Friday Roundup
“Scurrilous and hypocritical,” scrutiny alerts and updates, a foreign official brain teaser, quotable, and for the reading stack. It’s all here in the Friday roundup.
“Scurrilous and Hypocritical”
As I have highlighted for years (see approximately 25 separate posts under the subject matter heading double standard), there is a double standard concerning corporate interaction with “foreign officials” under the FCPA and corporate interaction with U.S. officials under other U.S. laws – specifically 18 U.S.C. 201.
Commenting on JPMorgan’s current FCPA scrutiny concerning its alleged hiring practices in China, former SEC Commissioner Arthur Levitt writes, in pertinent part, in this Wall Street Journal opinion piece as follows.
“[A]ccording to financial regulators now looking into the hiring practices of major U.S. banks and multinationals in China—some of which have employed members of influential Chinese families—anyone who once hired me [Levitt’s father was the New York state comptroller] might have been violating ethical and legal standards. Securities and Exchange Commission regulators now suggest that such hiring overseas is a form of untoward influence, akin to bribing foreign officials to win business.
The accusation is scurrilous and hypocritical. 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.
[…]
Whether this is right or wrong, unfair or fair, is not the point. It is hypocritical of financial regulators to criticize—even penalize—practices abroad that are commonplace in Washington, New York and other seats of political and economic power.
Were the SEC to be completely consistent in its approach, it would have to come down hard on the same practices here in the U.S. And the agency would have a field day. Members of Congress and the executive branch regularly hire the children of major donors. Regulators would find scores of examples of men and women, occupying internships and entry-level positions in U.S. corporations, who were hired on the say-so of someone much higher up in the organization.
[…]
[I]f we were to deny multinational companies the ability to hire locally recommended talent, where do we draw the line? Are spouses of influential officials off-limits, but not their children? What about siblings? If not siblings, what about cousins, uncles, nephews? And then there is the issue of friends: How can a financial regulator know whether a friend of someone in power received a job offer in good faith or as a form of influence peddling?
I would hate to imagine what would happen if we applied the same kind of sliding scale to the many people who have received job offers by way of their familial relationships. If that happened, there aren’t many people in finance who would escape the accusation that their hiring was the byproduct of influence peddling.”
Scrutiny Alerts and Updates
This Macau Business Daily report notes the timing of a $10 million pledge by Nasdaq-listed Melco Crown Entertainment for a cultural project in collaboration with the Tokyo University of the Arts. As noted in the article, the company needs various government permissions to increase its presence in Japan. As noted in this prior post, among others, casino operators including Wynn Resorts have been the subject of FCPA scrutiny based on similar charitable contributions.
This previous post highlighted how Transparency International urged the DOJ to investigate the conduct of Walters Power International (an Oklahoma based company that supplies, develops, services and manages electrical generation power plants around the world) in connection with power plant projects in Pakistan. This recent article in The News International reports that Walters Power has “been cleared of any misconduct by the US Department of Justice.” The article notes:
“Following [TI’s] complaint, the US Department of Justice launched a lengthy inquiry against WPIL […]. On Oct 31, 2012, it informed WPIL’s […] lawyers in the US that the inquiry was being closed as no evidence of wrongdoing could be found against the companies. The clearance letter, a copy of which is available with The News, said: “Over the past several months, your client, Walters Power International Ltd., has responded to a number of inquires by the Department of Justice, Criminal Division, Fraud Section, into possible violations of the Foreign Corrupt Practices Act. You have also responded to inquiries on behalf of Pakistan Power Resources, LLC, and Walters Power International, LLC. As you are aware, the Supreme Court of Pakistan issued an order on March 30, 2012, that declared the country’s rental power plant contracts void ab initio. Our review of that order and related pleadings has revealed no allegations of bribery in connection with those contracts. In addition, on July 24, 2012, Pakistan’s National Accountability Bureau closed its case regarding Walters Power noting that “there remains no basis for further proceedings about the Company.” Finally, Transparency International Pakistan, which publicly referred this matter to the US Department of Justice, has provided no evidence of bribery in connection with the RPP contracts in response to our request for further information. Based upon our investigation and the information that has been made available to us to date, we presently do not intend to take any enforcement action and are closing our inquiry into this matter. If, however, additional information or evidence should be made available to us in the future, we may reopen our inquiry.”
The article concludes as follows.
“Interestingly, WPIL […] sat on this letter issued by the US Department of Justice for over a year. When asked why this letter had not been made public for so long, a spokesman for WPIL said: “We cooperated unreservedly with the impartial and unimpeachable investigation of the US Department of Justice and are satisfied with the results. The findings of the US Department of Justice were shared with all shareholders and financial institutions but not made public for fear that this might be misconstrued as a rebuke by the now former chief justice of Pakistan.” He added that the Washington inquiry found no evidence of wrongdoing on the part of either company, contrary to popular misconceptions within Pakistan.”
“Foreign Official” Brain Teaser
As noted in this recent Wall Street Journal article, China State Construction Engineering Corp. (the largest home builder in the world), “is making its first acquisition in the U.S. market through its American subsidiary, as the company continues its aggressive push into overseas markets. China Construction America, the U.S. subsidiary, … agreed to acquire Manhattan-based Plaza Construction for an undisclosed sum.” As noted in the article, “Plaza Construction mainly provides construction management and consulting services in places including New York, Florida, California and Washington, D.C.”
Congress never intended for employees of state-owned or state-controlled enterprises (SOEs) to be “foreign officials” under the FCPA – see here for my “foreign official” declaration – but given the DOJ and SEC’s “foreign official” interpretations, post-acquisition are Plaza Construction employees now Chinese “foreign officials?”
Quotable
World Bank Group President Jim Yong Kim recently stated as follows:
“I’d like to make clear why fighting corruption is a critical priority for me personally, and for the entire World Bank Group: Every dollar that a corrupt official or a corrupt business person puts in their pocket is a dollar stolen from a pregnant woman who needs health care; or from a girl or a boy who deserves an education; or from communities that need water, roads, and schools. Every dollar is critical if we are to reach our goals to end extreme poverty by 2030 and to boost shared prosperity. Let’s not mince words: In the developing world, corruption is public enemy number one. We will never tolerate corruption, and I pledge to do all in our power to build upon our strong fight against it.”
Reading Stack
The most recent edition of the always-informative Debevoise & Plimpton FCPA Update is here. As to the recent Weatherford settlement, the Update states as follows.
“The $152 million in fines and penalties paid by Weatherford make it the eighth largest FCPA settlement in history. Although the monetary resolution is objectively large, comparing it to the monetary resolution in another recent enforcement action points to the difficulty of ascertainting the logic of penalty determinations.
[…]
Beyond the lack of transparency in the calculations that led to the financial resolution – a recurring feature of settled FCPA matters – the Weatherford settlement, like other recent settlements, is a disposition in which facts are included in the allegations or information without an explanation as to why they are relevant, potentially creating even more confusion as to what is or is not acceptable from the enforcement agencies’ point of view.”
For the recent post titled “FCPA Settlements Have Come a Long Way In a Short Amount of Time,” see here.
As to the recent Corruption Perception Index scores recently released by Transparency International (see here for the prior post), the FCPA Update rightly notes as follows.
“[W]hile companies subject to the FCPA, the UKBA, or other transnational anti-bribery regimes should continue to pay heed to the CPI, those seeking most efficiently to assess compliance risks also need to assess such matters as: (1) sector risk; (2) business model risk (including the degree to which the firm relies on third parties and the nature of controls over their activities); and (3) the nature and scope of government interactions, not only in connection with winning sales from government customers but also in obtaining zoning and building permits, tax clearances, customs rulings, currency transaction permissions, investment and financing approvals, and a range of other daily decisions from government actors. Firms with business risks associated with non-compliance such as expiring patents, excess capacity, disproportionate sales-based compensation, and limited oversight over sales and supply chain personnel, may well have significant corruption risks even in nations ranked highly in the CPI.”
*****
A good weekend to all.
Friday Roundup
Interesting, hardly a smoking gun, law enforcement ought not be a competition, quotable, and for the reading stack. It’s all here in the Friday roundup.
Interesting
An interesting study (here) from Michael Klausner (Nancy and Charles Munger Professor of Business and Professor of Law at Stanford Law School) and Jason Hegland (Project Manager for Stanford Securities Litigation Analytics). Using a “universe of SEC enforcement actions involving nationally listed firms for violation of disclosure-related rules—fraud, books and records and internal control rules” from 2000 to the present, the authors found, among other things, that only 7 percent of corporate SEC enforcement actions involved no individual defendants.
Such a finding stands in stark contrast to corporate SEC Foreign Corrupt Practices Act enforcement actions. As noted in this previous post, since 2008 approximately 80% of corporate SEC FCPA enforcement actions have not (at least yet) resulted in any SEC charges against company employees. This figure is likely to climb when I re-calculate the statistic to account for 2013 FCPA enforcement. To date, the SEC has brought four corporate FCPA enforcement and none have resulted (at least yet) in any SEC charges against company employees.
Kudos to Klausner and Hegland for the quality of their data and using the “core” approach. The authors state:
“We define a “case” in a specific way in order to organize the data. A case, as we use the term, is a set of one or more enforcement actions against a company and/or its executives and/or third parties such as accountants or underwriters for the same misstatement that led to a violation. Thus, if the SEC brings an action against ABC Co and one or more separate actions against ABC Co.’s executives and its outside auditor, all for a misstatement in ABC Co.’s 2012 financial statements, we consider all those separate actions as one “case.””
This is consistent with the “core” approach I use to keep my FCPA statistics. (See here for the prior post). The “core” approach is also what the DOJ uses (see here for the prior post). However, many in FCPA Inc. use other creative counting methods to measure FCPA enforcement and related issues. This is a huge quality of data issue and completely muddies the conversational waters on many FCPA issues.
Hardly a Smoking Gun
Reuters and other media outlets have carried forward Chinese state media reports as follows. “A Chinese police investigation into drugmaker GlaxoSmithKline has discovered that alleged bribery of doctors in China was coordinated by the British company and was not the work of individual employees.”
The smoking gun?
Apparently GSK “had set goals for annual sales growth as high as 25 percent. That rate was 7 to 8 percentage points above the average growth rate for the industry” [according to one of GSK’s detained executives] and “GSK implemented salary policies based on sales volumes and such goals could not be achieved without “dubious corporate behavior.”
That is hardly a smoking gun.
Competition
At times it seems like there is a new “global arms race” to see which country can bring the most enforcement actions for the largest dollar value. Competition is generally good, but law enforcement ought not be a competition where quantity of enforcement becomes more important than quality of enforcement. Evidence of the former can be found in the following.
In this recent speech David Green (Director of the U.K. Serious Fraud Office) stated as follows.
“When it comes to prosecutions of corporates, the SFO’s performance is often compared unfavourably to that of US prosecutors. The key reason for this is the much higher bar that we in the SFO face in proving corporate criminal liability. Currently, in order to prove corporate liability, we have to prove that the controlling mind of the corporate was complicit in the relevant criminality.”
In other respects, Green’s speech reads like a political stump speech, not that of a high-profile law enforcement official.
This article in the South China Morning Post titled “Beijing Weighing Large Fines Against GlaxoSmithKline quotes from the China Ministry of Public Security website which states: “We should learn from the practice of other countries in imposing astronomical fines.”
Quotable
From Jonathan Weil’s Bloomberg View column:
“In the U.S., companies hire powerful people’s children all the time for reasons beyond their obvious skill set. (Chelsea Clinton working at a hedge fund?) And they don’t just bother with the kids — they hire the powerful people themselves. (Do you think Larry Summers got a high-paying job at the hedge fund D.E. Shaw because of his skills as a trader?)
If the feds are going to target wheel-greasing in China — where it can be difficult to get business done without bribing somebody — does this mean we need a Domestic Corrupt Practices Act, too? In Colorado, JPMorgan used to employ Chris Romer as a banker. His father, Roy Romer, was the state’s governor for 12 years. Did that help Chris Romer get hired? It couldn’t have hurt. Do we need a law against this? Of course not.
There are certain facts of life that aren’t worth bringing in the FBI to check out. When rich people with teenage children give millions of dollars to elite universities, there’s a good chance they want special attention from the admissions office for their kids, if not an outright guarantee they will get in. And when owners of companies hire senators’ kids for internships, they probably would like to meet the parents someday.
Perhaps what JPMorgan did in China was worse. We don’t know yet. But let’s not get ahead of ourselves. The decision of whether to hire someone often has less to do with that person’s qualifications than it does with who they are. Life isn’t fair — not in the U.S. and not in China.”
Reading Stack
From Thomas Gorman (Dorsey & Whitney), “The New FCPA Guide: A Road Map to Crafting an Effective Compliance Defense.”
A client alert from Paul Hastings, “Preparing for Shareholder Lawsuits When Dealing with Foreign Corrupt Practices Act Investigations.”
*****
A good weekend to all.
Friday Roundup
Scrutiny updates and alerts, a double standard, upcoming events, and for the reading stack. It’s all here in the Friday roundup.
Scrutiny Updates and Alerts
JPMorgan
In this initial post concerning JPMorgan’sFCPA scrutiny in China I noted that hiring the son or daughter of an alleged “foreign official” is not inherently illegal, absent certain red flags.
In this recent article, Bloomberg reports on the existence of a potential red flag. The article states:
“A probe of JPMorgan’s hiring practices in China has uncovered red flags across Asia, including an internal spreadsheet that linked appointments to specific deals pursued by the bank, people with knowledge of the matter said. […] The bank has opened an internal investigation that has flagged more than 200 hires for review, said two people with knowledge of the examination, results of which JPMorgan is sharing with regulators. The scrutiny began in Hong Kong and has now expanded to countries across Asia, looking at interns as well as full-time workers, two people said. The employees include influential politicians’ family members who worked in JPMorgan’s investment bank, as well as relatives of asset-management clients, the people said. […] The spreadsheet, which links some hiring decisions to specific transactions pursued by the bank, may be viewed by regulators as evidence that JPMorgan added people in exchange for business, according to one person with knowledge of the review.”
The article also notes that the DOJ has joined the SEC in the probe.
In this article, the New York Times reports:
“The [JPMorgan hiring] program was originally called “Sons and Daughters.” And although it was supposed to protect JPMorgan Chase’s business dealings in China, the program went so off track that it is now the focus of a federal bribery investigation in the United States, interviews and a confidential government document show. JPMorgan started the program in 2006 as the friends and family of China’s ruling elite were clamoring for jobs at the bank, according to the interviews with former bank employees and financial executives in China and the United States. The program’s existence, which has not been previously reported, suggests that the bank’s hiring of such employees was widespread. Saying they wanted to weed out nepotism and avoid bribery charges in the United States, JPMorgan employees in Asia started the program to hire well-connected candidates on a separate track from ordinary applicants, the employees and executives said. Without the program and its heightened scrutiny of the candidates, the employees argued, JPMorgan might improperly hire the children of Chinese officials to win business. But in the months and years that followed, the two-tiered process that could have prevented questionable hiring practices instead fostered them, according to the interviews as well as the confidential government document. Applicants from prominent Chinese families, interviews show, often faced few job interviews and relaxed standards. While many candidates met or exceeded the bank’s requirements, some had subpar academic records and lacked relevant expertise.”
According to this Wall Street Journal article, there is now a full-fledged industry sweep of hiring practices. The article states:
“U.S. authorities are questioning numerous banks and hedge funds on their international hiring practices for interns and other employees, according to people with knowledge of the situation. The Justice Department and Securities and Exchange Commission are seeking information to determine if there have been any violations of the U.S. Foreign Corrupt Practices Act …”.
Vision-China Media
JPMorgan’s scrutiny is focused on the alleged hiring of relatives of alleged Chinese “foreign officials” into non-executive positions.
That’s one thing.
It is quite another when the CEO of an issuer under the FCPA “is the daughter-in-law of a senior figure in the Chinese Communist Party.”
As detailed in this Wall Street Journal article, this is the situation at Vision-China Media, a company with shares traded on NASDAQ. As noted in the article, “how many Chinese companies listed in the U.S. enjoy political ties is unknown. That makes it all but impossible to quantify whether and how such relationships might dictate a business’s profitability or stock-market performance.”
PetroChina
Various outlets (see here for the Wall Street Journal article) have reported that three senior executives of PetroChina “are under investigation by authorities for ‘severe disciplinary violations’ and have resigned.” The article notes that “while neither PetroChina nor its parent [company China National Petroleum Corp.] have released specifics of the probes, the phrase ‘severe disciplinary violations’ is typically used by Chinese officials when investigating cases of corruption.”
The interesting thing about this of course is that PetroChina executives are – in the eyes of the enforcement agencies – “foreign officials” under the FCPA while at the same time being executives of an issuer subject to the FCPA given that PetroChina’s ADRs trade on the New York Stock Exchange.
EADS / ThyssenKrupp
Reuters reports here:
“A joint venture of EADS and ThyssenKrupp and offices of Rheinmetall were raided this week in Germany on suspicion of paying bribes related to an order of submarine equipment from Greece, a spokesman for the state prosecutor in Bremen said on Saturday. The Atlas Elektronik joint venture and Rheinmetall Defence Electronics were searched as they are suspected of paying 18 million euros ($24 million) in bribes and of avoiding taxes, the prosecutor’s spokesman said. […] EADS and ThyssenKrupp both confirmed the raid on their unit, which they bought from BAE Systems. […] ThyssenKrupp said it had discovered the matter itself “as part of a compliance investigation” and notified the authorities in 2010 about it.”
Although neither EADS or ThyssenKrupp have shares traded on a U.S. exchange, the shares of both companies trade “over-the-counter” in the U.S. In the FCPA Guidance, the DOJ and SEC state – “any company with a class of securities quoted in the over-the-counter market in the United States and required to file periodic reports with SEC, is an issuer.” A certain other FCPA enforcement action (see here) began with a raid on offices by German law enforcement authorities.
In other raid news.
BSGR-Related
Reuters reports (here):
“Swiss police on Thursday searched the Geneva offices of Onyx Financial Advisors, a company providing management services for BSGR, the mining arm of Israeli billionaire Beny Steinmetz’s business empire.”
As highlighted in this previous post, French citizen Frederic Cillins was criminally charged by the DOJ for allegedly attempting to obstruct an ongoing FCPA investigation into whether a mining company paid bribes to win lucrative mining rights in the Republic of Guinea. Cillins has been linked to BSGR.
Double Standard?
A back to school edition of the double standard?
FCPA enforcement actions have included allegations of the following things of value being given to alleged foreign officials: a bottle of wine (see here), a watch (see here), a camera (see here), kitchen appliances and business suits (see here), television sets, laptops and appliances (see here), and tea sets and office furniture (see here). Likewise, the December 2012 enforcement action (see here for the prior post) against Eli Lilly included allegations (no joke) that meals, visits to bath houses, spa treatments, and cigarettes were provided to Chinese physicians.
Given these enforcement agency allegations, my radar went off when reading this recent Wall Street Journal article about U.S. school supplies. According to the article, a popular website “that posts more than 300,000 back-to-school lists from around the country and is sponsored” by major corporate brands offers teachers (the vast majority of which in this country are public employees) and schools freebies and other goodies if the teachers put company product on the list. As the article notes “getting on teacher lists is crucial, because parents tend to buy the suggested brands even though they aren’t mandatory.”
Upcoming Events
The ABA’s Sixth Annual National Institute on the Foreign Corrupt Practices Act will take place in Washington, D.C. on Sept. 18-20th (see here for program details). I am pleased to be participating. The following panel is particularly delicious.
Existing Limitations on the Scope of the FCPA: Is Anyone Paying Attention?
Most reform arguments have focused on narrowing the scope of the statute or providing new defenses. A better question, however, might be whether the statute’s existing limitations and defenses are being properly articulated and applied in enforcement actions. It is arguable that in several recent enforcement actions, the government’s factual allegations do not satisfy the FCPA’s elements or hide the ball on critical elements, deliberately blur different provisions of the statute, or seek remedies inconsistent with the letter and goals of the statute. Given that only two corporations have taken the government to trial on FCPA cases and individual cases do not always create opportunities to resolve these issues, the question is posed: Who is policing the police in FCPA matters?
In sum, that is the thesis of my 2010 article “The Facade of FCPA Enforcement.”
Securities Docket will be hosting Securities Enforcement Forum 2013 in Washington, D.C. on October 9th (see here for program details).
Reading Stack
The latest volume of the FCPA Update from Debevoise & Plimpton.
The latest Anti-Corruption Digest from Dorsey & Whitney.
*****
A good long weekend to all.
What’s On Your Mind?
The dog days of summer. A time for reflection, a time to think.
I posed the question “what’s on your mind” to the following FCPA practitioners and below are their responses.
Philip Rohlik (Debevoise & Plimpton – Hong Kong)
“While I have been working on Asian related FCPA matters for more than seven years, I moved to the region two years ago. Living here and interacting with local employees in situations other than investigations has given me a different perspective of the cost and difficulties associated with compliance.
Facilitating payments and transnational legal regimes that seek to bar them are on my mind. While it is correct and easy to say that ethical multinational corporations should not give in to the petty extortion that characterizes facilitation payments, the issue is not so simple when looked at from the reality of an employee in a high-risk jurisdiction — the kind of employee who recently asked me for advice on “how do I make the police go away?” when they visit the second or third week of every month (about the time their last month’s paycheck runs out). It is easy for a compliance officer or lawyer who encounters random government officials on his or her way to or from the airport to make full use of the ICC’s Resist handbook. Local (and, let’s face it, not that well paid) employees who must deal with specific officials on a regular basis are in a different situation especially if they have no desire to test the limits of “imminent physical harm.”
When laws impose vicarious or respondeat superior liability, situations to which the law applies should not be determined from the abstract perspective of a corporation but from the realities faced by the company’s employees. Is the fight against corruption really furthered by having zero tolerance policies for facilitation payments at the corporate level, but local employees very rationally believing that such grand pronouncements leave them in a situation that will either (i) make their life very difficult or (ii) force them to circumvent internal controls in order to make the payment (thereby creating a potential mechanism for more nefarious payments)? In this respect, the U.S. law that exempts facilitating payments from the anti-bribery provisions of the FCPA may be less anachronistic than it is often made out to be.
Also often on my mind is third party due diligence. Right now, one of our concerns is attending to our clients’ needs for right-sizing third party due diligence. Businesses are concerned that the continued lack of clarity from regulators as to the required steps results in excessive cost and a misallocation of compliance resources. While some third parties deserve thorough diligence, how much diligence is due other third-parties? Is a basic questionnaire and (the often-not-inexpensive) outsourcing of a public records check sufficient? What if such checks are almost always inconclusive in countries with limited public records? Do they just become inefficient box ticking? We are actively working with both clients as well as due diligence firms providing cloud-based and world-wide investigative services to help get these costs under control. Among the solutions we are working on are greater use of in-house information. If there are adequate internal controls on the evaluation of in-house experience with a third party, we believe that the greater use of on-hand information to evaluate third parties can be a real cost-saver. Doing so would free up resources for other compliance tasks as well as improve the client’s bottom line.”
John Rupp (Covington & Burling – London)
“As we continue to struggle on behalf of clients with demands for bribes, large and small, by government officials in a depressing number of countries, I have become ever more convinced that a new approach to the campaign against bribery – in particular, by western countries – is needed. The approach that western countries have taken thus far to the bribery of foreign government officials is to punish the bribe giver. The premise appears to be that international companies, including those subject to the US Foreign Corrupt Practices Act and the UK Bribery Act 2010, rather like bribing foreign government officials, seeing it as a convenient way to win business without having to compete fairly with other companies operating in the same space.
A completely different picture emerges, of course, when one spends a good part of each working day developing strategies to enable clients to operate in countries where official corruption is endemic. The international company employee who wakes up in the morning, steadies himself or herself in the mirror and then looks forward to winning business through bribery is an exceedingly rare bird in my experience. Overwhelming, the reflected image of the vast majority of employees of international companies grappling with bribery demands is of consternation – how does one continue to operate in Country X when everyone on the government payroll in the country is demanding a bribe for everything?
A fully developed, and maximally effective, anti-bribery program by a western country would involve, I believe, much more attention than has been paid in the past to assisting international companies when they are confronting demands for bribes by foreign government officials. The US State and Commerce Departments, UK and German Foreign Ministries, World Bank – and many others – should put much more emphasis in the future than they have in the past on assisting companies fend off official demands for bribes. In many, many cases, they have the resources – and the leverage – to do so.
I’m not suggesting that western countries consider repealing statutes punishing the bribery of foreign government officials. What I am suggesting is that they balance that approach with an equally concerted effort to deal with the demand side of the bribery equation.“
Thomas Fox (Solo Practitioner, Founder and Editor of the FCPA Compliance and Ethics Blog)
“The Securities and Exchange Commission (SEC) is investigating JPMorgan Chase regarding its hiring practices in China. It appears that JP Morgan Chase hired children of Chinese government officials or heads of state owned enterprises. While such hirings do not violate the FCPA per se, they do raise red flags. The FCPA Professor was quoted in the New York Times, “While the hire of a son or daughter itself is not illegal, red flags would be raised if the person hired was not qualified for the position, or, for example, if a firm never received business before and then lo and behold, the hire brought in business.” Such a hire may be a FCPA noteworthy event if the timing of the alleged hiring is closely connected to important business victories and awards of government business.
While the questions of corrupt intent will be paramount I think that this episode emphasizes the continuing key concept of the three most important things in any FCPA compliance program; that being: Document, Document, Document. If your compliance program does not document its successes there is simply no evidence that it has succeeded. In addition to providing to your company support to put forward to the DOJ, it is the only manner in which to gauge the overall effectiveness of your compliance program. To negate corrupt intent, JP Morgan Chase will have to dis-link any hiring with the obtaining of business. It will be the documentary efforts of the company in answering this query that may well decide the question of whether the SEC will consider the matter a FCPA violation or not.”
Regarding Princelings And Family Members
As a result of JPMorgan’s scrutiny over its alleged hiring of family members of alleged Chinese “foreign officials,” (see here for the prior post), FCPA Inc.’s vocabulary has been expanded to include the word “princelings.” But then again “princelings” in China are nothing new – see this excellent May 2012 article in the New York Times – as well as here.
The prior JPMorgan post highlighted at least five FCPA enforcement actions based, in part, on allegations that a company hired family members of alleged “foreign officials” for alleged improper purposes. As typical with FCPA corporate enforcement actions, none of those enforcement actions were subjected to any meaningful judicial scrutiny.
This Wall Street Journal article earlier this week cites a “U.S. official” who said that “the government wouldn’t even have to show a benefit was actually derived from a hire. ‘Corrupt intent is the beginning and the end of the analysis,’ the official said. ‘It’s what your intent was, not if you were successful.’ Not so fast, said this FCPA attorney in the WSJ article – that scenario presents “epic proof problems for the government” and “even if the hiring may be motivated by a desire to curry favor with the foreign official, that doesn’t mean the hiring is corrupt if everything else about the hiring is appropriate.”
Indeed, as I noted in the prior post and in the New York Times article, there is nothing inherently illegal about hiring family members of alleged “foreign officials.”
The issue of hiring a family member of an alleged “foreign official” as an agent or representative (not in-house so to speak) has been directly raised in three DOJ FCPA opinion procedure releases.
Release 82-04 (1982) states:
“The Department of Justice has received a review request from Thompson & Green Machinery Company, Inc. (“T & G”) pursuant to the Review Procedure Releases Procedure.
T & G intends to compensate a foreign businessman (“Mr. X”) whom it hired and used as its agent in connection with a generator sale in a foreign country. The written consultant agreement, which obligates T & G to pay “Mr. X” a commission for his efforts in promoting the sale, notes that no part of Mr. X’s commission will be used by Mr. X, either directly or indirectly, to pay any commission or finder’s fee to a third party. Furthermore, the consultant agreement references the FCPA’s prohibition of the payment or giving anything of value to an employee or official of a foreign government. After having been advised that Mr. X’s brother (“Mr. Y”) is an employee of the very foreign government with whom T & G concluded the generator sale, T & G obtained separate affidavits from both Mr. X and Mr. Y in which they pledge adherence to the antibribery provisions of the FCPA. T & G has represented that it will pay Mr. X his commission by check or bank transfer in the country where the services were rendered, and the company will require Mr. X to declare and exchange his commission in accordance with all applicable currency control laws in that foreign country.
Based on all the facts and circumstances as represented by the requestor, the Department does not presently intend to take an enforcement action with respect to the compensation of Mr. X by T & G.”
Release 84-01 (1984) states:
“The Department has reviewed a review request from an American firm which seeks to engage a foreign firm (“Marketing Representative”) as its marketing representative in a foreign country. The Marketing Representative’s principals are related to the head of state of the foreign country. Moreover, one of the Marketing Representative’s principals personally manages certain of the head of state’s private business affairs and investments.
This proposed contractual relationship has raised concerns about the application of the FCPA, and the American firm has requested a determination of the Department’s present enforcement intention under the Act.
The requester has made the following representations, among others, with respect to its proposed contractual relationship with the Marketing Representative:
1. The Marketing Representative will represent that it will not pay or agree to pay, directly or indirectly, any funds or anything of value, on behalf of the American firm, to any public official in the foreign country for the purpose of influencing the official’s official acts, or to induce the official to use his influence to the Marketing Representative’s benefit. The Marketing Representative will also represent that no owner, partner, officer, director, or employee is or will become an official of the foreign government during the term of the agreement.
2. The proposed agency agreement provides that if the Marketing Representative directly or indirectly offers, pays, promises, gives or authorizes payment of any money or anything of value to any government or public official for the purpose of influencing any act or decision of such official in his official capacity, or inducing him to use his influence with the foreign government to influence the government’s decision concerning retention of the American firm, the agreement will automatically be rendered void ab initio and the Marketing Representative will automatically surrender any claim for any payment under the agreement even for sales previously concluded or sales previously rendered. Either party may terminate the agreement without cause upon 30 days’ notice. The agreement is governed by the law of the state in which the American firm has its principal place of business.
3. The Marketing Representative will be solely responsible for all of its costs and expenses incurred in connection with its representation of the American firm, unless the latter expressly assumes responsibility in writing in advance for specified expenses. Any claim for reimbursement of expenses specifically assumed in advance by the American firm must be accompanied by a detailed itemization of expenses claimed and a copy of the American firm’s written authorization of the expenditure. All purchase orders must be in writing. The American firm will pay commissions only in U.S. dollars and only in the foreign country in which the Marketing Representative has its principal place of business.
4. The Marketing Representative will have no right to assign any portion of its rights under the agreement to any third party without the prior written consent of the American firm. Likewise, the Marketing Representative will not obligate the American firm to third parties without the latter’s prior written consent.
5. The Marketing Representative will make, when required, full disclosure to the United States government and the foreign government of its identity and the amount of commission applicable to a specific contract. It has also been represented that the American firm considered several factors in selecting the Marketing Representative. Among these were considered: (1) the number of years the Marketing Representative has been in operation; (2) the Marketing Representative’s successful representation of several large U.S. and foreign corporations; (3) the qualifications of the Marketing Representative’s principals; and (4) the Marketing Representative’s reputation among businessmen and bankers both in the U.S. and abroad.
Based upon all of the facts and circumstances, as presented by the requester, the Department does not presently intend to take any enforcement action premised upon its proposed contractual relationship with Marketing Representative.”
Release 95-03 (1995) states:
“The Department has received an FCPA opinion request from an American company and several foreign entities and individuals with which the American company proposes to enter into a joint venture. The proposed Joint Venture would engage in cooperative ventures in the investment banking field in a foreign country. The Joint Venture would also apply for a license to do business in the foreign country. Formation of the Joint Venture was conditioned upon, in part, a favorable FCPA opinion from the Department.
One of the proposed Joint Venture partners of the American firm is an entity which is the family investment company of, among others, a relative of the leader of the country in which the Joint Venture will conduct business. The relative is represented to be a prominent businessperson with significant managerial experience and responsibilities and who holds public and political party offices. Without question, the relative is a “foreign government official” as that term is used in the FCPA, and it is this circumstance which has prompted the request under the FCPA Opinion Procedure.
The American company, which will provide 50 percent of the start-up capital for the Joint Venture, would have effectively irrevocable power to appoint the most senior official of the Joint Venture — and any successors — who would have extensive powers in the management of the business of the Joint Venture, including the power to appoint outside auditors. The Joint Venture official would also have the power to take such steps as he or she deemed necessary to ensure compliance with the FCPA, including the power to order an audit.
The role of the foreign government official and member of that official’s immediate family in the Joint Venture would include assisting the Joint Venture in making important contacts in the country, providing investment advice and management consulting services, and development of new business for the Joint Venture.
Each of the parties to the FCPA request would receive a percentage of the gross or net profits received as a result of the government projects awarded to the Joint Venture. The foreign government official and the official’s relative would also receive annual payments in the range of $100,000 to $250,000 for services rendered as officers of the Joint Venture.
The foreign government official and the official’s relative have signed the FCPA Opinion Request, and have thus represented directly to the Department of Justice that they will comply with the FCPA as if they were subject to the Act. All the requestors, including the foreign official, further represent, among other things, the following:
1. Each requestor is familiar with the FCPA and its prohibitions; is in compliance with the laws of the foreign country and the FCPA as if they were subject to it and will remain in compliance for the duration of the Joint Venture.
2. No part of the payments received directly or indirectly by the requestors from the American company will be used for any purpose, nor will any action be taken by any requestor in connection with the business of the Joint Venture, which would constitute a violation of the laws of the foreign country or the FCPA.
3. The foreign official’s government and political party duties do not involve any decisions to award business in connection with the government projects sought by the Joint Venture or in the appointment, promotion, or compensation of the government officials who will decide which companies will receive such business, nor are those duties related to any of the official’s other duties on behalf of the Joint Venture or the interests of the American company.
4. Should the nature of the foreign government official’s public offices or responsibilities change so that the official’s representations in the FCPA Opinion Procedure request would no longer apply, the official will so notify the other requestors so that appropriate actions may be taken.
5. No meetings with government officials on behalf of the Joint Venture will be initiated by the foreign government official and all such meetings will be attended by no fewer than two Joint Venture representatives.
6. In connection with each meeting the official attends with a government official on behalf of the Joint Venture, the official will provide a letter to the Minister and most senior civil servant of the relevant government department, stating that the official is acting solely in the official’s capacity as a participant in the Joint Venture.
7. No member of the Joint Venture will assign its rights under the Joint Venture to a third party without the prior approval in writing of the other Joint Venture members. The requestors acknowledge that such a transfer, if approved, may require consultation with the Department of Justice should the identity of the transferee implicate the FCPA.
8. Specific procedures will be in effect with respect to the operation of the Joint Venture, including requirements concerning the keeping of accurate expense, correspondence, and other records of the business of the Joint Venture, including a requirement that all payments by the Joint Venture will be by check or bank transfer and no payments will be made in cash or by bearer instruments. All payments owed to a requestor or Joint Venture party will be made directly to that party and all payments to foreign parties will be made in the foreign country in question.
Based upon all the facts and circumstances, as represented by the requestors, the Department does not presently intend to take any enforcement action with respect to the prospective Joint Venture described in the request.”
The above releases contain, as do all such releases, the following qualification.
“this Release have no binding application to any party which did not join in the request and can be relied upon by the requesting party only to the extent that the disclosure of facts and circumstances in the request is accurate and complete and continues to accurately and completely reflect such facts and circumstances”
And of course these 1980’s releases were authored by individuals who have long left the DOJ’s FCPA enforcement program.
The above releases are in addition to numerous DOJ FCPA releases that address the issue of hiring an alleged “foreign official” directly or otherwise doing business with an alleged “foreign official” – see 80-04, 82-03, 85-03, 86-01, 93-01, 93-02, 94-01, 96-02, 00-01, 01-02, 08-01, 10-01, 10-03, 12-01. See here and here for links to the releases.
For addition reading, see “Corrupt Intent, Relationship Building, and Quid Pro Quo Bribery: Recent Domestic Bribery Cases” in the September 2011 FCPA Update from Debevoise & Plimpton.