The Sun Rose, A Dog Barked, And A Company Disclosed FCPA Scrutiny
Yesterday, a colleague stopped by my office and commented how it seems like every day the news contains a story about a company subject to FCPA scrutiny. Every day may be a stretch, but a new company every week is probably accurate.
In its Feb. 14th 10-K filing, Goodyear Tire and Rubber Company disclosed as follows.
“In June 2011, an anonymous source reported, through our confidential ethics hotline, that our majority-owned joint venture in
Kenya may have made certain improper payments. In July 2011, an employee of our subsidiary in Angola reported that similar
improper payments may have been made in Angola. Outside counsel and forensic accountants were retained to investigate the
alleged improper payments in Kenya and Angola, including our compliance in those countries with the U.S. Foreign Corrupt
Practices Act. We do not believe that the amount of the payments in question in Kenya and Angola, or any revenue or operating
income related to those payments, are material to our business, results of operations, financial condition or liquidity.
Following our internal investigation, we have implemented, and are continuing to implement, appropriate remedial measures
and have voluntarily disclosed the results of our investigation to the U.S. Department of Justice (“DOJ”) and the Securities and
Exchange Commission (“SEC”), and are cooperating with those agencies in their review of these matters. We are unable to predict the outcome of any review that may be undertaken by the DOJ and SEC.”
In this prior post, I asked why in this era of increased FCPA compliance there seems to be more, not less, FCPA inquiries? Does effective compliance reduce FCPA scrutiny or does effective compliance uncover more potential FCPA issues? Based on Goodyear’s disclosure, it seems that in its case, the later is true, its compliance policies and procedures worked! If so, does this not argue in favor of an FCPA compliance defense? See here for a webcast next Tuesday on this topic.
If every company hired FCPA counsel to do a thorough review of its world-wide operations would – given the enforcement agencies theories of interpretation – 50% of companies find technical FCPA violations? 75%? 95%? If the answer is any one of these numbers, is that evidence of how corrupt business has become or is that evidence of how unhinged FCPA enforcement theories have become?
In other words, what does it say about enforcement of a law if, at any given time, the majority of corporations are on the wrong end of how that law is enforced? After all, according to the FCPA Blog’s most recent corporate disclosure list (here) approximately 80 companies are currently under investigation for FCPA violations. As the FCPA Blog rightly notes “nearly all entries are based on disclosures in SEC filings. That means non-issuers (non-public companies) aren’t included. And perhaps not all issuers have made a disclosure about a pending FCPA investigation, in which case the company may not appear on this list.”
Indeed, today’s Wall Street Journal editorial is titled “Justice’s Bribery Racket.” It begins as follows. “The Justice Department’s creative prosecutions under the Foreign Corrupt Practices Act (FCPA) continue to disintegrate […] The 1977 FCPA was intended to prevent American companies from joining the Third World’s payoff habits. Over the last five years, however, Justice has begun to stretch the law into a far more blunt instrument. Instead of going after clear violations, the vague statute has become a tool to prosecute or threaten legions of companies.” I agree and the issues discussed in the WSJ editorial have been the focus of my writing for years. See here for the “Facade of FCPA Enforcement,” here for “Revisiting A Foreign Corrupt Practices Act Compliance Defense,” here for my Senate FCPA testimony and here for my “foreign official” declaration. [As to the WSJ’s reference to News Corp. “if Justice tries to portray payments made as part of traditional news-gathering as criminal acts, the list of felons won’t stop at the tabloids,” I’ve stated before (here) that News Corp.’s FCPA exposure – and the intense media coverage it has generated – does shine a much needed light on the current era of FCPA enforcement and raises two distinct questions. The first question is whether – given the DOJ and SEC’s current enforcement theories – the News Corp. payments at issue can expose it to FCPA liability and the answer is yes. The second question is whether Congress intended the FCPA to apply to the numerous enforcement actions in this new era that have nothing to do with obtaining or retaining foreign government contracts. This is a valid and legitimate question and the same question could also be asked as to many other current FCPA enforcement theories.]
Goodyear states in its disclosure that it does not believe that the amount of the payments in question or any revenue or operating income related to those payments, are material to its business, results of operations, financial condition or liquidity. Then why disclose? It is perfectly acceptable in a situation like this to promptly implement remedial measures, revise and enhance compliance policies and procedures – all internally without disclosure to the enforcement agencies.
Yet the steady stream of disclosures feed a growing and vibrant FCPA industry where FCPA issues, no matter how limited in scope, often turn into a boondoggle for many involved. Corporate voluntary disclosures are like a rainbow and waiting on the other side is often the pot of gold “where else” question. For more on this dynamic, see this prior post.
News Corp. Inquiry Is Following A Typical Path
In July 2011, world-wide media attention focused on News Corporation and its potential Foreign Corrupt Practices Act exposure. See here for a detailed prior post.
Recently, News Corp. has been back in the news. Last week, various news outlets (see here from Reuters for instance) reported that New Corp.’s potential FCPA exposure has escalated as U.S. authorities continue to investigate the company. Among other things, the report noted that “much of the evidence police are examining in the News Corp case was handed over to investigators by the company, who have set up a special clean-up unit in London and hired batteries of lawyers in Britain and the United States, some of whom specialize in FCPA cases.”
Over the weekend, it was reported (see here from the Guardian) that five senior journalists of The Sun (a News Corp. owned paper) were arrested concerning allegations of payments to police officers and others including Ministry of Defense and other military officials – all “foreign officials” under the FCPA. As relevant to the FCPA’s books and records and internal control provisions, reports suggest that company records show many of the intended recipients of the problematic payments being recorded in company records under false names.
The recent News Corp. news and the escalation of the investigation are not surprising. In fact, the inquiry is following a typical path for an FCPA inquiry. In this July 2011 post, I noted (as to “what is likely to happen next”) that News Corp. would cooperate in the investigations and that cooperation in the FCPA context often means conducting an internal, independent review of the conduct at issue and sharing the results, witness statements, key documents, etc. with the enforcement agencies on a near real-time basis. Indeed, the New York Times reports (here) that “those arrested have been presented with receipts, expenses reports, messages and other internal documents during questioning.”
The July 2011 post noted that the gray cloud hanging over News Corp. is likely to last for a couple of years because it is typical for an FCPA enforcement inquiry to begin based on a certain set of limited and discrete facts but that before the enforcement agencies will agree to resolve an FCPA matter, it is typical for the agencies to ask the “where else” question. I noted that News Corp. was likely to conduct a targeted world-wide review of its operations to understand whether the London police payments were isolated or whether other News Corp. employees around the world, or in other business units or divisions, made similar payments to “foreign officials.” The recent developments suggest that this is the case. As I indicated to the Guardian (here), the recent arrests and allegations spread the alleged bribery to a different newspaper, to a different segment of the company, and to other public officials.
In short, the News Corp. FCPA inquiry is following a typical path and the recent news surrounding News Corp. is not surprising nor is it likely to be the last.
Friday Roundup
Some light reading to ease you into your holiday weekend. A News Corp. checkup, ADM’s delayed disclosure, and some news from Canada … it’s all here in the Friday roundup.
News Corp. Checkup
As detailed in this Reuter’s piece by Mark Hosenball and Georgina Prodhan, the News Corp. internal investigation is proceeding as one might suspect. According to the article, the firm leading the investigation is “looking for anything that U.S. government investigators might be able to construe as evidence the company violated American law, particularly the Foreign Corrupt Practices Act …”. Lawyers are combing through e-mails and financial records and journalists at other News Corp. U.K. newspapers reportedly have been or will be interviewed as part of the investigation.”
To learn more about News Corp.’s potential FCPA exposure – see this prior post.
ADM’s Delayed Disclosure
From a disclosure perspective, issuers handle FCPA inquiries and investigations across a wide spectrum. Some disclose the existence of a potential issue or inquiry at the first available opportunity and some never disclose the inquiry and it is not publicly known until the actual enforcement action.
Archer Daniels Midland Company (ADM) choose a middle option, a delayed (much delayed) disclosure. Here is what ADM said its most recent annual report filed on August 25th.
“Since August 2008, the Company has been conducting an internal review of its policies, procedures and internal controls pertaining to the adequacy of its anti-corruption compliance program and of certain transactions conducted by the Company and its affiliates and joint ventures, primarily relating to grain and feed exports, that may have violated company policies, the U.S. Foreign Corrupt Practices Act, and other U.S. and foreign laws. The Company initially disclosed this review to the U.S. Department of Justice, the Securities and Exchange Commission, and certain foreign regulators in March 2009 and has subsequently provided periodic updates to the agencies. The Company engaged outside counsel and other advisors to assist in the review of these matters and has implemented, and is continuing to implement, appropriate remedial measures.”
Canada News
This March 2010 post detailed NGO requests for Canadian authorities to investigate Blackfire Exploration (a privately owned Canadian exploration and mining company headquartered in Calgary) given allegations of payments to a Mexican mayor. Update. Canadian authorities recently raided the company’s offices and alleged in an affidavit “that the company funnelled bribes into the personal bank account” of the Mayor “to ensure protection from anti-mining protestors.” So reports Greg McArthur in this piece from The Globe and Mail.
Staying up north, this recent post highlighted the Niko Resources enforcement action. For a dandy read about the facts and circumstances leading to the enforcement action, as well as Canada’s historical efforts in enforcing its “FCPA-like” law – see here from McArthur as well.
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A good weekend to all.
Recent Disclosures Raise Many Questions
Deere & Co., Goldman, Pfizer, News Corp, Parametric Technology, Bruker, Diebold, Watts Water Technologies, 3M Corp. The flurry of public company disclosures of FCPA inquiries (some new, some merely updates) in recent days raise many questions.
Has the increase in FCPA enforcement done anything to deter future FCPA violations?
Why in this era of increased FCPA compliance does there seem to be more, not less, FCPA inquiries? Does effective compliance reduce FCPA scrutiny or does effective compliance uncover more FCPA issues? If the latter, does that argue in favor of a compliance defense?
If every company hired FCPA counsel to do a thorough review of its world-wide operations would – given the enforcement agencies theories of interpretation – 50% of companies find technical FCPA violations? 75%? 95%? If the answer is any one of these numbers is that evidence of how corrupt business has become or is that evidence of how unhinged FCPA enforcement theories have become?
Other than plaintiffs’ firms representing certain investors in (some would say opportunistic) securities class actions or derivative claims, do investors even care about these disclosures?
What do these recent disclosures – involving companies in diverse industries operating in diverse countries – say about the FCPA itself? Is it working? Does it need reform?
Ponder these questions while browsing the latest disclosures.
Goldman
From the company’s August 9th 10-Q:
“[The company] and certain of its affiliates are subject to a number of investigations and reviews, certain of which are industry-wide, by various governmental and regulatory bodies and self-regulatory organizations relating to the sales, trading and clearance of corporate and government securities and other financial products, including compliance with the SEC’s short sale rule, algorithmic and quantitative trading, futures trading, securities lending practices, trading and clearance of credit derivative instruments, commodities trading, private placement practices, compliance with the U.S. Foreign Corrupt Practices Act and the effectiveness of insider trading controls and internal information barriers.”
As noted in this prior post, Goldman’s FCPA scrutiny relates to its relationship with Libya’s sovereign wealth fund.
Pfizer
The company stated as follows in its August 11th 1o-Q:
“The Company has voluntarily provided the DOJ and the U.S. Securities and Exchange Commission (SEC) with information concerning potentially improper payments made by Pfizer and by Wyeth in connection with certain sales activities outside the U.S. We are in discussions with the DOJ and SEC regarding a resolution of these matters. In addition, certain potentially improper payments and other matters are the subject of investigations by government authorities in certain foreign countries, including a civil and criminal investigation in Germany with respect to certain tax matters relating to a wholly owned subsidiary of Pfizer.”
News Corp.
News Corp.’s FCPA exposure has been detailed in several prior posts (see here for instance) and in the company’s August 10th 8-K it stated as follows.
“In July 2011, the Company announced that it would close its publication, News of the World, after allegations of phone hacking and payments to police. As a result of these allegations, the Company is subject to several ongoing investigations by U.K. and U.S. regulators and governmental authorities, including investigations into whether similar conduct may have occurred at the Company’s subsidiaries outside of the U.K. The Company is fully cooperating with these investigations. In addition, the Company has admitted liability in a number of civil cases related to the phone hacking allegations and has settled a number of cases. The Company has taken steps to solve the problems relating to News of the World including the creation and establishment of an independent Management & Standards Committee, which will have oversight of, and take responsibility for, all matters in relation to the News of the World phone hacking case, police payments and all other connected issues at News International Group Limited (“News International”), including as they may relate to other News International publications.”
Parametric Technology Corp.
In a new disclosure, the company stated as follows in its August 10th 10-Q:
“In the third quarter of 2011, we identified certain payments by certain business partners in China that raised questions of compliance with laws, including the Foreign Corrupt Practices Act, and/or compliance with our business policies. We are conducting an internal investigation and have voluntarily disclosed this matter to the United States Department of Justice and the Securities and Exchange Commission. We are unable to estimate the potential penalties and/or sanctions, if any, that might be assessed in connection with this matter. If we determine that the replacement of certain employees and/or business partners is necessary, it could have an impact on our level of sales in China until such replacements are in place and productive. Revenue from China has historically represented 6% to 7% of our total revenue.”
Bruker Corp.
In a new disclosure, the company stated as follows in its August 9th 10-Q:
“The Company has received certain anonymous communications alleging improper conduct in connection with the China operations of its Bruker Optics subsidiary. In response, the Audit Committee of the Company’s Board of Directors initiated an investigation of those allegations, with the assistance of independent outside counsel and an independent forensic consulting firm. The investigation is ongoing and includes a review of compliance by Bruker Optics and its employees in China with the requirements of the Foreign Corrupt Practices Act (“FCPA”) and other applicable laws and regulations. To date, the investigation has found evidence indicating that payments were made that improperly benefit employees or agents of government-owned enterprises in China. The Company voluntarily contacted the United States Securities and Exchange Commission and the United States Department of Justice to advise both agencies that an internal investigation is underway. It is the intent of the Audit Committee and the Company to cooperate with both agencies in connection with any investigation that may be conducted in this matter. In 2010, the China operations of Bruker Optics accounted for less than 2.5 percent of the Company’s consolidated net sales and less than 1.0 percent of its consolidated total assets. The internal investigation being conducted by the Audit Committee is ongoing and no conclusions can be drawn at this time as to its outcome; however, the FCPA and related statutes and regulations do provide for potential monetary penalties as well as criminal and civil sanctions in connection with FCPA violations. It is possible that monetary penalties and other sanctions could be assessed by the Federal government in connection with this matter. The nature and amount of any monetary penalty or other sanctions cannot reasonably be estimated. We have not recorded any provision for monetary penalties related to criminal and civil sanctions at this time.”
Diebold Inc.
In its August 8th 10-Q the company stated as follows.
“The Company’s global Foreign Corrupt Practices Act (FCPA) review remains on schedule with no material developments during the three months ended June 30, 2011: During the second quarter of 2010, while conducting due diligence in connection with a potential acquisition in Russia, the Company identified certain transactions and payments by its subsidiary in Russia (primarily during 2005 to 2008) that potentially implicate the FCPA, particularly the books and records provisions of the FCPA. As a result, the Company is conducting an internal review and collecting information related to its global FCPA compliance. In the fourth quarter of 2010, the Company identified certain transactions within its Asia Pacific operation over the past several years which may also potentially implicate the FCPA. The Company’s current assessment indicates that the transactions and payments in question to date do not materially impact or alter the Company’s consolidated financial statements in any year or in the aggregate. The Company’s internal review is ongoing, and accordingly, there can be no assurance that this review will not find evidence of additional transactions that potentially implicate the FCPA. The Company has voluntarily self-reported its findings to the SEC and the DOJ and is cooperating with these agencies in their review. The Company was previously informed that the SEC’s inquiry has been converted to a formal, non-public investigation. The Company also received a subpoena for documents from the SEC and a voluntary request for documents from the DOJ in connection with the investigation. The Company expects to complete its internal review of these matters by the end of 2011. Once the Company completes its internal review, it will begin discussions with the SEC and the DOJ to resolve this matter. At this time, the Company cannot predict the results of the government investigations and therefore cannot estimate the potential loss or range of loss it may incur with respect to these investigations or their potential impact on the consolidated financial statements. Future resolution of these matters with the DOJ and SEC could result in a material impact to the Company’s consolidated financial statements.”
Watts Water Technologies Inc.
In an August 3rd 8-K filing, the company provided this update:
“In the second quarter of 2011, the Company recorded income of $0.05 per share in discontinued operations related to a reserve adjustment for the previously disclosed FCPA investigation. The adjustment reflects management’s best estimate of a possible charge in connection with this matter based on ongoing discussions with SEC staff. There is no definitive agreement for resolution of this matter at this time.”
3M Company
In an August 4th 10-Q filing, the company provided this update:
“On November 12, 2009, the Company contacted the Department of Justice (DOJ) and Securities and Exchange Commission (SEC) to voluntarily disclose that the Company was conducting an internal investigation as a result of reports it received about its subsidiary in Turkey, alleging bid rigging and bribery and other inappropriate conduct in connection with the supply of certain reflective and other materials and related services to Turkish government entities. The Company also contacted certain affected government agencies in Turkey. The Company retained outside counsel to conduct an assessment of its policies, practices, and controls and to evaluate its overall compliance with the Foreign Corrupt Practices Act, including an ongoing review of our practices in certain other countries and acquired entities. The Company continues to cooperate with the DOJ and SEC and government agencies in Turkey in the Company’s ongoing investigation of this matter. The Company cannot predict at this time the outcome of its investigation or what regulatory actions may be taken or what other consequences may result.”
Deere & Co.
In addition to the above disclosures, the Wall Street Journal Corruption Currents, among others, reported this week that Deere & Co. “received an inquiry from regulators last month regarding payments made in Russia and nearby countries.” In a statement, Deere stated as follows. “On July 25, 2011, Deere received a request from the SEC that it voluntarily produce documents relating to Deere’s activities, and those of third parties, in certain foreign countries. Deere is cooperating with the SEC’s requests.”
Bribery Is Not A First Amendment Issue, But News Corp’s Potential FCPA Liability Does Shine A Needed Light On The FCPA’s Current Era
[On July 20th, the Wall Street Journal published an Op-Ed (here) by David Rifkin and Lee Casey concerning the FCPA implications of the News Corporation scandal titled “Payments and News-Gathering: The New First Amendment Threat.” I drafted and submitted to the WSJ a piece that, in part responded to certain of the FCPA assertions made by Rivkin and Casey, and in other respects sought to further inform the public discussion concerning News Corporation’s potential FCPA exposure and more broadly the current era of FCPA enforcement. The WSJ declined to publish the piece and it thus appears below – modified slightly to conform to the typical postings on this site]
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One aspect of the growing News Corporation scandal concerns the Foreign Corrupt Practices Act (“FCPA”) given the allegations that News Corporation employees and agents may have provided cash or other things of value to London police officers to obtain non-public information that better allowed News Corporation entities to publish stories and thus sell more newspapers.
Based on these allegations and revelations, calls by certain U.S. senators for an FCPA investigation of News Corporation find firm support given how the Department of Justice and the Securities and Exchange Commission have aggressively interpreted the FCPA during the past decade of its resurgence. (See here for a prior post).
Yet, recently in a WSJ Op-Ed, David Rivkin (here) and Lee Casey (here), commenting on the FCPA implications of the News Corporation scandal, made the senseless assertion that the First Amendment makes an FCPA inquiry of News Corporation “inappropriate” because the “the FCPA was certainly not intended to police news-gathering .”.
In passing the FCPA in 1977, Congress clearly demonstrated a capability of creating certain exceptions. For instance, the FCPA has always contained a limited national security exception for conduct engaged in pursuant to a specific, written directive of the head of any Federal department or agency pursuant to Presidential authority to issue such directives. However, having analyzed the FCPA’s entire legislative history (including thousands of pages of Congressional hearing transcripts, Congressional floor statements, texts of competing bills, and Executive agency documents and statements – see here for more) I can say that there is no basis to suggest that Congress sought to exclude the media industry from the FCPA’s prohibitions.
Nor should the media industry be excluded from FCPA scrutiny if its news gathering methods include paying bribes to “foreign officials” to obtain information. Few would suggest that the media industry would be excluded from criminal liability if its news gathering methods include assault and battery of sources to obtain information. The same logic and reasoning applies when news gathering is facilitated through the payment of bribes.
Even though Rivkin and Casey are off-base with their First Amendment assertion, they do correctly state that “since the late 1990’s […] the Securities and Exchange Commission and the U.S. Department of Justice have begun applying the law ever more broadly – to conduct that has little connection to obtaining government contracts or other government benefits, such as product approvals, permits or licenses.” Likewise, a recent WSJ editorial (here) also correctly stated that the FCPA “has historically been enforced against companies attempting to obtain or retain government business” but that “U.S. officials have been attempting to extend their enforcement to include any payments that have nothing to do with foreign government procurement.”
The intense media coverage of New Corporation’s potential FCPA exposure has succeeded in raising two distinct, yet equally important questions, as to the FCPA’s current era of enforcement. The first question is whether – given the DOJ and SEC’s current enforcement theories – the London police officer payments can expose News Corporation to FCPA liability. That answer is yes and the First Amendment, for the reasons stated above, is not relevant to this question. The second question is whether Congress intended the FCPA to apply to the numerous FCPA enforcement actions (actions typically resolved through non-prosecution and deferred prosecution agreements and thus subject to little or no judicial scrutiny) in this new era that have nothing to do with obtaining or retaining foreign government contracts.
This is a valid and legitimate question and the same question could also be asked as to many other current FCPA enforcement theories. For instance, in the FCPA’s decade of resurgence, a significant percentage of FCPA enforcement actions do not involve foreign government officials. Rather, the “foreign officials” at issue are alleged employees of state-owned or state-controlled enterprises (such as procurement managers and project engineers) and thus employees of alleged “instrumentalities” of a foreign government. This common enforcement agency position, even as to commercial enterprises in which a foreign state holds merely a minority interest, is the functional and substantive equivalent of alleging that General Motors and American International Group are “instrumentalities” of the U.S. government and that all GM and AIG employees are therefore U.S. “officials.” The enforcement agencies frequently assert this position even though there is no express statement or information in the FCPA’s extensive legislative history to support the position.
In “The Façade of FCPA Enforcement” recently published by the Georgetown Journal of International Law (see here) and in my other writings I have extensively profiled how the FCPA has frequently come to mean whatever the enforcement agencies say it means and how the FCPA has morphed into an all-purpose corporate ethics statute. The issue is not whether payments to London police officers to obtain information or to employees of commercial enterprises with a dint of foreign government ownership are ethical – few would suggest they are. Rather the issue is whether such payments are what Congress intended to regulate when it passed the FCPA. If Congress desires an all-purpose corporate ethics statute vs. a limited foreign bribery statute that is a decision for Congress to make – not for the enforcement agencies to make via its charging decisions that are largely insulated from judicial scrutiny.
News Corporation’s potential FCPA exposure based on current DOJ and SEC enforcement theories has succeeded in focusing greater attention on this new era of FCPA enforcement and that is a good thing and in the public interest for this dialogue to continue.