees received training on the policies;
  • Had existing policies and procedures in place related to commission payments to channel partners, due diligence of channel partners, and other tracking policies regarding channel partners;
  • Had an existing approval process in place that applied to all service-related projects valued at greater than $500,000 anywhere in the world and as part of that process HP managers questioned relevant subsidiary employees at questionable information;
  • Had an existing SOX certification and sub-certification process in place as relevant to the referenced subsidiaries.

Yet, and here comes the “hocus pocus” moment, the SEC states against the backdrop of the same covert means, concealment, and misrepresentations and deception alleged in the DOJ actions that:

“[A]lthough HP had certain anti-corruption policies and controls in place during the relevant time period, those policies and controls were insufficiently implemented on the regional or country level.  Further, HP failed to devise and maintain an adequate system of internal accounting controls sufficient to provide reasonable assurance that (i) access to assets was permitted only in accordance with management’s authorization; (2) transactions were recorded as necessary to maintain accountability of assets; and (3) transactions were executed in accordance with management’s authorization.”

It is difficult to reconcile the SEC’s HP allegations against actual legal authority in that the internal-controls provisions are specifically qualified through concepts of reasonableness and good faith.  The only judicial decision to directly address the substance of the internal-controls provisions states, in pertinent part, as follows:

“It does not appear that either the SEC or Congress, which adopted the SEC’s recommendations, intended that the statute should require that each affected issuer install a fail-safe accounting control system at all costs.”

In addition, various courts have held—in the context of civil derivative actions in which shareholders seek to hold company directors liable for breach of fiduciary duties due to the company’s alleged FCPA violations— that just because improper conduct allegedly occurred somewhere within a corporate hierarchy does not mean that internal controls must have been deficient.

The SEC’s allegations against HP are further difficult to reconcile with SEC guidance concerning the internal controls provisions. This guidance states, among other things:

“Inherent in this concept [of reasonableness] is a toleration of deviations from the absolute.”

“The test of a company’s internal control system is not whether occasional failings can occur. Those will happen in the most ideally managed company.”

The critical point in assessing an issuer’s internal controls is at the time of the alleged conduct and whether – at that time – the issuer had internal controls sufficient to provide various reasonable assurances.   In other words, the critical point is not 5 or 10 years later and the issue is not – with the benefit of perfect hindsight – whether the issuer could have done more.

Further problematic in the SEC’s enforcement action against HP is that it is yet another example of “non-charged bribery disgorgment” and among the most vocal critics of this SEC theory is a former high-ranking SEC enforcement attorney (see here).

Whether the proper title should have been “The FCPA’s Free-For-All Continues,” “HP = Hocus Pocus” or how the HP enforcement action, with reason, should induce mental anguish among many, there is much to analyze and critique in the DOJ’s and SEC’s enforcement actions against HP and related entities.

The same applies to much recent FCPA enforcement activity.

To recap, since December 2013 the FCPA enforcement agencies have extracted approximately $546 million against risk averse corporations:

  • (i) based on enforcement agency allegations that the parent company issuer was a victim of deceptive conduct and actions by a “small fraction” of its global workforce;
  • (ii) based on enforcement agency allegations that the corporate entities were victims of a corrupt Ukraine government that refused to pay VAT refunds that the companies were legitimately owed (see here); and
  • (iii) in a case concerning alleged conduct (approximately 10 to 15 years ago) by a consultant who was criminally charged by another law enforcement agency, put the law enforcement agency to its burden of proof at trial, and the law enforcement agency dismissed the case because there was no ”realistic prospect of conviction” (see here).

Friday Roundup

It’s a complex world, you ask – I answer, scrutiny alerts and updates, quotable, and for the reading stack.  It’s all here in the Friday Roundup.

It’s a Complex World

The world in which we live in is seldom simple and straight-forward.  This includes the so-called “fight” against corruption and bribery.  Regarding China’s “crackdown” on bribery, the BBC China Blog reports:

“Much has been written about China’s ongoing crackdown on corruption, but now one of the world’s biggest banks has put a price on it.  According to a report published by Bank of America Merrill Lynch this week, the Chinese government’s anti-graft campaign could cost the economy more than $100bn this year alone. […]  Many of the micro effects of Xi Jingping’s anti-corruption drive have already been well documented of course; a slowdown in the restaurant trade for example, and a big dip in sales of luxury goods.  Over the past year or so, in Shanghai’s posh malls and boutique designer shops – once at the centre of the happy merry-go-round of official largesse and gift giving – you’ve almost been able to hear the sound of the weeping and gnashing of teeth. But the BofAML report suggests that the campaign is also having a significant and troubling macroeconomic effect.  Since early last year, it says, government bank deposits have been soaring, up almost 30% year on year. Even honest officials, the report suggests, are now so terrified of starting new projects, for fear of being seen as corrupt, that they’re simply keeping public funds in the bank.  […] The report’s authors admit their calculations are a “back-of-the-envelope estimate of fiscal contraction”, but even if they are only half right it is an extraordinary amount of money and it highlights some of the challenges facing China’s anti-corruption crusader-in-chief, President Xi Jinping.”

Some-what related to the above topic, as noted in this Washington Times article:

“A key player in Nigeria’s emergence as Africa’s largest economy says U.S. companies are ceding investment opportunities to China and the Obama administration should do more to reverse the trend.  “The Obama administration has to focus more on Nigeria, said Prince Adetokunbo Sijuwade, whose family holds royal status in a vital corner of southern Nigeria and is invested heavily in transportation and oil infrastructures. “We feel that we can learn from the U.S. in terms of expertise. […]  Prince Sijuwade speculated that several factors may have deterred U.S. investors in recent years, from concerns about government corruption to security. But he argued that allegations of widespread corruption in Nigeria are “overstated.”“Corruption is all over the world,” he said, noting potential U.S. investors’ fears of violating the Justice Department’s anti-corruption laws as an inhibiting factor on Nigerian investment.”

You Ask – I Answer

This op-ed poses the question “what’s driving pharma’s international bribery scandals?”

You ask – I answer.

A dubious and untested enforcement theory + extreme risk aversion because of potential exclusion from government sponsored healthcare programs + other typical reasons for why other companies face FCPA scrutiny, such as employees and third parties acting contrary to a company’s good-faith compliance policies and procedures = several FCPA enforcement actions against pharma and healthcare related companies.

Scrutiny Alerts and Updates

The Wall Street Journal reported earlier this week:

“GlaxoSmithKline PLC is investigating allegations of bribery by employees in the Middle East, according to emails reviewed by The Wall Street Journal, opening a new front for the company as it manages a separate corruption probe in China.  A person familiar with Glaxo’s Mideast operations emailed the U.K. drug company late last year and earlier this year to report what the person said were corrupt practices in Iraq, including continuing issues and alleged misconduct dating from last year and 2012. The emails cite behavior similar to Glaxo’s alleged misconduct in China, including alleged bribery of physicians. […]  In an email, the person said Glaxo hired 16 government-employed physicians and pharmacists in Iraq as paid sales representatives for the company while they continued to work for the government. A government-employed Iraqi emergency-room physician has prescribed Glaxo products, even when they weren’t in the hospital’s pharmacy and a competitor’s brand was in stock, an email from the person said. Glaxo has been hiring government-employed Iraqi doctors as medical representatives and paying their expenses to attend international conferences, the person alleged in the emails. Glaxo pays other doctors high fees to give lectures in exchange for promoting and prescribing its drugs, the allegations continued. After Glaxo won a contract with the Iraqi Ministry of Health in 2012 to supply the company’s Rotarix vaccine, Glaxo paid for a workshop in Lebanon for Iraqi Ministry of Health officials, the email said. That included paying for a doctor’s family to travel to Lebanon “so it would be a family vacation for him at the hotel.”

As noted in the article, GSK has been under FCPA scrutiny since 2011 and GSK’s scrutiny China was the frequent focus of media attention last summer (see here for the prior post).

Quotable

Russel Ryan (King & Spalding and former high-ranking SEC enforcement attorney) hits a home run with this recent Wall Street Journal editorial titled:  “When Regulators Think They Are Prosecutors.”  It states, in pertinent part:

“[A]dministrative agencies like the SEC were never intended to become arms of law enforcement. They were created to regulate, not prosecute. […]  There are good constitutional reasons why agencies like the SEC were not born with this power to prosecute and punish. Prosecuting private citizens and companies is serious business. It’s a core executive branch function historically entrusted to the attorney general, a “principal Officer” subject to unfettered presidential control under Article II of the Constitution. […]   [I]f policy makers insist on transforming the commission and similar agencies into quasi-criminal prosecutors with ever-increasing power to seek harsh punitive sanctions, those agencies should be brought under the stewardship of the attorney general or given cabinet rank with leaders who are removable at the president’s pleasure. Even that wouldn’t cure a second level of constitutional infirmity. Based mostly on precedent established before the SEC had any power to punish, courts have exempted SEC prosecutions from many bedrock due-process protections taken for granted in criminal cases. The presumption of innocence, for example, is largely meaningless because the SEC can win by a mere “preponderance of the evidence” rather than proof beyond reasonable doubt. The right to remain silent is equally hollow because courts let the SEC treat silence as evidence of guilt. For SEC defendants who can’t afford a good lawyer, tough luck, because there’s no right to have counsel appointed at government expense as there would be in a criminal prosecution. And even when the SEC loses after trial, double jeopardy doesn’t prevent it from trying to reverse the verdict or force a retrial, as it would a criminal prosecutor.  Dodd-Frank made things even worse by expanding the SEC’s ability to impose draconian financial penalties in administrative proceedings that have lax evidentiary rules, no jury trial, and limited judicial oversight.Basic constitutional safeguards should protect American citizens and businesses whenever a law-enforcement agency seeks to punish them for alleged wrongdoing, even in nominally civil proceedings. It’s time to incorporate those safeguards into an increasingly penal administrative prosecution system that is quickly sliding down a slick and constitutionally hazardous slope.”

For Ryan’s previous guest post on similar issues, see here.

Reading Stack

Certain of the conduct at issue in this week’s FCPA enforcement action against HP and related entities concerned alleged conduct in Poland.  This article from a Polish news service looks at what happens “when the dust settles.”

An insightful post on the Trace Blog from a former DOJ FCPA enforcement attorney who oversaw several monitors titled “Five Questions That can Keep Your Monitor From Running Away.”  Perhaps the best question though is: are monitors truly needed in many FCPA resolutions?  (See here and here for prior posts).

For your viewing enjoyment here, recently indicted Ukrainian businessman Dmytro Firtash (see here) has released a video which insists he is an innocent party caught at the center of a “battlefield for the two biggest global players of Russia and the USA”.

*****

A good weekend to all.

HP And Related Entities Resolve $108 Million FCPA Enforcement Action

Hewlett-Packard Co. (“HP”) has over 300,000 employees worldwide.

Among the employees during a certain relevant time period, were 5 individuals in Russia employed by a subsidiary, 1 individual in Poland employed by a subsidiary, and a vaguely defined group of individuals in Mexico employed by a subsidiary that worked on one sales deal.

The above individuals engaged in conduct largely occurring 7-14 years ago.

The government alleges that all of these individuals were specifically trained on the FCPA by HP and that HP had other internal controls in place as relevant to these individuals.

Notwithstanding these controls, the government alleges that the individuals willfully circumvented HP’s controls to make alleged improper payments to alleged “foreign officials” by, among other things, creating secret slush funds, concealing certain other information, making false representations, and engaging in other covert means such as anonymous e-mail accounts and pre-paid mobile telephones.

So reads the latest Foreign Corrupt Practices Act enforcement action.

Yesterday the DOJ and SEC announced (here and here) a coordinated FCPA enforcement action against various HP and related entities based on alleged conduct in Russia, Poland and Mexico.  As noted in this previous post, HP has been under FCPA scrutiny since early 2010.

The enforcement action involved:

HP and related entities agreed to pay approximately $108.2 million (all guaranteed by HP) to resolve the alleged FCPA scrutiny (approximately $76.7 million in the DOJ actions; and approximately $31.5 million in the SEC action).

The enforcement action, in terms of settlement amount, is the 11th largest of all-time and the 2nd largest of all-time against a U.S. company (recognizing of course that HP’s foreign subsidiaries were a large focus of the enforcement actions).

This post summarizes both the DOJ and SEC enforcement actions based on a review of the original source documents (comprising approximately 175 pages in total).

DOJ Enforcement Action

The enforcement action involved a criminal information against HP Russia resolved via a plea agreement; a criminal information against HP Poland resolved via a DPA; and an NPA concerning HP Mexico.

HP Russia

According to the information, HP Russia is a wholly owned subsidiary of HP and was principally responsible for transacting business in Russia and the Commonwealth of Independent States (“CIS”).  During the relevant time period, the information alleges that HP Russia had approximately 315 and 55o employees and that HP Russia “was subject to HP’s internal accounting controls, and HP Russia’s financial results were included in the consolidated financial statements that HP filed with the SEC.”

The alleged conduct concerns five employees at HP Russia.

  • HP Russia Executive 1
  • HP Russia Executive 2
  • HP Russia Manager 1
  • HP Russia Manager 2
  • HP Russia Manager 3

The conduct at issue concerns “a project to automate the telecommunications and computing infrastructure of the Office of the Prosecutor General of Russia (“GPO” or “GP”),” a project valued at approximately $100 million.  According to the information, the Russian government used a state-owned entity organized under the Department of Affairs of the President of the Russian Federation, to manage the GPO project tender and execution.”

In pertinent part, the information alleges as follows.

“Between in or about 2000 and 2007, HP Russia and co-conspirators agreed to make and did make improper payments to secure, retain and implement the GPO project.  Members of the conspiracy structured the deal to create a secret slush fund, which by 2003 totaled approximately ($10 million at then-prevailing exchange rates), at least part of which was intended for bribes, kickbacks, and other improper payments.  To execute and hide the scheme, members of the conspiracy failed to implement internal controls intended to maintain accountability over HP’s assets, willfully circumvented existing internal controls, and falsified corporate books and records relied on by HP officers and external auditors to authorize the transaction and prepare HP’s consolidated financial statements.”

Regarding the slush fund, the information alleges that HP Russia “created million of dollars in excess margin for use as a slush fund” by selling product to an “often-used channel partner of HP” which in turn sold product to an intermediary at a mark-up. According to the information, “To keep track of the fund, which was concealed in the project’s financials, HP Russia maintained two sets of project pricing records:  off-the-books versions, known only to conspirators, which identified slush fund recipients, and sanitized versions of the same documents which were provided to HP credit, finance, and legal officers outside of HP Russia.” According to the information, “one example of an off-the-books document was an encrypted, password-protected spreadsheet.”

According to the information, various HP Russia employees concealed the slush fund during HP’s Solution Opportunity Approval and Review (“SOAR”) process which applied to “all-service related projects valued at greater than $500,000 anywhere in the world, including Russia.”  Among other things, the information alleges that HP Russia employees made false representations and falsely certified the adequacy of HP Russia’s internal controls, a certification the information alleges that “was relied upon by HP’s EMEA business to certify to HP’s headquarters in the United States that EMEA’s financial statements were accurate.”

According to the information, the alleged improper payments (approximately €8 million) were made through various intermediaries to “Russian Official A,” a director of a Russian government agency who assumed responsibility for the GPO Project as well as “Individual A,” an associate of Russian Official A, for things such as:

  • “expensive jewelry, luxury automobiles, travel, and other items typically associated with gifts”
  • “travel services, vehicles, tuition, electronic equipment, cotton, textiles, and various other items”
  • a “hotel bill: and “other luxury purchases” such as “expensive watches, swimming pool technology, and other items”
  • “furniture, vehicles, clothing, travel services, household appliances, hotel stays, and other items”

Based on the above alleged conduct, the information charges (i) conspiracy to violate the FCPA’s anti-bribery provisions and books and records and internal controls provisions; (ii) one count of violating the FCPA’s anti-bribery provisions; (iii) one count of violating the FCPA’s internal controls provisions; and (iv) one count of violating the FCPA’s books and records provisions.

The conduct alleged in the information allegedly occurred between December 2000 and February 2007.  As to U.S. jurisdictional allegations, the information alleges a 2001 meeting in Rockville, Maryland regarding the GPO project; a 2003 e-mail “which was routed through the United States;” and a 2003 certification “transmitted to HP’s offices in California.”

The above charges were resolved via a plea agreement in which HP Russia agreed to plead guilty to the four charges described above.  Pursuant to the plea agreement, HP Russia agreed to pay a criminal fine of approximately $58.8 million.  In the plea agreement, HP agreed to guarantee HP Russia’s payment as well as other conditions imposed upon HP Russia such as cooperation, and compliance obligations typical in corporate FCPA enforcement actions.  Among other things, the plea agreement imposed upon HP a three year reporting obligation to the DOJ regarding remediation and implementation of various compliance measures. As pertinent to the above allegations, in the plea agreement HP Russia and HP waived any and all statute of limitation defenses.

According to the plea agreement, the advisory fine range based on the alleged conduct at issue was $87 million to $174 million.   The plea agreement states that the approximate $58.8 million fine was appropriate based on the following factors:

“(a) monetary assessments that HP has agreed to pay to the SEC and is expected to pay to law enforcement authorities in Germany relating to the same conduct at issue …; (b) HP Russia’s and HP’s cooperation has been, on the whole, extraordinary, including conducting an extensive internal investigation, voluntarily making U.S. and foreign employees available for interviews, and collecting, analyzing, and organizing voluminous evidence and information for the Department; (c) HP Russia and HP have engaged in extensive remediation, including by taking appropriate disciplinary action against culpable employees of HP and enhancing their internal accounting, reporting, and compliance functions; (d) HP has committed to continue enhancing its compliance program and internal accounting controls … (e) the misconduct identified … was largely undertaken by employees associated with HP Russia, which employed a small fraction of HP global workforce during the relevant period; (f) neither HP nor HP Russia has previously been subject of any criminal enforcement action by the Department or law enforcement authority in Russia or elsewhere; (g) HP Russia and HP have agreed to continue to cooperate with the Department and other U.S. and foreign law enforcement authorities, if requested by the Department …”

HP Poland

According to the information, HP Poland is a wholly owned subsidiary of HP and, among other functional responsibilities, HP Poland managed most of HP’s activities in Poland and had more than 200 employees during the relevant time period.   According to the information, HP Poland “was subject to HP’s internal accounting controls, and HP Poland’s financial results were included in the consolidated financial statements that HP filed with the SEC.”

The specific alleged conduct concerned “HP Poland Executive” (a citizen of Poland who was the District Manager of Public Sector Sales and Public Sector Sales Lead).

According to the information, HP Poland “(i) caused the falsification of HP’s books and records; and (ii) circumvented HP’s existing internal controls, in connection with a scheme to make corrupt payments to one or more foreign officials in Poland, including the Polish Official [the Director of Information and Communications Technology within the Polish National Police Agency (“KGP”) which was part of the Polish Ministry of the Interior and Administration].”

According to the information, “the conduct was related to HP Poland’s efforts to secure and maintain millions of dollars in technology contracts with the Polish government.”  The information alleges that HP Poland “resorted to corruption to foster a relationship with the Polish Official.”

Specifically, the information alleges that in 2006 the Polish Official attended a technology-industry conference in San Francisco and that the “weekend before the conference” HP Poland “paid for dinners, gifts, and sightseeing by the Polish Official in San Francisco.”  The information also alleges that HP Poland took the Polish Official on a side trip to Las Vegas “with no legitimate business purpose” and that while in Las Vegas HP Poland paid for the Polish Official’s “transportation and expenses … including lodging, drinks, dining, shows, other events on or near the Las Vegas Strip, and a private tour flight over the Grand Canyon.”  As to the above travel and entertainment allegations, the information also alleges that “another global technology company” (“Company A”) also wined and dined the Polish Official and paid for his expenses.

The information also alleges that “beginning in late 2006, HP Poland started providing technology products to the Polish Official for personal use.”  The information states:

“Early gifts included HP products, such as desktop and laptop computers, and later expanded to include additional HP computers, HP-branded mobile devices, an HP printer, iPods, flat screen televisions, cameras, a home theater system, and other items.”

According to the information, the above things of value were provided to the Polish Official “in circumvention of HP’s internal controls” and were not “properly reflected in HP’s books and records.”

The information also alleges that in early 2007, “shortly after receiving the first of these gifts, Polish Official signed a contract with HP Poland on behalf of the Polish government, valued at approximately $4.3 million.  A month later, the Polish Official signed another contract with HP Poland, valued at approximately $5.8 million.”

According to the information, “around the date of the second contract award, HP Poland expanded the bribes to include large cash payments to Polish Official from off-the-books accounts.  HP Poland agreed to pay Polish Official 1.2% of HP Poland’s net revenue on any contract awarded by KGP.”

The information then specifically alleges that in 2007 “Polish Official signed a KGP contract with HP Poland valued at approximately $15.8 million” and that “HP Poland Executive delivered to Polish Official’s personal residence a bag filled with approximately $150,000 in cash.”  The information also alleges another instance in which HP Poland Executive met Polish Official in a Warsaw parking lot and gave Polish Official another bag filled with approximately $100,000 in cash.  Further, the information alleges that in 2008, on at least four separate occasions, HP Poland Executive gave Polish Official bags of cash totaling at least $360,000.  According to the information, in 2008, Polish Official signed three contracts on behalf of KGP with HP Poland for approximately $32 million.

As to the above payments, the information alleges that HP Poland willfully circumvented HP’s internal controls and falsified corporate books and records relied on by HP’s officers and external auditors to prepare HP’s financial statements.  Moreover, the information alleges that HP Poland facilitated the corrupt relationship with Polish Official through covert means such an anonymous e-mail accounts, pre-paid mobile telephones, and other means to circumvent HP’s internal controls.

In total, the information alleges between 2006 and 2010 HP Poland “provided Polish Official cash worth the equivalent of approximately $600,000, gifts valued in excess of $30,000, and several thousand dollars in improper travel and entertainment benefits.” According to the information, “during this same time span, the Polish government awarded to HP Poland at least seven contracts for KGP-related information technology products and services, with a total value of approximately $60 million.

Based on the above conduct, the information charges HP Poland with violating the FCPA’s books and records and internal controls provisions.

The above charges were resolved via a DPA in which HP Poland admitted and accepted responsibility for the above conduct.  The DPA has a term of three years and it lists the following relevant considerations considered by the DOJ;

“(a) HP Poland’s cooperation with the Department’s investigation; (b) HP Poland’s ultimate parent corporation, HP, has committed to maintain and continue enhancing its compliance program and internal accounting controls …; and (c) HP Poland and HP have agreed to continue with the Department and other U.S. and foreign law enforcement authorities in any ongoing investigation …”

Based on the advisory guidelines calculation in the DPA, the fine range for the alleged conduct at issue was $19.3 million to $38.6 million.  Pursuant to the DPA, HP Poland agreed to pay approximately $15.5 million, an amount deemed “appropriate” given the “nature and extent of HP Poland’s and HP’s cooperation and their extensive remediation in this matter.”

Like the HP Russia plea agreement, in the HP Poland DPA, HP agrees to guarantee the payment of HP Poland and to implement various compliance measures and report to the DOJ for a three year period.  As is typical in FCPA DPAs, the HP Poland DPA contains a so-called “muzzle clause.”

HP Mexico

The NPA with HP Mexico (a wholly-owned subsidiary of HP based in Mexico) states that beginning in 2008 “HP Mexico began presales activities and discussions with Pemex (Mexico’s alleged state-owned petroleum company) to sell to Pemex a suit of business technology optimization (“BTO”) software, hardware, and licenses.”  According to the NPA, BTO is a niche product that requires sophisticated knowledge to integrate with other software products and the contracts for this software sale were for approximately $6 million.

According to the NPA, “HP Mexico sales managers on the BTO Deal ultimately decided that they could not win the business without working with, and making payments to, a Mexican information-technology consulting company. (“Consultant”)”  According to the information, “HP Mexico sales managers knew that Pemex’s Chief Operating Officer (“Official A”) was a former principal of Consultant” and that “HP Mexico employees also knew that Official A supervised Pemex’s Chief Information Officer (“Official B”), who was a key signatory on behalf of Pemex for the BTO Deal.”

According to the NPA, while the Consultant had prior technical experience, “HP Mexico ultimately retained Consultant in connection with HP Mexico’s bid for the sale to Pemex primarily because of Consultant’s connections to Official A, Official B, and other senior Pemex officials.”  According to the information, as part of its agreement with Consultant, HP Mexico agree to pay Consulant a commission, “which HP Mexico also called an ‘influencer fee,’ equal to 25% of the licensing and support components of the BTO Deal.”

To circumvent HP’s internal controls regarding channel partners, the NPA states that “HP Mexico executives pursuing the BTO Deal arranged for another entity (“Intermediary”), which was already an approved HP Mexico channel partner, to join in the transactions” and that “HP Mexico executives recorded Intermediary as the deal partner in its internal tracking system.”

The NPA states “HP Mexico through the Intermediary, Consultant made a cash payment of approximately $30,000 to an entity controlled by Official B” and that “Consultant made three additional cash payments totaling approximately $95,000 to the Official B controlled entity.”

According to the NPA, “in total, HP Mexico received approximately $2,527,750 as its net benefit on the BTO Deal.”

According to the NPA, the DOJ agreed to enter it based on the following factors:

“(a) HP Mexico and HP’s cooperation, including conducting an extensive internal investigation, voluntarily making U.S. and foreign employees available for interviews, and collecting, analyzing, and organizing voluminous evidence and information for the DOJ; (b) HP Mexico and HP have engaged in extensive remediation, including taking appropriate disciplinary action against culpable employees, enhancing their due diligence protocol for third-party agents and consultants, and enhancing their controls for payments of sales commissions to channel partners in Mexico; (c) HP Mexico’s and HP’s continued commitment to enhancing their compliance programs and internal controls; and (d) HP Mexico’s and HP’s agreement to continue to cooperate with the DOJ in any ongoing investigation.”

In the NPA HP Mexico admitted and acknowledged responsibility for the above conduct.  Pursuant to the NPA, HP Mexico agreed to pay a forfeiture of approximately $2.5 million.  Pursuant to the NPA, which has a term of 3 years, HP Mexico and HP agreed to various compliance obligations.  As is typical in FCPA NPAs, the NPA contains a so-called muzzle clause.

In the DOJ release, Deputy Assistant Attorney General Bruce Swartz states:

“Hewlett-Packard subsidiaries created a slush fund for bribe payments, set up an intricate web of shell companies and bank accounts to launder money, employed two sets of books to track bribe recipients, and used anonymous email accounts and prepaid mobile telephones to arrange covert meetings to hand over bags of cash.  Even as the tradecraft of corruption becomes more sophisticated, the department is staying a step ahead of those who choose to violate our laws, thanks to the diligent efforts of U.S. prosecutors and agents and our colleagues at the SEC, as well as the tremendous cooperation of our law enforcement partners in Germany, Poland and Mexico.”

Melinda Haag (U.S. Attorney for the N.D. of California) states:

“The United States Attorney’s Office, working alongside our colleagues in the Criminal Division, will vigorously police any efforts by companies in our district to illegally sell products to foreign governments using bribes or kickbacks in violation of the FCPA,  Today’s resolution with HP reinforces the fact that there is no double standard: U.S. businesses must respect the same ethics and compliance standards whether they are selling products to foreign governments or to the United States government.”

Valerie Parlave (Assistant Director in Charge of the FBI’s Washington Field Office) states:

“This case demonstrates the FBI’s ability to successfully coordinate with our foreign law enforcement partners to investigate and bring to justice corporations that choose to do business through bribery and off-the-book dealings.  I want to thank the agents who worked on this case in Washington, New York and in our Legal Attaché offices in Mexico City, Moscow, Berlin and Warsaw as well as the prosecutors.  Their work ensures a level playing field for businesses seeking lucrative overseas government contracts.”

Richard Weber (Chief of the Internal Revenue Service – Criminal Investigation) states:

“This agreement is the result of untangling a global labyrinth of complex financial transactions used by HP to facilitate bribes to foreign officials.  IRS-CI has become a trusted leader in pursuit of corporations and executives who use hidden offshore assets and shell companies to circumvent the law.  CI is committed to maintaining fair competition, free of corrupt practices, through a potent synthesis of global teamwork and our dynamic financial investigative talents.”

SEC Enforcement Action

The enforcement action involved an administrative cease and desist order against HP and is based on the same Russia, Poland and Mexico conduct described above.

Under the heading “Summary,” the order states:

“From approximately 2003 to 2010 (the “relevant period”), HP Co.’s indirect, wholly-owned subsidiaries in Russia, Mexico and Poland, by and through their employees, agents and intermediaries, made unlawful payments to various foreign government officials to obtain business. These payments were also falsely recorded in the subsidiaries’ books and records and, ultimately, in HP Co.’s books and records. In Russia, HP Co.’s subsidiary (“HP Russia”) made payments through HP Russia’s agents to a Russian government official to retain a multi-million dollar contract with the federal prosecutor’s office. The payments were made through shell companies engaged by the agents to perform purported services under the contract. In Poland, certain agents or employees of HP Co.’s Polish subsidiary (“HP Poland”) provided gifts and cash bribes to a Polish government official to obtain contracts with Poland’s national police agency. In Mexico, HP Co.’s Mexican subsidiary (“HP Mexico”) made improper payments to a third party in connection with a sale of software to Mexico’s state-owned petroleum agency. HP Co. and its consolidated subsidiaries (collectively, “HP”) earned approximately $29 million in illicit profits as a result of this improper conduct.

The payments and improper gifts to government officials made directly or through intermediaries were falsely recorded in the relevant HP subsidiaries’ books and records as legitimate consulting and service contracts, commissions, or travel expenses. In fact, the true purpose of the payments and gifts was to make improper payments to foreign government officials to obtain lucrative government contracts for HP. During the relevant period, HP lacked sufficient internal controls to detect and prevent the improper payments and gifts made by executives and representatives of certain of its foreign subsidiaries.”

As to HP Russia, the order also states under the heading “Additional Conduct,” as follows.

“In June and July 2006, several European HP subsidiaries, including HP Russia, arranged for a high-profile customer marketing event in connection with the FIFA World Cup soccer tournament in Germany. Despite managerial directives not to invite representatives of government customers, certain HP sales employees arranged for a number of government or state-owned customers to attend the event. In all, HP Russia and other European subsidiaries of HP paid tens of thousands of dollars in travel and entertainment expenses for these government customers, and HP Co.’s internal controls failed to detect or prevent the conduct.

Finally, in June 2005, HP Russia paid more than $2.5 million to a third party distributor for the supply of software and implementation services to a Russian state-owned enterprise. HP Russia’s records do not reflect what, if any, work was actually performed by the distributor for these payments, and communications among HP Russia employees suggest that the distributor may have played an influential role in connection with obtaining the contract. The payments to the distributor were recorded in HP Russia’s books and records as a payment for providing software and services, even though there was minimal evidence concerning what was actually provided for these payments.”

Based on the above, the order finds violations of the FCPA’s books and records and internal controls provisions.  Specifically, the order states:

“HP’s global operations are organized by geographic regions and sub-regions, as well as business units. Employees in HP’s foreign subsidiaries may report to a supervisor in both their geographic region and their business unit. During the relevant period, HP’s foreign subsidiaries operated pursuant to compliance policies and directives developed by HP and implemented at the local subsidiary level by the country or regional management. Although HP had certain anti-corruption policies and controls in place during the relevant period, those policies and controls were not adequate to prevent the conduct described herein and were insufficiently implemented on the regional or country level. Further, HP failed to devise and maintain an adequate system of internal accounting controls sufficient to provide reasonable assurance that: (1) access to assets was permitted only in accordance with management’s authorization; (2) transactions were recorded as necessary to maintain accountability for assets; and (3) transactions were executed in accordance with management’s authorization.

[…]

As described above, HP Co. violated Section 13(b)(2)(A) of the Exchange Act. Its subsidiaries in Russia, Poland and Mexico falsely recorded the payments made to agents as payments for legitimate services or commissions, when the true purpose of these payments was to make corrupt payments to government officials to obtain business. The false entries were then consolidated and reported by HP in its consolidated financial statements. HP Co. also violated Section 13(b)(2)(B) by failing to devise and maintain sufficient accounting controls to detect and prevent the making of improper payments to foreign officials and ensure that payments were made only to approved channel partners.”

Under the heading “Remedial Efforts,” the order states:

“In response to the Commission’s investigation, HP retained outside counsel to assist it in conducting an internal investigation into improper conduct in the jurisdictions that were the subject of the staff’s inquiry, as well as in other jurisdictions where HP identified additional issues. HP cooperated with the Commission’s investigation by voluntarily producing reports and other materials to the Commission staff summarizing the findings of its internal investigation. HP also cooperated by, among other things, voluntarily producing translations of numerous documents, providing timely reports on witness interviews, and by making foreign employees available to the Commission staff to interview.

HP has also undertaken significant remedial actions over the course of the Commission’s investigation, including by implementing a firm-wide screening process for its channel partners, training its public sector sales staff on its policies for dealing with business intermediaries, increasing compliance-related training for its global work force, and implementing additional enhancements to its internal controls and compliance functions. In addition, HP took disciplinary actions against certain of its employees in response to the conduct identified by the Commission staff and by the company through its internal investigation.”

In resolving the matter, the SEC ordered HP to cease and desist from committing future violations of the FCPA’s books and records and internal controls provisions and to pay disgorgement of $29 million and prejudgment interest of $5 million. According to the order, approximately $2.5 million of the disgorgement amount will be satisfied by HP’s payment of $2.5 million in forfeiture in connection with the HP Mexico DOJ action.  The order also requires HP to report to the SEC for a three year period regarding the status of its remediation and implementation of various compliance measures.

In the SEC release, Kara Brockmeyer (Chief of the SEC’s FCPA Unit) states:

“Hewlett-Packard lacked the internal controls to stop a pattern of illegal payments to win business in Mexico and Eastern Europe. The company’s books and records reflected the payments as legitimate commissions and expenses.  Companies have a fundamental obligation to ensure that their internal controls are both reasonably designed and appropriately implemented across their entire business operations, and they should take a hard look at the agents conducting business on their behalf.”

Gibson Dunn attorneys Joseph Warin and John Chesley represented the HP entities.

In this release (a release HP had to consult with the DOJ before issuing) HP Executive Vice President and General Counsel John Schultz states:

“The misconduct described in the settlement was limited to a small number of people who are no longer employed by the company.  HP fully cooperated with both the Department of Justice and the Securities and Exchange Commission in the investigation of these matters and will continue to provide customers around the world with top quality products and services without interruption.”

HP’s stock closed yesterday up approximately .8%

Friday Roundup

Scrutiny alerts and updates, sunshine, year in review roundups, and for the reading stack.  It’s all here in the Friday roundup.

Scrutiny Alerts and Updates

H-P

The company has been under FCPA scrutiny since at least 2010 and recently disclosed, in pertinent part, as follows.

“The U.S. Department of Justice and the SEC have been conducting an investigation into the Russia GPO deal and potential violations of the Foreign Corrupt Practices Act (“FCPA”). These U.S. enforcement agencies, as well as the Polish Central Anti-Corruption Bureau, are also conducting investigations into potential FCPA violations by an employee of Hewlett-Packard Polska Sp. z o.o., an indirect subsidiary of HP, in connection with certain public-sector transactions in Poland. In addition, the same U.S. enforcement agencies are conducting investigations into certain other public-sector transactions in Russia, Poland, the Commonwealth of Independent States, and Mexico, among other countries.  HP is cooperating with these investigating agencies. In addition, HP is in advanced discussions with the U.S. enforcement agencies to resolve their investigations.”

JPMorgan

The New York Times returned – yet again (see here and here for prior NY Times article) – to JPMorgan’s hiring practices in China.  The article states:

“For Wall Street banks enduring slowdowns in the wake of the financial crisis, China was the last great gold rush. As its economy boomed, China’s state-owned enterprises were using banks to raise billions of dollars in stock and debt offerings — yet JPMorgan was falling further behind in capturing that business.  The solution, the executives decided over email, was to embrace the strategy that seemed to work so well for rivals: hire the children of China’s ruling elite.

[…]

In the months and years that followed, emails and other confidential documents show, JPMorgan escalated what it called its “Sons and Daughters” hiring program, adding scores of well-connected employees and tracking how those hires translated into business deals with the Chinese government. The previously unreported emails and documents — copies of which were reviewed by The New York Times — offer a view into JPMorgan’s motivations for ramping up the hiring program, suggesting that competitive pressures drove many of the bank’s decisions that are now under federal investigation.

The references to other banks in the emails also paint for the first time a broad picture of questionable hiring practices by other Wall Street banks doing business in China — some of them hiring the same employees with family connections. Since opening a bribery investigation into JPMorgan this spring, the authorities have expanded the inquiry to include hiring at other big banks. Citigroup, Credit Suisse, Deutsche Bank, Goldman Sachs and Morgan Stanley have previously been identified as coming under scrutiny. A sixth bank, UBS, is also facing scrutiny, according to interviews with current and former Wall Street employees.

[…]

The investigation has also had a chilling effect on JPMorgan’s deal-making in China, interviews show. The bank, seeking to build good will with federal authorities, has considered forgoing certain deals in China and abandoned one assignment altogether.”

Once again, the latest NY Times article sparked much commentary.  See here, here and here.

Former Siemens Executives

The Buenos Aires Herald reports:

“Seventeen people, including former managers of the Siemens company, were … accused of paying off officials in order to help win a contract to produce the national identity cards …”.  The decision was made by Federal Judge Ariel Lijo, who decided to indict them for having allegedly committed bribery.”

Regarding the defendants, the article states:

“Twelve people working for Siemens were included in the indictment: Uriel Jonathan Sharef, Ulrich Albert Otto Fritz Bock, Eberhard George Reichert, Luis Rodolfo Schirado, Andrés Ricardo Truppel, Ernst Michael Brechtel, Bernd Regendatz, Ralph Matthias Kleinhempel and José Alberto Ares. Sharef, for instance, was a member of Siemens’ managing board. He also was the first former board member of a Fortune Global 50 company to be indicted under the US Foreign Corrupt Practices Act, as happened in 2011.  Judge Lijo also charged Carlos Francisco Soriano, Miguel Ángel Czysch and José Antonio David as “middlemen” between the company and Menem’s administration to arrange the payment for benefitting the company in the bid. The magistrate also accused Antonio Justo Solsona, Guillermo Andrés Romero, Orlando Salvestrini, Luis Guillermo Cudmani and Federico Rossi Beguy, who allegedly worked for the company competing in the bid against Siemens IT Services and who presumably agreed not to challenge the government’s decision.”

Allegations regarding the Argentine identity card project were included in the 2008 FCPA enforcement action against Siemens (see here) and also served as the basis for 2011 criminal and civil charges against several former Siemens executives, including those recently charged in Argentina (see here for the prior post summarizing the action).

As noted in this previous post, the U.S. charges against the former Siemens executives were brought after the DOJ faced scrutiny (including at the Senate’s 2010 FCPA hearing) for not bringing any individual enforcement action in connection with a bribery scheme “unprecedented in scale and geographic reach” in which there existed at Siemens a “corporate culture in which bribery was tolerated and even rewarded at the highest levels of the company.”

The U.S. criminal charges against former Siemens executives sits on the docket and a recent docket search indicates that there has not been any activity in the case in over two years.

Sunshine

Mark Cuban, who recently prevailed against the SEC in a long-running insider trading enforcement action, says in this Wall Street Journal article that he is “now considering a new venture publicizing SEC transcripts.”  Says Cuban, “I’m going to get as many as I can, and I’ll put it out there.” “Sunshine is the best disinfectant.”

The article further states:

“Mr. Cuban says he isn’t against the SEC as a whole but thinks that the lawyers who work there should be held responsible for their actions. “There’s such a revolving door, and it was run by attorneys with an attorney’s mind-set looking for their next job,” he says. “It’s a résumé builder.” Mr. Cuban says individual lawyers aren’t held accountable because the public is familiar only with the name of the SEC’s chair, Mary Jo White.  “No wonder they say or do whatever they damn well please,” he says. “I’m like, ‘OK, I’m going to start calling them out by name.’  George Canellos, co-director of the SEC’s enforcement division, sent a response to Mr. Cuban’s statements through an SEC spokesperson: “Mr. Cuban’s comments are without merit and uncalled for. Our lawyers acted in the finest traditions of government counsel and entirely appropriately in strongly advocating the position of the government in this matter.”

On a related note, did you know that the FCPA Professor Scribd page contains approximately 250 hard to find FCPA documents, pleadings, briefs, etc.

Year In Review Roundups

From the Wall Street Journal Risk & Compliance Journal page – a “Q&A with Asheesh Goel, Ropes & Gray, on The Year in FCPA

From Trace Blog – “FCPA Corporate Settlements by the Numbers

From Michael Volkov (Corruption, Crime & Compliance) – “The FCPA Person of the Year – The Prosecutor” and “FCPA Predictions for the New Year – 2014

From Thomas Fox (FCPA Compliance and Ethics Blog) – “My Favorite Blog Posts from 2013

Reading Stack

Thomas Fox (FCPA Compliance and Ethics Blog) and Jon Rydberg (Orchid Advisor) are out with a new book here titled “Anti-Bribery Leadership: Practical FCPA and U.K Bribery Act Compliance Concepts for the Corporate Board Member, C-Suite Executive and General Counsel.”

*****

A good weekend to all.

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