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In The Words Of Loretta Lynch

By on November 11, 2014 in Compliance, Enforcement Agency Policy, Enforcement Agency Speeches, Morgan Stanley, Ralph Lauren Corp.
Lynch

President Obama nominated Loretta Lynch (U.S. Attorney, Eastern District of New York) to be the next Attorney General.

This post highlights Lynch’s responses to various Foreign Corrupt Practices Act or FCPA related questions originally posed in this September/October 2013 Q&A with the Society of Corporate Compliance and Ethics’ magazine Compliance & Ethics Professional and posted on the DOJ’s website.

In the Q&A, Lynch speaks generally about corruption and compliance and specifically about Morgan Stanley’s so-called “declination” and the FCPA enforcement action against Ralph Lauren.  For additional information on Morgan Stanley’s so-called “declination” (see here and here) and for additional information on the Ralph Lauren enforcement action (see here, here and here).

Q: What did you learn about compliance programs, good and bad, in your [prior private] practice?

A: The most important thing I learned about compliance programs is also the most basic thing—the tone at the top truly sets the
parameters for whether one has an effective or ineffective compliance program. And by effective, I don’t mean a program in a company where there is never any wrongdoing, because that company does not exist. If there is one message I’d like to leave with corporate America, it is that the government actually does understand that things can and will go wrong, even where there is a strong compliance program. Every company develops issues. It’s how you deal with them that defines your corporate culture and informs me if you are serious about fixing the problem and preventing it from recurring going forward.

Q: One of the things that strikes me about your career in the U.S. Attorney’s Office is that fighting corruption has been an ongoing focus. And, it’s notable to point out that we’re not just talking about the Foreign Corrupt Practices Act (FCPA), but also corruption here in the U.S. Are there common threads that you see among government corruption cases everywhere?

A: Corruption, whether here in Brooklyn or on the other side of the globe, has real and far-reaching consequences. The common
thread is that someone in power loses their connection to the constituency they are supposed to serve, whether citizens or shareholders. When government officials engage in self-dealing, when they abdicate their responsibility, when they succumb to greed, the average citizen pays for it dearly and on many levels. Constituents everywhere end up spending more for services—infrastructure, healthcare, education—and sometimes have to go without these vital services, when government officials line their own pockets with public funds. Law-abiding companies here in the U.S. and abroad are placed at a competitive disadvantage when business is won or lost based on bribes, not the quality of a company’s products and services.

And because corruption involves, at its heart, the breaking of a trust relationship, its ramifications often go far beyond the financial. Corruption infects society as a whole, increasing the level of cynicism and distrust that constituents have about their elected officials and government processes. In this way, corruption also impacts those government officials who are truly trying to do the right thing. They get tarred with the same brush. We all deserve honest and effective representation, and my office is committed to investigating and prosecuting those who trade on the trust we place in them to enrich themselves, who let greed get in the way of helping the people that they represent.

Q: The Morgan Stanley FCPA case was a very high-profile declination by main Justice and your U.S. Attorney’s Office. They don’t come that often, and it’s very rare to see compliance efforts cited so widely as the reason why. Can you give a brief description of the case for those who are not familiar with it?

A: Absolutely. In April of 2012, my office and the Department of Justice’s (DOJ) fraud section prosecuted Garth Peterson, the former Managing Director in charge of the Morgan Stanley’s real estate group in Shanghai, China. Peterson had engaged in a conspiracy to sell an ownership interest in a Shanghai building owned by Morgan Stanley to a local government official who had provided assistance to Peterson in securing business for Morgan Stanley in China. During the conspiracy, Peterson repeatedly and falsely told Morgan Stanley that the corporation buying the ownership interest in the building was owned by the Shanghai government when, in fact, it was owned by Peterson and the local government official, among others. By lying and providing false information to Morgan Stanley, Peterson was circumventing the company’s internal controls, which were created and intended to prevent FCPA violations. Peterson was charged with one count of conspiring to circumvent Morgan Stanley’s internal controls, and after pleading guilty, he was ultimately was sentenced to a period of incarceration. We declined to take any action against Morgan Stanley in that case.

Q: Again, what’s notable is that it was the first major FCPA case I can recall in which there was a public declination, and just as importantly, the compliance program was cited so publicly as a major part of the reason why. In fact, it’s hard to remember many cases of any type in which the compliance program’s effectiveness was cited so publicly, which suggests to me that even people without FCPA risks should take note. What made this case so different?

A: You’re right. This was an unusual case. Morgan Stanley self-reported Peterson’s conduct, and cooperated fully and extensively
with the government’s investigation. But that’s not what made the case different. What set Morgan Stanley apart was that, after considering all the available facts and circumstances, the government concluded that Morgan Stanley was a company that had done all that it could. It had a compliance program specifically tailored to its business risks, with commitment to compliance from the very top of the company, that itself did not tolerate wrongdoing. The bank acted to fire Peterson before any of the facts became
public. We concluded that Peterson was the quintessential “rogue employee” who schemed to affirmatively sidestep compliance because he knew his behavior would  not be countenanced. Every company says its bad actors are “rogues,” and that they do not promote corruption, but at Morgan Stanley we could see it. There was a stark contrast between the bank’s corporate culture and Peterson’s actions.

This presented a fundamentally different situation from companies that say they don’t tolerate wrongdoing, yet push employees to meet goals and quotas overseas with little to no guidance on the risks and consequences. It was fundamentally different from companies who distance themselves from their agents and consultants overseas, and then argue that they have to “go along” to avoid being disadvantaged in overseas markets. And it was fundamentally different from companies that say “That’s not who we are,” yet have nothing on record that informs me otherwise.

What we saw was that Morgan Stanley conducted extensive due diligence with respect to the sale that Peterson orchestrated.
We saw that Peterson had circumvented a compliance program that was an active component of the company’s business—Peterson himself was trained on FCPA compliance seven times and reminded about FCPA compliance at least 35 times. Compliance
at Morgan Stanley was also proactive, with the bank routinely adjusting and updating its compliance program to address new
issues and problems as they arose. It was not simply a program that was put in place 10 years ago, set apart from the business, and
left unchanged over time, without regard to changes in the company’s business or the increasing complexity of transactions. When we looked at Morgan Stanley, we also saw a bank that invested resources, that had internal controls in place to ensure accountability, that regularly monitored transactions, and that randomly audited employees, transactions, and business units.

This case stands out because it also touched on a common complaint in the FCPA world, and that is the supposed lack of transparency regarding the government’s consideration of a company’s compliance efforts in making charging decisions. The lengthy description of Morgan Stanley’s compliance program in the Peterson charging document was a deliberate response to that criticism. The Peterson case was even cited for that purpose in the FCPA Resource Guide prepared by DOJ and the Securities and Exchange Commission (SEC) in November 2012.

Q: What should compliance professionals take away as key learning from that case?

A: There are actually two “takeaways” in this case. The first is that the government will aggressively pursue those who engage in criminal conduct involving corporate corruption. The second is that companies that employ robust and effective compliance programs are not only better able to detect and identify potential compliance issues that may negatively affect the company’s business and reputation, but also those unusual instances where an employee is intent on circumventing a company’s internal controls. An added benefit for a company that employs a robust compliance program is that the company will be in a better position to address concerns raised by regulators or the government, if the company’s conduct ever comes under scrutiny. Morgan Stanley was able to demonstrate that Peterson truly was a “rogue,” that he had betrayed them, and he had rejected their culture of compliance.

Q: More recently we had the declination in the Ralph Lauren case. In that case, Ralph Lauren discovered questionable payments by a third party working on their behalf in Argentina. You were the US attorney on that case as well. What were some of the factors that led to the decision not to prosecute?

A: Actually we did not decline prosecution in that case. Rather, we entered into a non-prosecution agreement with Ralph Lauren. The agreement is for a two-year term and requires the implementation of various corporate reforms. Ralph Lauren also paid an $882,000 penalty to the DOJ and disgorged $700,000 in ill-gotten gains and interest to the SEC. There were several reasons for that outcome. Ralph Lauren discovered criminal conduct involving violations of the FCPA while it was in the midst of trying to improve its internal controls and compliance worldwide. Our investigation revealed that, over the course of five years, the manager of Ralph Lauren’s subsidiary in Argentina had made roughly $580,000 in corrupt payments to customs officials for unwarranted benefits, like obtaining entry for its products into the country without the necessary paperwork or without any inspection at all. The bribes were funneled through a customs broker who, at the manager’s direction, created fictitious invoices that were paid by Ralph Lauren in order to cover up the scheme.

Several factors compelled our decision to enter into a non-prosecution agreement with Ralph Lauren. First, there was the detection
of the wrongdoing by the corporation itself, as part of an effort to improve global compliance standards. Following the discovery of the corruption, the company also undertook an exceedingly thorough internal investigation of the misconduct and cooperated fully with our investigation. They made foreign witnesses available for government interviews; they provided real-time translation
of foreign documents.

It was also very significant that Ralph Lauren implemented a host of extensive, remedial measures, including the termination of employees engaged in the wrongdoing, and improvements in internal controls and compliance programs. Finally, we took into account that they swiftly and voluntarily disclosed the conduct to the government and the SEC. The company first self-reported the misconduct to the government within two weeks of discovering it. They basically did everything that a company that finds itself in that unfortunate situation can possibly do.

Q: This was the first time the SEC publicly stated it would not proceed. What got their attention and led to the decision?

A: I cannot speak for the SEC, but we do typically have parallel investigations of FCPA violations, and I believe that they were swayed by the same factors that we were. Although Ralph Lauren did not have an anti-corruption program and did not provide any anticorruption training or oversight during the five-year span of the conspiracy, all of the government agencies investigating the case were impressed with their resulting commitment to compliance in this area globally, as well as their self-disclosure and full cooperation.

Q: Finally, are we seeing the start of a new era in which compliance programs are going to be looked at more closely by prosecutors? And, just as importantly, will good programs earn organizations public credit for their efforts?

A: Absolutely. Compliance is the lens through which we view your company. A robust compliance program demonstrates to us that the company “gets it.” Making your compliance program a top priority is an investment a company can’t afford not to make. To put it more bluntly, by the time you have a problem that has drawn the government’s attention, under our principles and guidelines that govern corporate prosecutions, the existence of a robust compliance program can save you, as in the Morgan Stanley case.

When Is It Strategically Wise (or Not) to Self-Report FCPA Violations to the SEC?

By on May 5, 2014 in FCPA Scholarship, Ralph Lauren Corp., Voluntary Disclosure

The Foreign Corrupt Practices Act often intersects with other disciplines and it is refreshing to read how others see this current era of FCPA enforcement including the resolution vehicles used to resolve enforcement actions as well as government policy relevant to such resolution vehicles.

Professor Peter Reilly (Texas A&M School of Law) focuses his writing in the area of alternative dispute resolution, ethics, emotional intelligence and theories of influence and persuasion within the context of mediation and negotiation.  Professor Reilly previously authored this guest post regarding his article “Negotiating Bribery: Toward Increased Transparency, Consistency, and Fairness in Pre-Trial Bargaining Under The Foreign Corrupt Practices Act”  and he is out with a new article to be published soon in the Harvard Business Law Review titled:  “Ralph Lauren, Transnational Bribery, and Voluntary Disclosure Under the Foreign Corrupt Practices Act: When Is It Strategically Wise (or Not) to Self-Report FCPA Violations to the SEC?”

Below is the abstract and the article can be downloaded here.

“In 2013, the SEC announced a non-prosecution agreement (“NPA”) with Ralph Lauren Corporation in connection with bribes paid to government officials in Argentina. The SEC decided not to charge the corporation with violations of the Foreign Corrupt Practices Act due to the company’s response to the situation, including: (1) the prompt reporting of the violations on its own initiative; (2) the completeness of the information provided; and (3) the “extensive, thorough, and real-time cooperation” put forth during the SEC investigation. While the SEC and various legal commentators suggest the case stands for the proposition that “substantial and tangible” benefits will accrue to companies that self-report FCPA violations and cooperate fully with the SEC, this article arrives at a very different assessment of the matter. Specifically, the article suggests that (1) it might not have been a good idea, from a business perspective, for Ralph Lauren Corporation to self-report the potential violation to the SEC; and (2) the non-prosecution agreement negotiated to resolve the matter — the SEC’s first-ever NPA awarded in an FCPA case — also might not have been in the best interest of the company. In other words, this article suggests that, under current SEC policy, a company’s ability and willingness to self-report to and cooperate with the government is not always strategically wise in the context of FCPA enforcement.

The article explores, through the lens of the Ralph Lauren case, the factors that companies and their counsel must consider when making the difficult and critical calculation of whether or not to voluntarily disclose a potential FCPA violation to the SEC. I investigate the policies and programs used by the SEC to entice voluntary reporting and cooperation, as well as the kinds of results and rewards that might be achieved therefrom. I demonstrate that although the risks associated with voluntary disclosure tend to be concrete and predictable, the rewards have heretofore been largely uncertain — a calculus that militates against disclosure. I conclude that in order to increase the likelihood that companies will self-report FCPA violations in the future, and thereby assist in eradicating the scourge of transnational bribery worldwide, the SEC must be far more transparent: Its policies, pronouncements, rules, and regulations must provide more certain, specific, and calculable incentives to companies for volunteering to come forward. Simply put, companies will not come forward in large numbers, or on significant FCPA matters, until they can determine with certainty and specificity that the rewards obtained will outweigh the risks involved. The article concludes with reform measures that can and should be implemented within the SEC to bring about such transparency. Implementing these changes would benefit everyone involved — the companies and their counsel, the regulatory agencies, and, perhaps most important of all, the people and institutions throughout the world currently suffering the ill effects of transnational bribery.”

“The Shadow Lengthens”

By on March 20, 2014 in Deferred Prosecution Agreements, FCPA Reform, FCPA Scholarship, Marubeni Corp., Non-Prosecution Agreement, Ralph Lauren Corp.

[Late yesterday the DOJ announced this $88 million FCPA enforcement action (the 12th largest of all-time in terms of settlement amount) against Marubeni Corporation – the same company that resolved a $55 million DOJ FCPA enforcement action in 2012 (see here for the prior post) involving Bonny Island, Nigeria conduct.  Yesterday’s FCPA enforcement action against Marubeni involving the Tarahan power plant project in Indonesia is not a surprise.  In this April 2013 post regarding the FCPA enforcement action against current and former Alstom employees in connection with the same project, I sniffed out the details and accurately connected the dots to Marubeni.  A future post will go in-depth as to yesterday’s Marubeni enforcement action when original source documents become available]

I have long called for abolition of non-prosecution and deferred prosecution agreements in the FCPA context.  (See previous posts here, here, here, and here for instance).  In short, and as noted in the prior posts, use of NPAs and DPAs to resolve alleged corporate criminal liability in the FCPA context present two distinct, yet equally problematic public policy issues as well as other issues.  (See “The Facade of FCPA Enforcement“).

As noted in this previous post, in May 2012 the Center for Legal Policy Research at the Manhattan Institute released this dandy report titled “The Shadow Regulatory State: The Rise of Deferred Prosecution Agreements.” Authored by James Copland, the report stated in pertinent part as follows:

“… [P]rosecutors’ virtually unchecked powers under DPAs and NPAs threaten our constitutional framework. To be sure, prosecutors are acting upon duly enacted laws, but federal criminal provisions are often vague or ambiguous, and the fact that prosecutors and large corporations alike feel obliged to reach agreement, rather than follow an orderly regulatory process and litigate disagreements in court, denies the judiciary an opportunity to clarify the boundaries of such laws. Instead, the laws come to mean what the prosecutors say they mean—and companies do what the prosecutors say they must. Federal prosecutors are thus assuming the role of judge (interpreting the law) and of legislature (setting broad policy choices about industry conduct), substantially eroding the separation of powers. That such discretion is often delegated to private contractors with sweeping powers—namely, corporate monitors—makes the denial of justice even graver.”

Recently, Copland and a co-authored followed up with this dandy report titled “The Shadow Lengthens:  The Continuing Threat of Regulation by Prosecution.”  In pertinent part, the Executive Summary states:

“The last ten years have seen the emergence of a new approach to business regulation and prosecution of wrongdoing in the United States. The U.S. Department of Justice now regularly enters into “deferred prosecution” or “non-prosecution” agreements (DPAs or NPAs) with large corporations, in which companies are paying billions of dollars in fines annually without trial. These agreements are presented as steps short of prosecution of corporations, a step that might drive firms into bankruptcy and disrupt their economic sectors. At the same time, a good case can be made that these agreements suffer from a lack of transparency. Questions naturally arise as to whether attorneys working for the federal government, with minimal to no judicial oversight, are best positioned to change significantly the business practices of individual companies and, indeed, entire industries.

Businesses prefer to enter into DPAs or NPAs rather than face trial, even when the costs of such arrangements are severe, because of the significant capital-market pressures stemming from criminal inquiries (including depressed stock prices and impaired credit) as well as the statutory and regulatory consequences flowing from indictment or conviction—for example, exclusion from government reimbursement or contracts, or the retraction of government licenses vital to a company’s operation. Prosecutors, in turn, prefer to avoid the risk and cost of trial as well as the potentially severe collateral consequences that indictment or conviction can impose on corporate stakeholders, including employees and creditors, as witnessed in the collapse of the large accounting firm Arthur Andersen following its 2002 federal indictment—which was ultimately set aside by the U.S. Supreme Court.

Thus, such arrangements have become commonplace, so much so that they might be characterized as a “shadow regulatory state” over business. The federal government has reached 278 DPAs and NPAs with businesses since 2004, with ten of the Fortune 100 companies operating under such agreements just since 2010. Although the federal government entered into only 17 DPAs and NPAs from 1993 through 2003, it entered into 66 in just the last two years, in which almost $12 billion in total fines and penalties were imposed. Companies in the finance and health-care sectors have been particularly likely to wind up under such agreements, with the finance sector accounting for 13 DPAs and NPAs and the health-care sector accounting for 8 of them in 2012–13. The reach of federal prosecutorial agreements has not stopped at America’s shores: the Department of Justice has asserted authority over hosts of foreign businesses—in some cases, for alleged conduct occurring completely outside the United States.

DPAs and NPAs are notable in that they impose terms on companies that go beyond the fines or incarceration normally associated with criminal punishment and because they go beyond requiring that the companies correct the specific practices alleged to be violations of the law. Instead, these agreements often call for major changes in firms’ internal processes of many types—from training to human resources—based on the apparent assumption that absent such changes, wrongdoing will be more likely to recur.

[…]

In many cases, the alleged predicate offenses underlying DPAs or NPAs involve ambiguous facts or strained or novel interpretations of law—interpretations that have remained untested in court, given companies’ pronounced pressure to settle. In addition, DPAs and NPAs regularly cede to prosecutors the sole discretion to determine whether companies are in breach of the agreement’s terms, without judicial oversight or the possibility of appeal.”

One of the NPAs highlighted in the recent report is the Ralph Lauren Corporation.  Citing to, among other sources, prior FCPA Professor posts, the report states:

“The Ralph Lauren [NPA] also highlights the broad scope of federal FCPA enforcement, in which the executive branch is arguably holding companies to account for activities exempted from Congress’s statute, with minimal prospects for judicial review.”

The report also rightly notes:

“Congress’s intent in enacting the FCPA was clearly to deter American companies from buying foreign influence on a large scale – but not to police all foreign bribes potentially paid by U.S. businesses.  Given the powerful incentives that businesses have to enter into DPAs and DPAs, however, federal prosecutors have broadly interpreted the FCPA’s scope – and limited its express exemption – effectively insulting it from judicial review.”

To learn more about Congressional intent in enacting the FCPA, see “The Story of the Foreign Corrupt Practices Act.”

Friday Roundup

By on February 28, 2014 in Bio-Rad, China, FCPA Inc., FCPA Statistics, Merck, Monitor, News Corporation, Non-Prosecution Agreement, Ralph Lauren Corp., SEC, Third Parties, Trade Barriers and Distortions, Voluntary Disclosure, Whistleblowers, World’s Most Ethical FCPA Violaters

Most admired, from the U.K., one way to avoid judicial scrutiny is to avoid the courts, another DOJ official departs, scrutiny updates, and survey says.  It’s all here in the Friday roundup.

Most Admired

Are companies that resolve a Foreign Corrupt Practices Act enforcement or are otherwise under FCPA scrutiny bad or unethical companies?  To be sure, certain companies that have resolved FCPA enforcement actions are deserving of this label, yet most are not.  Indeed, as detailed in this prior post several companies have earned designation as “World Most Ethical Companies” during the same general time period relevant to an enforcement action or instance of FCPA scrutiny.

In a similar vein, several FCPA violators or companies under FCPA scrutiny can be found on Fortune’s recent “Most Admired Company” list.  In the top 50, I count 12 such companies including IBM, Johnson & Johnson, Microsoft, Wal-Mart, JPMorgan, and Cisco.

Let’s face it, not all companies that resolve FCPA enforcement actions or are under FCPA scrutiny are bad or unethical companies.  If more people would realize this and accept this fact, perhaps a substantive discussion could take place regarding FCPA reform absent the misinformed rhetoric.

From the U.K.

In this October 2013 post at the beginning of the U.K. trial of former News Corp. executives Rebekah Brooks, the former editor of News of the World, and Andy Coulson, another former News of the World editor, I observed as follows.

“What happens in these trials concerning the bribery offenses will not determine the outcome of any potential News Corp. FCPA enforcement action.  But you can bet that the DOJ and SEC will be interested in the ultimate outcome.  In short, if there is a judicial finding that Brooks and/or Coulson or other high-level executives in London authorized or otherwise knew of the alleged improper payments, this will likely be a factor in how the DOJ and SEC ultimately resolve any potential enforcement action and how News Corp.’s overall culpability score may be calculated under the advisory Sentencing Guidelines.”

Well …, this Wall Street Journal article reports as follows.

“[Rebekah Brooks testified that] she authorized payments to public officials in exchange for information on “half a dozen occasions” during her time as a newspaper editor—but did so only in what she said was the public interest. […]  On the stand, Ms. Brooks, who edited News Corp’s Sun newspaper and its now-closed News of the World sister title, said the payments were made for good reasons, and done so on rare occasions and after careful consideration. “My view at the time was that there had to be an overwhelming public interest to justify payments in the very narrow circumstances of a public official being paid for information directly in line with their jobs,” said Ms. Brooks.”

As noted in this previous post at the beginning of News Corp.’s FCPA scrutiny, any suggestion that the media industry is somehow excluded from the FCPA’s prohibitions is entirely off-base.

One Way to Avoid Judicial Scrutiny is to Avoid the Courts

In recent years, the SEC has had some notable struggles in the FCPA context and otherwise when put to its burden of proof in litigated actions or otherwise having to defend its settlement policies to federal court judges.  For instance, Judge Shira Scheindlin (S.D.N.Y.) dismissed the SEC’s FCPA enforcement against former Siemens executive Herbert Steffen.  In another FCPA enforcement action,  Judge Keith Ellison (S.D.Tex.) granted without prejudice Mark Jackson and James Ruehlen’s motion to dismiss the SEC’s claims that sought monetary damages.  In Gabelli, the Supreme Court unanimously rejected the SEC’s statute of limitations position.  Judge Richard Leon (D.D.C.) expressed concerns regarding the SEC’s settlement of FCPA enforcement actions against Tyco and IBM and approved the settlements only after imposing additional reporting requirements on the companies.  In addition, the SEC’s neither admit nor deny settlement policy has been questioned by several judges (most notably Judge Jed Rakoff) and the merits of this policy is currently before the Second Circuit.

The SEC’s response to this judicial scrutiny has been, as strange as it may sound, to bypass the judicial system altogether  when resolving many of its enforcement actions including in the FCPA context.  As detailed in this previous post concerning SEC FCPA enforcement in 2013, of the 8 corporate enforcement actions from 2013, 3 enforcement actions were administrative actions (Philips Electronics, Total, and Stryker) and 1 action (Ralph Lauren) was a non-prosecution agreement.  In other words, there was no judicial scrutiny of 50% of SEC FCPA enforcement actions from 2013.

Based on recent statements from SEC officials at the “SEC Speaks” conference this trend is going to continue.

According to this Vedder Price bulletin:

“Charlotte Buford, Assistant Chief Counsel, spoke about the SEC’s intention to use the administrative proceeding forum more frequently and in a wider variety of upcoming enforcement actions. Ms. Buford stated that in choosing the forum, the SEC considers factors such as speed and efficiency, the nature of the case, litigation considerations such as the amount of discovery needed, and settlement considerations. Ms. Buford noted that, although certain types of actions such as insider trading cases were historically brought in district court, two insider trading cases were recently brought as administrative actions. She also referenced the SEC’s recent action against Alcoa, Inc. involving FCPA violations, which was filed as a settled administrative proceeding. Ms. Buford indicated that the SEC will continue to increase its use of administrative proceedings in the coming years.”

This Perkins Coie alert adds the following:

“[Kara Brockmeyer – Chief of the SEC’s FCPA Unit] also noted that companies can expect to see more cases resolved in administrative proceedings, and that the FCPA Unit is considering bringing litigated FCPA cases through administrative proceedings as well.”

SEC administrative settlements in the FCPA context were rare prior to 2010 largely because the SEC could not impose monetary penalties in such proceedings absent certain exceptions.  However, the Dodd-Frank Wall Street Reform Act granted the SEC broad authority to impose civil monetary penalties in administrative proceedings in which the SEC staff seeks a cease-and-desist order.  However, Congress’s grant of such authority to the SEC – no doubt politically popular in the aftermath of the so-called financial crisis – has directly resulted in less judicial scrutiny of SEC enforcement theories including in the FCPA context.

Like so much of what is happening in the FCPA space (and government regulation of corporate conduct generally), this is a troubling development.

In other “SEC Speaks” tidbits, the Vedder Price bulletin also states:

“Kara Brockmeyer, Chief of the FCPA Unit, noted that her unit brought a variety of cases in 2013, which included “old school” bribery cases funneling money, improper travel and entertainment, and improper charitable donations. Ms. Brockmeyer stated that the SEC continues to see issues with third-party intermediaries, as many companies enter into arrangements with third parties without adequately explaining the roles of the third parties. Ms. Brockmeyer lauded companies for “putting more thought” into compliance programs and internal controls, as well as for their decisions to self-report. She also discussed the Cross-border working group, which has brought 21 fraud actions involving 90 individuals or entities and has revoked the registrations of 63 companies since this initiative started three years ago.”

The Perkins Coie alert also states:

“Turning to the area of cooperation credit and non-prosecution agreements (NPAs), Chief Brockmeyer stated that the 2013 Ralph Lauren case is a good example of where such an outcome was warranted.  Several factors that weighed in favor of that favorable NPA settlement resulted from the company: self-reporting the suspected bribery within two weeks of finding violations; discovering the violations on its own through internal monitoring activities; assisting the SEC’s investigation by providing English language translations of foreign documents, and bringing witnesses to the United States for questioning; and undertaking extensive remediation efforts, including a worldwide investigation to determine if there were any systemic issues.  Finally, Chief Brockmeyer added that it was significant that Ralph Lauren’s investigation determined that the bribery issues were confined to one country; if the violations were found to be more widespread, the company would likely still have received cooperation credit, but would not have been a candidate for a NPA.

Chief Brockmeyer stated that the SEC will continue to address Compliance Monitorship requirements on a case-by-case basis.  Recently, the SEC has imposed both “full” monitorships, as well as some “hybrid” monitorships that include 18 months of monitoring, combined with 18 months of self-monitoring by the company.  She noted that some companies might even qualify for just internal monitoring, but all these considerations depend heavily on the state of the company’s compliance program.

Finally, Chief Brockmeyer indicated that whistleblower tips continue to serve as a primary lead for the SEC in identifying potential FCPA actions.  The SEC is using these tips to identify specific sectors or industries that are not paying sufficient attention to corporate compliance or internal controls.  The SEC is also focused on enforcing the anti-retaliation whistleblower provisions in Dodd Frank.  In some instances, the SEC has observed that companies have required employees to sign confidentiality agreements that appear to bar an employee from becoming a whistleblower.  She opined that such agreements would violate Dodd-Frank’s prohibition against regulated entities taking actions to impede employees from making whistleblower complaints.”

Another DOJ Official Departs

When Lanny Breuer departed as DOJ Assistant Attorney Criminal Division in March 2013, Mythili Raman became Acting Assistant Attorney and carried forward much of the same rhetoric Breuer frequently articulated concerning the DOJ’s FCPA enforcement program.  (See here for my article “Lanny Breuer and Foreign Corrupt Practices Act Enforcement).

In speeches (here and here) Raman stated that the DOJ’s “stellar FCPA Unit continues to go gangbusters, bringing case after case,” “our recent string of successful prosecutions of corporate executives is worth highlighting” and “we are not going away … our efforts to fight foreign bribery are more robust than ever.”

Like other DOJ FCPA officials before her, Raman frequently highlighted certain enforcement statistics, yet conveniently ignored the most telling enforcement statistic of all – the DOJ’s dismal record when actually put to its burden of proof in FCPA enforcement actions.  In short, for a long time the DOJ’s FCPA Unit has had a distorted view of success.

Certainly, the DOJ and SEC have had “success” in this new era of FCPA enforcement exercising leverage and securing large corporate FCPA settlements against risk-averse corporations through resolution vehicles often not subjected to any meaningful judicial scrutiny.  However, by focusing on the quantity of FCPA enforcement, the quality of that enforcement is often left unexplored.  The simplistic notion advanced by the enforcement agencies seems to be that more FCPA enforcement is an inherent good regardless of enforcement theories, regardless of resolution vehicles, and regardless of actual outcomes when put to its burden of proof.  This logic is troubling and ought to be rejected.  In a legal system founded on the rule of law, a more meaningful form of government enforcement agency success is prevailing in the context of an adversarial system when put to the burden of proof.  As to this form of success, during this new era of FCPA enforcement, the DOJ and SEC have had far less “success” in enforcing the FCPA.

Recently the DOJ announced that Raman is departing from her position. (See here).  In this related Q&A with the Wall Street Journal Law Blog (LB) Raman confirmed that the DOJ measures success in terms of quantity without regard to quality.

LB: [On enforcement of the Foreign Corrupt Practices Act, which has increased in recent years] do you think you’re winning? Are there fewer bribes being paid now?

MR: We often measure our success by numbers of enforcement actions but actually at the end of the day…. the deterrent effect is what actually matters. I don’t know if fewer bribes are being paid or not. But I do know that there are many more companies who know what their obligations are now.

For additional coverage of Raman’s departure, see here and here.

Scrutiny Alerts

Last summer German healthcare firm Fresenius Medical Care AG disclosed an FCPA internal investigation (see here for the prior post).  In its recently filed annual report, the company stated as follows:

“The Company has received communications alleging certain conduct in certain countries outside the U.S. and Germany that may violate the U.S. Foreign Corrupt Practices Act (“FCPA”) or other anti-bribery laws. The Audit and Corporate Governance Committee of the Company’s Supervisory Board is conducting an internal review with the assistance of independent counsel retained for such purpose. The Company  voluntarily advised the U.S. Securities and Exchange Commission (“SEC”) and the U.S. Department of Justice (“DOJ”) that allegations have been made and of the Company’s internal review. The Company’s review and dialogue with the SEC and DOJ are ongoing.  The review has identified conduct that raises concerns under the FCPA or other anti-bribery laws that may result in monetary penalties or other sanctions. In addition, the Company’s ability to conduct business in certain jurisdictions could be negatively impacted. Given the current status of the internal review, the Company cannot reasonably estimate the possible loss or range of possible loss that may result from the identified matters or from the final outcome of the continuing internal review. Accordingly, no provision with respect to these matters has been made in the accompanying consolidated financial statements.  The Company’s independent counsel, in conjunction with the Company’s Compliance Department, have reviewed the Company’s anti-corruption compliance program, including internal controls related to compliance with international anti-bribery laws, and appropriate enhancements are being implemented. The Company is fully committed to FCPA compliance.”

Bio-Rad Laboratories disclosed as follows yesterday in an earnings release.

“[Fourth quarter] results included an accrued expense of $15 million in connection with the Company’s efforts to resolve the previously disclosed investigation of the Company in connection with the United States Foreign Corrupt Practices Act; this is in addition to an accrued expense of $20 million in the third quarter of 2013.”

Survey Says

The American Chamber of Commerce in Shanghai recently released its China Business Report (2013-2014).

Notable findings include the following:

“Generally consistent with previous years, 80 percent of respondents cited bureaucracy as the No. 1 challenge, with 72 percent declaring difficulties from an unclear regulatory environment and 70 percent were concerned over problems with tax administration rounding out the top three leading legal and regulatory challenges that companies said hindered their business.”

As I’ve frequently stated, the root causes of much bribery and corruption are various trade barriers and distortions. These barriers and distortions – whether complex customs procedures, import documentation and inspection requirements, local sponsor or other third-party requirements, arcane licensing and certification requirements, quality standards that require product testing and inspection visits, or other foreign government procurement practices – all serve as breeding grounds for harassment bribes to be requested. Simply put, trade barriers and distortions create bureaucracy. Bureaucracy creates points of contact with foreign officials. Points of contact with foreign officials create discretion. Discretion creates the opportunity for a foreign official to misuse their position by making demand bribes.

The report also stated:

“Efforts by the Chinese government to target companies for corruption investigations have sharply increased companies’ concern over compliance with China’s laws and regulations. In 2013, 46 percent of companies said compliance with domestic laws was more important to their business, up from 31 percent in 2012, compared to international anti-bribery laws such as the FCPA (32 percent).

Twice as many respondents said that China’s more aggressive regulatory enforcement for anti-corruption and anti-competition has greatly increased or increased their own business risk (18 percent) than those who say their business risk has greatly decreased or decreased (8 percent). The issue of corruption and fraud was most strongly felt in the healthcare industry (24 percent), which contended with high profile government investigations of foreign and domestic pharmaceutical companies in 2013.”

The impetus for much of this concern is the result of GSK’s (and other pharma and healthcare related companies) scrutiny by Chinese authorities for alleged improper business practices.  (See here for the prior post).

*****

A good weekend to all.

Former DOJ FCPA Enforcement Attorney Blasts Ralph Lauren Enforcement Action

By on May 9, 2013 in Parent – Subsidiary Issues, Ralph Lauren Corp.

This prior post summarizing the recent Ralph Lauren enforcement action noted that there was no allegation or suggestion that Ralph Lauren Corporation (RLC”)  was aware of, or participated in, the alleged improper conduct.  The same could be said of many FCPA enforcement actions against a parent company – resolved via a non-prosecution and deferred prosecution agreement – based on foreign subsidiary conduct.

Respondeat superior corporate criminal liability is broad, but not this broad.  Absent an “alter ego” / “piercing the veil” analysis, legal liability of any kind does not ordinary hop, skip, and jump around a multinational enterprise as the DOJ or SEC see fit.

In this prior post, I collected RLC enforcement action commentary hits and misses.  Contrary to many, I found nothing to trumpet in the RLC enforcement action, but much to lament.

There has been another “hit” when it comes to RLC enforcement action commentary, and this one is a home run.

It comes from former DOJ Assistant Chief of the Fraud Section Philip Urofsky (currently a partner at Shearman & Sterling).  Urofksy has always been one of the best, most insightful, FCPA commentators.  His writings were cited in my article the “Facade of FCPA Enforcement,” his critiques of DOJ enforcement theories (such as jurisdictional issues and obtain or retain business) have frequently been highlighted on these pages – see here for instance.

In short, when Urofsky writes, given his prior experience and insight, we really ought to read and take notice.

His latest is “The Ralph Lauren FCPA Case:  Are There Any Limits to Parent Corporation Liability?” recently published in Bloomberg BNA’s Securities Law Daily.

Urofsky and his co-author state, in pertinent part, as follows.

“The facts of the case … point to the steady entrenchment of a more ominous prosecution theory:  an approach that appears to approximate strict criminal and civil liability of parent corporations for their subsidiaries’ corrupt acts.  Although this disregard of corporate structures has been hinted at in previous SEC matters – and the theoretical underpinnings discussed in last year’s DOJ/SEC Resource Guide – the RLC case puts both agencies firmly in the camp of this aggressive and unprecedented expansion of corporate liability.”

“This approach, however, fails to honor the corporate form and the black-letter rule that to ‘pierce the corporate veil’ the government and other litigants must show that the parent operated the subsidiary as an alter ego, and itself paid no attention to the corporate form.  Moreover, it is contrary to the language of the [FCPA’s] original history.”

In conclusion, the article states as follows.

“It is disquieting [that in the RLC case] the DOJ appears to have jumped on the charge-the-parent bandwagon, bringing a bribery case against a parent without alleging any involvement by the parent in those violations.  One can only speculate that it did so because it had no jurisdiction over the foreign subsidiary itself, given that it also did not allege any act by the subsidiary in U.S. territory.  However, as always, the maxim that bad facts make bad law applies, and evidentiary weaknesses cannot excuse the distortion of the statute’s previously clear and reasonable allocation of responsibility.”

I can write about the “facade of FCPA enforcement,” legislative history, how many FCPA enforcement actions seemingly violate basic black-letter principles and the like until the cows come home.

But hopefully more people will finally pay attention to this new era of FCPA enforcement when someone like Urofsky uses terms like “disquieting” “jump on the bandwagon” and “distortion of the statute.”

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