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Does The DOJ Really Believe That A Significant Percentage Of Issuers Are Engaged In Criminal Acts?

By on June 5, 2013 in Guidance, Internal Controls, Third Parties, Total S.A.

The DOJ has stated that non-prosecution and deferred prosecution agreements “benefit the public and industries by providing guidance on what constitutes improper conduct.”  (See here).

With that in mind, consider the recent Total enforcement action (see here for the prior post).  The DOJ alleged, in support of criminal FCPA internal controls violations, as follows.

“Total:  (a) failed to implement adequate anti-bribery compliance policies and procedures; (b) failed to maintain an adequate system for the selection and approval of consultants; (c) failed to conduct adequate audits of payments to purported consultants; (d) failed to establish a sufficiently empowered and competent corporate compliance office; (e) failed to take reasonable steps to ensure the company’s compliance and ethics program was followed; (f) failed to evaluate regularly the effectiveness of the company’s compliance and ethics program; (g) failed to provide appropriate incentives to perform in accordance with the compliance and ethics program; (h) concealed the consulting agreements’ true nature and true participants; (i) performed no due diligence concerning the named or unnamed parties to these agreements; and (j) lacked controls sufficient to provide reasonable assurances that the consulting agreements complied with applicable laws.”

If the DOJ believes that each of the above constitutes a criminal violation of the internal controls provisions, then a significant percentage of issuers are engaged in criminal acts.

Survey after survey indicates that a significant percentage of companies, including issuer’s subject to the FCPA’s internal controls provisions, fail to maintain an adequate system for selection and approval of consultants, fail to conduct audits of payments to consultants, fail to conduct due diligence of third-parties, and fail to regularly evaluate the effectiveness of its compliance and ethics program.

For instance, the recently issued Kroll / Compliance Week Anti-Bribery and Corruption Benchmarking Report found “that 47 percent of all respondents say they conduct no anti-corruption training with their third parties” and  “of the remainder who do train their third parties on anti-corruption, only 30 percent of that group believe their efforts are effective.”

Likewise, as noted in this recent post, according to a recent survey “only 30% of all survey respondents say their companies always conduct a risk review of existing business relationships and ties to agents in foreign countries.”

Further, as noted in this prior post, a survey found as follows.  “Despite the significant risks and specified demands of regulators [as to third parties], our survey suggests that the corporate response to mitigating third-party risks is still inadequate. Many companies are failing to adopt even the most basic controls to manage their third-party relationships.”  “Effective third-party management does not end at the performance of due diligence. Third parties also should be monitored on an ongoing basis, including regular compliance assessments and audits. It is therefore worrying that only 45% of respondents identified audit rights or regular audits of the third party as a process in place to monitor the relationship.”

Indeed, as even the DOJ and SEC recognized in the November 2012 FCPA guidance, “64% of general counsel whose companies are subject to the FCPA say there is room for improvement in their FCPA training and compliance programs.”  (See here for the prior post).

The DOJ’s allegations in the Total enforcement action are all the more alarming given that the time period relevant to the conduct at issue was between 1995 to 2004.  Is the DOJ suggesting that nearly every issuer during this time period was engaged in criminal acts given that issuers during that time period likely failed to engage in all of the compliance practices identified in the Total enforcement action?

Perhaps the Total enforcement action is the product of vague and sloppy pleading.  Because there is little chance that the DOJ will ever have to prove its allegations, this tends to happen in many FCPA enforcement actions.  Yet, if the DOJ truly believes that all of the above generic allegations in the Total enforcement action represent issuer criminal violations, then the DOJ is suggesting that a significant percentage of issuers are engaged in criminal acts.

If so, this is troubling.

In my article “Grading the Foreign Corrupt Practices Act Guidance” and in this prior post, I detailed how DOJ officials stated that the legal community can have confidence that the enforcement agencies will act consistently with the Guidance.  I then observed that the FCPA Guidance can serve as a useful measuring stick for future enforcement agency activity and detailed various statements in the Guidance that can serve this purpose.

Certain statements concerned the FCPA’s book and records and internal controls provisions, including that the FCPA “does not specify a particular set of controls that companies are required to implement” and that the concept of reasonableness (a key statutory element) “of necessity contemplates the weighing of a number of relevant factors, including the costs of compliance.”

“Total”ly Milking The FCPA Cash Cow?

By on June 3, 2013 in Cash Cow, Foreign Issuers, Jurisdiction, Statute of Limitations, Total S.A.

There are many who believe that certain aspects of FCPA enforcement represent a cash cow for the government.

This previous post on the White Collar Crime Prof Blog stated as follows.  “FCPA is a cash cow. Big companies, most of whom are quite vulnerable, will do anything to avoid a civil or criminal trial. FCPA becomes a cost of doing business. The money flows into the government.”

In this article, a former Assistant Director in the SEC Division of Enforcement stated that one reason for the increase in FCPA enforcement is a “very simple reason–it’s lucrative.”

This post from the Chamber of Commerce titled “Justice’s FCPA Cash Cow” stated that “FCPA prosecutions have turned into a cash cow for the Justice Department” and the author noted as follows.  “I’m pretty sure using the justice system as an ATM wasn’t what the authors of the FCPA had in mind.”

This Business Insider article notes that “the profitability enforcement has garnered for the government” is one of the reasons for the increase in FCPA enforcement.  The article states “quite simply, [FCPA enforcement] is lucrative for the government” and it quotes David Krakoff, (BuckleySandler and a former federal prosecutor) as follows.  ” You have to think of the SEC and the DoJ as businesses.  They are looking for growth areas, too.”

As noted in this previous post, Adam Siegel (co-chair of the global white collar group at Freshfields Bruckhaus Deringer and a former federal prosecutor) stated as follows concerning increased enforcement.  “We’re in an economic climate today where I don’t think there’s a single government in the world that isn’t struggling to find resources.  This area has emerged … as a money making center, which is kind of bizarre.”

Matthew  Jacobs, a former DOJ prosecutor who now heads the San Francisco offices of  Vinson & Elkins LLP, stated as follows in a recent Law360 article (“FCPA  Enforcement Will Stay Robust Beyond Obama’s 2nd Term”): “The Department of  Justice has figured out that conducting investigations of corporations is a  lucrative business.  This is the one area of government activity that actually  brings money in rather than shoots money out. We’re talking about literally  billions of dollars that the government is able to collect … as long as there’s  a budget issue it’s not too cynical to say that … generating revenue is a factor  in bringing these cases.”

This Forbes contributor noted as follows. “FCPA enforcement has long been considered a cash cow for the Department of Justice.”

See also this prior post titled “Is the FCPA a Government Cash Cow” as well as my comments to the New York Times in this article.

And who can forget the comments of William Jacobson, a former DOJ Assistant Chief for FCPA enforcement.  Referencing a different member of the animal kingdom, he stated in a 2010 American Lawyer article that “[t]he government sees a profitable program, and it’s going to ride that horse until it can’t ride it anymore.”

Those who believe that certain aspects of FCPA enforcement represent a government grab for easy settlement money will find new support in the recent $398 million Total enforcement action (see here for the prior post).

The salient points as to the third largest settlement in FCPA history are as follows.

  • The enforcement action was against a French oil and gas company for making improper payments to an Iranian Official through use of an employee of a Swiss private bank and a British Virgin Islands company.
  • The vast majority of the alleged improper conduct took place between 1995 and 1997 (that is 16 to 18 years ago).
  • The sole U.S. jurisdictional nexus (a required legal element for an anti-bribery violation since Total is a foreign issuer) is a 1995 wire transfer of $500,000 (representing less than 1% of the alleged bribe payments at issue) from a New York based account.
  • The same exact conduct at issue is the focus of a French law enforcement investigation (i.e. Total’s “home” country).

So old is the conduct giving rise to the Total enforcement action, that the DOJ made the unusual statement in the DPA that “evidentiary challenges” were present for both parties given that “most of the underlying conduct occurred in the 1990s and early 2000s.”

A $398 million U.S. enforcement action against a French company for allegedly making improper payments to an Iranian Official with the sole U.S. jurisdictional nexus being an immaterial wire transfer through a U.S. account 18 years ago does not exactly dispel beliefs that certain aspects of FCPA enforcement represent a U.S. government cash cow.

Rather the Total enforcement action supports the legitimacy of this belief.

Total Agrees To Pay $398 Million To Resolve Its FCPA Scrutiny

By on May 30, 2013 in 2013 Enforcement Actions, Deferred Prosecution Agreements, DOJ Enforcement Action, Foreign Issuers, Iran, Monitor, Oil and Gas Industry, SEC Enforcement Action, Total S.A.

Yesterday, the DOJ and SEC announced (here) and (here) a Foreign Corrupt Practices Act enforcement action against Total S.A., a French oil and gas company that has American Depositary Shares registered with the SEC and traded on the New York Stock Exchange.

The enforcement action involved a DOJ criminal information resolved via a deferred prosecution agreement and a SEC administrative cease and desist order.  Total agreed to pay approximately $398 million to resolve its alleged FCPA scrutiny ($245.2 million to resolve the DOJ enforcement action and $153 million to resolve the SEC enforcement action).  The $398 million enforcement action is the third largest in FCPA history in terms of fine / penalty amount.

DOJ

The DOJ enforcement action involved a criminal information (here) resolved through a deferred prosecution agreement (here).

Information

In the criminal information, the DOJ charged Total with conspiracy to violate the FCPA’s anti-bribery provisions and violating the FCPA’s books and records and internal controls provisions.  The conduct at issue centered on Total’s negotiation of a contract with the National Iranian Oil Company (“NIOC”) in 1995 and 1997 for the development of the certain oil and gas fields.  NIOC is described in the information as a “government-owned corporation operating under the direction and control of the Ministry of Petroleum of Iran.”

The information alleges as conspiracy “to obtain and retain lucrative contracts related to [the oil and gas fields] through the promise and payment of tens of millions of dollars in unlawful payments to the Iranian Official and others.  The Iranian Official is described in the information as “the Chairman of an Iranian engineering company that was more than 90% owned by the Government of Iran and substantially controlled by the Government of Iran.”  The information further states that “from at least early 2001, the Iranian Official was the head of an Iranian organization concerned with fuel consumption, which was a wholly owned subsidiary of NIOC, and was a government advisor to a high-ranking Iranian official.”

The information alleges that Total caused Total International Ltd. (a wholly-owned subsidiary of Total registered in Bermuda) to execute purported consulting agreements with Intermediary One (described as an employee of a Swiss private bank who acted at the direction of the Iranian Official) and Intermediary Two (described as a British Virgin Islands company that acted at the direction of the Iranian Official) as a “mechanism for Total to pay at the direction of the Iranian Official millions of dollars in unlawful payments.”

According to the information, Total paid approximately $60 million to accounts designated by Intermediary One and Two.  The information allegations that “Total mischaracterized the payments under the various consulting agreements as ‘business development expenses,’ when they were, in fact, unlawful payments for the purpose of inducing the Iranian Official to use his influence in connection with the granting of development rights” in the oil and gas projects.

The information then alleges 20 overt acts in furtherance of the conspiracy.  19 of the overt acts (95%) are alleged to have taken place between 10 to 18 years ago.  The most recent alleged overt act is a November 2004 wire transfer.  The only alleged overt act with a U.S. nexus is a 1995 wire transfer of $500,000 (.8% of the overall bribe payments) from Total International’s account at Banker’s Trust in New York to an account in Switzerland.

As to the FCPA books and records charge, the information states as follows.

“… Total knowingly falsified and caused to be falsified books, records, and accounts, required to, in reasonable detail, accurately and fairly reflect the transactions and dispositions of Total, to wit:  Total (a) mischaracterized the unlawful payments under the various consulting agreements as ‘business development expenses’ and (b) improperly characterized the unlawful consulting agreements as legitimate consulting agreements.”

As to the FCPA internal controls charge, the information states as follows.

“… Total knowingly circumvented and knowingly failed to implement a system of internal accounting controls sufficient to provide reasonable assurances that transactions and dispositions of Total’s assets complied with applicable law, including the FCPA, to wit:  Total:  (a) failed to implement adequate anti-bribery compliance policies and procedures; (b) failed to maintain an adequate system for the selection and approval of consultants; (c) failed to conduct adequate audits of payments to purported consultants; (d) failed to establish a sufficiently empowered and competent corporate compliance office; (e) failed to take reasonable steps to ensure the company’s compliance and ethics program was followed; (f) failed to evaluate regularly the effectiveness of the company’s compliance and ethics program; (g) failed to provide appropriate incentives to perform in accordance with the compliance and ethics program; (h) concealed the consulting agreements’ true nature and true participants; (i) performed no due diligence concerning the named or unnamed parties to these agreements; and (j) lacked controls sufficient to provide reasonable assurances that the consulting agreements complied with applicable laws.”

DPA

The above charges against Total were resolved via a DPA in which Total admitted, accepted, and acknowledged that it was responsible for the acts of its officers, employees, agents, and subsidiaries as charged in the information.

The DPA has a term of three years and under the heading “relevant considerations” it states as follows.

“The Department enters into this Agreement based on the individual facts and circumstances presented by this case and Total.  Among the facts considered were the following:  (a) the related investigation by French criminal enforcement authorities of the same conduct that forms the basis of this resolution and to which the Department has been providing assistance; (b) the evidentiary challenges presented to both parties by this matter, in which most of the underlying conduct occurred in the 1990s and early 2000s; and (c) Total’s production of relevant documents from abroad and disclosure of the results of its internal investigation into the misconduct described in the Information.”

Pursuant to the DPA, the advisory Sentencing Guidelines range for the conduct at issue was $235.2 to $470.4 million.  The $245.2 million that Total agreed to pay pursuant to the DPA is a rare instance of an FCPA corporate penalty being within the Guidelines range.  Most corporate FCPA criminal fines are approximately 25% below the minimum amount suggested by the Guidelines range.

Pursuant to the DPA, Total agreed to review its existing internal controls, policies and procedures regarding compliance with the FCPA, the anti-corruption provisions of French law, and other applicable anti-corruption laws.  The specifics are detailed in Attachment C to the DPA.  The DPA also requires Total to engage a corporate compliance monitor who is a French national for a three year term.  The specifics, including the Monitor’s reporting obligations to the DOJ, are detailed in Attachment D to the DPA.

In the DOJ’s release (here) Acting Assistant Attorney General Mythili Raman stated as follows.

“Today we announce the first coordinated action by French and U.S. law enforcement in a major foreign bribery case.  Our two countries are working more closely today than ever before to combat corporate corruption, and Total, which bought business through bribes, now faces the criminal consequences across two continents.”

The DOJ release further states as follows.

“In addition, French enforcement authorities announced earlier today that they had requested that Total, Total’s Chairman and Chief Executive Officer, and two additional individuals be referred to the Criminal Court for violations of French law, including France’s foreign bribery law.”

In this Wall Street Journal article,  “Total said the company and [its CEO] acted in accordance with all applicable French laws. The decision to send [Total] and its CEO to trial now rests with the magistrate in charge of the investigation.”  Total’s CFO is quoted as follows concerning he U.S. settlement.  “These settlements, the outcome of which are customary in the U.S., allow us to put an end to this investigation.”

SEC

The SEC’s administrative cease and desist order (here) is based on the same core set of facts alleged in the above DOJ action.

The Order states, in summary fashion, as follows.

“During the relevant time period, Total and others violated the anti-bribery provisions of the Foreign Corrupt Practices Act by making payments at the direction of the Iranian Official in connection with obtaining contracts.  In addition, Total lacked sufficient internal controls and, by mischaracterizing the payments as legitimate consulting fees, Total violated the books and records [and internal controls] provisions of the federal securities laws.”

Under the heading “Total’s Steps to Conceal the Payments” the Order states as follows.

“From the inception of Total’s relationship with the Iranian Official Total mischaracterized the expenses under the Consulting Agreements as ‘business development expenses’ when they were, in fact, unlawful payments for the purpose of inducing the Iranian Official to use his influence in connection with granting rights to Total for the development of the [oil and gas] fields. Total improperly characterized the unlawful consulting agreements as legitimate consulting agreements.  Total ceased making payments to the Iranian Official’s designated intermediary in approximately November 2004.”

As noted in this SEC release, the Order requires Total to pay disgorgement of $153 million in illicit profits and to cease and desist from committing future FCPA violations.  In the release, Andrew Calamari (Director of he SEC’s New York Regional Office) stated as follows.  “Total used illicit payments to win business in Iran, and reaped substantial financial benefits as a result.  Total must now pay back all of its profits from the company’s corrupt conduct and additionally pay criminal penalties on top of that.”

Robert Luskin (Patton Boggs) represented Total.

*****

Total’s most recent SEC filing states, in pertinent part, as follows.

“In 2003, the SEC followed by the DOJ issued a formal order directing an investigation in connection with the pursuit of business in Iran by certain oil companies, including among others, Total.”

“Since 2010, the Company has been in discussions with U.S. authorities (DOJ and SEC)” to resolve the case.

*****

The Total enforcement action is not the first FCPA enforcement action against a foreign oil and gas company focused on conduct in Iran’s oil and gas fields.  In 2006, the DOJ and SEC brought a coordinated FCPA enforcement action against Norway-based Staoil by which the company agreed to pay $21 million in combined fines and penalties.  Like the Total enforcement action, the Statoil enforcement action was also based on a slim US jurisdictional nexus – that the company received an invoice from a U.K. consulting company instructing that money “be routed through a United States bank in New York, New York to a bank account in Switzerland” which the company paid.

Friday Roundup

By on May 3, 2013 in 2013 Enforcement Actions, ADM, ALSTOM, Avon, Charitable Contributions, DOJ Enforcement Action, ENRC, IBM, Individual Enforcement Action, Indonesia, Investigative Fees, Serious Fraud Office, Total S.A., United Kingdom, Wal-Mart, William Pomponi

Additional individual defendant added to Alstom-related enforcement action, a mere $110,000 per working day, a focus on international philanthropy, scrutiny alerts, and for the reading stack.  It’s all here in the Friday roundup.

Additional Alstom-Related Charges

This prior post highlighted the recently unsealed criminal charges against Frederic Pierucci (a current Alstom employee) and David Rothschild (a former Alstom employee) concerning alleged conduct in connection with the Tarahan coal-fired steam power plant project in Indonesia.  The post highlighted several other individuals generically referred to in the charging documents.

Earlier this week, the DOJ announced (here) that William Pomponi (a former executive of Alstom Power Inc., a Connecticut-based subsidiary of Alstom) was charged for his alleged participation in the same scheme.   Pomponi, previously identified as “Employee A,” is now described as “a Vice President of Regional Sales” at Alstom Power Inc. and “was one of the people responsible for approving the actions of, and authorizing payments to, Consultants A and B, knowing that a portion of the payments [to the consultants] was intended for Indonesian officials in exchange for their influence and assistance in awarding the Tarahan Project …”.

Like the original Pierucci indictment, all of the alleged overt acts in the superseding indictment against Pomponi allegedly occured between 2002 and 2004, although the information does allege wire transfers from Alstom Power Inc.’s bank account to the bank account of Consultant A until 2009.

Like Pierucci, Pomponi is also charged with one count of conspiracy to violate the FCPA, four substantive counts of FCPA anti-bribery violations, money laundering conspiracy and four substantive counts of money laundering.

Kudos to the DOJ for including a link to the charging document in the release.  This used to be DOJ’s practice, but when its new site launched a few years ago, it stopped doing this.  Let’s hope this is a new practice!

Avon’s FCPA Expenses

Nearly five years ago – in June 2008 – Avon launched an internal investigation concerning FCPA compliance in China and other countries.  In many respects, the most notable aspect of Avon’s FCPA scrutiny has been its pre-enforcement action professional and expenses – approaching $350 million (see here for instance).

In its most recent quarterly filing, Avon stated as follows.  “Professional and related fees associated with the FCPA investigations and compliance reviews … amounted to approximately $7 during the three months ended March 31, 2013.”

Headlines read “Avon FCPA Costs Down to $7 Million for Q1” and “Avon Slows Spending on Bribery Probe.”

Both accurate headlines, but it is amazing to note nevertheless that – five years into Avon’s FCPA scrutiny – the company is still spending approximately $110,000 per working day on its FCPA issues.  (See this prior post concerning Wal-Mart’s pre-enforcement action professional fees and expenses and asking “does it really need to cost this much?”).

International Philanthropy

FCPA material pops up in a variety of places.  Such as this article in www.wealthmanagement.com concerning the perils of global giving.  With two FCPA enforcement actions (Schering-Plough and Eli Lilly) based, in whole or in part, on donations made to a Polish castle foundation and with Wynn Resorts under FCPA scrutiny for a donation to the University of Macau (see here), FCPA scrutiny based on international charitable giving is no mere hypothetical.

Scrutiny Alerts

Scrutiny alerts concerning IBM, ADM, Total, and ENRC.

IBM

This recent post highlighted a ProPublica report regarding the relationship between various tech companies including H-P, IBM and Oracle with a ”senior technology officer for Poland’s national police and, later, the nation’s Interior Ministry, [who] set the terms for hundreds of millions of dollars in technology contracts and decided which ones should be awarded without competitive bidding.”

In a recent quarterly filing, IBM disclosed as follows.

“In early 2012, IBM notified the SEC of an investigation by the Polish Central Anti-Corruption Bureau involving allegations of illegal activity by a former IBM Poland employee in connection with sales to the Polish government. IBM is cooperating with the SEC and Polish authorities in this matter. In April 2013, IBM learned that the U.S. Department of Justice (DOJ) is also investigating allegations related to the Poland matter, as well as allegations relating to transactions in Argentina, Bangladesh and Ukraine. The DOJ is also seeking information regarding the company’s global FCPA compliance program and its public sector business. The company is cooperating with the DOJ in this matter.”

In 2011, IBM resolved an FCPA enforcement action concerning alleged conduct in South Korea and China.  (See here).  The settlement is still pending the approval of Judge Richard Leon (D.D.C.).  In 2000, IBM resolved an FCPA enforcement action concerning alleged conduct in Argentina. (See here).

ADM

Archer Daniels Midland Company recently stated as follows in this release.

“ADM is in discussions with the U.S. Department of Justice and the U.S. Securities and Exchange Commission regarding a previously disclosed FCPA matter dating back to 2008 and earlier, and expects a resolution sometime this year. Based upon recent discussions, ADM believes it is appropriate to establish a provision of $25 million ($0.04 per share) to cover the potential assessments that may be imposed by these government agencies.”

Total

France-based Total recently stated as follows (here) concerning its long-running FCPA scrutiny concerning business conduct in Iran.

“In 2003, the United States Securities and Exchange Commission (SEC) followed by the Department of Justice (DoJ) issued a formal order directing an investigation in connection with the pursuit of business in Iran by certain oil companies including, among others, TOTAL.  The inquiry concerns an agreement concluded by the Company with consultants concerning gas fields in Iran and aims to verify whether certain payments made under this agreement would have benefited Iranian officials in violation of the Foreign Corrupt Practices Act (FCPA) and the Company’s accounting obligations. The Company fully cooperates with these investigations.  Since 2010, the Company has been in discussions with U.S. authorities (DoJ and SEC) to consider, as it is often the case in these kinds of proceedings, an out-of-court settlement, which would terminate the investigation in exchange for TOTAL respecting a number of obligations, including the payment of a fine and civil compensation, without admission of guilt.  U.S. authorities have proposed draft agreements that could be accepted by TOTAL. Consequently, and although discussions have not yet been finalized, a provision of $398 million, unchanged since its booking as of June 30, 2012 and reflecting the best estimate of potential costs associated with the resolution of these proceedings, remains booked in the Group’s consolidated financial statements as of March 31, 2013.  In this same affair, TOTAL and its Chief Executive Officer, President of the Middle East at the time of the facts, have been placed under formal investigation, following a judicial inquiry initiated in France in 2006. At this point, the Company considers that the resolution of these cases is not expected to have a significant impact on the Group’s financial situation or consequences on its future planned operations.”

A $398 million FCPA enforcement action would be the third-highest of all-time.

ENRC

Last week the U.K. Serious Fraud Office announced here as follows.

“The Director of the SFO has accepted [Eurasian Natural Resources Corp.] ENRC Plc. for criminal investigation.  The focus of the investigation will be allegations of fraud, bribery and corruption relating to the activities of the company or its subsidiaries in Kazakhstan and Africa.”

In a statement, the U.K. company,  stated as follows.

“The Board of Directors (the ‘Board’) of Eurasian Natural Resources Corporation PLC (‘ENRC’ or, together with its subsidiaries, the ‘Group’) today notes that the SFO has moved to a formal investigation. ENRC confirms that it is assisting and cooperating fully with the SFO. ENRC is committed to a full and transparent investigation of its procedures and conduct.

ENRC has ADRs listed with the SEC and thus could also be subject to the FCPA.

This recent article in the Wall Street Journal states as follows.

“U.K.-listed Eurasian Natural Resources Corp. PLC said … allegations of wrongdoing over minerals sales conducted through a Russian network of agents were thoroughly investigated and dismissed” in 2007.

Reading Stack

Tom Fox (FCPA Compliance and Ethics Blog) has penned a new book – “Best Practices Under the FCPA and Bribery Act: How to Create a First Class Compliance Program.”  I was pleased to contribute the foreword to the book and noted that Tom’s “use of real events as learning devices to demonstrate compliance best practices make [the] book an engaging and informative read.”

Inside the NY Times Wal-Mart investigation (here) from the perspective of the Mexican journalist who assisted in the investigative reporting.

Friday Roundup

By on August 3, 2012 in Alba, Alcoa, Avon, Brazil, Declination Decisions, Deferred Prosecution Agreements, Foreign Issuers, Fresenius Medical Care, Innospec, Iraq, Paul Jennings, Related Civil Litigation, Sensata Technologies, Serious Fraud Office, Smith and Wesson, SOX Certification Issues, Teva Pharmaceuticals, Total S.A., Travel and Entertainment, United Kingdom, Victor Dahdaleh

Add two more companies to the list, a reply to a retort, Avon developments, Total S.A. perhaps nears a top-5 settlement, the reason for those empty Olympic seats, another FCPA-inspired derivative action is dismissed, Sensata Technologies and more on the meaning of “declination,” one of my favorite reads and additional material for the weekend reading stack.  It’s all here in the Friday roundup.

Recent Disclosures

As noted in this Wall Street Journal Corruption Currents post “German healthcare firm Fresenius Medical Care AG has opened an internal investigation into potential violations” of the FCPA.  The company’s recent SEC filing (here) states as follows.

“The Company has received communications alleging certain conduct that may violate the U.S. Foreign Corrupt Practices Act (“FCPA”) and other anti-bribery laws. In response to the allegations, the Audit and Corporate Governance Committee of the Company’s Supervisory Board is conducting an internal review with the assistance of counsel retained for such purpose. The Company has voluntarily advised the U.S. Securities and Exchange Commission and the U.S. Department of Justice that allegations have been made and of the Company’s internal review. The Company is fully committed to FCPA compliance. It cannot predict the outcome of its review.”

In addition, as noted in this Wall Street Journal Corruption Currents post, “the Securities and Exchange Commission is investigating Teva Pharmaceutical Industries Ltd, the world’s largest manufacturer of generic drugs, for possible violations” of the FCPA.   The Israel based company recently stated in an SEC filing (here) as follows.

“Teva received a subpoena dated July 9, 2012 from the SEC to produce documents with respect to compliance with the Foreign Corrupt Practice Act (“FCPA”) in Latin America. Teva is cooperating with the government. Teva is also conducting a voluntary investigation into certain business practices which may have FCPA implications and has engaged independent counsel to assist in its investigation. These matters are in their early stages and no conclusion can be drawn at this time as to any likely outcomes.”

U.K. DPAs

In this previous post, I discussed my letter to the U.K. Ministry of Justice urging the MoJ to just say no to deferred prosecution agreements.  Over at thebriberyact.com (a site that has lead discussion of the issue) the authors disagree with me (see here).  That’s all fine and dandy and healthy to the discussion, but the substance of the retort is not persuasive.

The retort is  basically that the SFO “frequently has to fight its corner in court” and that “sometimes it loses” whereas in the U.S. “the accepted wisdom [is] that an FCPA investigation would result in a corporate settlement” and the “DOJ simply [does] not have to test its legal theories in court.”  In short, the authors state “statistically in the US corporates and their counsel often fold in the face of a DOJ investigation” but “in the UK this is not so.”

Contrary to the suggestion in the retort, I did not ignore the Bribery Act’s Section 7 offense – rather it is all the more reason to reject DPAs.

The retort closes as follows.  “Sadly, as it stands, the UK enforcement agencies do not have equality of arms when it comes to their enforcement toolkit.  Put another way the DOJ can end run UK enforcement agencies because it does have the potential to enter into DPA’s.  This reason alone is justification enough for putting in place a system which delivers a similar result to the US system.”

This confirms in my mind that the UK’s desire for DPAs has little to do with justice and deterring improper conduct, but more to do with enforcement statistics and posturing in an emerging “global arms race” when it comes to “prosecuting” corruption and bribery offenses.

Avon Developments

Avon was in the news quite a bit this week.

On Monday, the Wall Street Journal reported (here) that “federal prosecutors looking into possible bribery of foreign officials by Avon have asked to speak to Andrea Jung, the former chief executive and current full-time chairman.”

On Wednesday, the company filed its quarterly report and stated, among other things, as follows.  “We are in discussions with the SEC and DOJ regarding mutually resolving the government investigations. There can be no assurance that a settlement will be reached or, if a settlement is reached, the timing of any such settlement or that the terms of any such settlement would not have a material adverse effect on us.”  During the Q2 earnings call, company CEO Sheri McCoy stated as follows.   “We are in discussion with the SEC and DOJ regarding mutually resolving the government investigations.”

On Thursday, the Wall Street Journal reported (here) that McCoy “frustrated with the pace of Avon’s internal probe, has pushed to bring in a second law firm for advice on the progress of the investigation.   The company has held discussions with law firm Allen & Overy LLP for that role.”  Arnold & Porter has been leading Avon’s investigation.  According to the article, Avon’s “probe has turned up millions of dollars of payments in Brazil and France made to consultants hired to assist with Avon’s tax bills in those countries.”

What to make of the above information?

It is unusual for the enforcement agencies to want to speak to a former CEO and current chairman in connection with an FCPA inquiry.  But then again, prosecutors have reportedly spoken to several other Avon executives in connection with the probe.  Given Avon’s disclosure that it has begun settlement discussions, this would suggest that the factual portion of the enforcement agencies investigation is over.

Avon’s FCPA scrutiny has perhaps been most notable for the amount of pre-enforcement action professional fees and expenses – approximately $280 million.  Thus, yesterday’s report that the company is considering bringing in a second law firm nearly four years into the investigation is interesting and unusual.

Even though Avon has disclosed it is in settlement talks, an enforcement action in 2012 is not certain.  In many cases, companies have disclosed the existence of FCPA settlement discussions, but the actual enforcement action did not happen for 6-12 months (or longer).

Whenever the enforcement action occurs, and whatever the ultimate fine and penalty is, Avon’s greatest financial hit  has likely already occured – its pre-enforcement action professional fees and expenses.  For instance, assuming a settlement amount would match the $280 million, this would be the sixth largest FCPA settlement of all time, and none of the enforcement actions in the top 5 were outside the context of foreign “government” procurement.

Total Settlement Near?

For some time, there has been speculation that Total S.A. (you better sit down for this) would actually mount a defense and put the DOJ and SEC to its burden of proof in an enforcement action.  Information in a recent company press release suggests that this is unlikely to occur.  In this recent release, Total stated as follows.  “Total has been cooperating with the … SEC and DOJ in connection with an investigation concerning gas contracts awarded in Iran in the 1990’s.  Total, the SEC, and the DOJ have conducted discussions to resolve issues arising from the investigation.  In light of recent progess in these discussions, Total has provisioned 316 million euros [$389 million]  in its accounts in the second quarter of 2012.”

A $389 million settlement would be a top five FCPA settlement in terms of fine and penalty amounts.  For additional coverage, see here from Reuters.

Empty Olympic Seats

A reason, perhaps, for those empty Olympic seats?  According to a recent study (see here) by the Society for Corporate Compliance and Ethics  “tighter than anticipated corporate entertainment and gift policies.”

Smith & Wesson Derivative Action Dismissed

Even against the backdrop of generally frivolous plaintiff derivative claims in the FCPA context, the action against Smith & Wesson (“S&W”) stood out.  After S&W employee Amaro Goncalves was criminally indicted in the manufactured Africa Sting case, certain investors filed a derivative claim in U.S. District Court in Massachusetts suing members of the board of S&W and company officers derivatively on behalf of the corporation for failing to have effective FCPA controls and oversight, thereby breaching their duty of care.

In dismissing the complaint (see here for the decision) Judge Michael Ponsor characterized the complaint as follows. “[I]n essence, that the company enjoyed an increase in international sales and then had an employee indicted for FCPA violations. This indictment, later dropped, supposedly evidenced a failure to implement proper controls.”

For another recent dismissal of an FCPA inspired derivative claim against Tidewater, see this prior post.  See also this recent post from Kevin LaCroix at The D&O Diary blog.

Sensata Technologies

In October 2010, Sensata Technologies disclosed in a quarterly report (here) as follows.

“An internal investigation has been conducted under the direction of the Audit Committee of the Company’s Board of Directors to determine whether any laws, including the Foreign Corrupt Practices Act (“FCPA”), may have been violated in connection with a certain business relationship entered into by one of the Company’s operating subsidiaries involving business in China. The Company believes the amount of payments and the business involved was immaterial. The Company discontinued the specific business relationship and its investigation has not identified any other suspect transactions. The Company has contacted the United States Department of Justice and the Securities and Exchange Commission to begin the process of making a voluntary disclosure of the possible violations, the investigation, and the initial findings. The Company will cooperate fully with their review.”

In its most recent quarterly report (here), the company disclosed as follows.

“During 2012, the DOJ informed us that it has closed its inquiry into the matter but indicated that it could reopen its inquiry in the future in the event it were to receive additional information or evidence. We have not received an update from the SEC concerning the status of its inquiry.”

Did Sensata “win a declination” as the FCPA Blog suggested here?

Since August 2010 (see here for the prior post) I have proposed that when a company voluntarily discloses an FCPA internal investigation to the DOJ and the SEC, and when the DOJ and/or SEC decline enforcement, the DOJ and/or the SEC should publicly state, in a thorough and transparent manner, the facts the company disclosed to the agencies and why the agencies declined enforcement on those facts.

Perhaps then we would know if the DOJ concluded it could prove beyond a reasonable doubt all the necessary elements of an FCPA charge, yet decided not to pursue Sensata – which is my definition of declination as noted in this prior post.  Anything else, is what the law commands, not a declination.

Favorite Read

One of my favorite reads is always Shearman & Sterling’s “Recent Trends and Patterns in the Enforcement of the Foreign Corrupt Practices Act.”  See here for the most recent edition.

As to “foreign official,” the report states as follows. “[T]he government does not appear to have been deterred by the [foreign official] debate. In most of the cases brought in 2012, the relevant government officials were employed by “instrumentalities” such as state health insurance plans (Orthofix), a state-owned nuclear plant (Data Systems & Solutions), government hospitals (Biomet and Smith & Nephew), a state-owned real estate development company (Peterson) a state-owned oil company (Marubeni), and state-owned airlines (NORDAM).”

As to FCPA guidance, the report states as follows. “We understand that this guidance will be issued before October, when the US is scheduled to issue a written progress report on its implementation of the OECD Working Group on Bribery’s recommendations.”

A final kudos – Shearman & Sterling keeps its FCPA enforcement statistics the best way.  As it explains – “we count all actions against a corporate “family” as one action. Thus, if the DOJ charges a subsidiary and the SEC charges a parent issuer, that counts as one action.”  This is consistent with my “core” approach (see here), but unlike many others in the industry.

Weekend Reading Stack

An interesting and informative article (here) in Fortune about the Alba-Alcoa tussle and the role of Victor Dahdaleh.  For more on the underlying civil suit between Alba and Alcoa see this recent Wall Street Journal Corruption Currents post.

SOX’s executive certification requirements were supposed to be a panacea for corporate fraud.  It has not happened.  See here from Alison Frankel (Reuters) and here from Michael Rapoport (Wall Street Journal).  As noted in this prior post concerning the Paul Jennings (former CFO and CEO of Innospec) enforcement action, SOX certification charges were among the charges the SEC filed against Jennings.  Then SEC FCPA Unit Chief Cheryl Scarboro stated, “we will vigorously hold accountable those who approve such bribery and who sign false SOX certifications and other documents to cover up the wrongdoing.”  Speaking of Jennings, as noted in this recent U.K. Serious Fraud Office, Jennings recently pleaded guilty to one charge of conspiracy to corrupt Iraqi public officials and other agents of the Government of Iraq.

*****

A good weekend to all.

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