Friday Roundup
Thanks, the “foreign officials” of Medicine Bow, are you sure the company is FCPA-compliant in China, quotable, checking in on Brazil, and an interesting read.
Thanks
Many thanks for making FCPA Professor a part of your day. October readership was an all-time record in the history of FCPA Professor (this site launched in July 2009) and two posts earlier this week “Stop Drinking the Kool-Aid” and “It Ought to Stop” were among the most read posts in FCPA Professor history. As to these posts, I received many positive and supportive comments.
Should you have ideas for how FCPA Professor can be improved, please let me know at fcpaprofessor@gmail.com.
The “Foreign Officials” of Medicine Bow
Given the enforcement agencies’ untethered and boundless views on who is a “foreign official” under the FCPA, one never knows where a “foreign official” will pop up.
Such as Medicine Bow, Wyoming – population 300.
As noted in this recent Wall Street Journal article, “an arm of [China] state-controlled Sinopec Group, also known as China Petrochemical Corp., is planning to build an advanced facility [in Medicine Bow] that will convert coal into gasoline.” According to the article, the project will create approximately 400 full-time jobs when the facility goes into operation.
In this 2010 article, I noted that with foreign government owned sovereign wealth funds making investments around the world (including in U.S. companies) and with SOEs listing public shares on various exchanges and otherwise doing business around the world, there has never been a more critical time for the enforcement agencies to make clear their legal and policy reasoning on “foreign official.”
Far from adding clarity on this issue, the recent “foreign official” trial court decisions (see here and here), as well as the DOJ’s recent “foreign official” reversal (see here), has only muddied the waters.
Are You Sure the Company Is Compliant?
Subject to a few observable exceptions, investors seem to care very little about FCPA scrutiny and enforcement actions. All the more reason the below exchange from the recent Novartis AG earnings conference call caught my eye.
ANDREW BAUM (Citigroup Analyst): One trend would notice with some of you peers is where there is a sudden acceleration in the growth in China, it is often closely followed by scrutiny under the Foreign Corrupt Practices Act. Could you just give us an update on what you’re doing to ensure compliance in Novartis in China, is held in check, so that doesn’t become a risk?
DAVID EPSTEIN (Novartis, Head of Pharmaceuticals): “You asked about compliance. And just — I would just say rest assured our Company does everything that is in the power to be done, on a worldwide basis, to teach our people to be compliant. Both in terms of training and coming from the top and everything else. So I’m quite pleased with where our Chinese business is going. And leave it at that.”
Quotable
The U.K. Independent recently ran (here) a profile of David Green (who became Director of the U.K. Serious Fraud Office this past spring).
Below are some notable Green quotes.
- “I would like the SFO to have a hard-edged, tough reputation. It should be something which is feared. You don’t want to be investigated by the SFO.”
- On the issue of guidance. “I am sceptical of guidance notes. I suspect the motives of those that want absolutely precise guidance, because I suspect they want to wait round the corner and hit you over the head with it, and say, you are acting contrary to your guidance. The criminal law covers an endless multitude of possibilities and possible sets of facts. It is very hard to be specific. On corporate hospitality, it rather depends on the motive and the context and the timing and the value. You can’t just say, Wimbledon tickets are OK. They’ll say that you said, ‘Wimbledon tickets are all right.'”
- On the issue of criminal law enforcement as a funding source. “It is a good source of income, and as a matter of principle I see nothing wrong with prosecutors being in part funded by money taken from criminals. I am all for that.”
Matthew Jacobs, a former DOJ prosecutor who now heads the San Francisco offices of Vinson & Elkins LLP, stated as follows in a recent Law360 article (“FCPA Enforcement Will Stay Robust Beyond Obama’s 2nd Term”): “The Department of Justice has figured out that conducting investigations of corporations is a lucrative business. This is the one area of government activity that actually brings money in rather than shoots money out. We’re talking about literally billions of dollars that the government is able to collect … as long as there’s a budget issue it’s not too cynical to say that … generating revenue is a factor in bringing these cases.”
Matt Kelly at Compliance Week recently stated (here) as follows concerning the DOJ’s promise of upcoming FCPA guidance and the role of Assistant Attorney General Lanny Breuer. “We’d be foolish to ignore the profit motive, too [in addressing the why FCPA guidance now question]: Breuer will be in the private sector again soon enough, representing companies ensnared in FCPA probes. He’ll be able to command quite a premium if he can legitimately say, ‘I know how the Justice Department will interpret its FCPA guidance, because I wrote it. I don’t believe that career advancement is why Breuer is pushing for this guidance, but the fact remains that he stands to reap more money because of it.”
Brazil Developments
If Latin America is an area of your interest and concern, you should be reading the FCPAmericas blog (here) run by Matteson Ellis. This recent post tracks developments of Brazil’s draft bribery bill.
Interesting Read
See here for a write-up of an article examining the differences between a tip and a bribe. From the article. “It is generally considered a good-natured prosocial thing to tip, but bribing is considered to be antisocial and negative. […] Tips and bribes can possess striking similarities that may lead to their positive association. In a sense, both are gifts intended to strengthen social bonds and each is offered in conjunction with advantageous service. One could even argue that the main difference between the two acts is merely the timing of the gift: Tips follow the rendering of a service, whereas bribes precede it.”
*****
A good weekend to all.
The U.K. Moves One Step Closer To The “Facade” Of Enforcement
Prior posts here, here, here and here have tracked the desire of United Kingdom law enforcement agencies to import deferred prosecution agreements (DPAs). In response to the U.K. Ministry of Justice’s (“MoJ”) open consultation process, I submitted this letter suggesting that the MoJ should say no to DPAs in the Bribery Act context. Among other things, I noted that in its consultation paper, the MOJ relied upon several unfounded assertions when discussing use of DPAs in the U.S.
I also posed the following questions the MoJ should consider during its consultation process. “Why does a law with an adequate procedures defense require the third option of a deferred prosecution agreement (the first two options being prosecute vs. not prosecute)? If a corporate has adequate procedures, but an isolated act of bribery nevertheless occurs within its organization, the corporate presumably would not face prosecution under the Bribery Act. This seems like a just and reasonable result and there is no need for a third option in such a case. On the other hand, if a corporate does not have adequate procedures (thus demonstrating a lack of commitment to anti-bribery compliance) and an act of bribery occurs within its organization, it presumably would face prosecution under the Bribery Act. This seems like a just and reasonable result. Does a third option really need to be created for corporates who do not implement adequate procedures?”
Last week, the MOJ issued it consultation response (found here). Despite stating in the Executive Summary that its response “summarises the responses” received, no where in the response does the MoJ address the questions I posed.
The MoJ’s response makes much of the fact that “respondents overwhelmingly welcomed the proposals to create a new tool for prosecutors to tackle economic crime, with 86% of respondents agreeing that Deferred Prosecution Agreements have the potential to improve the way in which corporate economic crime is dealt with and would enable prosecutors to bring more cases to justice.”
This high percentage is hardly surprising. As indicated by Annex A of the MoJ consultation response, law firms were by far the largest category of the 75 respondents. In this regard, the MoJ’s response “poll” is like taking a poll of car dealers and car manufacturers asking them if they are in favor of new and unique ways to sell cars. Likewise, both the MoJ and law firms benefit from alternative resolution vehicles such as DPAs. However, the alternate reality that is DPAs harm other stakeholders and undermine the rule of law and justice. This is becoming increasingly clear in the U.S. and I predict will become clear as well in the U.K. with the passage of time.
The most revealing part of the MoJ’s consultation response concerns the “appropriate level of evidence that prosecutors would need in order to satisfy themselves that entering into a DPA would be appropriate. The response notes that there was disagreement as to whether the test for entering into a DPA should “be the same test as for bringing a prosecution (a “realistic prospect of conviction”) or whether a lower evidential threshold would suffice.”
The MoJ punts on this issue, yet implicitly endorses a lower evidential threshold. Its consultation response states as follows. “With regards to the evidential test, we consider that this should be included in the DPA Code of Practice for Prosecutors [yet more guidance that the MoJ says is forthcoming] and must set a sufficiently high threshold to establish a real threat of future prosecution for the other party. However, the exact contents of the DPA Code of Practice for Prosecutors will be a matter for those responsible for developing it.”
By endorsing a system whereby lower thresholds of proof will suffice to resolve a corporate “criminal” enforcement action, the U.K. has moved one step closer to a “facade” of enforcement.
In the concluding section of my 2010 article “The Facade of FCPA Enforcement” (here), I stated that among the reasons why the facade of FCPA enforcement matters is “the increasing frequency by which other nations are modeling enforcement of their own bribery laws on U.S. enforcement methods and theories.” I warned that a “global facade of enforcement” will follow unless these methods are corrected here in this country. These methods have not been corrected here at home. Indeed, as noted in this recent post, Assistant Attorney General Lanny Breuer recently defended the DOJ’s use of NPAs and DPAs. I have argued here, here and elsewhere that use of NPAs or DPAs in the FCPA context allow “under-prosecution” of egregious instance of corporate bribery while at the same time facilitate the “over-prosecution” of business conduct.
The global push for alternative resolution agreements I warned about in the “Facade of FCPA Enforcement” is just beginning. As noted in this recent Irish Times article, there is now discussion of importing these agreements into Irish law. And who can blame the Irish?
Alternative resolution vehicles allow law enforcement agencies to pad enforcement statistics creating the appearance that such “enforcement” actually accomplishes a worthy objective. How will Irish law enforcement authorities keep pace with the U.S. and (now the English) if it has fewer options? If its enforcement statistics are lower, the Irish will be shamed by civil society organizations and others (who appear to place a premium on quantity of enforcement vs. quality of enforcement).
As evidence that DPAs are a wanted device in this new “global arms race” (i.e. which country can bring the most bribery and corruption enforcement actions) the MoJ says that obtaining DPAs will be a “prize.” Specifically, the MoJ consultation response states as follows. “We will now forward legislative provisions to introduce DPAs in England and Wales in the Crime and Courts Bill, which is currently making its way through Parliament. The prize will be a more just and effective system for dealing with economic crime, where wrongdoers are identified and brought to justice as commonly as for other offences.” (emphasis added). Further to this issue, last week U.K. Solicitor General Oliver Heald stated (here) as follows. “DPAs will be a swifter, more nimble way to conduct enforcement.”
The global facade of enforcement is beginning to take hold. Does anyone else care?
*****
Even though this post has been critical of the MoJ for moving forward on DPAs, the following points remain relevant.
As highlighted in this previous post, the U.K. has rejected non-prosecution agreements – a resolution vehicle that has been used to resolve several FCPA enforcement actions. As also highlighted in the previous post, even though the U.K. is moving forward on DPAs, its proposed model is not the U.S. model. Rather, the U.K. model envisions judicial involvement in the DPA process from an early stage whereby the proposed DPA is considered by the judiciary at a preliminary hearing before it returns for final judicial approval.
Indeed, the U.K. Solicitor General recently stated (here) as follows. “We decided to build on the U.S. model by formulating proposals which ensure a greater level of judicial involvement, from an earlier stage, as well as greater levels of transparency in order to command the confidence of the public.”
Yawning At The SFO’s “Revised Policies”
Yesterday, the U.K. Serious Fraud Office (“SFO”) issued a release (here) announcing that it “has reviewed its policies on facilitation payments, business expenditure (hospitality) and corporate self-reporting.” According to the SFO, the purpose of the “revised policies” is to
- restate the SFO’s primary role as an investigator and prosecutor of serious or complex fraud, including corruption;
- ensure there is consistency with other prosecuting bodies; and
- meet certain OECD recommendations.
For the most part, although much ink is likely to be spilled by FCPA Inc. / Bribery Act Inc. in the coming days, the SFO’s “revised policies” are a yawner.
As to facilitation payments (here) and business expenditures (here), the SFO notes as follows. Whether or not the SFO will prosecute in respect of a facilitation payment or payments or in respect of a bribe presented as hospitality or some other business expenditure will be governed by the Full Code Test in the Code for Crown Prosecutors and the Joint Prosecution Guidance of the Director of the SFO and the Director of Public Prosecutions on the Bribery Act 2010.
The Full Code Test (see here at Section 4) is essentially a realistic prospect of conviction plus in the public interest standard for bringing prosecutions.
As to facilitation payments, the SFO stated that “facilitation payments were illegal before the Bribery Act came into force and they are illegal under the Bribery Act, regardless of their size or frequency.”
Treatment of facilitation payments under the Bribery Act has been analyzed to death since enactment of the Bribery Act, however I have yet to see any reference to a pre-Bribery Act prosecution even though such payments were illegal prior to the Bribery Act. That would seem to answer the public interest prong of the Full Code Test the SFO refers to regarding facilitation payments.
The Joint Prosecution Guidance of the Director of the SFO and the Director of Public Prosecutions on the Bribery Act 2010 (here) that the SFO refers to in its “revised policies,” and that it reaffirms, states as follows concerning facilitation payments and hospitality expenditures.
“Facilitation payments
Facilitation payments are unofficial payments made to public officials in order to secure or expedite the performance of a routine or necessary action. They are sometimes referred to as ‘speed’ or ‘grease’ payments. The payer of the facilitation payment usually already has a legal or other entitlement to the relevant action. There is no exemption in respect of facilitation payments. They were illegal under the previous legislation and the common law and remain so under the Act.
Public Interest Considerations
Prevention of bribery of foreign public officials is a significant policy aspect of the Act. In the context of facilitation payments, the following public interest factors tending in favour of and against prosecution may be relevant. A prosecution will usually take place unless the prosecutor is sure that there are public interest factors tending against prosecution which outweigh those tending in favour.
Factors tending in favour of prosecution:
- Large or repeated payments are more likely to attract a significant sentence;
- Facilitation payments that are planned for or accepted as part of a standard way of conducting business may indicate the offence was premeditated;
- Payments may indicate an element of active corruption of the official in the way the offence was committed;
- Where a commercial organisation has a clear and appropriate policy setting out procedures an individual should follow if facilitation payments are requested and these have not been correctly followed.
Factors tending against prosecution:
- A single small payment likely to result in only a nominal penalty;
- The payment(s) came to light as a result of a genuinely proactive approach involving self-reporting and remedial action;
- Where a commercial organisation has a clear and appropriate policy setting out procedures an individual should follow if facilitation payments are requested and these have been correctly followed;
- The payer was in a vulnerable position arising from the circumstances in which the payment was demanded.
Hospitality and promotional expenditure
Hospitality or promotional expenditure which is reasonable, proportionate and made in good faith is an established and important part of doing business. The Act does not seek to penalise such activity.
Hospitality and promotional expenditure could, however, form the basis of offences under s1 (bribing another person) or s6 (bribing a foreign public official) and constitute a bribe for the purpose of s7 (failure to prevent bribery). Under section 1 there must be an element of “improper performance”. Under section 6, it will be necessary to show that the provision of hospitality or promotional expenditure was intended to influence the foreign public official so as to obtain or retain business, or an advantage in the conduct of business.
The more lavish the hospitality or expenditure (beyond what may be reasonable standards in the particular circumstances) the greater the inference that it is intended to encourage or reward improper performance or influence an official. Lavishness is just one factor that may be taken into account in determining whether an offence has been committed. The full circumstances of each case would need to be considered. Other factors might include that the hospitality or expenditure was not clearly connected with legitimate business activity or was concealed.
Public Interest Considerations
Prevention of bribery of foreign public officials is a significant policy aspect of the Act. When considering the public interest stage, the factors tending in favour of and against prosecution referred to in respect of “active bribery” (section 1) are likely to be relevant. A prosecution will usually take place unless the prosecutor is sure that there are public interest factors tending against prosecution which outweigh those tending in favour.”
As noted in this March 2011 post, U.K. guidance on facilitation payments and hospitality expenditures pretty much aligns the Bribery Act and the FCPA despite the obvious statutory differences. I predicted in January 2011 (see here) that enforcement of the Bribery Act will be disciplined and measured and this belief is further strengthened by yesterday’s SFO release of its “revised policies.”
As the SFO indicates in this Q&A regarding its “revised policies,” the only change “is that reference in the joint prosecution guidance to the SFO’s former policy on self-reporting has been removed.” (See here for that policy which explained that “the benefit to the corporate [in self-reporting] will be the prospect (in appropriate cases) of a civil rather than a criminal outcome as well as the opportunity to manage, with us, the issues and any publicity proactively.”
The Joint Prosecution Guidance, which the SFO reaffirms in its “revised policies,” stated as follows regarding self-reporting.
“The SFO encourages corporate self-reporting, but offers no guarantee that a prosecution will not follow any such report.”
The remainder of the “revised policy” on self-reporting (here) states as follows.
“If on the evidence there is a realistic prospect of conviction, the SFO will prosecute if it is in the public interest to do so. The fact that a corporate body has reported itself will be a relevant consideration to the extent set out in the Guidance on Corporate Prosecutions. That Guidance explains that, for a self-report to be taken into consideration as a public interest factor tending against prosecution, it must form part of a “genuinely proactive approach adopted by the corporate management team when the offending is brought to their notice”. Self-reporting is no guarantee that a prosecution will not follow. Each case will turn on its own facts.”
There is nothing revolutionary about any of this.
It substantively aligns with the DOJ’s Principles of Prosecution of Business Organizations (here) which states that a company’s “timely and voluntary disclosure of wrongdoing and its willingness to cooperate in the investigation of its agents” is one factor the DOJ will consider in deciding whether to criminally charge a business organization.”
In short, although much ink is likely to be spilled in the coming days, the SFO’s revised policies are a yawner. Speaking of the ink, before the clock struck midnight on the SFO’s “revised policies” the industry was cranking out the marketing material.
This industry participant stated as follows regarding the “revised policies” and the DOJ’s promised forthcoming guidance. “Given this activity from government regulators, it is more important than ever that companies develop a meaningful compliance program that can be adapted if needed to meet changing government expectations. A successful compliance system must adequately educate employees and create a framework that can prevent violations before they occur. [Company] has the expertise to implement a truly functional FCPA or UK Bribery Act compliance program. We can help companies protect themselves in the face of strict enforcement of these laws and constantly changing government guidance.”
This industry participant stated as follows. “Given the new [Bribery] Act’s tough penalties and the apparent ambiguity surrounding the consequences of self-disclosure, businesses may want to take extra care to comply with its provisions. Accordingly, businesses should consider seeking the advice of legal counsel in navigating this statute and its attendant revisions.”
Friday Roundup
A focus on entertainment and calling out FCPA / Bribery Act Inc. and a recent disclosure from a company that is part of FCPA history. It’s all here in the (slimmer than normal) Friday roundup.
Recent Comments From The Director of the U.K. SFO
The briberyact.com previously mentioned here recent comments made by David Green (Director of the U.K. Serious Fraud Office) in a Daily Mail article (here) that “mainstream corporate entertaining” is of little concern to the SFO. Green states in the article as follows. “We are not interested in that sort of case. We are interested in hearing that a large company has mysteriously come second in bidding for a big contract. The sort of bribery we would be investigating would not be tickets to Wimbledon or bottles of champagne. We are not the ‘serious champagne office.'”
The same can not always be said of the DOJ or SEC. Although such seemingly minor corporate entertainment expenditures have never been the sole focus of an enforcement action, several enforcement actions have included such allegations. For instance, the UTStarcom enforcement action (see here for the prior post) contained allegations about a $600 bottle of wine. The Data Systems and Solutions enforcement action (see here for the prior post) contained allegations regarding a Cartier watch. The IBM enforcement action (see here for the prior post) contained allegations about a camera. The RAE Systems enforcement actions (see here for the prior post) contained allegations about kitchen appliances, business suits, and high-priced liquor. Numerous other examples abound. One must assume that the enforcement agencies included such allegations in the resolution documents for a reason, not just to fill up paper.
Alexandra Wrage (President of Trace International) noted the U.K. / U.S. irony in this recent piece for Corporate Counsel. “[W]hereas the U.S. law permits these expenditures [facilitation payments and reasonable entertainment expenses], within reason, and then enforces when companies overstep, the U.K. prohibits them, but assures the public that they won’t be prosecuted.”
Green’s comments to the Daily Mail were also notable for his calling out of FCPA (or as the case may be Bribery Act) Inc. The Daily Mail article notes as follows. “[Green] criticised American law firms that had taken advantage of the uncertainty. ‘It is in their interest to focus attention on the Bribery Act. They put up talking heads and arrange conferences. It is a huge industry.’” Green’s comments are similar to those noted in this prior post by Kenneth Clark (the U.K.’s anti-corruption champion) who stated, in the House of Commons, leading up to the Bribery Act as follows. “I hope to put out very clear guidance [regarding the Bribery Act] to save [businesses] from the fears that are sometimes aroused by the compliance industry, the consultants and lawyers who will, of course, try to persuade companies that millions of pounds must be spent on new systems that, in my opinion, no honest firm will require to comply with the Act.”
Harris Corp.
As previously noted in this Wall Street Journal Corruption Currents post, Harris Corporation disclosed as follows in its recent annual report.
“[I]n April 4, 2011, we completed the acquisition of Carefx and thereby also acquired its subsidiaries, including in China (“Carefx China”). The consolidated revenue of the Carefx China operations for fiscal 2012 was approximately $1.4 million, or less than 0.1% of our consolidated revenue. In connection with our integration activities and the subsequent audit of the financials of the Carefx China operations, we became aware that certain entertainment, travel and other expenses in connection with the Carefx China operations may have been incurred or recorded improperly. In response, with the concurrence of our Audit Committee, we initiated an internal investigation, with the assistance of outside legal counsel, to determine whether violations of the FCPA potentially occurred. In the course of our investigation, we learned that certain employees of the Carefx China operations had provided pre-paid gift cards and other gifts and payments to certain customers and potential customers. Although our investigation is not complete, we have already taken remedial actions related to the Carefx China operations, including changes to internal control procedures, termination of the gift-giving practice, additional compliance training and termination of the employment of certain individuals. The preliminary results of the investigation have been disclosed to our Audit Committee, Board of Directors and auditors, and we have also contacted the U.S. Department of Justice and the SEC to voluntarily disclose that we are conducting the investigation and to advise that it is our intent to fully cooperate with any investigation that they may conduct with respect to this matter. We cannot predict at this time any regulatory action that may be taken with respect to this matter or any other potential consequences that may result. However, based on the information available to date, we do not believe that this matter will have a material adverse effect on our financial condition, results of operations or cash flows.”
As noted in this previous post, Harris Corp. is part of FCPA history. It is believed to be the first, and to this day only, publicly traded company to have put the DOJ to its burden of proof at trial. As noted in the post, Harris Corp. prevailed in the enforcement action (1990-1991). I noted in the previous post as follows. If non-prosecution and deferred prosecution agreements existed in 1990, would Harris have resolved the enforcement action via such a resolution vehicle? Likely yes. Yet Harris and the individual defendants all prevailed at trial.
If the conduct Harris recently disclosed gives rise to an enforcement action, will Harris likewise this time around put the DOJ to its burden of proof? Even if it has valid legal and factual defenses, not a chance. NPAs and DPAs exist today and resolving FCPA inquiries is often more about cost-beneft / risk-reward, than law and facts.
*****
A good weekend to all.
Friday Roundup
Add two more companies to the list, a reply to a retort, Avon developments, Total S.A. perhaps nears a top-5 settlement, the reason for those empty Olympic seats, another FCPA-inspired derivative action is dismissed, Sensata Technologies and more on the meaning of “declination,” one of my favorite reads and additional material for the weekend reading stack. It’s all here in the Friday roundup.
Recent Disclosures
As noted in this Wall Street Journal Corruption Currents post “German healthcare firm Fresenius Medical Care AG has opened an internal investigation into potential violations” of the FCPA. The company’s recent SEC filing (here) states as follows.
“The Company has received communications alleging certain conduct that may violate the U.S. Foreign Corrupt Practices Act (“FCPA”) and other anti-bribery laws. In response to the allegations, the Audit and Corporate Governance Committee of the Company’s Supervisory Board is conducting an internal review with the assistance of counsel retained for such purpose. The Company has voluntarily advised the U.S. Securities and Exchange Commission and the U.S. Department of Justice that allegations have been made and of the Company’s internal review. The Company is fully committed to FCPA compliance. It cannot predict the outcome of its review.”
In addition, as noted in this Wall Street Journal Corruption Currents post, “the Securities and Exchange Commission is investigating Teva Pharmaceutical Industries Ltd, the world’s largest manufacturer of generic drugs, for possible violations” of the FCPA. The Israel based company recently stated in an SEC filing (here) as follows.
“Teva received a subpoena dated July 9, 2012 from the SEC to produce documents with respect to compliance with the Foreign Corrupt Practice Act (“FCPA”) in Latin America. Teva is cooperating with the government. Teva is also conducting a voluntary investigation into certain business practices which may have FCPA implications and has engaged independent counsel to assist in its investigation. These matters are in their early stages and no conclusion can be drawn at this time as to any likely outcomes.”
U.K. DPAs
In this previous post, I discussed my letter to the U.K. Ministry of Justice urging the MoJ to just say no to deferred prosecution agreements. Over at thebriberyact.com (a site that has lead discussion of the issue) the authors disagree with me (see here). That’s all fine and dandy and healthy to the discussion, but the substance of the retort is not persuasive.
The retort is basically that the SFO “frequently has to fight its corner in court” and that “sometimes it loses” whereas in the U.S. “the accepted wisdom [is] that an FCPA investigation would result in a corporate settlement” and the “DOJ simply [does] not have to test its legal theories in court.” In short, the authors state “statistically in the US corporates and their counsel often fold in the face of a DOJ investigation” but “in the UK this is not so.”
Contrary to the suggestion in the retort, I did not ignore the Bribery Act’s Section 7 offense – rather it is all the more reason to reject DPAs.
The retort closes as follows. “Sadly, as it stands, the UK enforcement agencies do not have equality of arms when it comes to their enforcement toolkit. Put another way the DOJ can end run UK enforcement agencies because it does have the potential to enter into DPA’s. This reason alone is justification enough for putting in place a system which delivers a similar result to the US system.”
This confirms in my mind that the UK’s desire for DPAs has little to do with justice and deterring improper conduct, but more to do with enforcement statistics and posturing in an emerging “global arms race” when it comes to “prosecuting” corruption and bribery offenses.
Avon Developments
Avon was in the news quite a bit this week.
On Monday, the Wall Street Journal reported (here) that “federal prosecutors looking into possible bribery of foreign officials by Avon have asked to speak to Andrea Jung, the former chief executive and current full-time chairman.”
On Wednesday, the company filed its quarterly report and stated, among other things, as follows. “We are in discussions with the SEC and DOJ regarding mutually resolving the government investigations. There can be no assurance that a settlement will be reached or, if a settlement is reached, the timing of any such settlement or that the terms of any such settlement would not have a material adverse effect on us.” During the Q2 earnings call, company CEO Sheri McCoy stated as follows. “We are in discussion with the SEC and DOJ regarding mutually resolving the government investigations.”
On Thursday, the Wall Street Journal reported (here) that McCoy “frustrated with the pace of Avon’s internal probe, has pushed to bring in a second law firm for advice on the progress of the investigation. The company has held discussions with law firm Allen & Overy LLP for that role.” Arnold & Porter has been leading Avon’s investigation. According to the article, Avon’s “probe has turned up millions of dollars of payments in Brazil and France made to consultants hired to assist with Avon’s tax bills in those countries.”
What to make of the above information?
It is unusual for the enforcement agencies to want to speak to a former CEO and current chairman in connection with an FCPA inquiry. But then again, prosecutors have reportedly spoken to several other Avon executives in connection with the probe. Given Avon’s disclosure that it has begun settlement discussions, this would suggest that the factual portion of the enforcement agencies investigation is over.
Avon’s FCPA scrutiny has perhaps been most notable for the amount of pre-enforcement action professional fees and expenses – approximately $280 million. Thus, yesterday’s report that the company is considering bringing in a second law firm nearly four years into the investigation is interesting and unusual.
Even though Avon has disclosed it is in settlement talks, an enforcement action in 2012 is not certain. In many cases, companies have disclosed the existence of FCPA settlement discussions, but the actual enforcement action did not happen for 6-12 months (or longer).
Whenever the enforcement action occurs, and whatever the ultimate fine and penalty is, Avon’s greatest financial hit has likely already occured – its pre-enforcement action professional fees and expenses. For instance, assuming a settlement amount would match the $280 million, this would be the sixth largest FCPA settlement of all time, and none of the enforcement actions in the top 5 were outside the context of foreign “government” procurement.
Total Settlement Near?
For some time, there has been speculation that Total S.A. (you better sit down for this) would actually mount a defense and put the DOJ and SEC to its burden of proof in an enforcement action. Information in a recent company press release suggests that this is unlikely to occur. In this recent release, Total stated as follows. “Total has been cooperating with the … SEC and DOJ in connection with an investigation concerning gas contracts awarded in Iran in the 1990’s. Total, the SEC, and the DOJ have conducted discussions to resolve issues arising from the investigation. In light of recent progess in these discussions, Total has provisioned 316 million euros [$389 million] in its accounts in the second quarter of 2012.”
A $389 million settlement would be a top five FCPA settlement in terms of fine and penalty amounts. For additional coverage, see here from Reuters.
Empty Olympic Seats
A reason, perhaps, for those empty Olympic seats? According to a recent study (see here) by the Society for Corporate Compliance and Ethics “tighter than anticipated corporate entertainment and gift policies.”
Smith & Wesson Derivative Action Dismissed
Even against the backdrop of generally frivolous plaintiff derivative claims in the FCPA context, the action against Smith & Wesson (“S&W”) stood out. After S&W employee Amaro Goncalves was criminally indicted in the manufactured Africa Sting case, certain investors filed a derivative claim in U.S. District Court in Massachusetts suing members of the board of S&W and company officers derivatively on behalf of the corporation for failing to have effective FCPA controls and oversight, thereby breaching their duty of care.
In dismissing the complaint (see here for the decision) Judge Michael Ponsor characterized the complaint as follows. “[I]n essence, that the company enjoyed an increase in international sales and then had an employee indicted for FCPA violations. This indictment, later dropped, supposedly evidenced a failure to implement proper controls.”
For another recent dismissal of an FCPA inspired derivative claim against Tidewater, see this prior post. See also this recent post from Kevin LaCroix at The D&O Diary blog.
Sensata Technologies
In October 2010, Sensata Technologies disclosed in a quarterly report (here) as follows.
“An internal investigation has been conducted under the direction of the Audit Committee of the Company’s Board of Directors to determine whether any laws, including the Foreign Corrupt Practices Act (“FCPA”), may have been violated in connection with a certain business relationship entered into by one of the Company’s operating subsidiaries involving business in China. The Company believes the amount of payments and the business involved was immaterial. The Company discontinued the specific business relationship and its investigation has not identified any other suspect transactions. The Company has contacted the United States Department of Justice and the Securities and Exchange Commission to begin the process of making a voluntary disclosure of the possible violations, the investigation, and the initial findings. The Company will cooperate fully with their review.”
In its most recent quarterly report (here), the company disclosed as follows.
“During 2012, the DOJ informed us that it has closed its inquiry into the matter but indicated that it could reopen its inquiry in the future in the event it were to receive additional information or evidence. We have not received an update from the SEC concerning the status of its inquiry.”
Did Sensata “win a declination” as the FCPA Blog suggested here?
Since August 2010 (see here for the prior post) I have proposed that when a company voluntarily discloses an FCPA internal investigation to the DOJ and the SEC, and when the DOJ and/or SEC decline enforcement, the DOJ and/or the SEC should publicly state, in a thorough and transparent manner, the facts the company disclosed to the agencies and why the agencies declined enforcement on those facts.
Perhaps then we would know if the DOJ concluded it could prove beyond a reasonable doubt all the necessary elements of an FCPA charge, yet decided not to pursue Sensata – which is my definition of declination as noted in this prior post. Anything else, is what the law commands, not a declination.
Favorite Read
One of my favorite reads is always Shearman & Sterling’s “Recent Trends and Patterns in the Enforcement of the Foreign Corrupt Practices Act.” See here for the most recent edition.
As to “foreign official,” the report states as follows. “[T]he government does not appear to have been deterred by the [foreign official] debate. In most of the cases brought in 2012, the relevant government officials were employed by “instrumentalities” such as state health insurance plans (Orthofix), a state-owned nuclear plant (Data Systems & Solutions), government hospitals (Biomet and Smith & Nephew), a state-owned real estate development company (Peterson) a state-owned oil company (Marubeni), and state-owned airlines (NORDAM).”
As to FCPA guidance, the report states as follows. “We understand that this guidance will be issued before October, when the US is scheduled to issue a written progress report on its implementation of the OECD Working Group on Bribery’s recommendations.”
A final kudos – Shearman & Sterling keeps its FCPA enforcement statistics the best way. As it explains – “we count all actions against a corporate “family” as one action. Thus, if the DOJ charges a subsidiary and the SEC charges a parent issuer, that counts as one action.” This is consistent with my “core” approach (see here), but unlike many others in the industry.
Weekend Reading Stack
An interesting and informative article (here) in Fortune about the Alba-Alcoa tussle and the role of Victor Dahdaleh. For more on the underlying civil suit between Alba and Alcoa see this recent Wall Street Journal Corruption Currents post.
SOX’s executive certification requirements were supposed to be a panacea for corporate fraud. It has not happened. See here from Alison Frankel (Reuters) and here from Michael Rapoport (Wall Street Journal). As noted in this prior post concerning the Paul Jennings (former CFO and CEO of Innospec) enforcement action, SOX certification charges were among the charges the SEC filed against Jennings. Then SEC FCPA Unit Chief Cheryl Scarboro stated, “we will vigorously hold accountable those who approve such bribery and who sign false SOX certifications and other documents to cover up the wrongdoing.” Speaking of Jennings, as noted in this recent U.K. Serious Fraud Office, Jennings recently pleaded guilty to one charge of conspiracy to corrupt Iraqi public officials and other agents of the Government of Iraq.
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A good weekend to all.