Top Menu

Navigation

Issues To Consider From The Hitachi Enforcement Action

By on October 1, 2015 in Hitachi, Root Causes
Issues

This recent post highlighted the SEC’s FCPA enforcement action against Hitachi.

This post continues the analysis by highlighting various issues to consider from the enforcement action.

Too Lenient?

A $19 million FCPA enforcement action is nothing to yawn about.

However, it is not every Foreign Corrupt Practices Act enforcement action in which the SEC alleges that approximately $10.5 million in improper payments or benefits were provided in connection with two contracts worth approximately $5.6 billion in business.

Against this backdrop, a $19 million settlement amount appears at first blush to be very lenient.  Particularly because the SEC makes no mention of voluntary disclosure or cooperation in its resolution documents (something the SEC typically mentions in resolution documents if indeed it has occurred).  Moreover, most FCPA enforcement actions (even those that merely charge books and records and internal controls violations) typically include disgorgement.  There was no disgorgement in the Hitachi enforcement action, only a civil penalty.

Hitachi was represented by Linda Chatman Thomsen (a former SEC Director of Enforcement currently at Davis Polk & Wardwell).

Rare Civil Complaint

Since 2014, the SEC has brought, including the Hitachi action, 15 corporate FCPA enforcement actions. Along with Avon, Hitachi was the only enforcement action resolved through a settled SEC civil complaint filed in federal court.

Why? Presumably because the SEC wanted to invoke the injunctive powers of a federal court to enjoin Hitachi from future violations of the FCPA’s books and records and internal control provisions.

An FCPA First

The Hitachi enforcement action is believed to be the first FCPA enforcement action to allege improper conduct in South Africa.

Root Causes

The root causes of many FCPA enforcement are often foreign trade barriers or distortions.

As relevant to this topic, the SEC alleged:

“[I]n establishing a local presence in South Afiica, Hitachi [sought] to identify a local black-owned entity or entities with whom HPA could partner in connection with its submission of bids, or “tenders,” for government business. By partnering with a local black-owned entity, HPA would seek to qualify under the requirements of South Africa’s Black Economic Empowerment Act of 2003 (“BEE”), which promoted participation in the South African economy by companies that were at least 25% owned by black South Africans or black-owned South African entities. In general, companies that qualified under the terms of the BEE enjoyed preferential status in government procurements.”

No Anti-Bribery Charges

Certain readers may be surprised that the Hitachi enforcement action did not include violations of the FCPA’s anti-bribery provisions.

However, in order for the anti-bribery provisions to apply to a foreign issuer like Hitachi, the jurisdictional element of the provisions must be met – in other words “use of the mails or any means or instrumentality of interstate commerce” in furtherance of a payment scheme.

There is no allegation, inference or suggestion that the conduct at issue had a U.S. nexus.

Thus, based on the information in the SEC’s complaint, there were no anti-bribery charges to bring.

Friday Roundup

By on April 10, 2015 in Banco Santander, Brazil, FCPA Inc., Ford Motor, JBS, Petrobras, Root Causes
Roundup2

Making a difference, to FCPA Inc., and scrutiny alert.  It’s all here in the Friday roundup.

Making a Difference

In running this website, I sometimes feel like the captain of a small ship on a wide vast ocean.  My metrics tell me that many people are reading, but is the content on FCPA Professor making a difference?  Many people have told me that it is and I could cite several examples such as the most recent one.

On April 2nd, FCPA Professor published this post about the recent decision from the W.D. of Ark. in the Wal-Mart FCPA-related derivative actions.  The post highlighted two errors in the court’s decision.

“In a footnote, Judge Hickey’s order states: “The Foreign Corrupt Practices Act prohibits United States companies from bribing foreign officials to secure improper business advantage.”

This is an inaccurate statement of law.

Rather, the FCPA contains an “obtain or retain business” element that must be proved.  Indeed, the DOJ’s position that the FCPA captures payments to “secure an improper business advantage” wholly apart from the “obtain or retain business” element has been specifically rejected by courts. (See here for the prior post).

The inaccurate statement of law in the order is perhaps not surprising given that the Judge referred to the FCPA as the “Federal Corrupt Practices Act.”

I am happy to see that a day later, on April 3rd, the court issued an amended order to “reflect the correction of minor typographical errors.”

The above referenced footnote (and its substance) no longer appear in the decision and reference to the “Federal” Corrupt Practices Act has been removed.

 To FCPA Inc.

It happens so often it is difficult to keep track of, but I try my best.

Earlier this week, Morrison & Foerster announced:

“James Koukios, who served in the Fraud Section of the Criminal Division at the U.S. Department of Justice (DOJ), most recently as Senior Deputy Chief, has joined the firm’s Washington, D.C. office as a partner in the Securities Litigation, Enforcement & White-Collar Criminal Defense Practice Group.

Mr. Koukios is the second high-ranking DOJ prosecutor to join MoFo in the past year, following the 2014 arrival of former Fraud Section Deputy Chief Charles Duross, who served as head of the DOJ’s Foreign Corrupt Practices Act (FCPA) Unit. In his most recent position, Mr. Koukios oversaw the FCPA, Health Care Fraud, and Securities and Financial Fraud Units. With the addition of Mr. Koukios, who previously served as an Assistant Chief in the FCPA Unit and tried two of the most significant FCPA cases in the past decade, MoFo is the only law firm in the world with two former FCPA Unit managers.

[…]

During his tenure at DOJ, Mr. Koukios worked with domestic and foreign law enforcement authorities around the globe. He tried nearly two dozen jury cases, serving as a lead trial attorney in two landmark FCPA-enforcement trials: Esquenazi and Duperval.”

Not to dissect the MoFo press release too much, but the Duperval case was not an “FCPA-enforcement” trial. Rather, it was a non-FCPA case against the alleged “foreign official” in the Esquenazi case and directly related to the Esquenazi case.

Scrutiny Alert

The Wall Street reports on a bribery probe separate and distinct from the ongoing Petrobras probe.  According to the article:

“Prosecutors said 74 companies and 24 individuals are under investigation. None have been named publicly and no charges have been filed. But a leading investigator on the case said companies under investigation include Ford Motor Brazil, a unit of Ford Motor Co.; JBS, the world’s largest meatpacker, the Brazilian unit of the Spanish bank Banco Santander SA; and Brazil’s second largest private-sector bank, Bradesco SA.

[…]

Brazil’s tax system is among the most onerous and complex in the world. Penalties can be steep. That has fostered an environment where corruption can flourish, experts say.

“Taxes in Brazil are so high and complicated that it is easy for companies to get in trouble with the taxman,” the leading investigator told The Wall Street Journal. The investigator said frequent tax disputes created opportunities for ill-intentioned public servants to profit by helping firms circumvent red tape.”

Speaking of the Petrobras inquiry, the Wall Street Journal goes in-depth here.

*****

A good weekend to all.

Friday Roundup

By on January 16, 2015 in Asset Recovery, Entertainment Industry, FBI, Foreign Official, Internal Controls, Joseph Sigelman, Lions Gate Entertainment Corp, Mario Roberto Zelaya Rojas, Root Causes, Sony Corp., Voluntary Disclosure
Roundup2

Hollywood film studios, more FBI agents, asset recovery, quotable, and for the reading stack.  It’s all here in the Friday roundup.

Hollywood Film Studios

A recent Wall Street Journal article went in-depth regarding the FCPA scrutiny of Hollywood film studios doing business in China. According to the article, Sony received a subpoena from the SEC in June 2013 regarding possible violations of the U.S. Foreign Corrupt Practices Act.  The article states:

“The SEC’s questions to Sony dealt primarily with potential bribery related to the release of “Resident Evil: Afterlife” in China in 2010, according to email communication between Sony’s in-house and outside legal counsel. A Sony-led investigation that followed the SEC subpoena examined the company’s distribution efforts more broadly, the emails show. The subpoena indicates an escalation of an inquiry that began in 2012 when the SEC requested that every major studio voluntarily provide information about their movie-distribution practices in China, a request that was publicly reported at the time. However the SEC’s specific concerns weren’t disclosed nor was it previously known that the agency had stepped up its probe with a subpoena. Sony documents show that the SEC refers to its probe as “In the Matter of Lions Gate Entertainment Corp,” indicating that the rival Hollywood studio behind “The Hunger Games” has been asked questions as well.”

Many FCPA enforcement actions have, as a root cause, a foreign trade barrier or distortion.  This appears to be true in the case of the Hollywood film studios.  As stated in the article, the companies ran into “China’s quota and censorship systems to secure distribution for their films in that country.”  According to the article:

“Hollywood studios are barred from distributing films on their own in China, but instead work with the state-owned China Film Group to secure one of the 34 highly coveted spots offered each year for imported movies. [Third party distribution firms] help studios navigate the bureaucracy.”

More FBI Agents

The Wall Street Journal reports:

“The Federal Bureau of Investigation’s foreign corruption program will more than triple the number of agents focused on overseas bribery this year to more than 30 from around 10, according to bureau officials. The agents will focus on both sides of corruption, hunting down executives that pay off foreign officials, while also helping other nations recoup funds stolen by corrupt leaders. The FBI usually can’t directly arrest corrupt foreign leaders, but at the request of foreign law enforcement the bureau can help locate funds stolen by kleptocrats. […]  “With the growing global economy and the growing nature of international commerce with globalization of more companies and economies, it’s creating more opportunities for the potential of FCPA and corruption,” said Joseph Campbell, assistant director of the bureau’s criminal division, in an interview. The newly assigned agents will work out of field offices in New York, Washington, D.C., San Francisco, Los Angeles, Miami and Boston, with backup from forensic analysts and other specialists in headquarters, which is also located in the capital. Currently, the bureau’s foreign anti-corruption field agents are managed out of a field office in Washington, D.C. and split their time while pursuing other white collar crimes, bureau officials said.”

Asset Recovery

As part of its Kleptocracy Asset Recovery Initiative, the DOJ recently announced the filing of a “civil forfeiture complaint seeking the forfeiture of nine properties worth approximately $1,528,000 that were allegedly purchased with funds traceable to a $2 million bribe paid by a Honduran information-technology company to the former Executive Director of the Honduran Institute of Social Security.”

According to the DOJ:

“From 2010 to 2014, Dr. Mario Roberto Zelaya Rojas, 46, of Tegucigalpa, Honduras, served as the Executive Director of the Honduran Institute of Social Security (HISS), a Honduran Government agency that provides social security services, including workers’ compensation, retirement, maternity, and death benefits.  According to allegations in the forfeiture complaint, Zelaya solicited and accepted $2.08 million in bribes from Compania De Servicios Multiples, S. de R. L. (COSEM) in exchange for prioritizing and expediting payments owed to COSEM under a $19 million contract with HISS.  Zelaya also allegedly instructed COSEM to make bribe payments to two members of the Board of Directors of HISS charged with overseeing the COSEM contract.  To conceal the illicit payments, COSEM allegedly sent the bribes through its affiliate company, CA Technologies.  As further alleged in the complaint, the bribe proceeds were then laundered into the United States and used by Zelaya and his brother, Carlos Alberto Zelaya Rojas, to acquire real estate in the New Orleans area.  Certain properties were titled in the name of companies nominally controlled by Zelaya’s brother in an effort to conceal the illicit source of the funds as well as the beneficial owner.  The current action seeks forfeiture of nine properties acquired with the proceeds of Zelaya’s alleged bribery scheme.”

In the DOJ’s release, Assistant Attorney General Leslie Caldwell stated:

“Our action today highlights how the Criminal Division’s Kleptocracy Initiative, with our network of law enforcement partners around the globe, will trace and recover the ill-gotten gains of corrupt officials.  Criminals should make no mistake:  the United States is not a safe haven for the proceeds of your crimes.  If you hide or invest your stolen money here, we will use all the legal tools we have to find it and seize it.”

Quotable

In this Global Investigations Review article, Timothy Dickinson (Paul Hastings and a veteran of the FCPA bar) states:

“Ten years ago, I would have been happy to bet anyone a doughnut that I could accurately define what a foreign official is. Now, with various court definitions and a lack of clarity from the DoJ, I fear I might actually lose my doughnut.”

In this piece about the SEC’s internal controls enforcement theories, Michael Shepard (Hogan Lovells) states:

“Beneath the surface of these developments [the increased use of the internal controls provisions] is a disconnect about what the internal controls provisions actually require. The government — and especially the SEC — has settled on an interpretation of the internal controls provision that is at odds with the understanding of many in-house finance professionals about what internal controls are intended to address. Ask corporate finance professionals about internal controls at their companies and you will likely get an answer about processes designed to protect the company’s assets at a level that would materially impact the company’s financial statements. Ask your friendly neighborhood SEC investigator about internal controls and you will instead get inquiries about the exponentially smaller level of amounts of money that would be enough to influence a low-paid public official in a poor third-world country. Not only is the SEC looking at controls on a more microscopic level, but its predilection to pursue internal controls charges sometimes seems based on an interpretation of the FCPA that borders on strict liability. Circumstantial evidence of a bribery violation — such as evidence that some money may have left the company without proper authorization or accounting records — translates for the SEC into proof that the company’s controls were inadequate. Statutory elements of reasonableness and scienter get short shrift in a world in which the SEC aggressively pushes internal controls charges, and the vast majority of companies remain predisposed to settle.”

Reading Stack

Paul Barrett at Bloomberg BusinessWeek goes in-depth about the FCPA charges pending against Joseph Sigelman in an article titled “Does This Man Look Like a Felon to You?”

From the New Yorker, “Can Corruption Be Erradicated?”

“[C]orruption has always permeated so many fields of human endeavor that it may be not a corruption of anything—but, rather, a regrettable feature of our natural condition. Accountable government is an ideal, to be sure. It may also be an aberration.”

[O]ur conceptual vocabulary for understanding [corruption], let alone combatting it, remains conspicuously meagre. The very term “corruption” is so inclusive as to be almost meaningless, encompassing bribery, nepotism, bid-rigging, embezzlement, extortion, vote-buying, price-fixing, protection rackets, and a hundred other varieties of fraud.”

From Bloomberg BNA “As FCPA Complexity Increase, Corporate Interest in Self-Disclosure Wanes.”

*****

A good weekend to all.

Hercules Offshore: A Case Study In Risk Aversion

By on June 30, 2014 in Angola, Hercules Offshore, Risk Aversion, Root Causes, Trade Barriers and Distortions

In passing the Foreign Corrupt Practices Act, Congress (and the Executive branch) accepted the fact that U.S. companies would lose out on certain business by complying with the FCPA’s provisions.  For instance, as highlighted in “The Story of the Foreign Corrupt Practices Act,” Treasury Secretary Michael Blumenthal stated during Congressional hearings:

“To the very, very small extent a particular company may lose a particular contract because it refuses to engage in [improper payments], I would be willing to say, all right, we will be at a slight competitive disadvantage and we will all sleep the better for it.”

Losing business because of a refusal to make improper payments is one thing, losing business because of risk aversion is quite another.

This post concerns Hercules Offshore and how its FCPA risk aversion resulted in the company abandoning a $92 million contract in Angola, which when disclosed, resulted in the company’s stock falling approximately 11% (see here).

In this recent SEC filing, Hercules disclosed:

“Due to the failure of Sonangol [an entity the DOJ/SEC have alleged in past FCPA enforcement actions is the state-owned and controlled oil and gas company of Angola] officials to accept a local representative that meets the Company’s international legal compliance standards, the Company has experienced delays in obtaining Angolan visas for required crewmembers and delays in importing required parts and equipment into Angola to support operations under the drilling contract for the Hercules 267 (the “Contract”). As a result of these delays, the Contract will be terminated. Pursuant to an agreement with the customer, the Company will not have any contractual exposure to the customer as a result of the Contract termination.Sonangol has failed to accept any of three different local representatives proposed by the Company who meet our legal compliance standards, notwithstanding the legal and technical sufficiency of our proposals. The Company understands that working with a local representative is required under the Contract, and the transition to a representative meeting our compliance standards is a necessary condition for the Company to continue to perform its obligations under the Contract in Angola.

As previously disclosed in our fleet status report on May 20, 2014, the Company recently moved the Hercules 267 to Gabon from Angola. The Hercules 267 has been on zero dayrate since late April 2014, and final cessation of the rig’s operations under the Contract will reduce our current estimated future backlog by an estimated $91.8 million, until we are able to obtain a contract for the rig in another location.

Also as a result of these circumstances, the Company will voluntarily forgo a three-year contract award it previously received in Angola for the Hercules Triumph.”

Regarding the above circumstances, Hercules Offshore CEO and President John Rynd stated at the recent Global Hunter Securities 100 Energy Conference:
“And I guess compliance — if you have followed us, you know what — we pulled out of Angola last Friday. Tough decision for us. We could not get comfortable, and then the agents that we sent to Sonangol that had gone through our vetting process they would not accept. So we walked away from 2 1/2 years at $110,000 a day and three years at north of $200,000 a day on two assets, but it’s the right thing to do.We’re not going to get embroiled in an FCPA investigation. So it was a tough decision, but it was the right decision, and a decision we will make every time around the world every day.”
As with most root causes of FCPA risk and scrutiny, Hercules Offshore encountered various trade distortions and barriers in attempting to conduct business in Angola.  In this case, it was Angolan bureaucracy and requirements that the company work with a local representative (a circumstance that was, in part, the root cause of the 2013 FCPA enforcement action against Weatherford International – see here for the prior post).

The FCPA risk aversion of Hercules Offshore was no doubt heightened given that the company was the subject of FCPA scrutiny in 2011-2012 (see here).

Regardless, does anyone benefit from Hercules Offshore’s risk aversion?

Clearly, the company’s shareholders did not benefit, to the contrary shareholder value has been surrendered because of risk aversion.

The Angolan government (and by extension its people if one follows it down to that level) had the opportunity to have a local representative involved in a contract that was vetted through the compliance standards of a respected U.S. company.  Seemingly no benefits there because of Hercules Offshore’s risk aversion.

In the eyes of the DOJ and SEC, is Hercules Offshore’s risk aversion a success that ought to be celebrated?  Is there something the DOJ or SEC can do in instances such as the above rather just enforce the FCPA?  Was Hercules Offshore’s risk aversion a prime candidate for submission under the FCPA’s Opinion Procedure Release program?  If so, how would the DOJ have analyzed the situation?  Perhaps the DOJ did analyze the situation, but because of the de facto “mulligan rule,” there was no Opinion Procedure release.

This new era of FCPA enforcement has many effects besides “hard” enforcement.  Often times, the FCPA’s greatest impact is “soft” enforcement and the reluctance of risk averse companies to encounter potential FCPA risk.

Hercules Offshore’s risk aversion is an example of this, yet an example that raises several big picture policy questions.

Potpourri

By on June 23, 2014 in Business Effects, FCPA Appeals, FCPA Jurisprudence, Foreign Official, Multimedia, Root Causes, Trade Barriers and Distortions

Today’s post is short on written words, but long on content.

Recently, I had the pleasure to again visit with Thomas Fox for his Foreign Corrupt Practices Act Compliance and Ethics Report.  In this episode I discuss:

  • The 11th Circuit’s recent “foreign official” ruling (see here, here, here and here for prior posts).  Among the issues discussed are my involvement in the “foreign official” challenges, what was not at issue in the 11th Circuit appeal and what was at issue, and the court’s flawed reasoning.
  • My new book “The Foreign Corrupt Practices Act in a New Era”) (see here and here for prior posts).
  • My FCPA Institute – a unique two-day learning experience ideal for a diverse group of professionals seeking to elevate their FCPA knowledge and practical skills.  The inaugural FCPA Institute is July 16-17th in Milwaukee, WI.

During the past month, I also had the pleasure to conduct two webinars hosted by Hiperos (a leader in third party risk management).

The first webinar was titled “Understanding the Root Causes of FCPA Scrutiny and Enforcement” (see here to view the hour long event).  The webinar:

  • Highlights the fallacy that only “bad” and “unethical” companies are the subject of FCPA scrutiny and explores certain foreign business realities and conditions that often serve as the root causes of FCPA scrutiny and enforcement.
  • Discusses what 99% compliance means.
  • Uses the root causes of many FCPA enforcement actions to highlight how an essential component of FCPA compliance is understanding the boring, day-to-day aspects of a company’s business in foreign markets and targeting, through training and other compliance policies, the relatively low-level employees and others who engage in these day-to-day activities.

The second webinar was titled ““The Ripple Effect:  Understanding Financial and Business Consequences of FCPA Scrutiny and Enforcement” (see here to view the hour long event).  The webinar:

  • Highlights how settlement amounts in an actual FCPA enforcement action are often only a relatively minor component of the overall financial consequences that can result from FCPA scrutiny or enforcement in this new era.
  • Discusses the “three buckets” of FCPA financial exposure:  (1) pre-enforcement action professional fees and expenses; (2) enforcement action settlement amounts: and (3) post-enforcement action professional fees and expenses and highlights how bucket #1 is typically (in many cases 3, 5, 10 or higher times the settlement amount) the greatest financial hit to companies the subject of FCPA scrutiny or enforcement.
  • Explores other negative financial consequences that often result from FCPA scrutiny or enforcement such as market capitalization, cost of capital, M&A activity, lost or delayed business opportunities, and FCPA-related litigation.
  • Shifts the FCPA conversation from being a purely legal issue to its more proper designation as a general business issue that needs to be on the radar screen of business managers and highlights how the FCPA’s many ripples instruct that business managers should view the importance of FCPA compliance more holistically and not merely through the narrow lens of actual enforcement actions.

Thank you for reading FCPA Professor every day.

With today’s post, you have the opportunity to hear me discuss FCPA, FCPA enforcement, and FCPA compliance issues for 2 hours and 30 minutes … should you so choose.

Powered by WordPress. Designed by WooThemes