The U.K. Financial Conduct Authority And Its Focus On Adequate Procedures To Prevent Bribery
Today’s post is from Robert Amaee (Covington & Burling), the United Kingdom Expert for FCPA Professor.
In the post, Amaee notes that while the U.K. Bribery Act does not have formal books and records and internal controls provisions like the FCPA, the U.K. Financial Conduct Authority (which regulates firms in the U.K. that provide financial products and services to U.K. and overseas customers and is the U.K. listing authority) has brought several recent enforcement actions against regulated entities on grounds similar to typical FCPA books and records and internal controls actions.
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The recent enforcement action taken by the U.K. Financial Conduct Authority (“FCA”) against JLT Specialty Limited (“JLTSL”) is the latest example of the regulator’s drive to penalize companies in the financial sector for failures in their anti-corruption policies and procedures, even in the absence of any evidence of bribery. There is every indication that the FCA will continue to use its regulatory powers to bring enforcement actions against companies that it deems not to have adequate anti-corruption controls. In the words of Tracy McDermott, the FCA’s Director of enforcement and financial crime:
“[b]ribery and corruption from overseas payments is an issue we expect all firms to do everything they can to tackle. Firms cannot be complacent about their controls – when we take enforcement action we expect the industry to sit up and take notice.”
This article outlines the FCA’s role in combating financial crime and discusses some pertinent aspects of the JLTSL case as well as previous cases against Willis Limited (“Willis”), and Aon Limited (“Aon”).
The remit and track record of the Securities and Exchange Commission (“SEC”) in enforcing the internal control and accounting provisions of the Foreign Corrupt Practices Act 1977 is well known to readers of FCPA Professor. Companies that are US issuers have an obligation to keep accurate books, records and accounts, and to devise and maintain sufficient internal accounting controls to ensure such accuracy. In the UK, the Bribery Act 2010, does not contain equivalent internal control or accounting provisions.
In the case of a company that is suspected of failing to prevent bribery, the Serious Fraud Office (“SFO”) — the lead agency tasked with enforcing the Bribery Act — must assess the adequacy of the company’s procedures (i.e., whether the company has a defence) before deciding to bring Bribery Act charges (see Sec. 7 of the Bribery Act). In the absence of evidence of bribery, however, the SFO cannot simply take enforcement action under the Bribery Act against a company for failures in its anti-corruption procedures. In respect of a suspected failure to keep adequate accounting records, UK Prosecutors have in the past resorted to bringing action under the provisions of the Companies Acts of 1985 and 2006. In 2010, for example, the SFO relied on section 221 of the Companies Act 1985 (now replaced, in substantially the same form, by the sections 386 and 387 of the Companies Act 2006) to sanction BAE for a failure to keep adequate accounting records in relation to payments made to a third party intermediary.
The FCA
The FCA, which took over the majority of the responsibilities of the Financial Services Authority (“FSA”) in April 2013, however, has a statutory objective under the Financial Services & Markets Act 2000 (as amended by the Financial Services Act 2012) to protect and enhance the integrity of the UK financial system. This market integrity objective includes tackling the risk that the financial sector companies that it regulates may be used for a purpose connected with financial crime, including fraud, money laundering, and bribery and corruption. In its July 2013 publication, The FCA’s Approach to Advancing its Objectives, the FCA states: “we will take action against firms found to be using corrupt practices, or failing to prevent bribes being paid to win business.”
To achieve this objective, the FCA has imposed, via the FCA Handbook, a number of financial crime requirements on the financial sector companies that it regulates. The key requirements are set out in Principles 1 (integrity), 2 (skill, care and diligence), 3 (management and control) and 11 (relations with regulators) of the FCA’s Principles for Businesses (“PRIN”); and Chapters 3 and 6 of the FCA’s Senior Management Arrangements, Systems and Controls sourcebook (“SYSC”).
In addition, the FCA’s recently published Thematic Review TR13/9 (October 2013) (here) on Anti-Money Laundering and Anti-Bribery and Corruption Systems and Controls, based on an assessment of 22 companies, sets out a case-based analysis of good and bad practice examples for businesses dealing with the risks of bribery and corruption. The October 2013 review followed previous thematic reviews of anti-corruption controls in commercial insurance broking (2010), in investment banking (2012), and AML and sanctions controls in trade finance (2013). The foregoing, together with the FCA’s Financial Crime: A Guide for Firms (here), provide companies with a clear indication of the FCA’s expectations in relation to the implementation and monitoring of anti-corruption systems and controls.
The recent JLTSL enforcement action followed the FCA findings of a breach of Principle 3 of PRIN. Principle 3 provides that “A firm must take reasonable care to organise and control its affairs responsibly and effectively, with adequate risk management systems.” This includes implementing checks and controls designed to prevent bribery and corruption overseas. For a breach of Principle 3 to be established, there is no need for the FCA to show that suspicious payments were made or that an act of bribery has taken place. In both the Aon and Willis cases investigations did show that suspicious payments were in fact made, while in the JLTSL case there was no evidence of suspicious payments having been made.
JLT Speciality Limited
On December 19, 2013 JLTSL, a wholly owned subsidiary of JLT Group (the largest European broker quoted on the London Stock Exchange), was fined £1,876,000 in respect of breaches of Principle 3 of PRIN. The FCA found that JLTSL had failed to carry out effective due diligence before entering into relationships with, and making payments to overseas introducers. The FCA found that the overseas introducers had been paid in excess of £11.7 million, representing some 57% of the total amount received by JLTSL from the business that had been introduced by the overseas introducers. There was no evidence of bribery or any improper intent on the part of JLTSL, but the FCA concluded that the failings gave rise to an unacceptable risk that the payments made to the overseas introducers could have been used to pay bribes “to persons connected with the insured clients and/or public officials.”
It is worth noting that the FCA brought this action against JLTSL in spite of the fact that it found that JLTSL had (i) implemented policies and procedures aimed at countering the risk of bribery and corruption, including an Employee handbook and a Group Anti-Bribery and Corruption Policy which prohibited JLTSL employees from engaging in any form of bribery, an Operating Procedure Manual which contained more detailed procedures that employees had to follow in order to establish relationships with overseas introducers, and a 7 Alarm Bells policy to assess the bribery and corruption risk associated with entering into a relationship with an overseas introducer; and (ii) engaged an external adviser to review its systems and controls to assess compliance with the provisions of the Bribery Act 2010, concluding that the due diligence procedures in relation to introducer/facilitator relationships appeared comprehensive and broadly in line with the Act.
The FCA took the position that there was a failure to conduct adequate due diligence, and the external advisor had not conducted a “holistic” review of JLTSL’s systems and controls. JLTSL also was found to have failed to adequately assess bribery and corruption risks, only carrying out a risk assessment at the start of each relationship not every time that overseas introducer introduced a new piece of business. JLTSL also failed to adequately implement its own anti-bribery and corruption policies, which resulted in the risk of JLTSL entering into higher risk relationships with overseas introducers without senior management oversight and approval.
Specifically, JLTSL failed to assess whether or not there were any connections between the overseas introducers and the clients or any public officials. Although both the OPM and the Alarm Bells highlighted the importance of carrying out due diligence, there was a lack of practical guidance “to employees in order to establish whether the Overseas Introducer was connected to the client it was introducing.” On reviewing 17 of JLTSL’s relationships with overseas introducers, the FCA found that in the majority of cases in which the overseas introducer was a company, JLTSL had failed to screen one or more directors or beneficial owners. In one example, a major shareholder of the overseas introducer was known to JLTSL to be a Nigerian public official. The FCA concluded that as a Nigerian public official it was entirely possible even probable that the shareholder of the overseas introducer would have connections to West African public officials.
Willis Limited
On July 21, 2011 the insurance broker Willis was fined £6,895,000 for failings in its anti-corruption systems and controls (breaches were for Principle 3 of PRIN and Rule 3.2.6 R of the SYSC) which “contributed to a weak control environment surrounding the making of payments to Overseas Third Parties.”
The FSA found that overseas third parties had received commissions of approximately £27 million, representing some 45% of the brokerage earned by Willis from the business that had been introduced by the overseas third parties. The FSA’s findings were supported by Willis’ own internal investigation which identified a number of suspicious payments made to overseas third parties, two of which formed the subject of suspicious activity reports that Willis submitted to the Serious Organised Crime Agency (“SOCA”) (now replaced by the National Crime Agency (“NCA”)).
The FSA did not find any evidence to suggest that Willis’s conduct was either deliberate or reckless. It acknowledged that Willis had introduced improved anti-corruption policies and guidance in 2008, reviewed how its new policies were operating in practice and further revised its guidance in 2009. The FSA, however, formed the view that Willis had failed to ensure its policies were adequately implemented, that failures by staff to adhere to the new policies were identified in a timely manner, or that the Board was provided with sufficient relevant management information regarding the performance of the new policies.
Specifically, the FSA concluded, inter alia, that Willis had (i) failed to ensure that it had established and recorded an adequate commercial rationale for using overseas third parties; (ii) failed to provide formal training or adequate guidance for staff who only recorded brief descriptions of the reason for making commission payments; and (iii) conducted inadequate due diligence on overseas third parties to establish, for example, any connections with the insured, insurer or public officials.
Aon Limited
On January 6, 2009 Aon was fined £5,250,000 for failing to “take reasonable care to organise and control its affairs responsibly and effectively, with adequate risk management systems” (breach of Principle 3 of PRIN). In particular, the FSA highlighted Aon’s failure to establish and maintain effective systems and controls for countering the risks of bribery and corruption associated with its use of overseas Third parties in high risk jurisdictions.
As in the Willis case, the FSA found that the failings led to a weak control environment that gave rise to an unacceptable risk that Aon could become involved in potentially corrupt payments to win or retain business. The FSA highlighted 66 suspicious payments totalling in excess of US$7 million that were paid to nine overseas third parties. Aon’s own internal investigation identified a number of suspicious payments that it later reported to SOCA.
The FSA concluded, inter alia, that (i) procedures lacked adequate levels of due diligence either before commencing relationships with overseas third parties or before payments were made; (ii) Aon failed to monitor its relationships with overseas third parties in respect of specific bribery risks; (iii) Aon did not provide its staff with sufficient training and guidance on bribery and corruption matters; and (iv) Aon failed to ensure that the committees it appointed to oversee bribery and corruption risks received relevant management information or routinely assessed whether bribery and corruption risks were managed effectively. Aon also failed to implement effective internal systems and controls to mitigate those risks. Margaret Cole, FSA director of enforcement at the time, described the case as sending a clear message that it is “completely unacceptable for firms to conduct business overseas without having in place appropriate anti-bribery and corruption systems and controls”.
Adequate Procedures
The FSA’s 2009 action against Aon marked the start of period of concerted effort by the regulator to take action against companies deemed to have inadequate policies and controls, in particular in respect of the risks associated with making payments to overseas third parties. The Aon action was followed in 2011 by the FSA’s action against Willis for failings in its anti- corruption policies and controls. In bringing its recent action against JLTSL, the FCA has clearly signalled its intention to continue the focus on companies’ internal anti-corruption control environment. In addition, a number of separate enforcement actions have confirmed that the FCA remains focused on ensuring companies also maintain adequate anti-money laundering policies and controls. See here, here, here and here.
It is clear, in particular from the JLTSL case, that the FCA will not be impressed by the volume of policies and controls that have been drafted or the fact that an external vendor has given the anti-corruption program the all clear. The FCA is focused on the effectiveness of the policies and controls and how they have been implemented, and how they are being monitored in practice. There is little doubt that when the SFO starts to bring enforcement actions against companies under the failure to prevent bribery offence contained in section 7 of the Bribery Act, its assessment of the adequacy of a company’s policies and controls will similarly focus on their real life implementation, and not on the elegance of the prose, or the sign off of external vendors.
Friday Roundup
Looking for talent … got talent, the DOJ is sued, the Corruption Perceptions Index, a pulse on FCPA Inc., and for the reading stack. It’s all here in the Friday roundup.
Looking for Talent … Got Talent
If your firm or organization is looking for either a summer associate or full-time lawyer with a solid Foreign Corrupt Practices Act foundation, please e-mail me at fcpaprofessor@gmail.com. This past semester, twenty Southern Illinois University law students completed a semester long class on the FCPA, FCPA enforcement and FCPA compliance.
Learning objectives for the class included: (i) developing a comprehensive understanding of the FCPA’s anti-bribery provisions and books and records and internal controls provisions; (ii) analyzing legal, ethical and policy issues associated with FCPA enforcement; (iii) understanding the FCPA’s long tentacles and how actual FCPA enforcement actions brought by the DOJ and/or SEC are often just one consequence of FCPA scrutiny; and (iv) gaining practical FCPA compliance skills including the ability to conduct an FCPA risk assessment and develop FCPA compliance policies.
I am confident in saying that few, if any, law students in America have as solid a foundation in the FCPA and FCPA compliance as these students. I encourage you to give them an opportunity.
The DOJ Is Sued
University of Virginia Law Professor Brandon Garrett and Reference Librarian Jon Ashley maintain the excellent Federal Organizational Prosecution Agreements website which contains hundreds of federal organizational prosecution agreements such as non-prosecution and deferred prosecution agreements … at least those in the public domain.
Recently Ashley filed this lawsuit against the DOJ under the Freedom of Information Act seeking release of a certain non-prosecution agreement. The complaint asserts:
“Plaintiff is statutorily entitled to the disclosure of [the] non-prosecution agreement and [the DOJ] has improperly withheld the requested records in violation of the law and in opposition to the strong public interest in understanding the judicial system and why admitted wrongdoers are not criminally prosecuted.”
While lacking knowledge as to the specifics of the complaint, I applaud the lawsuit for seeking to shine a light on DOJ enforcement practices.
As noted in this prior post, the 2012 FCPA Guidance highlighted secret FCPA enforcement. While I did not file a formal Freedom of Information Act request, I sought on several occasions to seek information from the DOJ regarding its secret FCPA enforcement practices. In each instance, my requests were ignored.
Corruption Perceptions Index
Transparency International (“TI”) recently released its annual Corruption Perceptions Index (“CPI”) (see here).
The CPI ranks countries/territories based on how corrupt their public sector is perceived to be and is a composite index drawing on corruption-related data collected by a variety of institutions and reflecting the views of observers from around the world including those living and working in the countries/territories evaluated.
The top four (very clean) countries in the CPI were Denmark, New Zealand, Finland and Sweden. The bottom four (highly corrupt) countries were Somalia, North Korea, Afghanistan, and Sudan.
The United States placed 19th on the list of 177 countries.
The DOJ has spoken in religious terms regarding its FCPA enforcement actions as former Assistant Attorney General Lanny Breuer stated “we in the United States are in a unique position to spread the gospel of anti-corruption, because there is no country that enforces its anti-bribery laws more vigorously than we do.”
Yet, it remains a bit ironic that as the U.S. aggressively expands its Foreign Corrupt Practices Act enforcement practice and theories, the U.S. remains far from the top of the CPI. The latest CPI should again cause us to pause as to our claimed exceptionalism and moral superiority on this topic. For instance, see this prior post “We Really Ought to Pause and Reflect.”
See the “Double Standard” subject matter tag for more.
Pulse of FCPA Inc.
What is one reason Wal-Mart is spending in excess of $1 million per working day on its FCPA issues? Because, in many instances corporate FCPA scrutiny has turned into a full employment act for FCPA Inc.
Reuters recently reported here that Wal-Mart “is paying for lawyers to represent more than 30 of its executives involved in a foreign corruption investigation, according to people familiar with the matter, an unusually high number that shows the depth of the federal probe.” The article states:
“In recent months, the U.S. government has brought in a number of senior Wal-Mart executives for questioning, including officials from corporate headquarters in Bentonville, Arkansas, the sources said. The move, along with widespread publicity about the probe, appears to have prompted executives to seek their own legal representation. The sources declined to name the executives who have submitted to interviews.”
As noted in this recent Friday roundup, there are few relevant data points associated with the pulse of FCPA Inc. Much information is anecdotal, including the following from Legal Search Consultants Major, Lindsey & Africa in its Asia Legal Market, Semi-Annual Report.
“FCPA practices continue to grow with firms continuing to relocate specialists from their US offices to Asia. This is reflective of an effort to meet the unrelenting demand in investigations work. There seem to be few certainties in Asia, but one is that FCPA business will not be diminishing anytime soon.”
Reading Stack
An informative post recently on the FCPAmericas site titled “Conducting Effective FCPA Training in Latin America.” The eight pointers discussed are true regardless of which region FCPA compliance is focused.
A little dickey bird whispers to thebriberyact.com here regarding U.K. DPAs and Bribery Act prosecutions.
For the resources stack, the OECD, the U.N. Office on Drugs and Crime, and the World Bank recently released here the “Anti-Corruption Ethics and Compliance Handbook for Business.” It states:
“The handbook is not intended to create new standards or represent any form of legally binding requirement for businesses. It has been developed to serve as a useful, practical tool for companies seeking compliance advice in one, easy-to-reference publication. The handbook is divided into three sections. The first section provides an overview of the international anti-corruption framework, within which companies conducting international business must operate. The second section provides a brief introduction to how companies can assess their risk in order to begin developing an effective anti-corruption ethics and compliance programme. The third and most significant section brings together the major business guidance instruments. A comparison of these instruments reveals that they all largely include the same basic anti-corruption ethics and compliance elements. These elements are further illustrated using real-life, anonymised case studies provided by companies. Finally, the handbook includes as an annex a quick-reference table providing a cross-comparison of all the major business guidance instruments referenced in this handbook.”
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A good weekend to all.
Friday Leftovers
Scrutiny alerts, corruption in China, quotable, and for the reading stack. It’s all here in the Friday leftover version of the roundup.
Scrutiny Alerts
Caribbean News Now reports here as follows.
“A complaint has been filed with the Department of Justice (DOJ) in the United States under the Foreign Corrupt Practices Act (FCPA) in relation to a contract purporting to grant oil exploration rights over some eight million acres of Saint Lucia’s maritime territory. The 46-page complaint, which Caribbean News Now has seen, names Saint Lucia’s prime minister, Dr Kenny Anthony, and RSM Production Company (RSM), a Texas company, along with its president Jack J. Grynberg. Caribbean News Now has also seen a written notification confirming receipt of the document by the DOJ.
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Specifically, the complaint notes that, in or about February 2000, Anthony, as then minister of finance, planning and sustainable development, signed a contract with RSM that purported to grant the company an “Exploration License” in respect of territorial maritime resources belonging to Saint Lucia amounting to 8,726,263 acres. However, under Saint Lucia’s Minerals Vesting Act, all minerals in, on or under any land in Saint Lucia are vested in and controlled by the Crown and only the governor general may grant a licence to prospect for and/or mine such minerals. Further, although the contract provides that RSM shall pay a royalty to “the Government” (as required by section 5 of the Minerals Vesting Act), it goes on to state that the liability of RSM in this respect shall be discharged by paying such royalty to the minister and not the government.”
Reuters reports here as follows.
“The U.S. Justice Department is probing Morgan Stanley for its hiring practices in China as part of an industry-wide investigation by the government into whether banks’ employment of politically connected Chinese breached U.S. bribery laws, according to people familiar with the matter. As part of the industry sweep, the U.S. Securities and Exchange Commission sent letters to Morgan Stanley and other banks, including Goldman Sachs and Citigroup, seeking information about their hiring practices, according to several people familiar with the matter. The SEC has asked the financial services firms to provide information about their hiring of the relatives of government officials in China …”.
This is not a surprising development following the New York Times August story regarding JPMorgan (see here for the prior post).
Corruption in China
The Congressional-Executive Commission on China recently held a roundtable on “Corruption in China Today: Consequences for Governance, Human Rights, and Commercial Rule of Law.” As stated on the Commission’s website:
“Corruption takes many forms in China, from corrupt officials at all levels using their public office for private gain and seizing land for development to corrupt state-owned enterprises gaming the system to their advantage. Corruption also continues to be among the root causes of rights abuses against Chinese citizens. Senior leaders acknowledge that corruption threatens the legitimacy of the Communist Party and contributes to citizen dissatisfaction, and President Xi Jinping has stated that fighting corruption is a high priority. But Chinese authorities continue to crack down on independent and citizen-led efforts to combat corruption. Panelists will discuss corruption among Chinese high-level officials and recent anti-corruption efforts, and explore corruption’s role in human rights violations. Panelists also will examine corruption linked to state-owned and other enterprises and explore the implications for commercial rule of law.”
Among the panelists were Professor Daniel Chow (Ohio State) (see here for his statement). In 2012, I was pleased to play a role, along with Professor Chow and the staff of the Ohio State Law Journal, in organizing “The FCPA at Thirty-Five and Its Impact on Global Business,” a full-day symposium at The Ohio State University Moritz College of Law. (See here).
Quotable
On his Corruption, Crime & Compliance site, Michael Volkov states:
“The idea of legal ‘marketing’ has been diluted in the last few years. As businesses become smarter consumers of legal services, in-house counsel and Chief Compliance Officers are much better at deciphering legal mumbo jumbo. Perhaps the best example of legal marketing as an oxymoron, was the roll-out of the UK Bribery Act. Legal marketing was premised on one idea –fear and fear alone. Client alert after client alert warned companies about the impending doom, the effective date of the UK Bribery Act. Not to pat myself on the back (assuming my arm is long enough), but I wrote that the UK Bribery Act was a real non-event in the world anti-corruption compliance and that it was unlikely to have any real impact. To this day, those words still ring true. After writing the ‘truth’ about the UK Bribery Act, I received a call from the firm’s London partners and was chastised for undermining their entire ‘marketing’ program. (In stark contrast, many clients wrote me and thanked me for my ‘honesty.'”
Spot-on.
Nearly three years ago, I wrote:
“The U.K. Bribery Act … has been the subject of much discussion and much over-hype in my opinion. It has been called the FCPA ‘on steroids’ (here) and if one subscribes to the industry marketing material, you might be left with the impression that the end of the world is near. […] In sum, I don’t see how companies already subject to the FCPA and already thinking about compliance in a pro-active manner, have much to worry about when it comes to the U.K. Bribery Act because of the adequate procedures defense. I will be surprised if U.K. enforcement of the Bribery Act reaches the level of U.S. enforcement of the FCPA …”.
See here for my post the day the U.K. Bribery Act went live in July 2011.
See here for my post “Marketing The FCPA … The FCPA Risks Of … Well, Just About Everything.”
For the Reading Stack
The most recent issue of the always-informative FCPA Update from Debevoise & Plimpton is here. Among other things, the issue summarizes recent remarks of DOJ and SEC officials regarding the FCPA and FCPA enforcement.
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A good weekend to all.
The 100th Edition Of The Friday Roundup
Scrutiny alerts and updates, a first, blunt, and quotable. It’s all here in this – the 100th edition – of the Friday roundup.
[I hope the Friday roundup is a value added end to your work week. The Friday roundup alone represents several hours of work by highlighting recent FCPA and related news and developments not otherwise covered Monday – Thursday on FCPA Professor. Ask yourself: do you get your FCPA from FCPA Professor? If the answer is yes, you can help support this free website here]
Scrutiny Alerts and Updates
Wal-Mart
During its third quarter earnings call yesterday, Wal-Mart disclosed $69 million in “FCPA and compliance related expenses” in the quarter. According to the company “approximately $43.0 million of these expenses represented costs incurred for the ongoing inquiries and investigations and approximately $26.0 million is related to our global compliance program and organizational enhancements.”
Doing the math, $69 million in the third quarter is approximately $1.06 million per working day. As noted here, the figure for Q2 was approximately $1.26 million per working day and as noted here the figure for Q1 was approximately $1.16 million per working day. For more on Wal-Mart’s pre-enforcement action professional fees and expenses, see this prior post.
For the fourth quarter, Wal-Mart estimated $75 – $80 million in expenses related to FCPA matters.
JPMorgan
The NY Times returns (here) to the JPMorgan story it first reported in August (see here for the prior post). The article states:
“To promote its standing in China, JPMorgan Chase turned to a seemingly obscure consulting firm [Fullmark Consultants] run by a 32-year-old executive named Lily Chang. Ms. Chang’s firm, which received a $75,000-a-month contract from JPMorgan, appeared to have only two employees. And on the surface, Ms. Chang lacked the influence and public name recognition needed to unlock business for the bank. But what was known to JPMorgan executives in Hong Kong, and some executives at other major companies, was that “Lily Chang” was not her real name. It was an alias for Wen Ruchun, the only daughter of Wen Jiabao, who at the time was China’s prime minister, with oversight of the economy and its financial institutions.
[…]
Now, United States authorities are scrutinizing JPMorgan’s ties to Ms. Wen, whose alias was government approved, as part of a wider bribery investigation into whether the bank swapped contracts and jobs for business deals with state-owned Chinese companies, according to the documents and interviews. The bank, which is cooperating with the inquiries and conducting its own internal review, has not been accused of any wrongdoing. The investigation began with an examination of the bank’s decision to hire the daughter of a Chinese railway official and the son of a former banking regulator who is now the chairman of a state-controlled financial conglomerate.
[…]
Executives at JPMorgan’s headquarters in New York did not appear to be involved in retaining Fullmark, a decision that seemed to have fallen to executives in Hong Kong. And the documents reviewed by The Times do not identify a concrete link between the bank’s decision to hire children of Chinese officials and its ability to secure coveted business deals, a connection that authorities would probably need to demonstrate that the bank violated anti-bribery laws.”
Park-Ohio Holdings Corp.
The diversified manufacturing services and products holding company (here) disclosed as follows in a recent quarterly filing:
“In August 2013, the Company received a subpoena from the staff of the SEC in connection with the staff’s investigation of a third party. At that time, the Company also learned that the Department of Justice (DOJ) is conducting a criminal investigation of the third party. In connection with responding to the staff’s subpoena, the Company disclosed to the staff of the SEC that, in November 2007, the third party participated in a payment on behalf of the Company to a foreign tax official that implicates the Foreign Corrupt Practices Act (FCPA). The Board of Directors of the Company has formed a special committee to review the Company’s transactions with the third party and to make any recommendations to the Board of Directors with respect thereto. The Company intends to cooperate fully with the SEC and the DOJ in connection with their investigations of the third party and with the SEC in light of the Company’s disclosure. The Company is unable to predict the outcome or impact of the special committee’s investigation or the length, scope or results of the SEC’s review or the impact, if any, on its results of operations.”
Wynn Resorts
This previous Friday roundup highlighted the company’s disclosure that the SEC has ended its investigation of the company concerning a $135 million donation to the University of Macau. In this recent filing, Wynn states as follows concerning a related DOJ investigation.
“[The DOJ] has been conducting a criminal investigation into Wynn Resorts’ donation to the University of Macau […]. Wynn Resorts has not received any target letter or subpoena in connection with such an investigation. Wynn Resorts intends to cooperate fully with the government in response to any inquiry related to the donation to the University of Macau.”
SEC’s First Individual DPA
When the SEC announced in January 2010 (see here for the prior post) a series of measures, including non-prosecution and deferred prosecution agreements, “to further strengthen its enforcement program by encouraging greater cooperation from individuals and companies in the agency’s investigations and enforcement actions,” I called the development a blow to those who prefer government law enforcement agencies to enforce a law in an open, transparent matter and in the context of an adversary proceeding. Not that there was much judicial scrutiny of SEC enforcement prior to January 2010 (largely on account of the SEC’s then neither admit nor deny settlement policy), but the new measures, I noted, would lead to even less judicial scrutiny.
Earlier this week, the SEC announced “a [five year] deferred prosecution agreement with a former hedge fund administrator who helped the agency take action against a hedge fund manager who stole investor assets.” According to the SEC, the DPA – outside the context of the FCPA – is the SEC’s “first with an individual” and the SEC’s release further states:
“Deferred prosecution agreements (DPAs) encourage individuals and companies to provide the SEC with forthcoming information about misconduct and assist with a subsequent investigation. In return, the SEC refrains from prosecuting cooperators for their own violations if they comply with certain undertakings.”
Obviously the above statement is an opinion statement, not a factual statement.
As highlighted in this prior post, the FCPA Guidance indicated that the DOJ has in the past used non-public non-prosecution against individuals in the FCPA context. Despite claims by the DOJ that its FCPA enforcement program is transparent, my attempts to learn more about these secret FCPA NPA’s with individuals was unsuccessful.
Blunt
DOJ FCPA enforcement attorneys have publicly stated that among the many ways they learn of conduct which could implicate the FCPA is by reading the newspaper.
If so, this recent article in the Miami Herald may generate some interest. In the article concerning the satellite telephone business in Cuba, a “Miami Man” states that “he installs each system in Cuba for $3,500 to $4,200 — cash paid in South Florida, with part of the mark up going to bribes on the island. The costs are usually paid by U.S. relatives of the recipients.”
Quotable
From a recent poll regarding corruption in Africa: “corruption is a national sport every day at the direction of customs officials” (see here).
An extensive interview with U.K. Serious Fraud Director David Green (“DG”) in Fraud Magazine (“FM”) in which he discusses: corporate criminal liability, facilitation payments, Bribery Act Inc., voluntary disclosure and DPAs. Relevant excerpts include:
FM: What current changes, if any, to the legal system and or legislation would make the SFO more efficient?
DG: To our effectiveness and our reach, I would very much like the test for corporate criminal liability to be looked at again. As you know, in this country, it is extremely difficult to convict a company of an offence because the prosecution has to show that the controlling minds of the company — somebody at the board level — were complicit in the criminality you are trying to prove. I think that bar is too high, and is a very unrealistic test — not least because I think anyone will agree that if you’re looking into allegations of corporate misconduct spookily the e-mail trail tends to dry up at a fairly junior level. Where it can be shown that the company had really profited from the criminality of its employees then I think there is a sound case for expanding the ambit of section 7 of the U.K. Bribery Act. Section 7 creates the corporate offence of ‘failing to prevent bribery or corruption by an agent or employee’ with a statutory defence that they took all reasonable precautions. Now why can’t that be extended to cover fraud and offences of dishonesty so the offence would be failing to prevent fraud or offenses of dishonesty by members of your staff? It seems to me absolutely right that a corporation should have criminal liability for that when it has profited from it. Why should a company which has, in the way I’ve explained, been complicit in criminality just throw a few people over the side and sail bravely on? Why shouldn’t it have its ears clipped and marked as a company that has had dishonest employees and benefitted from it? Another argument is: Well you’d just be punishing a company for negligence. I would say it would be a pretty high degree of negligence when a company acts in that way and benefits from the dishonesty of its employees.
FM: Doesn’t the Bribery Act prejudice British business in that is a bit too harsh in relation to facilitation payments and hospitality payments?
DG: First of all, I don’t buy this argument that complying with the law is going to hold business back. Secondly, facilitation payments have always been illegal. However, it is a question of the public interest as to whether or not they are prosecuted. What would be a common facilitation payment? A 20-pound note and a bottle of whisky to some [maritime] pilot to take your ship from somewhere to somewhere else in a single payment; the SFO wouldn’t be interested in that. [Maritime pilots will guide ships into ports for hire.] But if it was a course of conduct over a number of years, then, of course, that becomes not just a very small insignificant little bribe but actually a regular payment over time to ensure that you get that business.
FM: What do you say about those medium to small companies who have ignored the preventative measures required by the Bribery Act?
DG: Well, it’s always difficult, isn’t it? On the one hand, I am very conscious that since the enactment of the act there has grown up a Bribery Act industry in London populated by a lot of American and British lawyers, accountants and so-called experts. I even came across a firm the other day that actually offers certificates to companies saying that they are compliant, and I suppose if the company were to land in court they would try to produce this certificate to say, “We can’t be prosecuted because we’ve got a certificate.” The effect of this is that these so-called experts have scared the pants off of medium and small enterprises. It is really a question of getting some sensible, reasonably priced legal advice to discern their risk areas and put in place basic safeguards. But the idea that the Serious Fraud Office is going after a ticket to Wimbledon or a bottle of Champagne is, and always has been, utter nonsense. If, on the other hand, we saw a situation in which the entire board and their spouses of a major corporation were put up in London for a week and then given tickets for the men’s finals at Wimbledon with a couple of banquets before, during and afterwards, then that would be very worrying. Throw in first-class airfare and that would become extremely worrying. But the key to all this in relation to bribery investigations and whether or not we are interested in them has to do with value and importance but also timing, the motive and the effect of it — was it done at a time when some enormously important decision was going down with a view to influencing it? This is fairly common sense; we use a reasonable approach.
FM: Will companies that self-report escape criminal proceedings?
DG: My predecessor had guidance on self-reporting, in which though it did not say it in so many words, was a very clear implication that if you self-reported as a company you would not be prosecuted, and there would be a civil disposal of what you had done. I disagree with that absolutely and fundamentally as a matter of principle because no prosecutor can ever give guarantees in advance. We have no idea what set of facts are going to come in through the door next. So, we have returned to the old guidance, which has always been there; we will apply the Code for the Crown Prosecutors. In other words, in each situation we would see if there’s enough evidence to prosecute. If there is, we consider if it’s in the public interest to prosecute this company. Now if a company were to come in and say, “Look, we have discovered this misconduct. We have conducted a full investigation; here are the results. We are willing for you to investigate it as you wish. We’ve gotten rid of all the people involved in this, we will hand over any illegal profits obtained as a result of this crime.” In such circumstances, one does struggle to think how it would be in the public interest to prosecute such a company. But it is a question of principle here. If you start — and I feel very strongly about this — if you start blurring the boundaries between what people involved in the criminal justice system do then it’s a dangerous path to follow. Prosecutors shouldn’t be doing deals or making offers in advance and defenders shouldn’t be too familiar with prosecutors. We need to stay where we are and within our own divisions. That’s my view.
FM: Could the deferred prosecution arrangement (DPA) be seen as a type of deal?
DG: Well, I think if you looked at the American model of DPAs you might think it could be described as a deal. We’ve adapted it for use in this country to have judicial involvement and scrutiny from the very beginning. The reason for that is to preserve the principle we have in this country, which they don’t have in the States, that sentencing is a matter for the judge. It’s not a matter for some cozy deal between prosecutor and defence. If we believe a case is appropriate for a DPA we would go before a judge and say, “Judge, these are the charges which we would be minded to bring against these people. However, we think for these reasons it’s an appropriate case for a DPA. Do you agree?” Now if the judge says, “No, I don’t I think this is a suitable case for a DPA,” we’ll carry on prosecuting. So, it is a transparent process. Ultimately, if a DPA did go ahead there would be a statement of facts read in court. Nothing would be hushed up. You can’t really go wrong if you’re transparent. Things go wrong in the criminal justice system if anything appears to be opaque. You lose public confidence and you lose the confidence of the people involved.
Professor Ellen Podgor states, in pertinent part, in this New York Times opinion piece:
“If we intend to punish people, shouldn’t we reasonably expect that they knew their actions were crimes? […] The accumulation of laws and rules has made it harder to assure that individuals who are punished understood that they were breaking the law. When the law is clear, and an individual deliberately transgresses the law, punishment serves an important purpose. Attributing criminality to business-related activities is not always so easy. The line between criminal activities and acceptable business judgments can be fuzzy. The conduct may not have a long biblical history of being offensive, and there may be no posted signs. […] In the corporate or financial world, multiple individuals may have a finger in a business decision — and some may be unaware that one has breached the law. Add to this ambiguity in both the law and the corporate world that business-related decisions are often made by individuals who find themselves placed in a forest of regulations and criminal statutes with varying interpretations that even legal scholars can’t agree upon. Overcriminalization presents unique issues in the white collar and business arena. There are thousands of criminal statutes scattered throughout the federal code, and there are thousands of regulations with accompanying criminal penalties. The prosecutor’s toolbox also includes overly broad statutes like RICO, mail fraud, wire fraud and offenses like making false statements. The bottom line is that the government’s power to indict has few restrictions, and overcriminalization provides federal prosecutors with super powers that they can easily abuse. Congress’s continuous and haphazard adding of criminal statutes and regulations is making it more difficult to assure that individuals who are punished truly understand that they are breaking the law.”
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A good weekend to all.
Corruption And Anti-Corruption: Challenges And Future Perspectives
Today’s post is from Professor Bruce Bean (Michigan State University College of Law). Prior to academia, Bean had a diverse practice career including at various law firms and in-house counsel positions.
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Last week in London, the University of Sussex Centre for the Study of Corruption presented its annual conference, this year entitled “Corruption and Anti-Corruption: Challenges and Future Perspectives.” This one day affair, organized by Professor Dan Hough, Director of the Centre, was held at the Canary Wharf offices of Clifford Chance with about 150 attendees.
Professor Michael Johnston from Colgate, author of Syndromes of Corruption, gave the keynote address, Are we there yet?
He emphasized these themes:
- All countries have corruption. It is not simply a problem of the “warmer parts of the world.”
- Corruption will never be “eliminated.”
- Anti-corruption efforts should not mean “Be like us.”
- Corruption is one aspect of political integrity, and the liberal democracies have a major corruption problem with the funding of political campaigns where we have merely legalized corruption.
My presentation emphasized the practical problems of complying with Section 7 of the Bribery Act, the strict liability corporate crime of Failing to Prevent a Bribe. Lost on my co-panelists was my principal point, that the penalties and disgorgement amounts extracted in settlements with the Department of Justice and the Securities and Exchange Commission deplete shareholder funds while not incentivizing corrective action by senior management.
Robert Barrington, Executive Director of Transparency International U.K., had no sympathy for the dilemma faced by companies doing only a “part of a business” in the UK, the sole jurisdictional nexus required under Section 7 of the Bribery Act. Ignoring the moral hazard of permitting senior executives to continue business as usual since it is only shareholders who might have to pay, Barrington suggested, naively in my view, that if shareholders do not approve of such settlements, “they can always change the CEO.”
Barrington’s major focus was on Transparency’s new global initiative, a world-wide survey of lobbying. He pointed out, as an example, that there is currently no information available to the public about lobbyists in London, and that Parliament is currently considering this issue. Barrington flatly stated that the bill before Parliament was “appallingly bad.” Referring to the U.S. requirement that lobbyists register and report, he observed that the U.S. procedure is a good example of where “transparency is not enough.”
Dmitri Vlassis, Chief of the Economic Crime Branch of the United Nations Office on Drugs and Crime in Vienna, noted that 2013 was the 20th anniversary of the creation of Transparency International and the 10th anniversary of the United Nations Convention Against Corruption. Vlassis announced that 167 nations have become party to the UNCAC, but, curiously, New Zealand has not. New Zealand declines to ratify the UNCAC on the theory that they are already #1 on the Transparency International Corruption Perceptions Index!
The final speaker of the day was Sir Ian Blair, Head of the Metropolitan Police (Scotland Yard) from 2005-2008. He made the surprising disclosure that Scotland Yard has itself had serious corruption problems. In the 1970’s, the then head of the Yard announced that he was trying to insure that there were more criminals apprehended by the Metropolitan Police than were working there. According to Blair, this problem has been substantially improved upon, but even at Scotland Yard, corruption will always be an issue.
Transparency International’s new emphasis on lobbying may indicate the beginning of a long overdue focus on political integrity in the economically advanced nations. Meanwhile, we await an indication of the approach prosecutors will take toward strict corporate criminal liability under the Bribery Act.