What’s The Difference?
As readers no doubt are aware, since August 2013 JP Morgan has been under FCPA scrutiny for its alleged hiring of so-called Chinese princelings (family members of alleged Chinese officials) to curry favor with Chinese officials in a position of influence over its business.
JP Morgan’s FCPA scrutiny soon lead to an industry sweep of the financial services industry concerning hiring practices in China and other Asian countries. Among the other banks under scrutiny are: Bank of New York Mellon Corp., Citigroup Inc., Credit Suisse Group AG, Deutsche Bank AG, Goldman Sach Group Inc., Morgan Stanley, and UBS AG.
Given the industry, the FCPA scrutiny has generated a significant amount of critical commentary. For instance, in this Wall Street Journal editorial former SEC Commissioner Arthur Levitt called the FCPA scrutiny of the financial industry “scurrilous and hypocritical.” He wrote:
“If you walk the halls of any institution in the U.S.—Congress, federal courthouses, large corporations, the White House, American embassies and even the offices of the SEC—you are likely to run into friends and family members of powerful and wealthy people.”
Double standard aside, in response to the FCPA scrutiny FCPA Inc. churned out clients alerts and other publications regarding best practices for hiring family members of foreign officials.
The following best practices were rightly noted (see here and here).
- Check the educational and professional qualifications of the individual being considered for employment and ensure that they are appropriate for the position being filled. Evidence that a relative of a government official was hired into a position for which he or she was not qualified will likely result in a finding that they were hired for improper purposes.
- Ensure that the salary and treatment given to the relative of the government official is commensurate with the position and consistent with other individuals in a similar position. Evidence that the relative of the government official is receiving a salary significantly higher than other individuals at a similar level and occupying similar positions suggests the additional funds may be provided to influence the related government official.
- Confirm that the position was not created specifically for the relative of the government official. Evidence that the position was created for a specific person will suggest that the company’s sole purpose in hiring the individual was to gain influence with the government official.
- Make certain that, to the extent possible, the responsibilities of the relative of the government official do not fall in the realm of conduct over which the government official holds regulatory or other decision making authority. For example, a relative of a government official charged with bank oversight should not be hired as the compliance officer for a bank subject to that authority. Similarly, the hiring decision-maker should be independent of the business unit that may interact with the government official.
- “An individual whose sole qualification for a prestigious Wall Street gig is a powerful mother or father in the … government should raise red flags.” If an individual “is not otherwise qualified for the position at [a] financial services company, the DOJ and SEC will ask about the basis for the hiring.”
Against this backdrop, as highlighted in this recent New York Times article:
“As [former Florida Governor and Republican Presidential Candidate Jeb] Bush sought to create a personal fortune for himself and his family after eight years in public office, he found a ready source of income: speeches sponsored by corporations and industry trade groups, including some that benefited from his administration’s policies.
Since 2007, Mr. Bush has delivered about 260 paid speeches, earning around $10 million in the process, according to records provided this week by his presidential campaign. The speeches, combined with his consulting and investment businesses, rapidly transformed his finances: His and his wife’s net worth soared to at least $19 million from $1.3 million over the past eight years.
The wealth he amassed from the speaking circuit pales in comparison to that collected by Hillary Rodham Clinton, a Democratic candidate. But it underscores the ease with which political figures can turn their public prominence into private riches.”
As relevent to the FCPA scrutiny of the financial services industry, as recently highlighted here by the Wall Street Journal, a release of Mr. Bush’s tax returns reveals that “over about six years as an adviser for the defunct Wall Street bank Lehman Bros. and later Barclays PLC, Mr. Bush earned, on average, between $1.3 million and $2 million.”
If the above bullet-point best practices were asked in connection with Mr. Bush’s adviser positions with Wall Street Banks, would what the answer be?
If the answers turned out to be the same as the answers regarding Wall Street’s FCPA scrutiny for allegedly hiring Chinese princelings, what’s the difference?
Let’s call a spade a spade.
We have princelings in this country too as well as individuals who bounce in and out of politics and “private” life so often that they are effectively part of the political class regardless of the precise moment in time in which the question is posed.
Friday Roundup
Scrutiny alerts and updates, quotable, and for the reading stack. It’s all here in the Friday Roundup.
Scrutiny Alerts and Updates
Net1
As highlighted here, in 2012 Net1 UEPS (a South African telecommunications company with shares traded on a U.S. exchange) disclosed that it had received information requests from the DOJ and SEC following South African media reports concerning civil litigation in that country by an unsuccessful bidder of a telecommunications contract.
As highlighted here, in 2013 Net1 announced: “[A] full bench of the South African Supreme Court of Appeal (“Appeal Court”) unanimously ruled that the tender process followed by the South African Social Security Agency (“SASSA”) in awarding a contract to Net1’s wholly owned subsidiary Cash Paymaster Services (Proprietary) Limited (“CPS”) was valid and legal.”
Recently, the company disclosed as follows.
“[We have] received a letter from the Foreign Corrupt Practices Act unit of the Division of Enforcement of the U.S. Securities and Exchange Commission (“SEC”), advising the Company as follows:
“We have concluded the investigation as to Net 1 UEPS Technologies, Inc. Based on the information we have as of this date, we do not intend to recommend an enforcement action by the Commission against Net 1 UEPS Technologies, Inc. We are providing this notice under the guidelines set out in the final paragraph of Securities Act Release No. 5310, which states in part that the notice “must in no way be construed that the party has been exonerated or that no action may ultimately result from the staff’s investigation” […]
“The investigation commenced in December 2012 following the award of the SASSA national contract to us in January 2012,” said Dr. Serge Belamant, Chairman and CEO of Net1. “It commenced largely as a result of one of the losing bidders for the contract, Barclays Africa’s subsidiary AllPay, referring unsubstantiated South African press articles alleging irregularities in the tender process to the U.S. Department of Justice. We believe that AllPay was responsible for instigating those media allegations. This resulted in the DOJ and SEC initiating investigations into alleged FCPA and disclosures violations. This letter from the SEC is an important step in the Company clearing its name and is in line with the total absence of any findings of irregularities against Net1 by any South African Court or Regulator resulting from actions pursued by AllPay over the past three years,” he concluded.
The separate investigation into these matters initiated by Net1 itself with the South African Police’s Commercial Crimes unit is expected to be concluded shortly.
It is the Company’s understanding that the DOJ investigation remains open at this time.”
Electrobras
As noted here:
“Brazil’s state-run power company Centrais Eletricas Brasileiras SA has hired U.S. law firm Hogan Lovells to assess possible cases of corruption in some of the projects the company is involved in. Eletrobras, as the company is known, said in a filing to the Brazilian market regulator that the law firm will check whether there were practices which violated the U.S. Foreign Corrupt Practices Act. The projects to be scrutinized will be selected based on their financial relevance to the company and on their relationships with construction companies already being investigated by Brazilian authorities in the so-called Operation Car Wash, focused on state-run oil company Petrobras. Eletrobras also said that internal units assigned to investigate possible wrongdoings are progressing with evaluations and that it will inform investors of their findings as soon as they are available.”
SOCO International
The British oil and gas company with ADRs traded on a U.S. exchange was recently the subject of this New York Times article:
“[A]ccording to documents obtained by Global Witness, an advocacy group, SOCO appears to have paid tens of thousands of dollars to a Congolese Army officer who has been accused of leading a brutal campaign against those objecting to the company’s oil exploration in the nature reserve, Virunga National Park. Over the course of two weeks during the spring of 2014, according to the documents, the officer, Maj. Burimba Feruzi, received at least $42,250 in payments from a local bank account associated with SOCO. That is the equivalent of 30 years of salary for the army officer, according to Global Witness.”
Quotable
Earlier this week Assistant Attorney General Leslie Caldwell spoke at the Annual Association of Certified Fraud Examiners Global Fraud Conference. In pertinent part, she stated:
“The threats posed by international corruption cannot be overlooked. Corruption renders countries less safe and less stable. Corruption thwarts economic development, traps entire populations in poverty and undercuts credible justice systems.
International corruption also inhibits the ability of American companies—and others—to compete overseas on a level playing field. Once bribery and corruption take hold, fair and competitive business practices are eliminated.
A timely example of how corruption can infect international business practices is the FIFA case recently charged by the U.S. Attorney’s Office of the Eastern District of New York. In that case, nine FIFA officials and five corporate executives have been charged with various offenses, including racketeering conspiracy, in connection with a 24-year scheme to enrich themselves through the corruption of international soccer. The Criminal Division’s Office of International Affairs has worked closely with the lead FIFA prosecutors to obtain evidence from numerous countries across the globe. Swiss authorities have opened a separate, parallel probe into FIFA, relating to the selection of World Cup hosts. We are sharing evidence and collaborating closely with governments around the world in connection with the ongoing investigation. This worldwide effort is a profound illustration of the success that can be achieved through a truly global coalition.
In many ways, the FIFA case is very much like the Foreign Corrupt Practices Act (FCPA) cases the Criminal Division is regularly investigating and prosecuting to attack illegal conduct in the global marketplace. These cases protect markets from corruption and the artificial influences of bribery, and ensure that American companies—indeed, all companies—can compete fairly and freely across international boundaries.
But make no mistake: fighting corruption is not some service we provide to the global community; this is a fight in which we have critical international allies. Far from acting as the world’s corruption police, the United States is part of a formidable and growing coalition of international enforcement partners who together combat corruption around the world—at home as well as abroad—that threatens each of our nations.
It is not just the United States that is recognizing the importance of foreign bribery laws. There is a growing chorus of countries voicing support for the fight against this type of corruption. More and more countries are joining international bodies—like the Organisation for Economic Co-operation and Development—that provide uniform standards for the criminalization of bribery of foreign public officials in international business transactions. This type of collaboration is critical if we are going to have a meaningful impact on international corruption.
[…]
At the same time that we work to combat corruption overseas, we are also increasing our efforts to ensure that American borders do not protect criminals or their assets. In this regard, the Justice Department launched the Kleptocracy Asset Recovery Initiative in 2010. The initiative relies on the use of U.S. civil forfeiture actions to recover the proceeds of foreign official corruption that pass through the United States.
More simply, it takes the monies and assets stolen by foreign despots and kleptocrats and returns them to the people harmed. This initiative protects the integrity of the U.S. financial system from use by corrupt officials and denies those officials the ability to enjoy luxuries purchased in the United States at the expense of the populations they purport to serve.
In many ways, the Criminal Division’s FCPA enforcement program and our Kleptocracy Initiative are really two sides of the same anti-corruption coin. We bring those who pay bribes to justice, no matter how rich and powerful they are. But by itself, that is not enough. We also attack corruption at its source, by prosecuting and seizing the assets of the corrupt officials who betray the trust of their people.”
[…]
The United States is not going to overcome the threat posed by global corruption and international organized crime by going it alone. The Department of Justice is never going to serve as the world’s global police force. But we can—and I believe we should—lead by example: by vigorously investigating and prosecuting international corruption and organized crime when it violates U.S. laws, and by sustaining and increasing our commitment to international collaboration in our nations’ shared struggle to safeguard our markets, our networks and our citizens.
Under my leadership, the Criminal Division will remain steadfastly committed to forging and growing our international partnerships as we fight the scourge of international corruption and organized crime.”
*****
This recent Global Investigations Review article highlights comments made by Matthew Queler ( assistant chief of the DoJ’s FCPA unit) concerning the hiring of so-called princelings (a hiring practice that has resulted in FCPA scrutiny of a variety of companies in the financial services sector). Queler’s comments reminded me of reading an article from the Onion in that he basically said its OK to hire princelings so long as it is legal and we at the DOJ determine what legal is.
For the Reading Stack
From Morrison & Foerster’s most recent Anti-Corruption Developments alert.
“DOJ Revokes Non-Prosecution Agreement (NPA). As we previously reported, Assistant Attorney General Leslie Caldwell publicly stated last month that DOJ would “not hesitate to tear up a DPA or NPA and file criminal charges” if a company breaches its agreement. AAG Caldwell’s statement was likely intended to foreshadow DOJ’s May 20, 2015 announcement that it had revoked an NPA with a corporate defendant, the first action of this kind since the revocation of a DPA with Aibel Group Limited in November 2008. In 2012, DOJ entered into an NPA with UBS AG in which DOJ declined to prosecute the bank for any crimes related to its submission of interest rates for LIBOR and other rate benchmarks. In return, the company was required to abide by several conditions during the pendency of the NPA, including the requirement that it “commit no United States crime whatsoever.” DOJ revoked the NPA after (according to the factual statement attached to the guilty plea) the company “engaged in deceptive FX trading and sales practices.” Although not an FCPA case, the revocation of the NPA in this case is relevant to FCPA enforcement because DOJ’s Fraud Section, which has exclusive authority to bring criminal FCPA cases, was involved in the decision. There are a number of reasons to find this action unfair to companies where, as here, the company implemented an enhanced compliance program, and once it found issues, it brought them forward voluntarily to the Antitrust Division (indeed, qualifying for immunity under the Leniency Program). In other words, the company undertook an enhanced compliance program as it promised to do and then it brought the matter forward, as DOJ has repeatedly encouraged companies to do, only to be punished for it. DOJ’s action, thus, presents a potential disincentive to well-meaning companies to report problems discovered as a product of the enhanced compliance program implemented in the wake of a DOJ resolution.”
Wall Street Firms Push Back Against FCPA Scrutiny
For the past several years, a number of banks have been under FCPA scrutiny based on alleged hiring practices in China and elsewhere. (See here among other prior posts).
Among the banks under scrutiny are the following: JP Morgan, Bank of New York Mellon Corp., Citigroup Inc., Credit Suisse Group AG, Deutsche Bank AG, Goldman Sach Group Inc., Morgan Stanley, and UBS AG.
The Wall Street Journal reports:
“Wall Street banks are embroiled in an intense dispute with the U.S. government over its “aggressive” interpretation of foreign-bribery laws, a flurry of legal wrangling in a probe with broad implications for how corporations do business overseas, according to people familiar with the matter.
The previously unreported campaign by banks goes to the heart of a wide-ranging inquiry into whether they ran afoul of U.S. antibribery laws by giving jobs to relatives of managers of state-owned companies and other well-connected officials, including the kin of high-ranking Chinese government officials known as “princelings,” allegedly to curry favor in getting deals.
In a series of meetings, calls and letters to regulators and federal prosecutors, banks have accused the government of overreaching by threatening to criminalize standard business practices in some countries, according to people close to the firms. The pushback differs from the normal squabbling over settlement terms, in part because the outcome is likely to set a blueprint for future cases, according to people familiar with the matter.
The government maintains its approach, which the banks have privately called “aggressive,” is within the confines of the law.”
According to the article, JP Morgan “is preparing a white paper to submit to the Securities and Exchange Commission and Justice Department, setting out the bank’s concerns about their approach.” The white paper is being written by Mark Mendelsohn.
Mendelsohn’s assignment is most interesting as the former DOJ FCPA Unit Chief describes himself on his law firm bio as the “architect and key enforcement official of DOJ’s modern Foreign Corrupt Practices Act (FCPA) enforcement program.” As highlighted in prior posts here and here, when Mendelsohn left the DOJ in April 2010 others stated as follows.
- “Mr. Mendelsohn has overseen a hot field in prosecution in recent years” and that “it has been up to the Justice Department – and specifically to Mr. Mendelsohn – to interpret the law.”
- “Mark Mendelsohn transformed the FCPA from a legal backwater to a headline practice” and during his “term, no corporations mounted a courtroom defense against FCPA charges; instead all made deals with the DOJ to settle their cases.” “That gave Mendelsohn extraordinary power — in the FCPA realm, he and the DOJ became prosecutor, judge, and jury.”
His own law firm, which is now representing a major Wall Street firm in the midst of FCPA scrutiny, issued a release at the time stating Mendelsohn “built the DOJ’s modern FCPA program.”
In certain respects, the FCPA scrutiny of JP Morgan and other Wall Street banks is a reflection of the DOJ (and SEC’s) modern FCPA enforcement program.
According to the Wall Street Journal article, Bank of New York Mellon Corp. “is expected in coming months to settle an SEC inquiry that includes allegations the firm gave internships to relatives of officials at a Middle Eastern sovereign-wealth fund.”
As I told the Wall Street Journal in the article, in FCPA history only one public company has forced the DOJ to carry its burden of proof as to the elements of an FCPA anti-bribery violation and the government will likely get away with pushing the envelope on the legal boundaries in the hiring probe. When push comes to shove, these banks are not going to risk a criminal indictment to litigate a disputed legal issue.
Chalk it up to another potential example of the “facade of FCPA enforcement.”
Indeed, in many instances of FCPA scrutiny in this new era two distinct questions can be asked.
The first is whether, given the DOJ’s and SEC’s enforcement theories, the conduct at issue can expose a company to FCPA scrutiny and an FCPA enforcement action? The second is whether Congress in passing the FCPA intended to capture the alleged conduct at issue and whether a court would find the alleged conduct to be in violation of the FCPA?
As a practical matter, risk-averse corporations care more about the first question than the second.
However, those who value the rule of law should care more about the second question. As former Attorney General Alberto Gonzales rightly noted:
“In an ironic twist, the more that American companies elect to settle and not force the DOJ to defend its aggressive interpretation of the [FCPA], the more aggressive DOJ has become in its interpretation of the law and its prosecution decisions.”
Corporations often complain about the expansive enforcement theories that have come to define this new era of enforcement. However, the business community itself is, at least in part, responsible for the current aggressive FCPA enforcement climate. Indeed, as Homer Moyer, a dean of the FCPA bar rightly observed:
“One reality is the enforcement agencies’ [FCPA] views on issues and enforcement policies, positions on which they are rarely challenged in court. The other is what knowledgeable counsel believe the government could sustain in court, should their interpretations or positions be challenged. The two may not be the same. The operative rules of the game are the agencies’ views unless a company is prepared to go to court or to mount a serious challenge within the agencies.”
Friday Roundup
Is trust “reasonable,” Sigelman formally indicted, scrutiny alerts and updates, and for the reading stack. It’s all here in the Friday roundup.
Is Trust “Reasonable”
This prior post asked:
Would FCPA compliance be better achieved if companies had fewer formal internal controls and instead devoted greater effort to fostering trust within a business organization? Would such an approach even satisfy an issuer’s obligations under the FCPA’s internal controls provisions which require that issuers devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that transactions are properly authorized, recorded, and accounted for by the issuer?
The questions are posed once again after reading this New York Times article titled “Berkshire’s Radical Strategy: Trust.” In the article, Charlie Munger, vice chairman of Berkshire Hathaway (arguably one of the most well-respected companies in America) “ruminates on the state of corporate governance, offering a counternarrative to the distrustful culture of most businesses: instead of filling your ranks with lawyers and compliance people, he argued, hire people that you actually trust and let them do their job.”
As highlighted in the article:
“Here’s a little-known fact: Berkshire Hathaway, the fifth-largest company in the United States, with some $162.5 billion in revenue and 300,000 employees worldwide, has no general counsel that oversees the holding company’s dozens of units. There is no human resources department, either.
If that sounds like a corporate utopia, that’s probably because it is. To some people in this day and age — given the daily onslaught of headlines about scandal and fraud in corporate America — that also may sound almost like corporate negligence.”
Sigelman Formally Indicted
In January 2014, the DOJ announced FCPA and related charges against former executives of PetroTiger Ltd., a British Virgin Islands oil and gas company with operations in Colombia and offices in New Jersey, “for their alleged participation in a scheme to pay bribes to foreign government officials in violation of the FCPA, to defraud PetroTiger, and to launder proceeds of those crimes.” The individuals charged were former co-CEOs of PetroTiger Joseph Sigelman and Knut Hammarskjold and former general counsel Gregory Weisman. (See this prior post for additional details).
In this criminal complaint, Sigelman was charged with conspiracy to violate the FCPA’s anti-bribery provisions as well as three substantive FCPA charges. The FCPA charges were based on allegations that Sigelman and others made at least four transfers of money in the approximate amount of $333,500 to an account in Colombia of a “foreign government official in Colombia.”
In this release, the DOJ announced today that Sigelman was formally criminally indicted for the same conduct. The release states that Sigelman “charged with conspiracy to violate the FCPA and to commit wire fraud, conspiracy to launder money, and substantive FCPA and money laundering violations.”
The DOJ release further states: “The case was brought to the attention of the department through a voluntary disclosure by PetroTiger, which cooperated with the department’s investigation.”
As previously noted, both Hammarskjold and Weisman have pleaded guilty.
Scrutiny Alerts
Key Energy Services
Key Energy Services disclosed in its recent SEC filing:
“The U.S. Securities and Exchange Commission has advised us that it is investigating possible violations of the U.S. Foreign Corrupt Practices Act involving business activities of Key’s operations in Russia. We take any such allegations very seriously and are conducting an investigation into the allegations. We are fully cooperating with and sharing the results of our investigation with the Commission. While the outcome of our investigation is currently not determinable, we do not expect that it will have a material adverse effect on our consolidated financial position, results of operations, or cash flows.”
Quanta Services
Quanta Services (an engineering, procurement and construction services company) disclosed in its recent SEC filing:
“On March 10, 2014, the SEC notified Quanta of an inquiry into certain aspects of Quanta’s activities in certain foreign jurisdictions, including South Africa and the United Arab Emirates. The SEC also requested that Quanta take necessary steps to preserve and retain categories of relevant documents, including those pertaining to Quanta’s U.S. Foreign Corrupt Practices Act compliance program. The SEC has not alleged any violations of law by Quanta or its employees. Quanta has complied with the preservation request and is cooperating with the SEC.”
PTC Inc.
PTC Inc. (formerly known as Parametric Technology) first disclosed its FCPA scrutiny in August 2011 and recently disclosed in this SEC filing:
“China InvestigationWe have been cooperating to provide information to the U.S. Securities and Exchange Commission and the Department of Justice concerning payments and expenses by certain of our business partners in China and/or by employees of our Chinese subsidiary that raise questions concerning compliance with laws, including the U.S. Foreign Corrupt Practices Act. Our internal review is ongoing and now includes periods earlier than those previously examined. We continue to respond to requests for information from these agencies, including a subpoena issued to the company by the SEC. We cannot predict when or how this matter may be resolved. Resolution of this matter could include fines and penalties; however we are unable to estimate an amount that could be associated with any resolution and, accordingly, we have not recorded a liability for this matter. If resolution of this matter includes substantial fines or penalties, this could materially impact our results for the period in which the associated liability is recorded or such amounts are paid. Further, any settlement or other resolution of this matter could have collateral effects on our business in China, the United States and elsewhere.”
“[The previously disclosed internal] review has identified conduct that raises concerns under the FCPA or other anti-bribery laws that may result in monetary penalties or other sanctions. In addition, the Company’s ability to conduct business in certain jurisdictions could be negatively impacted. The Company has recorded a non-material accrual for an identified matter. Given the current status of the internal review, the Company cannot reasonably estimate the range of possible loss that may result from additional identified matters or from the final outcome of the continuing internal review.”
In case you had not heard that numerous financial services companies were under FCPA scrutiny for alleged hiring practices, the Wall Street Journal reports:
“U.S. regulators have expanded their investigation into large banks’ hiring practices in Asia, seeking more information from at least five U.S. and European firms, according to people close to the probe. The Securities and Exchange Commission in early March sent letters to a group of companies including Credit Suisse Group AG, Goldman Sachs Group Inc., Morgan Stanley, Citigroup Inc. and UBS AG seeking more information about their hiring in Asia, according to people. […] The SEC late last year issued a round of letter to at least six banks, seeking information on their hiring practices, such as whether the firms had special programs dedicated to relatives of influential officials, according to people close to the inquiry. The second round of requests reflects a deepening of the probe. The agency is seeking more data on the banks’ recruiting in Asia, including lists of employees hired as a result of referrals from foreign officials and clients, added the people familiar with the investigation.”
As to the above, Goldman disclosed in its most recent SEC filing:
“Regulatory Investigations and Reviews and Related Litigation.
[The company] and certain of its affiliates are subject to a number of other investigations and reviews by, and in some cases have received subpoenas and requests for documents and information from, various governmental and regulatory bodies and self-regulatory organizations and litigation relating to various matters relating to the firm’s businesses and operations, including:
compliance with the U.S. Foreign Corrupt Practices Act, including with respect to the firm’s hiring practices …”
Reading Stack
No surprise that an individual who paid $174 million to post bail has hired an A-list legal team in defense of DOJ allegations that he violated, among other laws, the FCPA. (See here for a recent New York Times article regarding Dmitry Firtash).
Sound advice from former DOJ FCPA Unit Chief Chuck Duross in this MoFo Tech article concerning FCPA risk and the technology industry:
“[T]echnology companies are also at risk from the distribution model that’s often used in the industry. Many companies sell their products to channel partners, which add some value to the product or service—such as other hardware, software, an installation, or a service plan—and then resell it at a higher price. That’s an entirely appropriate business model. But as with any third party, companies need to appreciate the potential risk if, for example, the distributor is simply reselling at a higher price without adding any legitimate value and using that profit as a slush fund to funnel bribes to government officials. It may seem to the company that it is not violating the FCPA. It has simply sold its product to another company. But if a company’s employees are aware that the distributor is paying (or just offering) bribes to government officials to help sell the product, the company and its employees could be criminally liable as conspirators and aiders and abettors.
What should tech companies be doing to avoid these issues?
One thing is to know the third parties they’re doing business with. It is also fundamental to understand the business reason for working with third parties. One of the first questions asked during a DOJ or SEC investigation will often be, “What was the business purpose behind working with X?” Having a clear answer will earn credibility with regulators and underscore the company’s commitment to compliance. Also, making sure employees—and third parties—understand company policies, are properly trained, execute FCPA certifications, and are subject to appropriate ongoing reviews can prevent violations and mitigate (or avoid altogether) penalties if a problem does occur. That is just good business. Corruption tends to occur at companies with loose control environments. While I was at DOJ, we routinely saw loose control environments leading to embezzlement, self-dealing, fraud, and even antitrust violations. When a company doesn’t know where its money is going, that’s bad business and negatively impacts shareholder value. When companies invest in a compliance program, they are investing in the health of the business.”
This Kyiv Post article notes:
“Some of Ukraine’s underpaid cadre of civil servants might get bonuses from international finance institutions to reduce the temptation of taking bribes. According to Ukrainian Tax Service chief Ihor Bilous, the European Bank for Reconstruction and Development is exploring the idea of setting up a fund that would provide officials with additional pay. ‘Last week I had a meeting with EBRD representatives and they proposed to create a fund to pay money for people who serve the state in high positions,’ Bilous told the Kyiv Post. This idea was successfully implemented in Georgia, he adds, “we need to change the system, state salaries are very low and this situation creates some kind of temptation.”
*****
A good weekend to all, and to all mothers, Happy Mother’s Day!
Friday Roundup
FCPA scrutiny equals a raise, Qualcomm declines to cave, scrutiny alerts, industry specific risks, survey says, gaps in the narrative, a pulse on FCPA Inc., quotable and not quotable, and for the reading stack. It’s all here in the Friday Roundup
FCPA Scrutiny Equals A Raise
There are some things that happen in the FCPA space that cause one to scratch their head.
Such as a company being under FCPA scrutiny paying audit committee members more money because of the time devoted to the FCPA scrutiny. In its recent proxy statement, Wal-Mart disclosed as follows.
“Since November 2011, the Audit Committee has been conducting an internal investigation into, among other things, alleged violations of the U.S. Foreign Corrupt Practices Act of 1977 (the “FCPA”) and other alleged crimes or misconduct in connection with foreign subsidiaries, and whether prior allegations of such violations and/or misconduct were appropriately handled by Walmart. The Audit Committee and Walmart have engaged outside counsel from a number of law firms and other advisors who are assisting in the ongoing investigation of these matters. This investigation has resulted in a significant increase in the workload of the Audit Committee members since the commencement of this investigation, and during fiscal 2014, the Audit Committee conducted 13 additional meetings related to the investigation and compliance matters, and Audit Committee members received frequent updates via conference calls and other means of communication with outside counsel and other advisors related to the investigation. As it had done in November 2012 in recognition of the significantly increased commitment of time required of the Audit Committee to conduct this investigation, in November 2013, the CNGC (Compensation, Nomination, and Governance Committee) and the Board approved an additional annual fee in the amount of $75,000 payable to each Audit Committee member other than the Audit Committee Chair for fiscal 2014, and an additional annual fee in the amount of $100,000 payable to the Audit Committee Chair for fiscal 2014. These amounts were prorated for directors who served on the Audit Committee during a portion of fiscal 2014. The CNGC determined the amounts of these additional fees based on (1) the CNGC’s and the Board’s review of the significant additional time and effort that had been required of the Audit Committee members during the previous Board term in connection with these matters, which were in addition to the time spent by the Audit Committee with respect to the Audit Committee’s other duties and its regularly scheduled meetings, and (2) the expectation that the Audit Committee members would continue to expend approximately the same amount of time and effort in discharging their responsibilities as Audit Committee members at least through the remainder of fiscal 2014.”
Qualcomm Declines to Cave
Rare are so-called Wells Notices in the FCPA context for the simple reason that few issuers actually publicly push back against the SEC. Thus, the below disclosure by Qualcomm earlier this week stands out:
“Securities and Exchange Commission (SEC) Formal Order of Private Investigation and Department of Justice Investigation : On September 8, 2010, the Company was notified by the SEC’s Los Angeles Regional office of a formal order of private investigation. The Company understands that the investigation arose from a “whistleblower’s” allegations made in December 2009 to the audit committee of the Company’s Board of Directors and to the SEC. In 2010, the audit committee completed an internal review of the allegations with the assistance of independent counsel and independent forensic accountants. This internal review into the whistleblower’s allegations and related accounting practices did not identify any errors in the Company’s financial statements. On January 27, 2012, the Company learned that the U.S. Attorney’s Office for the Southern District of California/Department of Justice (collectively, DOJ) had begun an investigation regarding the Company’s compliance with the Foreign Corrupt Practices Act (FCPA). As previously disclosed, the audit committee conducted an internal review of the Company’s compliance with the FCPA and its related policies and procedures with the assistance of independent counsel and independent forensic accountants. The audit committee has completed this comprehensive review, made findings consistent with the Company’s findings described below and suggested enhancements to the Company’s overall FCPA compliance program. In part as a result of the audit committee’s review, the Company has made and continues to make enhancements to its FCPA compliance program, including implementation of the audit committee’s recommendations.
As previously disclosed, the Company discovered, and as a part of its cooperation with these investigations informed the SEC and the DOJ of, instances in which special hiring consideration, gifts or other benefits (collectively, benefits) were provided to several individuals associated with Chinese state-owned companies or agencies. Based on the facts currently known, the Company believes the aggregate monetary value of the benefits in question to be less than $250,000, excluding employment compensation.
On March 13, 2014, the Company received a Wells Notice from the SEC’s Los Angeles Regional Office indicating that the staff has made a preliminary determination to recommend that the SEC file an enforcement action against the Company for violations of the anti-bribery, books and records and internal control provisions of the FCPA. The bribery allegations relate to benefits offered or provided to individuals associated with Chinese state-owned companies or agencies. The Wells Notice indicated that the recommendation could involve a civil injunctive action and could seek remedies that include disgorgement of profits, the retention of an independent compliance monitor to review the Company’s FCPA policies and procedures, an injunction, civil monetary penalties and prejudgment interest.
A Wells Notice is not a formal allegation or finding by the SEC of wrongdoing or violation of law. Rather, the purpose of a Wells Notice is to give the recipient an opportunity to make a “Wells submission” setting forth reasons why the proposed enforcement action should not be filed and/or bringing additional facts to the SEC’s attention before any decision is made by the SEC as to whether to commence a proceeding. On April 4, 2014, the Company made a Wells submission to the staff of the Los Angeles Regional Office explaining why the Company believes it has not violated the FCPA and therefore enforcement action is not warranted.
The Company is continuing to cooperate with the SEC and the DOJ, but is unable to predict the outcome of their investigations or any action that the SEC may decide to file.”
Needless to say, this instance of FCPA scrutiny will be interesting to follow.
Scrutiny Alerts
Hiring Probes Expand
Reuters reports here:
“U.S. government agencies that have been probing banks’ hiring of children of powerful Chinese officials are expanding existing investigations in other industries across Asia to include hiring practices …The U.S. Justice Department and the Securities and Exchange Commission have been asking global companies in a range of industries including oil and gas, telecommunications and consumer products for information about their hiring practices to determine if they could amount to bribery …”.
For more on JPMorgan’s FCPA scrutiny which got this started, see here. For more on so-called industry sweeps, see here.
Delphi Automotive
Delphi Automotive disclosed in it most recent SEC quarterly filing as follows:
“During the first quarter of 2014, Delphi identified certain potentially improper payments, made by certain manufacturing facility employees in China, that may violate certain provisions of the U.S. Foreign Corrupt Practices Act (the “FCPA”). Under the oversight of Delphi’s Audit Committee of the Board of Directors, Delphi has engaged outside counsel to assist in the review of these matters, and to evaluate existing controls and compliance policies and procedures. This review remains ongoing. Violations of the FCPA could result in criminal and/or civil liabilities and other forms of penalties or sanctions. Delphi has voluntarily disclosed these matters to the U.S. Department of Justice and the SEC, and is cooperating fully with these agencies. Although Delphi does not expect the outcome of this review to have a material adverse impact on the Company, there can be no assurance as to the ultimate outcome of these matters at this time.”
United Technologies
United Technologies disclosed in its most recent SEC quarterly filing as follows:
“Non-Employee Sales Representative Investigation
In December 2013 and January 2014, UTC made voluntary disclosures to the United States Department of Justice, the Securities and Exchange Commission Division of Enforcement and the United Kingdom’s Serious Fraud Office to report the status of its internal investigation regarding a non-employee sales representative retained by United Technologies International Operations, Inc. (UTIO) and International Aero Engines (IAE) for the sale of Pratt & Whitney and IAE engines and aftermarket services, respectively, in China. On April 7, 2014, the SEC notified UTC that it is conducting a formal investigation and issued a subpoena to UTC seeking production of documents related to the disclosures. UTC is cooperating fully with the investigation. Because the investigation is at an early stage, we cannot predict its outcome or the consequences thereof at this time. At the outset of the internal investigation, UTIO and IAE suspended all commission payments to the sales representative, and UTIO and IAE have not resumed making any payments. This led to two claims by the sales representative for unpaid commissions: a civil lawsuit filed
against UTIO and UTC and an arbitration claim against IAE. We are contesting the lawsuit and the arbitration claim. We do not believe that the resolution of the lawsuit or the arbitration will have a material adverse effect on our competitive position, results of operations, cash flows or financial condition.”
Industry Specific Risk
The reasons why companies become the subject of FCPA scrutiny are often unique to the industry the company is in. This is why FCPA compliance is best tailored to a company’s unique risk profile as informed by a risk assessment.
This recent Wall Street Journal Risk & Compliance post from the Dow Jones Global Compliance Symposium is informative in collecting industry insight.
“Technology. Melissa Lea, Chief Global Compliance Officer, SAP AG. Profit margins for distributors are flexible in tech as so much of the cost is related to labor. And that flexibility offers room for partners to try to pad expenses to pay bribes. “Any time you hear about flexibility it opens the door for corruption,” said Ms. Lea, who noted that authorities have recently cracked down on bribery in the technology sector, once thought to be amongst the cleanest industries.
Pharmaceuticals. Rady A. Johnson, Chief Compliance & Risk Officer, Pfizer Inc. Drug companies pay doctors for a variety of consulting services and often invite them to attend events to promote their products. But since it’s these same doctors that prescribe drugs, pharmaceutical companies need to ensure that fancy conferences and payments for services are not cover for bribes. “We can’t do our job without interacting with health care professionals,” Mr. Johnson said. But companies need to ensure those interactions are appropriate and well defined, he said. In 2012, Pfizer agreed to pay more than $60 million to settle investigations into improper payments made to doctors and foreign officials.
Banks. W.C. Turner Herbert, Director of Anti-Corruption, Bank of America Corp. Lately in the banking sector, corruption concerns have centered on hiring the relatives of foreign officials in exchange for business. In the past few years, U.S. authorities have investigated a number of banks over allegations of the practice, including Goldman Sachs Group Inc. and J.P. Morgan Chase & Co. “Its a new area of enforcement without much precedence,” Mr. Herbert said. While hiring well-connected people shouldn’t, by itself, be a red flag, compliance officers need to ensure the selection is done on “merit and the business objectives” of the job, he said. “What draws red flags is if he’s not qualified,” Mr. Herbert said.
Survey Says
In connection with the above-mentioned Dow Jones Global Compliance Symposium, Dow Jones released this “Anti-Corruption Survey Results 2014.” The survey was conducted on-line “among compliance professionals worldwide” and 383 responses “were completed among companies with anti-corruption programs.” It is difficult to assess survey results without knowing the precise questions asked, but the Dow Jones survey does contain some interesting nuggets.
Such as “approximately 30% of companies spend $1 million or more on anti-corruption staff and policies.”
In “Revisiting a Foreign Corrupt Practices Act Compliance Defense,” I suggest that the current FCPA enforcement environment does not adequately recognize a company’s good faith commitment to FCPA compliance and does not provide good corporate citizens a sufficient return on their compliance investments.
Compliance defense opponents (such as the DOJ) like to point out that such a defense will result in “paper compliance” and “check-a-box” exercises. Such clichés, however, ignore the reality of the situation – this many companies are making substantial investments of time and money in pro-active compliance policies and procedures.
One irony of course is that several former DOJ FCPA enforcement attorneys who have criticized a compliance defense as resulting in “paper compliance” and “check-a-box” exercises now devote a substantial portion of their private practice advising companies on FCPA compliance.
Gaps in the Narrative
You know the narrative.
In 2002, an accounting partnership (Arthur Anderson) was convicted of obstruction of justice for shredding documents related to its audit of Enron. Even though the Supreme Court ultimately tossed the conviction, Arthur Anderson essentially went out of business. Because of this, in the minds of some, the DOJ can’t criminally charge business organizations with crimes and thus the DOJ has crafted alternative resolution vehicles such as non-prosecution and deferred prosecution agreements to avoid the perceived collateral consequences of a criminal indictment or conviction.
Never mind that the narrative is based on a false premise. (See here for the guest post and article by Gabriel Markoff titled “Arthur Anderson and the Myth of the Corporate Death Penalty).
Nevertheless, the narrative persists and is accepted by some as gospel truth.
However, perhaps you have heard that in early April Pacific Gas & Electric Corporation (PG&E – a public company) was criminally charged with multiple violations of the Natural Gas Pipeline Safety Act.
The company’s stock is still trading (in fact it is up since the criminal charges were announced), it is still employing people, and it is still operating its business.
Recognizing the fallacy of the narrative is important for corporate leaders of businesses subject to DOJ scrutiny in the FCPA context or otherwise. Defenses can be mounted and the DOJ can and should be put to its burden of proof more often.
A Pulse on FCPA Inc.
Law360 highlights “Four Practices Areas Generating Big Billable Hours.” As to the FCPA the article notes:
“The Foreign Corrupt Practices Act, which mandates certain accounting transparency requirements and gives the U.S. government the power to pursue businesses that bribe foreign officials, is creating long workdays for attorneys throughout the world. “If Foreign Corrupt Practices Act were a stock, I wish I would have held it,” said William Devaney, co-chair of Venable LLP’s FCPA and anti-corruption practice group. “We’ve seen huge growth in the practice area since 2004, and with the government’s current focus on FCPA, it’s safe to say anti-corruption enforcement will be around for a long time.” After the FCPA was amended in 1998 to include additional anti-bribery provisions, the U.S. government began actively applying the FCPA to not only large companies but also their smaller counterparts. As a result, Devaney says, a lot of midmarket and smaller companies are now coming into the FCPA compliance fold after acknowledging their obligations under the law, resulting in a surge in demand.
And according to Aaron G. Murphy, a partner with Akin Gump Strauss Hauer & Feld LLP, foreign countries passing legislation similar to the FCPA will create an explosion of fraud investigations that begin abroad but later will involve the U.S. Department of Justice. Murphy said the FCPA stood as one of the lone anti-corruption laws in the world for 20 years, then in the mid-1990s, numerous foreign governments adopted similar rules to punish local and international corruption. “No politician has ever been elected on a ‘get softer on corruption’ ticket,” Murphy said. “If anti-corruption laws get modified, they will probably get stronger, not weaker. So we likely won’t see, 20 years from now, attorneys reminiscing about when companies had to deal with corruption laws. This practice area is here to stay.”
That the FCPA practice is here to stay is all the more reason to elevate your FCPA knowledge and practical skills at the FCPA Institute.
The three other practice areas highlighted in the article were: export controls and trade sanctions; civil false claims act; and patent litigation and patent trolls.
Quotable
The White House recently announced that President Obama named Kirkland & Ellis partner W. Neil Eggleston to be White House Counsel (see here). FCPA Professor has highlighted in the past (see here and here) certain of Eggleston’s spot-on comments regarding the FCPA or related issues.
In this interview Eggleston stated: “I worry that [NPAs and DPAs] will become a substitute for a prosecutor deciding – this is not an appropriate case to bring – there is no reason to subject this corporation to corporate criminal liability. In the old days, they would have dropped the case. Now, they have the back up of seeking a deferred or non prosecution agreement, when in fact the case should not have been pursued at all. That’s what I’m worried about – an easy out.”
In another interview, Eggleston was asked “what is an important issue or case relevant to your practice area and why” and stated: “We are beginning to see the development of case law in the FCPA area, which I believe is good for the process. Most of these cases have been settled. When that occurs, defendants have little incentive to refuse to agree to novel Department of Justice theories of prosecution or jurisdiction, so long as the penalty is acceptable. The department then cites its prior settlement as precedent when settling later ones. But no court approved the earlier settlement, and the prior settlement should have no precedential value in favor of the DOJ in later settlements. As the DOJ increases its prosecution of individuals, we will see many more trials, which will give rise to courts, not the DOJ, interpreting the statute.”
Not Quotable
DOJ Deputy Attorney General James Cole was a keynote speaker earlier this week at the Dow Jones Global Compliance Symposium. According to the event agenda, the title was “What the Justice Department Has in Its Sights” and described as follows.
“From foreign bribery to insider trading, the U.S. Department of Justice has been at the forefront of rigorous enforcement that has forced companies to treat compliance seriously. We interview James Cole, deputy attorney general, about where the department is focusing its efforts now.”
I reached out to the DOJ Press Office for a transcript of Mr. Cole’s remarks and was told “we don’t have one.”
It is unfortunate that public officials speak about matters of public interest at private conferences that charge thousands of dollars to attend.
Reading Stack
The FCPA Guidance was sort of interesting to read, but as noted in my article “Grading the FCPA Guidance” it lacks any legal authority or effect. A hat tip to the Tax Law Prof Blog for highlighting a recent U.S. Tax Court decision finding that IRS Guidance is “not binding precedent” nor “substantial authority” for a tax position.
The New York Times here goes in-depth on Dmitry Firtash, the Ukrainian businessman recently criminally charged in connection with an alleged bribery scheme involving Indian licenses (see here for the prior post).
An informative three-part series (here, here and here) by Tom Fox (FCPA Compliance & Ethics Blog) regarding gifts, travel and entertainment.
Miller & Chevalier’s FCPA Spring 2014 Review is here.