Potpourri
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.
Friday Roundup
Up north, David Cameron gets it, scrutiny update, octogenarian, and quotable. It’s all here in the Friday roundup.
Up North
Earlier this week, the Royal Canadian Mounted Police announced:
“The RCMP’s National Division has charged US nationals Robert Barra (former Cryptometrics CEO) and Dario Berini (former Cryptometrics COO) under Section 3.1 of the Corruption of Foreign Public Officials Act (CFPOA). UK national Shailesh Govindia, an agent for Cryptometrics, has also been charged under Section 3.1 of the CFPOA and with one count of fraud contrary to Section 380 Criminal Code. The charges were laid at the Ottawa Courthouse on Elgin Street. These charges were laid as a result of an international investigation into allegations of bribery involving executives of Cryptometrics Canada Inc. In 2006, Cryptometrics Canada tendered a contract with Air India for a Biometric Passenger Security System valued at approximately $100 million USD. Evidence gathered and later presented at trial revealed an agreement by Mr. Nazir Karigar, an agent working for Cryptometrics, to pay millions of dollars in bribes to Indian public officials for the purpose of securing a contract with Air India. “We have a mandate to investigate domestic and international allegations of corruption of foreign public officials. This investigation demonstrates the RCMP’s commitment to combating international corruption. Leaving these crimes unchallenged can jeopardize Canada’s reputation as a fair and transparent society”, said Assistant Commissioner, Gilles Michaud, Commanding Officer of National Division. The initial investigation led to a conviction for Mr. Nazir Karigar who received a three year sentence. The second phase of the investigation focused on the activities of the former CEO and COO of the company. Canada-wide warrants have been issued for all three accused.”
See here for previous posts regarding the Karigar enforcement action. For additional coverage of the recent charges, see here and here.
The charges against the foreign national defendants will be most interesting to follow, particularly in light of this April 2014 decision by a judge in Toronto who stayed a bribery charge under the CFPOA against foreign national defendant Abul Hasan Chowdhury. The judge ruled that the CFPOA provided no jurisdiction over the foreign national defendant based on the alleged conduct.
David Cameron Gets It
In this opinion piece in the Wall Street Journal, the U.K. Prime Minister writes “the best way to fight corruption and drive growth is through what I call the three Ts: greater transparency, fair tax systems and freer trade.”
As to the later, Cameron writes:
“On trade, the World Trade Organization in December delivered a massive breakthrough, with the first global trade deal in a generation. Every country in the WTO committed to sweep away red tape and bureaucracy at ports and borders. This alone could add £70 billion to the world economy each year, including £7 billion for sub-Saharan Africa and £1 billion for the U.K. We must build on this momentum and press ahead with global negotiations on services and green goods, and we must take a bold and ambitious approach to bilateral trade deals. That means signing the EU-Canada deal and continuing the progress toward an EU-Japan agreement. Above all it means seizing the historic opportunity to conclude a deal like no other: the Trans-Atlantic Trade and Investment Partnership between the U.S. and EU begun at Lough Erne. This deal has the potential to deliver a turbo-boost to growth and jobs, helping to secure our economic future for the long-term. And by making global supply chains more efficient, it will also have benefits for the global economy. We must have the political courage to be radical in seeing this through. I certainly intend to be. And we must be just as ambitious in offering strong support for market access for the least developed countries.”
As previously highlighted (see here) 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. A reduction in bribery will not be achieved without a reduction in trade barriers and distortions.
Scrutiny Update
Key Energy Services
The company which previously disclosed FCPA scrutiny in Russia (see here) disclosed earlier this week as follows.
“In April 2014, the Company became aware of an allegation involving Key’s Mexico operations that, if true, could potentially constitute a violation of certain Company policies, including our Code of Business Conduct, the U.S. Foreign Corrupt Practices Act (FCPA) and other applicable laws. The Company conducted an initial investigation of this matter and the Board of Directors of the Company has formed a special committee of independent directors to oversee the investigation of this matter as well as the investigation of previously disclosed possible violations of the FCPA involving business activities of our operations in Russia, and any other resulting matters. The special committee has retained external independent legal counsel to continue these investigations. On May 30, 2014, the Company voluntarily disclosed the allegation and information from this initial investigation to the Securities and Exchange Commission (SEC) and the Department of Justice (DOJ). The Company and its management are fully cooperating with the SEC and DOJ; however, at this time the Company is unable to predict the ultimate resolution of these matters with these agencies.”
Octogenarian
The SEC turns 80 today. See here for an informative overview. With the SEC currently having an FCPA Unit, it is interesting to note that the SEC originally never wanted any part in enforcing the FCPA’s anti-bribery provisions. See here for “The Story of the Foreign Corrupt Practices Act.”
Quotable
I’ve never before visited the blog “The Campaign for Boring Development” but am glad my daily FCPA search landed me on this post because it contains perhaps the best comment under 25 words ever written about the word “corruption.”
“[C]orruption isn’t an analytical category, it’s a moral judgment. It’s a word that tends to close minds and end debates, rather than open them.”
I agree (see here for the prior post “Lots of Talk .. But What Is It?” and here for my article “Corruption Is Bad … But What Is It, and What Should Be Done?”).
This post earlier this week focused on the DOJ’s and SEC’s apparent obsession with enforcement statistics. In this retirement speech, long-time SEC enforcement attorney James Kidney calls this mindset a “cancer.” He states:
“The only other item I want to be serious about, besides some personal observations in a minute, is the metric of the division of enforcement: number of cases brought. It is a cancer. It should be changed. I have suggested to our higher ups on several occasions starting a discussion about factors we – after Monday, you — should weigh in evaluating investigations to be sure our resources are being well-spent and properly distributed. It has gone nowhere. One argument against change is that the press and congress are welded to our own anvil. But I submit that there are not more than a dozen reporters who matter covering the Commission, and about the same number of Hill staffers. I imagine they would welcome coming to an educational event about the Division’s new metric, one which focuses on quality, not quantity. Who could be against it? Goodness knows we spend millions promoting even our emptiest achievements. Why not promote a new metric that will be sensible and helpful. Current management of the Division would either adjust or leave.
Please don’t tell me we account for other factors in our management of cases. We think about them, of course, but we all see cases frequently to which we offer a head scratching response. Really? The SEC spent time and money on that? These cases have no significant impact and the conduct is of minimal or no harm to the investing public. But the investigation has been intense and expensive. Could no one in management exercise judgment and call the investigation to a halt? Of course not! Bringing the case is a stat!
The metric we have now is built into the soul of the Division. It has to be removed root and branch.”
*****
A good weekend to all.
Friday Roundup
A happy holiday to all, scholars program, scrutiny alerts and updates, departing speech, spot-on and inexcusable. It’s all here in the Friday roundup.
Happy Holiday
Readers often encourage me to “share” more about myself and background. I have obliged in part, by going off-topic once a year to share my Ironman triathlon results.
I will oblige once again, particularly since it is March Madness.
Happy Mike Koehler Day!
That’s right, on this day 21 years ago (gosh that is hard to believe) my hometown of Elkhart Lake, Wisconsin retired my #21 basketball jersey and proclaimed it “Mike Koehler Day.” No facilitating payments were necessary. I ended my high school basketball career, and still remain, the third leading scorer in the history of Wisconsin high school basketball (#1 leading scorer in the history of the state that did not play for their dad)! A poorly timed illness ended my high school career without that “one shining moment” I dreamed of, and while I was academic all-conference at the University of South Dakota, my college basketball career was uneventful.
So there you have it, you now know something more about me.
Back to the task at hand.
Scholars Program
Kudos to Trace International for launching a new scholars program. The Trace Scholars Program is aimed at developing exceptional leaders in the field of anti-corruption who are committed to advancing commercial transparency. The TRACE Scholar Program will fully fund, with tuition, lodging and travel, two international LLM students from developing countries to pursue studies related to strategies and tools for increasing transparency and reducing corruption. TRACE Scholars will spend an academic year at one of two universities (the University of Washington School of Law or the University of Maryland Francis King Carey School of Law) followed by a paid summer internship at TRACE headquarters in Annapolis, Maryland.
Scrutiny Alerts and Updates
Och-Ziff Capital Management Group, SL Industries, SciClone Pharmaceuticals, TeliSonera and a clarification regarding Beny Steinmetz.
Och-Ziff Capital Management Group
Och-Ziff Capital Management Group stated in its recent annual report as follows:
“Beginning in 2011, and from time to time thereafter, we have received subpoenas from the SEC and requests for information from the U.S. Department of Justice (the “DOJ”) in connection with an investigation involving the FCPA and related laws. The investigation concerns an investment by a foreign sovereign wealth fund in some of our funds in 2007 and investments by some of our funds, both directly and indirectly, in a number of companies in Africa. At this time, we are unable to determine how the investigation will be resolved and what impact, if any, it will have. An adverse outcome could have a material effect on our business, financial condition or results of operations.”
A day after the company’s annual report, the company’s stock closed down approximately 3.5% and you can rest assured plaintiffs firms will soon be announcing “investigations” and/or filing civil suits. For more see here from Bloomberg.
SL Industries
As noted in this Wall Street Journal Risk & Compliance Journal post has disclosed:
“During 2012, the Company conducted an investigation to determine whether certain employees of SL Xianghe Power Electronics Corporation, SL Shanghai Power Electronics Corporation and SL Shanghai International Trading Corporation, three of the Company’s indirect wholly-owned subsidiaries incorporated and operating exclusively in China, may have improperly provided gifts and entertainment to government officials (the “China Investigation”). The Company had retained outside counsel and forensic accountants to assist in the China Investigation. Based upon the China Investigation, the estimated amounts of such gifts and entertainment were not material to the Company’s financial statements. Such estimates did not take into account the costs to the Company of the China Investigation itself, or any other additional costs.
The China Investigation included determining whether there were any violations of laws, including the U.S. Foreign Corrupt Practices Act (“FCPA”). The Company’s outside counsel contacted the DOJ and the Securities and Exchange Commission (the “SEC”) voluntarily to disclose that the Company was conducting an internal investigation, and agreed to cooperate fully. Additionally, the Company hired outside consultants to provide assistance in implementing a mandatory FCPA compliance program for all of its employees which is now completed by such employees annually. Also, during the first and second quarters of 2013 the Company engaged outside consultants to perform FCPA compliance tests at its operations in China and Mexico, which, going forward, will be performed by the Company annually. On September 26, 2013, the DOJ notified the Company that it had closed its inquiry into this matter without filing criminal charges. The Company has not received an update from the SEC regarding the status of its inquiry. The Company cannot predict at this time whether any action may be taken by the SEC.”
SciClone Pharmaceuticals
SciClone Pharmaceuticals has been under FCPA scrutiny since August 2010 (see here for the prior post). In its most recent annual report, the company disclosed:
“For the year ended December 31, 2013, we determined that a payment of $2.0 million to the government in penalties, fines and/or other remedies is probable. Accordingly, we have recorded $2.0 million of operating expense in our 2013 results of operations to reflect our estimate of a probable loss incurred related to potential penalties, fines and/or other remedies in the ongoing investigations with the SEC and DOJ.”
Once again highlighting that any actual enforcement action fines and penalties are just the tip of the iceberg in terms of a company’s overall financial exposure due to FCPA scrutiny, SciClone also disclosed:
“Additional increases in general and administrative expenses for the year ended December 31, 2013, included higher professional expenses of approximately $5.3 million related to legal matters associated with the ongoing government investigation and our ongoing improvements to our FCPA compliance efforts …”.
TeliaSonera
Various media have reported (see here from the Wall Street Journal for instance) that the DOJ and SEC have opened investigations of Swedish telecommunications company TeliaSonera. According to the reports:
“[The DOJ and SEC] have requested documents relating to the acquisition of an Uzbekistan wireless data license and spectrum frequencies in 2007. The deals were done with a Gibraltar-based holding company with alleged ties to Uzbekistan’s authoritarian regime. The U.S. DOJ and the SEC join several authorities investigating the transactions. The scrutiny was sparked after a Swedish television program in 2012 alleged TeliaSonera may have been involved in corruption when it bought its Uzbeki telecom license.”
Steinmetz
Regarding Beny Steinmetz, the founder of BSG Resources, the 100 Reporters story that identified him as a “target” of a DOJ investigation has been amended as follows.
“After this story was published, the source informed 100Reporters that the source had mischaracterized the letter in question as a “target letter.” Later conversations and further reporting suggested that the letter had instead indicated that Steinmetz was a subject and not a target of the investigation.”
Departing Speech
As highlighted in this February post concerning the announced departure of Mythili Raman as Acting Assistant Attorney, Raman carried forward much of the same rhetoric former Assistant Attorney General Lanny Breuer frequently articulated concerning the DOJ’s FCPA enforcement program. (See here for my article “Lanny Breuer and Foreign Corrupt Practices Act Enforcement).
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.
During his last day as head of the Criminal Division, Raman delivered this speech before an FCPA audience and the critique remains the same. Among other things, Raman stated:
“[The DOJ’s] successful foreign bribery prosecutions speaks for itself …”
“These efforts and these successes are the product of the skill, hard work and determination of the talented prosecutors in our Fraud Section’s FCPA Unit, working in tandem with federal prosecutors across the country at many of the 94 U.S. Attorney’s Offices.”
“We have been successful in our efforts to prosecute individuals in part because we are using all of the law enforcement techniques that are at our disposal.”
Spot-On
I’ve written a number of times that trade barriers and distortions are often the root causes of bribery and a reduction in bribery will not be achieved without a reduction in trade barriers and distortions. Few in the anti-bribery space seem to grasp this basic issue, perhaps because it is just easier to pound the pavement for more enforcement or blame everything on those evil corporations.
However, Evelyn Suarez (Williams Mullen) gets it. In this recent piece about the pending Trade Facilitation Agreement (“FTA”), she writes:
“There can be no trade facilitation when border officials solicit bribes and grant favorable treatment to those who pay such bribes. The demand side of corruption has generally been overlooked, and the implementation of TFA provides an excellent and even funded opportunity to address the problem. Thus, measures to ensure public integrity must be adopted along with the trade facilitation measures specified in TFA.”
Spot-on.
Inexcusable
Did you know that NCR Corp. has “paid FCPA penalties in 2014”?
Did you know that Avon has “paid FCPA penalties in 2014?”
Did you know that in 2013 the “U.S. government handed down .. just five FCPA enforcement actions”?
Of course you did not know this, because every one of the above statements are false.
Yet every one of the above statements is included in just one paragraph in this recent Inside Counsel article.
Simply inexcusable, and once again not the media’s finest FCPA moment. (See here, here and here for prior posts).
*****
A good weekend to all – and good luck with your brackets.
FCPA Readings
If your idea of a good time is cuddling up with an entire law journal volume devoted to the Foreign Corrupt Practices Act, then this post is for you.
Even if that is not your idea of a good time, if you are the least bit interested in the FCPA and its evolution, then you owe it to yourself to get your hands on the Fall 1982 edition of the Syracuse Journal of International Law and Commerce, a symposium volume titled “The Foreign Corrupt Practices Act: Domestic and International Implications.”
This post previously highlighted the speech by Richard Shine (Chief, Multinational Fraud Branch, Criminal Division, U.S. Department of Justice – the name given to the DOJ’s then de facto FCPA Unit) in the volume.
This recent post highlighted the speech by Frederick Wade (Chief Counsel, SEC Enforcement Division) in the volume.
The remainder of this post highlights notable aspects of other articles found in the Fall 1982 edition of the Syracuse Journal of International Law and Commerce.
In “An Overview of the FCPA,” Wallace Timmeny (the former Deputy Director, SEC Division of Enforcement and at the time a lawyer in private practice) rightly identified the foreign policy concerns which motivated Congress to pass the FCPA:
“Concerns were expressed that our government was faced with foreign policy determinations and decisions made by American corporations. In other words, some of our corporations were affecting foreign policy and there was also the overriding concern that the whole idea of foreign payments or corruption in business was really putting an arrow in the bow of the countries that oppose our system.”
For more on this primary motivation of Congress in enacting the FCPA, and how the FCPA was thus not a purely altruistic act, see my article “The Story of the Foreign Corrupt Practices Act.”
In “An Examination of the Accounting Provisions of the FCPA,” Lloyd Feller (the former Associate Director of the SEC’s Division of Market Regulation and at the time a lawyer in private practice) nicely touched upon the FCPA’s books and records and internal controls provisions and how they created much controversy at the time.
“Let me try to put into context the controversy surrounding the accounting provisions. First, it is important to understand that the accounting provisions are part of the Securities Exchange Act of 1934, and apply to all issuers which register securities with the SEC. The provisions apply to all such issuers, whether or not they do business overseas. The Act, as it is applied through the accounting provisions, has absolutely nothing to do with foreign corrupt practices; it has to do with accounting, including the maintenance of books and records, and the establishment and maintenance of a system of internal accounting controls.”
“I think it is important to start with the understanding of how the Act was presented to the corporate community at the time it was passed, because the context in which the words were used and the purpose for which the accounting provisions were intended create the great controversy. It is important to understand that people who never heard of the bribery of foreign officials woke up one day and found that an Act had just been passed which applied to them in very significant ways. This was an Act which they had never heard of, had never thought involved them, had never paid any attention to, and had never understood. They listened to the lawyers and accountants explain it to them and still did not understand.”
In “The SEC Interpretative and Enforcement Program Under the FCPA,” John Sweeny (former Assistant General Counsel of the SEC and at the time a lawyer in private practice) rightly noted:
“The SEC did not actively support the bribery provisions of the Foreign Corrupt Practices Act. Indeed, it’s not entirely clear that they have any interest in prohibiting bribery per se.”
Sweeny also nicely touched upon a prosecutorial common law issue that remains today.
“The corporate community cannot sit back and wait to see how the law develops. Because it makes sound business sense to comply with federal regulatory authorities without a public clamor, corporations must confirm their activity in ways which the agency requires. To do otherwise would mean that the corporations would be risking substantial litigation expenses and adverse publicity.”
In “International Aspects of the Control of Illicit Payments,” Professor Seymour Rubin assessed the then current state of the FCPA.
“The course of events in this particular area has been long, but it has not yielded much in the way of result. Whether the FCPA has yielded a great deal in the way of results, I leave to all of you who have considered the matter. Certainly it has yielded much in the way of instruction to people in various corporations. I am somewhat impressed by the amount of paper which has been produced on this subject. It reminds me again of the old saying to the effect that when the weight of the paper equals the weight of the airplane, the airplane will fly.”
Professor Rubin also rightly identified bribery and corruption as a trade issue and particularly how Senate Resolution 265 sponsored by Senator Ribicoff during the FCPA’s legislative debate was the most promising way to deal with the bribery and corruption problem. For more on Senate Resolution 265, see the Story of the Foreign Corrupt Practices Act (pgs. 982-984).
“[Senator Ribicoff’s proposal – Senate Resolution 265] was more realistic than some of the other proposals. In particular, Senator Ribicoff argued that bribes, as well as similar practices, represent distortions of proper trade practices. Under this premise, the members of the General Agreement on Tariffs and Trade would be the appropriate group to consider the question of illicit payments and bribes that distort the fair competition desirable in the field of international trade. In other words, just as dumping and subsidization distort normal competition, so too does the practice of making illicit payments. This premise served as the basis upon which the issue was to be presented at the GATT conference. But when a special trade representative presented Senator Ribicoff’s proposal before the GATT conference, he was greeted with polite silence. The GATT, in 1979, concluded a multilateral trade negotiation. Among other things, this multilateral trade negotiation dealt with trade-distorting practices such as nontariff barriers, the question of government procurement, dumping codes, and the anti-subsidy or subsidies and countervailing duties. It would seem that the multilateral trade negotiation would have been a legitimate arena in which to discuss the subject, as being one more example of a trade distortion which ought to be regulated.”
“I think if one were to rexamine the idea presented in Senate Resolution 265 and adopt this in the area of trade, one would be addressing the problem of illicit payments in more meaningful and significant terms. When a large contract is lost by an American corporation because somebody else paid a bribe, a trade distortion results. Clearly, if one were really serious about achieving a meaningful agreement in the area of international control of illicit payments, the peg on which to hang it would be trade policy and not morality.”
In “The Foreign Corrupt Practices Act: Implications for the Private Practitioner,” Robert Primoff (a lawyer in private practice) called the FCPA a “prosecutor’s paradise” and observed:
“The target is always guilty of the violation. The government has the option of deciding whether or not to prosecute. For practitioners, however, the situation is intolerable. We must be able to advise our clients as to whether their conduct violates the law, not whether this year’s crop of administrators is likely to enforce a particular alleged violation. That would produce, in effect, a government of men and women rather than a government of law.”
If the Fall 1982 edition of the Syracuse Journal of International Law and Commerce does not completely fill your FCPA belly, you might also want to check out Volume 18, Number 2 of the Northwestern Journal of International Business (Winter 1998).
It is a symposium edition titled “A Review of the Foreign Corrupt Practices Act on Its Twentieth Anniversary: Its Application, Defense and International Aftermath.” The articles are rather pedestrian, but Stanley Sporkin’s (the former Director of the SEC’s Enforcement Division during Congress’s consideration and deliberation of the FCPA) article “The Worldwide Banning of Schmiergeld: A Look at the Foreign Corrupt Practices Act On Its Twenieth Birthday” is worth a read as he provides a first-person account of the origins of the FCPA. [In case you are wondering Schmiergeld is the German word for bribe].
See here for a prior post detailing articles in a 2012 symposium edition of the Ohio State Law Journal “The FCPA At Thirty-Five and Its Impact on Global Business.”
Friday Roundup
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.