The SEC Is Reportedly Sweeping Various Tech Companies
An industry sweep is a concept that entered the FCPA vocabulary over a decade ago.
As explained in this prior post by an FCPA practitioner:
“Industry sweeps are often led by the Securities and Exchange Commission (“SEC”), which has broad subpoena power as a regulatory agency, arguably broader oversight authority than prosecutors. They are different from internal investigations or traditional government investigations, and present different challenges to companies. Because the catalyst may be wrongdoing in a single company, agencies may have no evidence or suspicion of specific violations in the companies subject to an industry sweep. A sweep may thus begin with possible cause, not probable cause. In sweeps, agencies broadly solicit information from companies about their past FCPA issues or present practices. And they may explicitly encourage companies to volunteer incriminating information about competitors. This practice not only fuels the “salesman’s defense” (that “everybody does it”), but can also generate anecdotal or speculative information that simply leads to additional rounds of inquiries.
Observations From The OECD’s Phase 4 U.S. Review Report
Recently, the OECD released its Phase 4 review of the United State’s implementation of the OECD Anti-Bribery Convention … in effect a review of the FCPA, its enforcement, and related issues.
The first question one needs to ask themselves is whether they care what “experts from Argentina and the United Kingdom” (as stated by the OECD “the report and its recommendations reflect the findings of experts from Argentina and the United Kingdom”) think about the U.S. Foreign Corrupt Practices Act, U.S. law enforcement (DOJ and SEC) policies and practices, and U.S. jurisprudence.
In any event, the Phase 4 Report “explores issues such as detection, enforcement, corporate liability, and international cooperation, as well as covering unresolved issues from prior reports.” (See here for a 2010 post summarizing the OECD’s Phase 3 review).
SEC Director Of Enforcement Ceresney On …
Yesterday’s post highlighted comments made by Deputy Attorney General Sally Yates at a recent Foreign Corrupt Practices Act event and this post provides equal time to comments made by SEC Director of Enforcement Andrew Ceresney at the same event.
Similar to the DOJ speech, much of Ceresney’s speech represents the same old, same old something even he acknowledged during his speech.
When reading Ceresney’s comments about the importance of individual FCPA prosecutions keep in mind the following facts. In 2016 there have been 21 SEC corporate FCPA enforcement actions and 15 actions (72%) have not resulted (at least yet) in any related FCPA charges against company employees. This figure is generally consistent with the overall figure since 2008 in which approximately 80% of SEC corporate FCPA enforcement actions have not resulted in any related FCPA charges against company employees.
Friday Leftovers
Scrutiny alerts, corruption in China, quotable, and for the reading stack. It’s all here in the Friday leftover version of the roundup.
Scrutiny Alerts
Caribbean News Now reports here as follows.
“A complaint has been filed with the Department of Justice (DOJ) in the United States under the Foreign Corrupt Practices Act (FCPA) in relation to a contract purporting to grant oil exploration rights over some eight million acres of Saint Lucia’s maritime territory. The 46-page complaint, which Caribbean News Now has seen, names Saint Lucia’s prime minister, Dr Kenny Anthony, and RSM Production Company (RSM), a Texas company, along with its president Jack J. Grynberg. Caribbean News Now has also seen a written notification confirming receipt of the document by the DOJ.
[…]
Specifically, the complaint notes that, in or about February 2000, Anthony, as then minister of finance, planning and sustainable development, signed a contract with RSM that purported to grant the company an “Exploration License” in respect of territorial maritime resources belonging to Saint Lucia amounting to 8,726,263 acres. However, under Saint Lucia’s Minerals Vesting Act, all minerals in, on or under any land in Saint Lucia are vested in and controlled by the Crown and only the governor general may grant a licence to prospect for and/or mine such minerals. Further, although the contract provides that RSM shall pay a royalty to “the Government” (as required by section 5 of the Minerals Vesting Act), it goes on to state that the liability of RSM in this respect shall be discharged by paying such royalty to the minister and not the government.”
Reuters reports here as follows.
“The U.S. Justice Department is probing Morgan Stanley for its hiring practices in China as part of an industry-wide investigation by the government into whether banks’ employment of politically connected Chinese breached U.S. bribery laws, according to people familiar with the matter. As part of the industry sweep, the U.S. Securities and Exchange Commission sent letters to Morgan Stanley and other banks, including Goldman Sachs and Citigroup, seeking information about their hiring practices, according to several people familiar with the matter. The SEC has asked the financial services firms to provide information about their hiring of the relatives of government officials in China …”.
This is not a surprising development following the New York Times August story regarding JPMorgan (see here for the prior post).
Corruption in China
The Congressional-Executive Commission on China recently held a roundtable on “Corruption in China Today: Consequences for Governance, Human Rights, and Commercial Rule of Law.” As stated on the Commission’s website:
“Corruption takes many forms in China, from corrupt officials at all levels using their public office for private gain and seizing land for development to corrupt state-owned enterprises gaming the system to their advantage. Corruption also continues to be among the root causes of rights abuses against Chinese citizens. Senior leaders acknowledge that corruption threatens the legitimacy of the Communist Party and contributes to citizen dissatisfaction, and President Xi Jinping has stated that fighting corruption is a high priority. But Chinese authorities continue to crack down on independent and citizen-led efforts to combat corruption. Panelists will discuss corruption among Chinese high-level officials and recent anti-corruption efforts, and explore corruption’s role in human rights violations. Panelists also will examine corruption linked to state-owned and other enterprises and explore the implications for commercial rule of law.”
Among the panelists were Professor Daniel Chow (Ohio State) (see here for his statement). In 2012, I was pleased to play a role, along with Professor Chow and the staff of the Ohio State Law Journal, in organizing “The FCPA at Thirty-Five and Its Impact on Global Business,” a full-day symposium at The Ohio State University Moritz College of Law. (See here).
Quotable
On his Corruption, Crime & Compliance site, Michael Volkov states:
“The idea of legal ‘marketing’ has been diluted in the last few years. As businesses become smarter consumers of legal services, in-house counsel and Chief Compliance Officers are much better at deciphering legal mumbo jumbo. Perhaps the best example of legal marketing as an oxymoron, was the roll-out of the UK Bribery Act. Legal marketing was premised on one idea –fear and fear alone. Client alert after client alert warned companies about the impending doom, the effective date of the UK Bribery Act. Not to pat myself on the back (assuming my arm is long enough), but I wrote that the UK Bribery Act was a real non-event in the world anti-corruption compliance and that it was unlikely to have any real impact. To this day, those words still ring true. After writing the ‘truth’ about the UK Bribery Act, I received a call from the firm’s London partners and was chastised for undermining their entire ‘marketing’ program. (In stark contrast, many clients wrote me and thanked me for my ‘honesty.'”
Spot-on.
Nearly three years ago, I wrote:
“The U.K. Bribery Act … has been the subject of much discussion and much over-hype in my opinion. It has been called the FCPA ‘on steroids’ (here) and if one subscribes to the industry marketing material, you might be left with the impression that the end of the world is near. […] In sum, I don’t see how companies already subject to the FCPA and already thinking about compliance in a pro-active manner, have much to worry about when it comes to the U.K. Bribery Act because of the adequate procedures defense. I will be surprised if U.K. enforcement of the Bribery Act reaches the level of U.S. enforcement of the FCPA …”.
See here for my post the day the U.K. Bribery Act went live in July 2011.
See here for my post “Marketing The FCPA … The FCPA Risks Of … Well, Just About Everything.”
For the Reading Stack
The most recent issue of the always-informative FCPA Update from Debevoise & Plimpton is here. Among other things, the issue summarizes recent remarks of DOJ and SEC officials regarding the FCPA and FCPA enforcement.
*****
A good weekend to all.
Friday Roundup
A roundup of comments made yesterday by Charles Duross (DOJ FCPA Unit Chief) and Kara Brockmeyer (SEC FCPA Unit Chief) at the ABA’s National Institute on the Foreign Corrupt Practices Act in Washington, D.C.
Resources
Duross stated that the DOJ has “20 full-time prosecutors” focused on the FCPA, an “embarrassment of riches” in terms of resources compared to the past he said. He indicated that the DOJ’s FCPA unit also makes frequent use of Assistant U.S. Attorneys, particularly in litigated cases. Duross countered the notion that his unit sits “back on our hands” waiting for the next case to come in. He stated that DOJ FCPA attorneys are “actively encouraged to follow-up on leads” and cited the BizJet enforcement action as an example where the case involved a voluntary disclosure, individuals cooperating, and charging individuals under seal (see here for a prior post).
According to Brockmeyer, the SEC FCPA Unit “has about three dozen” staff dedicated full-time to the FCPA. This number is in addition to other enforcement attorneys in SEC offices outside of DC who may also work on FCPA cases. Her best guess is that approximately 75% of SEC FCPA cases are handled in Washington, D.C. with the rest of the cases handled by regional offices (such as Fort Worth, Salt Lake City, etc.) with coordination from D.C.
Law Enforcement Partners
According to Duross, domestic law enforcement partners include U.S. Attorneys Offices and the FBI. He also mentioned the IRS as a partner in FCPA cases and indicated that the Haiti Teleco case was an “IRS case from start to finish” and thus it was not surprising that the prosecutions in that case included money laundering charges.
Challenges
Despite an “embarrassment of riches” in terms of resources compared to the past, Duross indicated that the FCPA Unit, like other DOJ offices, “could always use more resources.” He cited the following challenges in bringing FCPA cases: foreign evidence collection, foreign laws concerning data privacy, foreign blocking statutes, and multi-jurisdictional issues. As to the later, Duross stated that with increasing frequency more than one sovereign is involved in bribery and corruption investigations and that this is a “fact of life.” He indicated that the U.S. has encouraged foreign jurisdictions to increase their involvement in this area and that since “we invited them to the party” “we must now deal with it.”
Brockmeyer cited the same general challenges as Duross in terms of enforcing the FCPA.
Case Origins
Brockmeyer indicated that the SEC FCPA Unit tracks its inventory of cases and she shared the following. 30% – 40% of cases come from corporate voluntary disclosures. According to Brockmeyer, the number of voluntary disclosures has been steady compared to prior years, but as a percentage of the overall enforcement pie it is shrinking because the overall enforcement pie is growing. Other sources Brockmeyer identified included whistleblower tips (including more sophisticated and detailed tips), enforcement attorneys reading the news, that a “pretty significant number of investigations” began as “spin-offs” of other investigations, and that “increasing number of referrals” are from foreign law enforcement authorities.”
Duross said that the DOJ FCPA Unit does not formally track its inventory like the SEC but his “general sense” was that voluntary disclosures are less than 50% of the inventory of cases. According to Duross, voluntary disclosure as a source of FCPA cases “is less than people tend to think it is.” According to Duross, the number of voluntary disclosures has remained steady, but most “get declined and nobody ever hears about them.”
Duross said that over the past several years, FBI agents and DOJ prosecutors (outside of the FCPA unit) have become more sophisticated about the FCPA and that more cases are coming to the FCPA Unit’s attention from others in the field who may spot FCPA issues in their other cases. Brockmeyer agreed with this comment and stated that SEC enforcement attorneys handling typical accounting fraud cases are also now looking for indicia of FCPA issues.
Related to the above issue, both Brockmeyer and Duross talked about so-called “industry sweeps” (see here for the prior post).
According to Brockmeyer, an industry sweep is not a situation where an existing case may suggest a wider problem in an industry and lead to investigations of others. Nevertheless, she did indicate that “very occasionally” the SEC does engage in industry sweeps, but “not as often as people think,” where the SEC, in its role as a regulator, sends out “high-level requests for information” to certain industries in which the SEC thinks there are FCPA risk factors. As to the predication leading to such an inquiry, Brockmeyer said that such a sweep can result even if there is no specific tip as to the industry. Nevertheless she stated that the SEC is not going to send out information letters “willy-nilly” because the SEC does recognize that when it sends out letters there are costs to the company’s associated with the request.
Duross agreed that following the evidence in one particular case to perhaps another company is not an “industry sweep,” it is simply following the evidence.
Future
According to Duross, the future of the DOJ FCPA’s unit is “bright,” there is a “tremendous pipeline of cases,” and that his unit continues “to do proactive cases” using all of the resources in its toolkit (i.e. wiretaps, etc.).
According to Brockmeyer, the SEC has become more focused on how compliance programs and internal controls are “intertwined.” She indicated that companies have generally become more sophisticated when it comes to compliance programs, but that much work still needs to be done in monitoring compliance programs and how compliance can impact a company’s overall internal financial controls.
Other Issues
As to the “where else” question (see here for the prior post), Duross suggested that often company lawyers are seeking to over do it through a global search of operations for FCPA issues. He discussed a case in which a company and its professional advisors came to a meeting with a global search plan and he said “no, no, no, that is not what I want.” He indicated that the lawyers and other professional advisors in the room “looked unhappy,” but that the general counsel of the company was happy. (For more on this dynamic, see this prior post).
As to a compliance defense, as I highlight in my article “Revisiting an FCPA Compliance Defense,” the DOJ already recognizes in various ways a de facto compliance defense to the FCPA. Further support for this proposition is found in the following comment from Duross. He indicated that a large company (he did not provide the company’s name – other than it would be recognizable to the audience) was a “serial reporter” of FCPA issues to the DOJ’s FCPA Unit. Duross said that this company has a “good compliance program and system” in place and does “robust” internal investigations when issues arise. Duross said that he and his unit have a “relationship of trust” with this company and its counsel and that “frankly, most of the time” the issue is “not a particularly large issue.” According to Duross this company remediates the issue and then it “goes on its way.”
As to the media, Duross indicated that media reports (domestic and foreign) have led the DOJ to open up FCPA investigations. He stated “what happens in China, doesn’t stay in China.” Duross stated that while the media can be critical of the DOJ’s FCPA unit and its efforts, that is not necessarily a “bad thing” because “criticism of us can be useful and cause us to look inward.” Duross indicated that “we should be held accountable for what we do – good and bad.” Duross shared that one of his biggest surprises upon becoming FCPA Unit chief is realizing how the unit “operates under a microscope” which highlights the need for his unit “to have its A game” at all times. Duross stated that media reporting of bribery and corruption issues can also spread a message of general deterrence.
Scrutiny Alerts
A roundup of the latest scrutiny alerts. As Christopher Matthews at the Wall Street Journal’s Risk & Compliance Journal stated “if you’re a corruption probe enthusiast, the hits just keep coming out of China these days.”
Danone
As noted in this article, Dumex Baby Food Co., a subsidiary of France’s Danone SA, is “launching a probe of its infant-formula marketing after China’s state broadcaster alleged the formula maker pays hospital staff to use its products and influence sales.” Danone has ADRs that are traded in the U.S.
Novortis
Novortis, already on the scrutiny list see here, was the focus of recent media articles (see here) suggesting that “it would investigate allegations published in a Chinese newspaper that its eye care unit Alcon bribed doctors.” Novortis has ADRs that are traded in the U.S.
Gabriel Resources
Gabriel Resources, a Canada based company with shares traded “over the counter” in the U.S., was the focus of this article concerning allegations of bribery in Romania in connection with a proposed gold mine.
*****
A good weekend to all.