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
Ask yourself, the true measure of success is, statute of limitations decision of note, and more on JPMorgan. It’s all here in the Friday roundup.
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The True Measure of Success Is …
As numerous sources have reported (for instance see here from Reuters and here from the Telegraph), the U.K. Serious Fraud Office’s prosecution of Victor Dahdaleh for allegedly paying millions in bribes to former managers of Aluminium Bahrain has collapsed.
The SFO provided the following statement to the court.
“At the commencement of this trial, the Serious Fraud Office was of the view that there was a realistic prospect of conviction in this case and that furthermore, the evidence in this case was strong. Two things, in particular, have happened which have led to the prospect of conviction deteriorating in this case. The first of those is that Bruce Hall, a conspirator and significant witness for the SFO significantly changed his evidence from that contained in his witness statement. Secondly, we have the unwillingness of two witnesses to face cross-examination. That impacts both on the fairness of the trial as well as the prospects of conviction. Since last Thursday, yet further contact has taken place with Akin Gump, the lawyers for Aluminium Bahrain, or “Alba”, to secure the attendance of these two American witnesses, Mark MacDougall and Randy Teslik who are both partners in that firm. As you will see from the correspondence, they have attempted to place limits on the extent to which they can be cross-examined. The Serious Fraud Office does not believe it would be appropriate to attempt to persuade the court to agree to such limits nor, given your comments last week, that they should appear via video-link. The Defence have raised issues questioning Akins Gump’s role in the provision of assistance to the Serious Fraud Office both as to what their motives may have been in the dissemination of material and assistance as to witnesses who could provide relevant information, this in the context, as accepted by the defence, of the Serious Fraud Office acting in good faith. The attendance of the two American witnesses would have allowed this aspect of the case to be ventilated before the jury. Their refusal to attend creates a situation where it is clear that the trial process cannot remedy the position and we accept unfairness now exists for the Defence. In seeking to secure the attendance of these two witnesses – who have previously attended court on every other occasion when their attendance has been required – the Serious Fraud Office has taken every available step, including a direct telephone conversation between the Director of the Serious Fraud Office and the chair of Akin Gump. Not every unfairness necessarily leads to trials being discontinued, particularly where there is other evidence and taking into account the public interest in pursuing serious crime. After careful consideration of all of the circumstances of the case the Serious Fraud Office has concluded that there is no longer a realistic prospect of conviction in this case and accordingly we offer no evidence.”
For an additional SFO statement, see here.
While I have no unique insight into the facts and circumstances relevant to the Dahdaleh case and the SFO’s decision to abandon it, this much I know.
Success in enforcing a law, whether in the corporate context or individual context, is best measured – not by instances in which an enforcement agency in position of various “carrots” and “sticks” is able to procure a settlement – but by instances in which an enforcement agency is actually put to its burden of proof in an adversarial proceeding.
Statute of Limitations Decision of Note
Speaking of that measure of success, earlier this week the Second Circuit Court of Appeals rejected the DOJ’s statute of limitations theory in U.S. v. Grimm.
The case – outside the FCPA context – involved employees of General Electric Company who allegedly engaged in a multi-year scheme to fix below-market rates on interest paid by GE to municipalities. The defendants were tried and convicted of violating the general federal conspiracy statute (18 USC 371). The defendants appealed their convictions on the ground that the indictment was barred by the statute of limitations. The trial court held that the statute of limitations continued to run during the period when GE paid the (depressed) interest to municipalities, and that the interest payments could constitute overt acts.
On appeal, the defendants argued that such interest payments cannot serve as overt acts because the routine payments were scheduled to continue for years (if not decades) after the contract was awarded and after all concerted conduct had ended.
The Second Circuit concluded that those payments do not constitute overt acts in furtherance of the conspiracy. In so holding, the court rejected the DOJ’s position that a conspiracy continues so long as a stream of anticipated payments contains an element of profit. The court stated, “but that proves too much” – “a conspiracy to corrupt the rent payable on a 99-year ground lease would, under the government’s theory, prolong the overt acts until long after any conspirator or co-conspirator was left to profit, or to plot.”
Not that statute of limitations have much practical impact on corporate FCPA enforcement actions given the “carrots” and “sticks” relevant to resolving an action, but if they did, it is easy to see relevance to the FCPA context as certain alleged bribe payments could be made to secure a contract – such as a production sharing agreement or similar – that has a revenue stream of serial payments over a number of years.
More on JPMorgan
The NY Times returned (here) to the JPMorgan story it first reported in August (see here and here for prior posts) regarding the company’s hiring practices in China. The article states:
“Federal authorities have obtained confidential documents that shed new light on JPMorgan Chase’s decision to hire the children of China’s ruling elite, securing emails that show how the bank linked one prominent hire to “existing and potential business opportunities” from a Chinese government-run company. The documents, which also include spreadsheets that list the bank’s “track record” for converting hires into business deals, offer the most detailed account yet of JPMorgan’s “Sons and Daughters” hiring program, which has been at the center of a federal bribery investigation for months. The spreadsheets and emails — recently submitted by JPMorgan to authorities — illuminate how the bank created the program to prevent questionable hiring practices but ultimately viewed it as a gateway to doing business with state-owned companies in China, which commonly issue stock with the help of Wall Street banks.
[…]
“There is no indication that executives at JPMorgan’s headquarters in New York were aware of the hiring practices described in the documents. And authorities might ultimately conclude that the bank’s hiring, while aggressive, did not cross a legal line.”
Once again (see here and here for prior posts), the latest JPMorgan article spawned much commentary touching upon double standard issues. For multimedia content, see here from the Daily Ticker.
In this Huffington Post column, former Labor Secretary Robert Reich states:
“But let’s get real. How different is bribing China’s “princelings,” as they’re called there, from Wall Street’s ongoing program of hiring departing U.S. Treasury officials, presumably in order to grease the wheels of official Washington?
[…]
Or, for that matter, how different is what JP Morgan did in China from Wall Street’s habit of hiring the children of powerful American politicians?
[…]
And how much worse is JP Morgan’s putative offense in China than the torrent of money JP Morgan and every other major Wall Street bank is pouring into the campaign coffers of American politicians — making the Street one of the major backers of Democrats as well as Republicans?”
Reich concludes by asking:
“The Foreign Corrupt Practices Act is important, and JP Morgan should be nailed for bribing Chinese officials. But, if you’ll pardon me for asking, why isn’t there a Domestic Corrupt Practices Act?”
Well, Mr. Reich, there is a domestic corrupt practices act – it is called 18 U.S.C. 201, but as I’ve highlighted for years there is a double standard (see the 25 separate posts under the subject matter heading double standard).
But why should corporate interaction with a “foreign official” be subject to greater scrutiny and different standards of enforcement than corporate interaction with a U.S. official? After all, 18 U.S.C. 201 has elements very similar to the FCPA. Why do we reflexively label a “foreign official” who receives “things of value” from private business interests as corrupt, yet generally turn a blind eye when it happens here at home?
*****
A good weekend to all.
The 100th Edition Of The Friday Roundup
Scrutiny alerts and updates, a first, blunt, and quotable. It’s all here in this – the 100th edition – of the Friday roundup.
[I hope the Friday roundup is a value added end to your work week. The Friday roundup alone represents several hours of work by highlighting recent FCPA and related news and developments not otherwise covered Monday – Thursday on FCPA Professor. Ask yourself: do you get your FCPA from FCPA Professor? If the answer is yes, you can help support this free website here]
Scrutiny Alerts and Updates
Wal-Mart
During its third quarter earnings call yesterday, Wal-Mart disclosed $69 million in “FCPA and compliance related expenses” in the quarter. According to the company “approximately $43.0 million of these expenses represented costs incurred for the ongoing inquiries and investigations and approximately $26.0 million is related to our global compliance program and organizational enhancements.”
Doing the math, $69 million in the third quarter is approximately $1.06 million per working day. As noted here, the figure for Q2 was approximately $1.26 million per working day and as noted here the figure for Q1 was approximately $1.16 million per working day. For more on Wal-Mart’s pre-enforcement action professional fees and expenses, see this prior post.
For the fourth quarter, Wal-Mart estimated $75 – $80 million in expenses related to FCPA matters.
JPMorgan
The NY Times returns (here) to the JPMorgan story it first reported in August (see here for the prior post). The article states:
“To promote its standing in China, JPMorgan Chase turned to a seemingly obscure consulting firm [Fullmark Consultants] run by a 32-year-old executive named Lily Chang. Ms. Chang’s firm, which received a $75,000-a-month contract from JPMorgan, appeared to have only two employees. And on the surface, Ms. Chang lacked the influence and public name recognition needed to unlock business for the bank. But what was known to JPMorgan executives in Hong Kong, and some executives at other major companies, was that “Lily Chang” was not her real name. It was an alias for Wen Ruchun, the only daughter of Wen Jiabao, who at the time was China’s prime minister, with oversight of the economy and its financial institutions.
[…]
Now, United States authorities are scrutinizing JPMorgan’s ties to Ms. Wen, whose alias was government approved, as part of a wider bribery investigation into whether the bank swapped contracts and jobs for business deals with state-owned Chinese companies, according to the documents and interviews. The bank, which is cooperating with the inquiries and conducting its own internal review, has not been accused of any wrongdoing. The investigation began with an examination of the bank’s decision to hire the daughter of a Chinese railway official and the son of a former banking regulator who is now the chairman of a state-controlled financial conglomerate.
[…]
Executives at JPMorgan’s headquarters in New York did not appear to be involved in retaining Fullmark, a decision that seemed to have fallen to executives in Hong Kong. And the documents reviewed by The Times do not identify a concrete link between the bank’s decision to hire children of Chinese officials and its ability to secure coveted business deals, a connection that authorities would probably need to demonstrate that the bank violated anti-bribery laws.”
Park-Ohio Holdings Corp.
The diversified manufacturing services and products holding company (here) disclosed as follows in a recent quarterly filing:
“In August 2013, the Company received a subpoena from the staff of the SEC in connection with the staff’s investigation of a third party. At that time, the Company also learned that the Department of Justice (DOJ) is conducting a criminal investigation of the third party. In connection with responding to the staff’s subpoena, the Company disclosed to the staff of the SEC that, in November 2007, the third party participated in a payment on behalf of the Company to a foreign tax official that implicates the Foreign Corrupt Practices Act (FCPA). The Board of Directors of the Company has formed a special committee to review the Company’s transactions with the third party and to make any recommendations to the Board of Directors with respect thereto. The Company intends to cooperate fully with the SEC and the DOJ in connection with their investigations of the third party and with the SEC in light of the Company’s disclosure. The Company is unable to predict the outcome or impact of the special committee’s investigation or the length, scope or results of the SEC’s review or the impact, if any, on its results of operations.”
Wynn Resorts
This previous Friday roundup highlighted the company’s disclosure that the SEC has ended its investigation of the company concerning a $135 million donation to the University of Macau. In this recent filing, Wynn states as follows concerning a related DOJ investigation.
“[The DOJ] has been conducting a criminal investigation into Wynn Resorts’ donation to the University of Macau […]. Wynn Resorts has not received any target letter or subpoena in connection with such an investigation. Wynn Resorts intends to cooperate fully with the government in response to any inquiry related to the donation to the University of Macau.”
SEC’s First Individual DPA
When the SEC announced in January 2010 (see here for the prior post) a series of measures, including non-prosecution and deferred prosecution agreements, “to further strengthen its enforcement program by encouraging greater cooperation from individuals and companies in the agency’s investigations and enforcement actions,” I called the development a blow to those who prefer government law enforcement agencies to enforce a law in an open, transparent matter and in the context of an adversary proceeding. Not that there was much judicial scrutiny of SEC enforcement prior to January 2010 (largely on account of the SEC’s then neither admit nor deny settlement policy), but the new measures, I noted, would lead to even less judicial scrutiny.
Earlier this week, the SEC announced “a [five year] deferred prosecution agreement with a former hedge fund administrator who helped the agency take action against a hedge fund manager who stole investor assets.” According to the SEC, the DPA – outside the context of the FCPA – is the SEC’s “first with an individual” and the SEC’s release further states:
“Deferred prosecution agreements (DPAs) encourage individuals and companies to provide the SEC with forthcoming information about misconduct and assist with a subsequent investigation. In return, the SEC refrains from prosecuting cooperators for their own violations if they comply with certain undertakings.”
Obviously the above statement is an opinion statement, not a factual statement.
As highlighted in this prior post, the FCPA Guidance indicated that the DOJ has in the past used non-public non-prosecution against individuals in the FCPA context. Despite claims by the DOJ that its FCPA enforcement program is transparent, my attempts to learn more about these secret FCPA NPA’s with individuals was unsuccessful.
Blunt
DOJ FCPA enforcement attorneys have publicly stated that among the many ways they learn of conduct which could implicate the FCPA is by reading the newspaper.
If so, this recent article in the Miami Herald may generate some interest. In the article concerning the satellite telephone business in Cuba, a “Miami Man” states that “he installs each system in Cuba for $3,500 to $4,200 — cash paid in South Florida, with part of the mark up going to bribes on the island. The costs are usually paid by U.S. relatives of the recipients.”
Quotable
From a recent poll regarding corruption in Africa: “corruption is a national sport every day at the direction of customs officials” (see here).
An extensive interview with U.K. Serious Fraud Director David Green (“DG”) in Fraud Magazine (“FM”) in which he discusses: corporate criminal liability, facilitation payments, Bribery Act Inc., voluntary disclosure and DPAs. Relevant excerpts include:
FM: What current changes, if any, to the legal system and or legislation would make the SFO more efficient?
DG: To our effectiveness and our reach, I would very much like the test for corporate criminal liability to be looked at again. As you know, in this country, it is extremely difficult to convict a company of an offence because the prosecution has to show that the controlling minds of the company — somebody at the board level — were complicit in the criminality you are trying to prove. I think that bar is too high, and is a very unrealistic test — not least because I think anyone will agree that if you’re looking into allegations of corporate misconduct spookily the e-mail trail tends to dry up at a fairly junior level. Where it can be shown that the company had really profited from the criminality of its employees then I think there is a sound case for expanding the ambit of section 7 of the U.K. Bribery Act. Section 7 creates the corporate offence of ‘failing to prevent bribery or corruption by an agent or employee’ with a statutory defence that they took all reasonable precautions. Now why can’t that be extended to cover fraud and offences of dishonesty so the offence would be failing to prevent fraud or offenses of dishonesty by members of your staff? It seems to me absolutely right that a corporation should have criminal liability for that when it has profited from it. Why should a company which has, in the way I’ve explained, been complicit in criminality just throw a few people over the side and sail bravely on? Why shouldn’t it have its ears clipped and marked as a company that has had dishonest employees and benefitted from it? Another argument is: Well you’d just be punishing a company for negligence. I would say it would be a pretty high degree of negligence when a company acts in that way and benefits from the dishonesty of its employees.
FM: Doesn’t the Bribery Act prejudice British business in that is a bit too harsh in relation to facilitation payments and hospitality payments?
DG: First of all, I don’t buy this argument that complying with the law is going to hold business back. Secondly, facilitation payments have always been illegal. However, it is a question of the public interest as to whether or not they are prosecuted. What would be a common facilitation payment? A 20-pound note and a bottle of whisky to some [maritime] pilot to take your ship from somewhere to somewhere else in a single payment; the SFO wouldn’t be interested in that. [Maritime pilots will guide ships into ports for hire.] But if it was a course of conduct over a number of years, then, of course, that becomes not just a very small insignificant little bribe but actually a regular payment over time to ensure that you get that business.
FM: What do you say about those medium to small companies who have ignored the preventative measures required by the Bribery Act?
DG: Well, it’s always difficult, isn’t it? On the one hand, I am very conscious that since the enactment of the act there has grown up a Bribery Act industry in London populated by a lot of American and British lawyers, accountants and so-called experts. I even came across a firm the other day that actually offers certificates to companies saying that they are compliant, and I suppose if the company were to land in court they would try to produce this certificate to say, “We can’t be prosecuted because we’ve got a certificate.” The effect of this is that these so-called experts have scared the pants off of medium and small enterprises. It is really a question of getting some sensible, reasonably priced legal advice to discern their risk areas and put in place basic safeguards. But the idea that the Serious Fraud Office is going after a ticket to Wimbledon or a bottle of Champagne is, and always has been, utter nonsense. If, on the other hand, we saw a situation in which the entire board and their spouses of a major corporation were put up in London for a week and then given tickets for the men’s finals at Wimbledon with a couple of banquets before, during and afterwards, then that would be very worrying. Throw in first-class airfare and that would become extremely worrying. But the key to all this in relation to bribery investigations and whether or not we are interested in them has to do with value and importance but also timing, the motive and the effect of it — was it done at a time when some enormously important decision was going down with a view to influencing it? This is fairly common sense; we use a reasonable approach.
FM: Will companies that self-report escape criminal proceedings?
DG: My predecessor had guidance on self-reporting, in which though it did not say it in so many words, was a very clear implication that if you self-reported as a company you would not be prosecuted, and there would be a civil disposal of what you had done. I disagree with that absolutely and fundamentally as a matter of principle because no prosecutor can ever give guarantees in advance. We have no idea what set of facts are going to come in through the door next. So, we have returned to the old guidance, which has always been there; we will apply the Code for the Crown Prosecutors. In other words, in each situation we would see if there’s enough evidence to prosecute. If there is, we consider if it’s in the public interest to prosecute this company. Now if a company were to come in and say, “Look, we have discovered this misconduct. We have conducted a full investigation; here are the results. We are willing for you to investigate it as you wish. We’ve gotten rid of all the people involved in this, we will hand over any illegal profits obtained as a result of this crime.” In such circumstances, one does struggle to think how it would be in the public interest to prosecute such a company. But it is a question of principle here. If you start — and I feel very strongly about this — if you start blurring the boundaries between what people involved in the criminal justice system do then it’s a dangerous path to follow. Prosecutors shouldn’t be doing deals or making offers in advance and defenders shouldn’t be too familiar with prosecutors. We need to stay where we are and within our own divisions. That’s my view.
FM: Could the deferred prosecution arrangement (DPA) be seen as a type of deal?
DG: Well, I think if you looked at the American model of DPAs you might think it could be described as a deal. We’ve adapted it for use in this country to have judicial involvement and scrutiny from the very beginning. The reason for that is to preserve the principle we have in this country, which they don’t have in the States, that sentencing is a matter for the judge. It’s not a matter for some cozy deal between prosecutor and defence. If we believe a case is appropriate for a DPA we would go before a judge and say, “Judge, these are the charges which we would be minded to bring against these people. However, we think for these reasons it’s an appropriate case for a DPA. Do you agree?” Now if the judge says, “No, I don’t I think this is a suitable case for a DPA,” we’ll carry on prosecuting. So, it is a transparent process. Ultimately, if a DPA did go ahead there would be a statement of facts read in court. Nothing would be hushed up. You can’t really go wrong if you’re transparent. Things go wrong in the criminal justice system if anything appears to be opaque. You lose public confidence and you lose the confidence of the people involved.
Professor Ellen Podgor states, in pertinent part, in this New York Times opinion piece:
“If we intend to punish people, shouldn’t we reasonably expect that they knew their actions were crimes? […] The accumulation of laws and rules has made it harder to assure that individuals who are punished understood that they were breaking the law. When the law is clear, and an individual deliberately transgresses the law, punishment serves an important purpose. Attributing criminality to business-related activities is not always so easy. The line between criminal activities and acceptable business judgments can be fuzzy. The conduct may not have a long biblical history of being offensive, and there may be no posted signs. […] In the corporate or financial world, multiple individuals may have a finger in a business decision — and some may be unaware that one has breached the law. Add to this ambiguity in both the law and the corporate world that business-related decisions are often made by individuals who find themselves placed in a forest of regulations and criminal statutes with varying interpretations that even legal scholars can’t agree upon. Overcriminalization presents unique issues in the white collar and business arena. There are thousands of criminal statutes scattered throughout the federal code, and there are thousands of regulations with accompanying criminal penalties. The prosecutor’s toolbox also includes overly broad statutes like RICO, mail fraud, wire fraud and offenses like making false statements. The bottom line is that the government’s power to indict has few restrictions, and overcriminalization provides federal prosecutors with super powers that they can easily abuse. Congress’s continuous and haphazard adding of criminal statutes and regulations is making it more difficult to assure that individuals who are punished truly understand that they are breaking the law.”
*****
A good weekend to all.
Friday Roundup
Scrutiny alerts and updates, quotable, and for the reading stack. It’s all here in the Friday Roundup.
Scrutiny Alerts And Updates
Avon
Yesterday, Avon’s stock dropped approximately 22% to $17.50. The company disclosed a drop in third quarter sales and weaker than expected earnings. Avon also disclosed, in pertinent part, the following regarding its long-running FCPA scrutiny:
“As previously reported in our Quarterly Report on Form 10-Q for the period ending June 30, 2013, we made an offer of settlement to the DOJ and the SEC in June 2013 that, among other terms, would have included payment of monetary penalties of approximately $12. Although our offer was rejected by the DOJ and the staff of the SEC, we accrued the amount of our offer in the second quarter of 2013.
In September 2013, the staff of the SEC proposed terms of potential settlement that included monetary penalties of a magnitude significantly greater than our earlier offer. We disagree with the SEC staff’s assumptions and the methodology used in its calculations and believe that monetary penalties at the level proposed by the SEC staff are not warranted. We anticipate that the DOJ also will propose terms of potential settlement, although they have not yet done so and we are unable to predict the timing or terms of any such proposal. If the DOJ’s offer is comparable to the SEC’s offer and if the Company were to enter into settlements with the SEC and the DOJ at such levels, we believe that the Company’s earnings, cash flows, liquidity, financial condition and ongoing business would be materially adversely impacted.
Although we are working to resolve the government investigations through settlement, our discussions are at early stages and at this point we do not know if those efforts will be successful and, if they are, what the timing or terms of any such settlements would be. We expect any such settlements will include civil and/or criminal fines and penalties, and may also include non-monetary remedies, such as oversight requirements and additional remediation and compliance requirements. We may be required to incur significant future costs to comply with the non-monetary terms of any settlements with the SEC and the DOJ. If we are able to reach settlements with the SEC and the DOJ, the Company believes that such settlements are likely to include monetary penalties that would be material to its earnings and cash flows in the relevant fiscal period and could, depending on the amounts of the settlements, materially adversely impact the Company’s liquidity, financial condition and ongoing business.
There can be no assurance that our efforts to reach settlements with the government will be successful. If we do not reach settlements with the SEC and/or the DOJ, we cannot predict the outcome of any subsequent litigation with the government but such litigation could have a material adverse effect on our earnings, cash flow, liquidity, financial condition and ongoing business.>We have not recorded an additional accrual beyond the amount recorded in the second quarter of 2013 because at this time, in light of the early stages of our discussions of possible settlement terms with the government, the magnitude of the difference between our offer and the amount proposed by the SEC and the absence of a proposal from the DOJ, and our inability to predict whether we will be able to reach settlements with the government, we cannot reasonably estimate the amount of additional loss above the amount accrued to date.
Until these matters are resolved, either through settlement or litigation, we expect to continue to incur costs, primarily professional fees and expenses, which may be significant, in connection with the government investigations. Furthermore, under certain circumstances, we may also be required to advance and/or reimburse significant professional fees and expenses to certain current and former Company employees in connection with these matters.”
In certain respects, Avon’s disclosure was similar to its August disclosure (see here for the prior post) in which it stated “we made an offer of settlement to the DOJ and the SEC that, among other terms, included payment of monetary penalties of approximately $12 [million]. The DOJ and the SEC have rejected the terms of our offer.”
The fact that there is a negotiation and back and forth between the SEC and a company concerning an FCPA settlement number is not unusual, what is a bit unusual is that this back and forth is being aired in public via the company’s SEC filings.
Embraer
Previous posts here and here have profiled Embraer’s FCPA scrutiny. In an article titled “Plane Maker Embraer Faces Bribery Inquiries,” the Wall Street Journal reports:
“U.S. and Brazilian authorities are investigating whether aircraft maker Embraer SA bribed officials in the Dominican Republic in return for a $90 million contracts to furnish the country’s armed forces with attack planes.”
According to the article, U.S. authorities say they have “evidence – including bank records and e-mails – that they believe shows that Embraer executives had approved a $3.4 million bribe to a Dominican official with influence over military procurement.”
Mead Johnson
Mead Johnson Nutrition Company recently disclosed as follows.
“The company has initiated an internal investigation of, and is voluntarily complying with a Securities and Exchange Commission request for documents relating to, certain business activities of the company’s local subsidiary in China. The company’s investigation is focused on certain expenditures that were made by the subsidiary in connection with the promotion of the company’s products or may have otherwise been made and that may not have complied with company policies and applicable U.S. and/or local laws. The company has retained outside legal counsel to conduct the investigation, which is being overseen by a committee of independent members of the company’s board of directors. At this time, the company is unable to predict the scope, timing or outcome of this ongoing matter or any regulatory or legal actions that may be commenced related to this matter.”
National Geographic
The on-line publication Vocativ recently published an article “Tut-Tut: Did National Geographic Bribe Egypt’s Famed Indiana Jones?” The article begins as follows.
“This is not your typical story about international bribery. For one thing, it involves mummies. It also involves one of America’s most beloved institutions: National Geographic. Vocativ has learned that the Justice Department has opened a criminal bribery investigation into the prestigious nonprofit. At issue: Nat Geo’s tangled relationship with Dr. Zahi Hawass, a world-famous Indiana Jones–type figure who for years served as the official gatekeeper to Egypt’s glittering antiquities. Beginning in 2001 and continuing for a decade, National Geographic paid the archaeologist between $80,000 and $200,000 a year for his expertise. The payments came at a time when the popularity of mummies and pharaohs was helping transform the 125-year-old explorer society into a juggernaut with multiple glossies, a publishing house and a television channel. But they also came as Hawass was still employed by the Egyptian government to oversee the country’s priceless relics.”
According to the article, Hawass also worked with National Geographic competitor, the Discovery Channel.
Although National Geographic is a non-profit entity, the FCPA’s definition of “domestic concern” is “any corporation, partnership, association, joint-stock company, business trust, unincorporated organization, or sole proprietorship …”.
Teva Pharmaceuticals
As noted in this previous post, in August the company disclosed that it “received a subpoena … from the SEC to produce documents
with respect to compliance with the FCPA in Latin America.” Earlier this week, Teva disclosed as follows.
“Beginning in 2012, Teva received subpoenas and informal document requests from the SEC and the Department of Justice (“DOJ”) to produce documents with respect to compliance with the Foreign Corrupt Practices Act (the “FCPA”) in certain countries. Teva has provided and will continue to provide documents and other information to the SEC and the DOJ, and is cooperating with the government in their investigations of these matters. Teva is also conducting a voluntary investigation into certain business practices that may have FCPA implications and has engaged independent counsel to assist in its investigation. In the course of its investigation, which is continuing, Teva has identified in Russia, certain Eastern European countries, and certain Latin American countries issues that could potentially rise to the level of FCPA violations and/or violations of local law. Teva has brought these issues to the attention of the SEC and the DOJ. No conclusion can be drawn at this time as to any likely outcomes in these matters.”
JPMorgan
As highlighted in this previous post, in August JPMorgan’s hiring practices in China came under scrutiny.
The company recently disclosed:
“The Firm has received subpoenas and requests for documents from the SEC’s Division of Enforcement regarding, among other things, hiring practices relating to candidates referred by clients, potential clients and government officials, the Firm’s employment of certain former employees in Hong Kong, its business relationships with certain related clients in the Asia Pacific region and its engagement of consultants in the Asia Pacific region. The Firm has also received a request for documents from the U.S. Department of Justice regarding the same referral hiring practices. The Firm is cooperating with these investigations. Separate inquiries on these or similar topics have been made by other authorities, including authorities in other jurisdictions, and the Firm is responding to those inquiries.”
Quotable
From Attorney General Eric Holder at the Arab Forum on Asset Recovery in Morocco.
“As we’ve all seen – and as President Obama has said – “[t]he struggle against corruption is one of the great struggles of our time.” Fortunately […] corruption is no longer widely seen as an accepted cost of doing business. It is no longer tolerated as an unavoidable aspect of government. On the contrary – it is now generally understood that the consequences of corruption are devastating – eroding trust in public and private institutions, undermining confidence in the fairness of free and open markets, siphoning precious resources at a time when they could hardly be more scarce, and all too often breeding contempt for the rule of law.
[…]
This is why, as Attorney General, I’ve consistently worked to ensure that anticorruption remains a top priority for my colleagues at every level of the United States Department of Justice – within as well as beyond our borders.”
A recent article in Corporate Counsel titled “The Perils of Keeping FCPA Infractions Under Wraps” states:
“Charles Duross, the deputy chief of the U.S. Justice Department’s Foreign Corrupt Practices Act Unit, delivered an ominous message Monday to in-house lawyers at the Association of Corporate Counsel’s Annual Meeting in Los Angeles: Failure to report potential bribery is more perilous than ever. Duross, who is based in Washington, D.C., said DOJ is handling a “pretty steady stream of cases,” with every major U.S. attorney’s office investigating alleged violations of the FCPA, which prohibits bribery of foreign officials. “The risk of getting caught . . . is greater today than any point previously,” Duross said. “I think that’s kind of a no-brainer.” Duross said he isn’t naïve about the calculus companies have to perform when deciding whether to report a potential FCPA infraction to the U.S. government. But if a company makes the disclosure on its own, he noted, the Justice Department stands ready to help. DOJ can make deferred-prosecution or non-prosecution agreements with businesses—or even decline to pursue any action against them, he said. “It’s a tough one” for companies, Duross said. “No doubt about it.” Self-reporting can be overrated, according to New York-based Morrison & Foerster partner Carl Loewenson Jr., a co-chairman of the firm’s securities litigation, enforcement, and white-collar defense group who also spoke at the ACC event. Making the disclosures is great for business at the DOJ, as well as law firms and accounting offices, he said. But companies that report almost always get some type of a public charge, he noted. “I think that these days there are too many cases in which too many companies are being too reflexive about self-reporting” to the government, Loewenson said. “In some cases, not in all, you can solve these problems yourself.”
Reading Stack
Several spot-on observations in the most recent issue of the always informative FCPA Update from Debevoise & Plimpton concerning the recent Diebold enforcement action (see here and here for prior posts).
“Although there are significant aggravating factors that might explain imposing $48 million in penalties and disgorgement on a company that voluntarily disclosed what are, unfortunately, common improprieties in China, combined with wholly unrelated commercial bribery in Russia, the size of the financial resolution – apart from the substantial burdens of the monitorship – raises questions about future enforcement of the FCPA, as well as the incentives for companies to self-report.
The first noteworthy aspect of this resolution is the enforcement agencies’ decision to use the books and records and internal controls provisions as a vehicle for obtaining monetary relief penalizing purely commercial bribery (40% of the improper payments at issue). While not entirely novel or outside the theoretical reach of those provisions, were the enforcement agencies routinely to investigate issuers in connection with commercial bribery abroad, the “risk-based” calculus of almost all corporate compliance programs would potentially need to be rebalanced.
Second, the total financial aspect of the resolution was 16 times the total value of alleged improper payments. In describing the improper payments, the enforcement agencies aggregated a number of often small payments over five years. When considered alongside the Ralph Lauren enforcement action from earlier this year, the Diebold enforcement action, and in particular its imposition of a monitor, long-considered one of the most burdensome aspects of FCPA settlements, could call into question one common view of the statements relating to gifts and corrupt intent in the November 2012 DOJ/SEC joint Resource Guide to the U.S. Foreign Corrupt Practices Act: namely, that FCPA covered companies should not “sweat the small stuff.”
[…]
“[T]he Diebold enforcement actions revive the pre-guidance confusion about the government’s enforcement priorities and raise significant questions about the value of voluntary disclosure. The confusion, arising from repeated charges related to relatively small expenditures, including, even, $500 for four pairs of shoes provided as gifts to Chinese officials, was part of the background of frustration with the government’s enforcement of the FCPA that led to publication of the joint DOJ/ SEC Resource Guide. It has been commonly thought that the Resource Guide’s distinctions between “expensive gifts” and “token[s] of esteem or gratitude” signified at least an implicit recognition by U.S. enforcement agencies that compliance resources would be better allocated to topics other than gifts valued at a few hundred dollars, let alone gifts that individually do not exceed $100 in value. But the Diebold case will raise new questions about the government’s enforcement priorities, questions that will only be amplified by the imposition of a monitor, potentially one of the most disruptive, burdensome, and costly components of FCPA settlement tools, and one that had been in declining use for several years.”
An observant article from The Lawyer titled “Round Table on Cross-Border Disputes – Bandwagons Roll.” It states:
“Co-operation [between foreign law enforcement regulators] is good.'” […] More co-operation between regulators when they are trying to address the same issues is welcome.” However, co-operation – while praised for attempting to provide consistency – has its drawbacks. “They all want to impose sanctions for the same conduct.” […] “It’s common now for a company to finish a US Foreign Corrupt Practices Act or UK Bribery Act investigation that has taken three years and generated huge fees, to turn around and see a long line of regulators from, say, China or India with their own legal and political concerns.”
It does not necessarily justify the behavior, but the following article at least puts the behavior in the proper context and highlights why Congress specifically included a facilitation payments exception in the FCPA’s anti-bribery provisions.
“Seventy-five percent of businesses in Vietnam pay bribes to government agencies on their own volition in order to avoid being stuck in red tape, a World Bank specialist says. At an anti-corruption conference held in Hanoi Thursday, Soren Davidsen said that sixty-three percent of firms questioned in a survey said they paid the “unofficial fees” to speed up procedures.”
A useful compliance resource here from the U.S. – China Business Council titled “Best Practices for Managing Compliance in China.”
*****
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.