Wal-Mart Discloses FCPA Compliance Enhancements
Last week Wal-Mart released this Global Compliance Program Report on FY 2014.
The report covered a number of topics including Foreign Corrupt Practices Act and related anti-corruption matters. As previously disclosed (see here for the prior post), Wal-Mart details that in FY 2014 it has spent in excess of “$109 million on enhancements to its global anti-corruption compliance program and financial controls.”
This significant investment in FCPA compliance should be relevant as a matter of law in the future if a non-executive employee or agent acts contrary to Wal-Mart’s policies and procedures and in violation of the FCPA. (See my article “Revisiting a Foreign Corrupt Practices Act Compliance Defense“).
Compliance defense detractors say that such a defense will promote “check-a-box compliance” and a “race to the bottom.”
There is nothing “check-a-box” about spending $109 million on FCPA compliance enhancements in one year nor can one credibly argue that if other companies follow Wal-Mart’s enhancements and approach that this is a “race to the bottom.”
The key policy issue is this.
Wal-Mart has engaged in FCPA compliance enhancements in reaction to its high-profile FCPA scrutiny.
Perhaps if there was a compliance defense more companies would be incentivized to engage in compliance enhancements pro-actively.
A compliance defense is thus not a “race to the bottom” it is a “race to the top” (see here for the prior post) and it is surprising how compliance defense detractors are unable or incapable of grasping this point.
In pertinent part, the Wal-Mart report provides:
“People
“[C]ompliance with the Foreign Corrupt Practices Act (FCPA) and other anti-corruption laws remained a key priority for the company. Walmart hired a number of anti-corruption directors and other anti-corruption staff in both its global headquarters and in its International retail markets during the year. The anti-corruption director for each market reports to a dedicated anti-corruption team in Walmart’s Home Office in Bentonville, Arkansas, which is led by the company’s Global Anti-Corruption Compliance Officer. Collectively, this global team is charged with conducting due diligence, developing and providing anti-corruption training, and overseeing the implementation of the company’s anti-corruption policies and procedures throughout the world.
To ensure that Walmart has an effective anti-corruption compliance program, the company continued to work closely with external anti-corruption compliance experts to continue reviewing, assessing and developing its anti-corruption program during the year. In total in Fiscal 2014, the company has spent in excess of $109 million on enhancements to its global anti-corruption compliance program and financial controls. With the addition of new anti-corruption resources, the company transitioned some anti-corruption compliance work from external consultants to internal staff during Fiscal 2014. This effort is critical to promoting the long-term sustainability and capability of the company’s anti-corruption compliance team.
Second, the company added personnel to the compliance program in its International division both through internal transfers of existing associates and through new hires. Notably, by the end of Fiscal 2014 the company had appointed 10 market-level CCOs in the International division to build and lead the compliance teams in the company’s retail markets. The company also appointed regional CCOs to lead and support the compliance organization within three international regions—LatAm (Argentina, Brazil, Central America, Chile, Mexico), Asia (China, India, Japan), and EMEA (Africa, Canada, U.K.).
[…]
Fifth, in Fiscal 2014 the company began the process of planning for and appointing teams of compliance monitors in all of its International retail markets. These monitors are known as Continuous Improvement Teams because of their mission to regularly review the company’s retail operations and assist the business in maintaining compliance with local laws and policies. In this respect, these international teams are intended to implement best practices that the company has learned in its U.S. retail operations, where similar compliance monitoring teams have functioned for several years.”
[…]
Improved Training
Anti-corruption remains a key focus for compliance training in all markets. Walmart’s anti-corruption training is designed to develop awareness and understanding of the relevant standards of conduct for associates and agents who interact directly or indirectly with government officials on the company’s behalf, among other topics. The training teaches the principles and processes embodied in the company’s Global Anti-Corruption Policy and anti-corruption procedures.
Between December 2011 and January 2014, the company delivered anti-corruption training to more than 100,000 attendees from all levels of the company around the world, including key senior executives and officers who interact directly or indirectly with government officials. This training was conducted in the local language where appropriate. This training was delivered in a number of ways, including via a computer-based learning module to provide consistent and effective anti-corruption training to a broader audience of more than 45,000 associates; in-person procedure and practical scenario training to more than 16,000 associates; in-person general FCPA awareness training in all markets to over 15,000 associates and ad hoc, and risk-based market-specific training to over 28,000 associates. In addition to training its own associates, Walmart has begun to provide training to certain third-party intermediaries and business partners.
The anti-corruption training provided over the last two years provides a solid foundation for an ongoing training regimen. The company will continue providing anti-corruption training in the fiscal year ending January 31, 2015 (“Fiscal 2015”) with the launch of an enhanced global anti-corruption training and communication program. This program was created in Fiscal 2014 to further define risk-based target audiences and design both global and market-specific training and communication plans and requirements.”
[…]
Policies and Processes
“Walmart’s Global Anti-Corruption Policy is part of the foundation for the company’s anti-corruption compliance program. Consistent with anti-corruption laws around the world, Walmart’s Global Anti-Corruption Policy prohibits anyone acting on behalf of the company from offering, giving or receiving anything of value to or from any person, including any government official, in order to improperly influence any act or decision or to otherwise gain an improper benefit for the company. The Global Anti-Corruption Policy prohibits “facilitating payments” and also clarifies that any associate or third party who violates the policy will be subject to disciplinary measures up to and including termination and, where appropriate, referral of the matter to relevant law enforcement authorities.
In Fiscal 2014, Walmart continued to develop and enhance its market-specific anti-corruption procedures tied to this global policy. Among other issues, these enhancements related to:
- Assessments of anti-corruption compliance risks;
- Due diligence on third parties who interact with government officials;
- Processes and anti-corruption-related contractual provisions for engaging third parties and business partners;
- Business expenditures (e.g., meals, travel, entertainment, and gifts) involving government officials;
- Charitable contributions and donations;
- Acquisition or lease of property from government officials and agencies
- Government inspections and any associated fines or penalties;
- Memberships and sponsorships;
- Training;
- Record-keeping; and
- Reporting and investigating allegations of violations relating to integrity.
Over the year, Walmart also continued to evaluate and improve the financial controls in its International retail markets using a team of internal personnel and external consultants. For example, during the year the company installed or amended financial controls for non-merchandise disbursements, employee expense reimbursements, and the sale of gift cards. To increase global and market-level knowledge of the company’s financial controls, the company established corporate-level and in-market communications tools that reported on the progress of the financial control enhancement project. Walmart also improved its in-market and corporate monitoring and reporting, including key control reporting, self-assessments, and certifications, to evaluate the effectiveness of its enhanced financial controls.
As Walmart’s business grows and the risk landscape changes, the company will continue to assess and improve its financial controls and global anti-corruption program.”
[…]
Systems
A. Third-Party Due Diligence
Third parties who interact with the government (including agents, consultants, and distributors) (collectively “TPIs”) could present potential compliance risks to international businesses. In Fiscal 2014 Walmart implemented a technology solution across all the company’s international retail markets to screen TPIs for anti-corruption and other compliance risks by collecting information on TPIs and comparing it with information from various databases. These databases help to expose some potential relationships between TPIs and foreign governments, identify whether the TPI has been subjected to certain government sanctions, and reveal adverse media stories about the TPI. The company also provided relevant associates in each market’s anti-corruption team with in-person training on the use of the tool.
B. Licenses and Permits
To systematize tracking of the company’s licenses and permits, the company selected a technology tool to manage licenses and permits in all markets and began the initial rollout of this system in four retail markets.
C. Compliance Monitoring
The company also began deploying an electronic tool for capturing monitoring data and tracking remediation of compliance issues identified by the company’s compliance monitors. The initial phase of the tool was installed in all of Walmart’s International retail markets, with a plan to deploy additional functionality in Fiscal 2015.”
Friday Roundup
FCPA scrutiny equals a raise, Qualcomm declines to cave, scrutiny alerts, industry specific risks, survey says, gaps in the narrative, a pulse on FCPA Inc., quotable and not quotable, and for the reading stack. It’s all here in the Friday Roundup
FCPA Scrutiny Equals A Raise
There are some things that happen in the FCPA space that cause one to scratch their head.
Such as a company being under FCPA scrutiny paying audit committee members more money because of the time devoted to the FCPA scrutiny. In its recent proxy statement, Wal-Mart disclosed as follows.
“Since November 2011, the Audit Committee has been conducting an internal investigation into, among other things, alleged violations of the U.S. Foreign Corrupt Practices Act of 1977 (the “FCPA”) and other alleged crimes or misconduct in connection with foreign subsidiaries, and whether prior allegations of such violations and/or misconduct were appropriately handled by Walmart. The Audit Committee and Walmart have engaged outside counsel from a number of law firms and other advisors who are assisting in the ongoing investigation of these matters. This investigation has resulted in a significant increase in the workload of the Audit Committee members since the commencement of this investigation, and during fiscal 2014, the Audit Committee conducted 13 additional meetings related to the investigation and compliance matters, and Audit Committee members received frequent updates via conference calls and other means of communication with outside counsel and other advisors related to the investigation. As it had done in November 2012 in recognition of the significantly increased commitment of time required of the Audit Committee to conduct this investigation, in November 2013, the CNGC (Compensation, Nomination, and Governance Committee) and the Board approved an additional annual fee in the amount of $75,000 payable to each Audit Committee member other than the Audit Committee Chair for fiscal 2014, and an additional annual fee in the amount of $100,000 payable to the Audit Committee Chair for fiscal 2014. These amounts were prorated for directors who served on the Audit Committee during a portion of fiscal 2014. The CNGC determined the amounts of these additional fees based on (1) the CNGC’s and the Board’s review of the significant additional time and effort that had been required of the Audit Committee members during the previous Board term in connection with these matters, which were in addition to the time spent by the Audit Committee with respect to the Audit Committee’s other duties and its regularly scheduled meetings, and (2) the expectation that the Audit Committee members would continue to expend approximately the same amount of time and effort in discharging their responsibilities as Audit Committee members at least through the remainder of fiscal 2014.”
Qualcomm Declines to Cave
Rare are so-called Wells Notices in the FCPA context for the simple reason that few issuers actually publicly push back against the SEC. Thus, the below disclosure by Qualcomm earlier this week stands out:
“Securities and Exchange Commission (SEC) Formal Order of Private Investigation and Department of Justice Investigation : On September 8, 2010, the Company was notified by the SEC’s Los Angeles Regional office of a formal order of private investigation. The Company understands that the investigation arose from a “whistleblower’s” allegations made in December 2009 to the audit committee of the Company’s Board of Directors and to the SEC. In 2010, the audit committee completed an internal review of the allegations with the assistance of independent counsel and independent forensic accountants. This internal review into the whistleblower’s allegations and related accounting practices did not identify any errors in the Company’s financial statements. On January 27, 2012, the Company learned that the U.S. Attorney’s Office for the Southern District of California/Department of Justice (collectively, DOJ) had begun an investigation regarding the Company’s compliance with the Foreign Corrupt Practices Act (FCPA). As previously disclosed, the audit committee conducted an internal review of the Company’s compliance with the FCPA and its related policies and procedures with the assistance of independent counsel and independent forensic accountants. The audit committee has completed this comprehensive review, made findings consistent with the Company’s findings described below and suggested enhancements to the Company’s overall FCPA compliance program. In part as a result of the audit committee’s review, the Company has made and continues to make enhancements to its FCPA compliance program, including implementation of the audit committee’s recommendations.
As previously disclosed, the Company discovered, and as a part of its cooperation with these investigations informed the SEC and the DOJ of, instances in which special hiring consideration, gifts or other benefits (collectively, benefits) were provided to several individuals associated with Chinese state-owned companies or agencies. Based on the facts currently known, the Company believes the aggregate monetary value of the benefits in question to be less than $250,000, excluding employment compensation.
On March 13, 2014, the Company received a Wells Notice from the SEC’s Los Angeles Regional Office indicating that the staff has made a preliminary determination to recommend that the SEC file an enforcement action against the Company for violations of the anti-bribery, books and records and internal control provisions of the FCPA. The bribery allegations relate to benefits offered or provided to individuals associated with Chinese state-owned companies or agencies. The Wells Notice indicated that the recommendation could involve a civil injunctive action and could seek remedies that include disgorgement of profits, the retention of an independent compliance monitor to review the Company’s FCPA policies and procedures, an injunction, civil monetary penalties and prejudgment interest.
A Wells Notice is not a formal allegation or finding by the SEC of wrongdoing or violation of law. Rather, the purpose of a Wells Notice is to give the recipient an opportunity to make a “Wells submission” setting forth reasons why the proposed enforcement action should not be filed and/or bringing additional facts to the SEC’s attention before any decision is made by the SEC as to whether to commence a proceeding. On April 4, 2014, the Company made a Wells submission to the staff of the Los Angeles Regional Office explaining why the Company believes it has not violated the FCPA and therefore enforcement action is not warranted.
The Company is continuing to cooperate with the SEC and the DOJ, but is unable to predict the outcome of their investigations or any action that the SEC may decide to file.”
Needless to say, this instance of FCPA scrutiny will be interesting to follow.
Scrutiny Alerts
Hiring Probes Expand
Reuters reports here:
“U.S. government agencies that have been probing banks’ hiring of children of powerful Chinese officials are expanding existing investigations in other industries across Asia to include hiring practices …The U.S. Justice Department and the Securities and Exchange Commission have been asking global companies in a range of industries including oil and gas, telecommunications and consumer products for information about their hiring practices to determine if they could amount to bribery …”.
For more on JPMorgan’s FCPA scrutiny which got this started, see here. For more on so-called industry sweeps, see here.
Delphi Automotive
Delphi Automotive disclosed in it most recent SEC quarterly filing as follows:
“During the first quarter of 2014, Delphi identified certain potentially improper payments, made by certain manufacturing facility employees in China, that may violate certain provisions of the U.S. Foreign Corrupt Practices Act (the “FCPA”). Under the oversight of Delphi’s Audit Committee of the Board of Directors, Delphi has engaged outside counsel to assist in the review of these matters, and to evaluate existing controls and compliance policies and procedures. This review remains ongoing. Violations of the FCPA could result in criminal and/or civil liabilities and other forms of penalties or sanctions. Delphi has voluntarily disclosed these matters to the U.S. Department of Justice and the SEC, and is cooperating fully with these agencies. Although Delphi does not expect the outcome of this review to have a material adverse impact on the Company, there can be no assurance as to the ultimate outcome of these matters at this time.”
United Technologies
United Technologies disclosed in its most recent SEC quarterly filing as follows:
“Non-Employee Sales Representative Investigation
In December 2013 and January 2014, UTC made voluntary disclosures to the United States Department of Justice, the Securities and Exchange Commission Division of Enforcement and the United Kingdom’s Serious Fraud Office to report the status of its internal investigation regarding a non-employee sales representative retained by United Technologies International Operations, Inc. (UTIO) and International Aero Engines (IAE) for the sale of Pratt & Whitney and IAE engines and aftermarket services, respectively, in China. On April 7, 2014, the SEC notified UTC that it is conducting a formal investigation and issued a subpoena to UTC seeking production of documents related to the disclosures. UTC is cooperating fully with the investigation. Because the investigation is at an early stage, we cannot predict its outcome or the consequences thereof at this time. At the outset of the internal investigation, UTIO and IAE suspended all commission payments to the sales representative, and UTIO and IAE have not resumed making any payments. This led to two claims by the sales representative for unpaid commissions: a civil lawsuit filed
against UTIO and UTC and an arbitration claim against IAE. We are contesting the lawsuit and the arbitration claim. We do not believe that the resolution of the lawsuit or the arbitration will have a material adverse effect on our competitive position, results of operations, cash flows or financial condition.”
Industry Specific Risk
The reasons why companies become the subject of FCPA scrutiny are often unique to the industry the company is in. This is why FCPA compliance is best tailored to a company’s unique risk profile as informed by a risk assessment.
This recent Wall Street Journal Risk & Compliance post from the Dow Jones Global Compliance Symposium is informative in collecting industry insight.
“Technology. Melissa Lea, Chief Global Compliance Officer, SAP AG. Profit margins for distributors are flexible in tech as so much of the cost is related to labor. And that flexibility offers room for partners to try to pad expenses to pay bribes. “Any time you hear about flexibility it opens the door for corruption,” said Ms. Lea, who noted that authorities have recently cracked down on bribery in the technology sector, once thought to be amongst the cleanest industries.
Pharmaceuticals. Rady A. Johnson, Chief Compliance & Risk Officer, Pfizer Inc. Drug companies pay doctors for a variety of consulting services and often invite them to attend events to promote their products. But since it’s these same doctors that prescribe drugs, pharmaceutical companies need to ensure that fancy conferences and payments for services are not cover for bribes. “We can’t do our job without interacting with health care professionals,” Mr. Johnson said. But companies need to ensure those interactions are appropriate and well defined, he said. In 2012, Pfizer agreed to pay more than $60 million to settle investigations into improper payments made to doctors and foreign officials.
Banks. W.C. Turner Herbert, Director of Anti-Corruption, Bank of America Corp. Lately in the banking sector, corruption concerns have centered on hiring the relatives of foreign officials in exchange for business. In the past few years, U.S. authorities have investigated a number of banks over allegations of the practice, including Goldman Sachs Group Inc. and J.P. Morgan Chase & Co. “Its a new area of enforcement without much precedence,” Mr. Herbert said. While hiring well-connected people shouldn’t, by itself, be a red flag, compliance officers need to ensure the selection is done on “merit and the business objectives” of the job, he said. “What draws red flags is if he’s not qualified,” Mr. Herbert said.
Survey Says
In connection with the above-mentioned Dow Jones Global Compliance Symposium, Dow Jones released this “Anti-Corruption Survey Results 2014.” The survey was conducted on-line “among compliance professionals worldwide” and 383 responses “were completed among companies with anti-corruption programs.” It is difficult to assess survey results without knowing the precise questions asked, but the Dow Jones survey does contain some interesting nuggets.
Such as “approximately 30% of companies spend $1 million or more on anti-corruption staff and policies.”
In “Revisiting a Foreign Corrupt Practices Act Compliance Defense,” I suggest that the current FCPA enforcement environment does not adequately recognize a company’s good faith commitment to FCPA compliance and does not provide good corporate citizens a sufficient return on their compliance investments.
Compliance defense opponents (such as the DOJ) like to point out that such a defense will result in “paper compliance” and “check-a-box” exercises. Such clichés, however, ignore the reality of the situation – this many companies are making substantial investments of time and money in pro-active compliance policies and procedures.
One irony of course is that several former DOJ FCPA enforcement attorneys who have criticized a compliance defense as resulting in “paper compliance” and “check-a-box” exercises now devote a substantial portion of their private practice advising companies on FCPA compliance.
Gaps in the Narrative
You know the narrative.
In 2002, an accounting partnership (Arthur Anderson) was convicted of obstruction of justice for shredding documents related to its audit of Enron. Even though the Supreme Court ultimately tossed the conviction, Arthur Anderson essentially went out of business. Because of this, in the minds of some, the DOJ can’t criminally charge business organizations with crimes and thus the DOJ has crafted alternative resolution vehicles such as non-prosecution and deferred prosecution agreements to avoid the perceived collateral consequences of a criminal indictment or conviction.
Never mind that the narrative is based on a false premise. (See here for the guest post and article by Gabriel Markoff titled “Arthur Anderson and the Myth of the Corporate Death Penalty).
Nevertheless, the narrative persists and is accepted by some as gospel truth.
However, perhaps you have heard that in early April Pacific Gas & Electric Corporation (PG&E – a public company) was criminally charged with multiple violations of the Natural Gas Pipeline Safety Act.
The company’s stock is still trading (in fact it is up since the criminal charges were announced), it is still employing people, and it is still operating its business.
Recognizing the fallacy of the narrative is important for corporate leaders of businesses subject to DOJ scrutiny in the FCPA context or otherwise. Defenses can be mounted and the DOJ can and should be put to its burden of proof more often.
A Pulse on FCPA Inc.
Law360 highlights “Four Practices Areas Generating Big Billable Hours.” As to the FCPA the article notes:
“The Foreign Corrupt Practices Act, which mandates certain accounting transparency requirements and gives the U.S. government the power to pursue businesses that bribe foreign officials, is creating long workdays for attorneys throughout the world. “If Foreign Corrupt Practices Act were a stock, I wish I would have held it,” said William Devaney, co-chair of Venable LLP’s FCPA and anti-corruption practice group. “We’ve seen huge growth in the practice area since 2004, and with the government’s current focus on FCPA, it’s safe to say anti-corruption enforcement will be around for a long time.” After the FCPA was amended in 1998 to include additional anti-bribery provisions, the U.S. government began actively applying the FCPA to not only large companies but also their smaller counterparts. As a result, Devaney says, a lot of midmarket and smaller companies are now coming into the FCPA compliance fold after acknowledging their obligations under the law, resulting in a surge in demand.
And according to Aaron G. Murphy, a partner with Akin Gump Strauss Hauer & Feld LLP, foreign countries passing legislation similar to the FCPA will create an explosion of fraud investigations that begin abroad but later will involve the U.S. Department of Justice. Murphy said the FCPA stood as one of the lone anti-corruption laws in the world for 20 years, then in the mid-1990s, numerous foreign governments adopted similar rules to punish local and international corruption. “No politician has ever been elected on a ‘get softer on corruption’ ticket,” Murphy said. “If anti-corruption laws get modified, they will probably get stronger, not weaker. So we likely won’t see, 20 years from now, attorneys reminiscing about when companies had to deal with corruption laws. This practice area is here to stay.”
That the FCPA practice is here to stay is all the more reason to elevate your FCPA knowledge and practical skills at the FCPA Institute.
The three other practice areas highlighted in the article were: export controls and trade sanctions; civil false claims act; and patent litigation and patent trolls.
Quotable
The White House recently announced that President Obama named Kirkland & Ellis partner W. Neil Eggleston to be White House Counsel (see here). FCPA Professor has highlighted in the past (see here and here) certain of Eggleston’s spot-on comments regarding the FCPA or related issues.
In this interview Eggleston stated: “I worry that [NPAs and DPAs] will become a substitute for a prosecutor deciding – this is not an appropriate case to bring – there is no reason to subject this corporation to corporate criminal liability. In the old days, they would have dropped the case. Now, they have the back up of seeking a deferred or non prosecution agreement, when in fact the case should not have been pursued at all. That’s what I’m worried about – an easy out.”
In another interview, Eggleston was asked “what is an important issue or case relevant to your practice area and why” and stated: “We are beginning to see the development of case law in the FCPA area, which I believe is good for the process. Most of these cases have been settled. When that occurs, defendants have little incentive to refuse to agree to novel Department of Justice theories of prosecution or jurisdiction, so long as the penalty is acceptable. The department then cites its prior settlement as precedent when settling later ones. But no court approved the earlier settlement, and the prior settlement should have no precedential value in favor of the DOJ in later settlements. As the DOJ increases its prosecution of individuals, we will see many more trials, which will give rise to courts, not the DOJ, interpreting the statute.”
Not Quotable
DOJ Deputy Attorney General James Cole was a keynote speaker earlier this week at the Dow Jones Global Compliance Symposium. According to the event agenda, the title was “What the Justice Department Has in Its Sights” and described as follows.
“From foreign bribery to insider trading, the U.S. Department of Justice has been at the forefront of rigorous enforcement that has forced companies to treat compliance seriously. We interview James Cole, deputy attorney general, about where the department is focusing its efforts now.”
I reached out to the DOJ Press Office for a transcript of Mr. Cole’s remarks and was told “we don’t have one.”
It is unfortunate that public officials speak about matters of public interest at private conferences that charge thousands of dollars to attend.
Reading Stack
The FCPA Guidance was sort of interesting to read, but as noted in my article “Grading the FCPA Guidance” it lacks any legal authority or effect. A hat tip to the Tax Law Prof Blog for highlighting a recent U.S. Tax Court decision finding that IRS Guidance is “not binding precedent” nor “substantial authority” for a tax position.
The New York Times here goes in-depth on Dmitry Firtash, the Ukrainian businessman recently criminally charged in connection with an alleged bribery scheme involving Indian licenses (see here for the prior post).
An informative three-part series (here, here and here) by Tom Fox (FCPA Compliance & Ethics Blog) regarding gifts, travel and entertainment.
Miller & Chevalier’s FCPA Spring 2014 Review is here.
Wal-Mart Two Years Later
Two years ago this week, the New York Times ran a major story (here) titled “Vast Mexico Bribery Case Hushed Up by Wal-Mart After Top-Level Struggle.”
The conduct at issue in the Times article related to Wal-Mart’s largest foreign subsidiary, Wal-Mart de Mexico (“Wal-Mart Mexico), and suggested that Wal-Mart Mexico “orchestrated a campaign of bribery to win market dominance” and that the entity “paid bribes to obtain permits in virtually every corner” of Mexico.
The April 2012 NY Times article resulted in intense world-wide media scrutiny of Wal-Mart. However, it was known months before the NY Times article that Wal-Mart was under FCPA scrutiny. (See here for the December 2011 post highlighting Wal-Mart’s FCPA disclosure). Thus, this week is a false two year anniversary of Wal-Mart’s FCPA scrutiny, but a meaningful anniversary nevertheless.
Two years ago this week, in response to the NY Times article, Wal-Mart’s stock dropped approximately 8%. However, savvy investors should have recognized the NY Times induced dip as a buying opportunity because the market often overreacts (perhaps because of the plethora of suspect FCPA enforcement information in the public domain). For instance, the last trading day before the NY Times April article, Wal-Mart stock closed at $62.45. Last Friday, Wal-Mart stock closed at $77.66 (relatively unchanged from a year ago when the stock closed at $78.29 on the one year anniversary)
A December 2012 front-page NY Times article (see here for the prior post) added additional details to the previous April 2012, but did not change much from an FCPA perspective.
In the two years since the original NY Times article, Wal-Mart’s FCPA scrutiny has followed a fairly typical pattern. Wal-Mart’s internal review has expanded beyond Mexico, civil shareholder suits and derivative claims have been filed, Wal-Mart has engaged in various remedial measures, and the company’s pre-enforcement action professional fees and expenses have skyrocketed.
As highlighted in this recent post, in FY 2014 Wal-Mart spent approximately $1.1 million per working day on FCPA issues. Total pre-enforcement action professional fees and expenses already disclosed plus estimates for the current fiscal year amount to approximately $659 million. As noted here, Wal-Mart’s FCPA scrutiny has, in many respects, turned into a full employment act for FCPA Inc.
As highlighted here, some are aghast at the mere mention of Wal-Mart’s high pre-enforcement action professional fees and expenses. Wal-Mart is a big company and “will survive its FCPA spending spree” plus it is “playing catch up for a decade of what appears to be FCPA neglect” is the response of some.
Such statement wholly ignores other aspects of the New York Times reporting.
Indeed, the conduct described in the NY Times articles was unremarkable from a Foreign Corrupt Practices Act perspective – a view I have consistently held since April 2012 (see here for a prior post and here for my article “Foreign Corrupt Practices Act Enforcement As Seen Through Wal-Mart’s Potential Exposure.”
The unremarkable portion of the NY Times articles is that a foreign subsidiary of a major multi-national company operating in an FCPA high-risk jurisdiction allegedly made payments to “foreign officials” to facilitate or grease the issuance of certain licenses or permits. Even according to the NY Times, Wal-Mart’s subsidiary in Mexico “had taken steps to conceal [the payments] from Wal-Mart’s headquarters in Bentonville, Ark.” and Wal-Mart Mexico’s chief auditor altered reports sent to Bentonville discussing various problematic payments.
A November 2012 NY Times article (here) by David Barstow (the same author as the April 2012 and December 2012 articles) rightly noted that Wal-Mart’s investigation “was uncovering the kinds of problems and oversights that plague many global corporations.” It was perhaps the most insightful thing the NY Times has said about Wal-Mart’s FCPA scrutiny, yet the November 2012 article received scant attention compared to the other two articles.
It is also interesting to ponder the salient question of whether the payments at issue in Wal-Mart, which are outside the context of procurement, actually violate the FCPA (and here, as in many cases, there is an important distinction between the law Congress passed and DOJ/SEC enforcement theories). For instance, as noted in this prior post and in my above article, the government has an overall losing record in non-procurement type cases when actually put to its burden of proof. However, as we all know, this will matter very little when it comes to any resolution of Wal-Mart’s scrutiny.
For all of the above reasons, I do not believe that Wal-Mart’s scrutiny “will test FCPA enforcement in new ways” as some have suggested. Nor should it.
FCPA enforcement ought not be influenced merely by the fact that a talented journalist at a leading newspaper has devoted time and effort to cover an instance of FCPA scrutiny. If Barstow and the NY Times would have focused on BizJet, the reaction likely would have been, and with good reason, more negative. But then again, there probably would not have been any reaction at all because BizJet is obviously no Wal-Mart. Insert many other recent FCPA enforcement actions [here], if Barstow and the NY Times would have focused on [that] instance of FCPA scrutiny, the story would have largely read the same.
Nor do I believe that Wal-Mart’s FCPA scrutiny will likely end up in the Top 5 FCPA enforcement actions of all time in terms of settlement amount. The reason? All of the cases in the Top 5 are procurement cases, not cases focused on licenses, permits and the like.
If Wal-Mart does indeed crack the Top 5 (and with the seeming escalation of FCPA fine and penalty amounts just because – see here – it is likely only a matter of time before a license, permit case does crack the Top 5), it will likely be for reasons unrelated to substantive FCPA issues, but rather an increase in the company’s culpability score under the advisory Sentencing Guidelines based on its alleged handling of the potential FCPA issues in 2005.
Corporate governance, or lack thereof, is what made the NY Times April 2012 remarkable. This is the reason why Wal-Mart generated all the buzz it did two years ago this week and I’ve consistently held the view that the Wal-Mart story is a corporate governance sandwich with the FCPA as a mere condiment.
But even here, the seldom-discussed November 2012 NY Times article, adds additional relevant details. It suggests that Wal-Mart’s December 2011 FCPA disclosure was motivated by Wal-Mart’s desire to pro-actively understand its FCPA risk (notwithstanding whatever may have occurred within the company in 2005 upon learning of potentially problematic payments in Mexico). According to the article, Wal-Mart’s internal review began in Spring 2011 when Jeffrey Gearhart (Wal-Mart’s general counsel) learned of an FCPA enforcement action against Tyson Foods (like Wal-Mart, a company headquartered in Arkansas – see here for the prior post discussing the Tyson enforcement action). According to the NY Times article, “the audit began in Mexico, China and Brazil, the countries Wal-Mart executives considered the most likely source of problems” and Wal-Mart hired KPMG and Greenberg Traurig to conduct the audit.
FCPA scrutiny tends to last, on average, 2-4 years from the point of disclosure to any eventual enforcement action. Wal-Mart’s FCPA scrutiny is thus now in this range. However, it is not uncommon for FCPA scrutiny to last 5-8 years, thus it may be many more years before Wal-Mart’s FCPA scrutiny and its eventually outcome are know.
Friday Roundup
Wal-Mart’s FCPA expenses, scrutiny alerts and updates, quotable, February 21st, further to the conversation, and for the reading stack. It’s all here in the Friday roundup.
Wal-Mart’s FCPA Expenses
For over a year now, I have been tracking Wal-Mart’s pre-enforcement action professional fees and expenses and calculating what Wal-Mart is spending per working day on its FCPA scrutiny and exposure. (See here for the prior post with embedded links to others). Here is what Wal-Mart executives said yesterday in its earnings conference call for the fourth quarter of FY 2014.
“Core corporate expenses [for the fourth quarter of FY 2014] increased 5.8 percent. FCPA and compliance-related expenses were approximately $58 million, which was below our guidance of $75 to $80 million for the quarter. Approximately $38 million of these expenses represented costs incurred for the ongoing inquiries and investigations, while the remaining $20 million was related to our global compliance program and organizational enhancements.”
[…]
“Corporate & support expenses [for the fiscal year 2014] increased 24.1 percent for the full year, primarily from our investments in leverage services and Global eCommerce. Core corporate expenses, which included $282 million in charges related to FCPA matters, increased 15.6 percent. Approximately $173 million of these expenses represented costs incurred for the ongoing inquiries and investigations, while the remaining $109 million was related to our global compliance program and organizational enhancements.”
[…]
“During the first quarter of this year, we will begin to anniversary the increased costs we’ve incurred for FCPA matters, including compliance program enhancements and the ongoing investigations. These costs will remain in the Corporate and Support area, and we anticipate expenses to be between $200 million and $240 million for the year. [for the fiscal year 2015]
You add it up, and here is what you get.
FY 2013 = $157 million (approximately $$604,000 per working day)
FY 2014 = $282 million (approximately $1.1 million per working day)
FY 2015 = $200 – $240 million (anticipated)
As Wal-Mart’s FCPA scrutiny will once again demonstrate, settlement amounts in an actual FCPA enforcement action are often only a relatively minor component of the overall financial consequences that can result from corporate FCPA scrutiny.
Pre-enforcement action professional fees and expenses are typically the largest (in many cases to a degree of 3, 5, 10 or higher than settlement amounts). For instance, the total of the above pre-enforcement action professional fees and expenses and estimates is approximately $659 million. A $659 million FCPA settlement amount would be second of all-time.
That pre-enforcement action professional fees and expenses are typically the most expensive aspect of FCPA scrutiny is a fact. However it must nevertheless be asked whether FCPA scrutiny has turned into a boondoggle for many involved. Using just Wal-Mart and Avon’s pre-enforcement professional fees and expenses results in FCPA Inc. being over a billion dollar industry!
Is Wal-Mart’s conduct for which it is under scrutiny in violation of the FCPA? Does it even matter? See my article “Foreign Corrupt Practices Act Enforcement As Seen Through Wal-Mart’s Potential Exposure.”
Scrutiny Alerts and Updates
Knut Hammarskjold
Earlier this week, the DOJ announced that Knut Hammarskjold “pleaded guilty today for his role in a scheme to pay bribes to foreign government officials and to defraud PetroTiger.” According to the release, Hammarskjold pleading guilty “to an information charging one count of conspiracy to violate the Foreign Corrupt Practices Act (FCPA) and to commit wire fraud and is scheduled for sentencing on May 16, 2014.” Despite the DOJ’s announcement, the docket for Hammarskjold’s case does not contain the plea agreement or related documents. For a comprehensive summary of the DOJ’s charges against Kammarskjold and co-defendants Joseph Sigelman and Gregory Weisman, see this prior post. As noted in the previous post, Weisman has also pleaded guilty and the charges against Sigelman remain pending.
Mead Johnson
As highlighted in this previous Friday Roundup, last year Mead Johnson Nutritional Company disclosed an internal investigation related to business practices in China. Thus, contrary to certain reports Mead Johnson’s FCPA scrutiny is not “new,” but earlier this week, the company updated its disclosure as follows.
“Following an SEC request for documents relating to certain business activities of the Company’s local subsidiary in China, the Company is continuing an internal investigation of such business activities. The Company’s investigation is focused on certain expenditures that were made in connection with the promotion of the Company’s products or may have otherwise been made. Certain of such expenditures were made in violation of Company policies and may have been made in violation of applicable U.S. and/or local laws, including the U.S. Foreign Corrupt Practices Act (the “FCPA”). The investigation is being conducted by outside legal counsel and overseen by a committee of independent members of the Company’s board of directors. The status and results of the investigation are being discussed with the SEC and other governmental authorities. At this time, the Company is unable to predict the scope, timing or outcome of this ongoing matter or any regulatory or legal actions that may be commenced related to this matter.”
Lyondellbasell
As highlighted in this 2010 post, in connection with a bankruptcy proceeding, Lyondellbasell’s disclosed as follows.
“We have identified an agreement related to a project in Kazakhstan under which a payment was made in late 2008 that raises compliance concerns under the U.S. Foreign Corrupt Practices Act (the “FCPA”).
Yesterday the company disclosed:
“We previously reported that we had identified, and voluntarily disclosed to the U.S. Department of Justice, an agreement related to a former project in Kazakhstan under which a payment was made that raised compliance concerns under the U.S. Foreign Corrupt Practices Act (the “FCPA”). In January 2014, the U.S. Department of Justice advised the Company that it had closed its investigation into this matter. No fine or penalty was assessed.”
In the minds of some, this is a declination. I beg to differ – see here.
Baxter International
The company recently disclosed as follows.
“The company was the recipient of an inquiry from the U.S. Department of Justice (DOJ) and the SEC that was part of a broader review of industry practices for compliance with the U.S. Foreign Corrupt Practices Act. In January 2014, the company was notified by both the DOJ and the SEC that their respective investigations were closed as to Baxter without any further action taken by either agency.”
For a previous post regarding Baxter, see here.
Alstom
Bloomberg reports:
“Alstom SA, the French maker of trains and power equipment, will be charged in the U.K. over bribery allegations after a five-year investigation, according to two people with knowledge of the case. The Serious Fraud Office may ask the attorney general to approve charges in the coming weeks, a standard requirement for the agency to prosecute some offenses, according to the people, who asked not to be identified because the case is private. […] The SFO said in 2011 it suspected that Alstom gave money to companies that acted as “bogus consultants” to bribe overseas officials for contracts from 2004 to 2010, according to court papers at the time.”
If Alstom does face criminal charges in the U.K., the charges are unlikely to fall under the U.K. Bribery Act as the law went effective in July 2011 and is forward-looking only. As highlighted in previous posts (see here for instance) in 2013 the DOJ brought charges against four individuals associated with Alstom concerning alleged conduct in Indonesia.
Quotable
In this recent Chicago Tribune article, Tom Pritzker (Chairman and Chief Executive Officer of The Pritzker Organization, LLC – the principal financial and investment advisor to various Pritzker family business interests) reportedly stated as follows at a recent Chicago Council on Global Affairs event:
“The way that [FCPA] enforcement is working out of Washington strikes all of us in American business as arbitrary. It’s a revenue-generating mechanism for Washington, and that makes it additionally difficult in terms of how you figure out how to navigate emerging markets.”
February 21st
Today is a notable day in FCPA history (see this prior post).
I am grateful that I – and this website – have played a role in these events.
Further to the Conversation I
As frequently highlighted on these pages (see here for instance), trade barriers and distortions are often the root causes of bribery and a reduction in bribery will not be achieved without a reduction in trade barriers and distortions.
Simply put, trade barriers and distortions create bureaucracy.
Bureaucracy creates points of contact with foreign officials.
Points of contact with foreign officials create discretion.
Discretion creates the opportunity for a foreign official to misuse their position by making demand bribes.
This recent Wall Street Journal article highlights China’s “quota system” for foreign-films. As the article states:
“[34 is] maximum number of foreign titles the Chinese government allows into its nation’s theaters every year, a quota in place to try to protect China’s own nascent movie business. Hollywood studios have wondered when that number might be boosted—the last time was in February 2012, when Vice President Joe Biden announced a deal increasing the quota to the current 34 titles, from 20.”
Perhaps you’ve heard that various film companies are under FCPA scrutiny concerning business practices in China. (See here).
Further to the Conversation II
Whether it’s a federal court judge stating that a pending federal criminal case is “not window dressing” nor is the court “a potted plant” in concluding that a federal court does indeed have supervisory authority over the DPA process (see here for the prior post) or whether it’s a federal court judge criticizing various common aspects of corporate criminal law enforcement, including DPAs, as “both technically and morally suspect” (see here for the prior post) – there is an important conversation taking place concerning how the DOJ resolves alleged instance of corporate criminal liability.
Further to this conversation, the Better Markets, Inc. (a group that advocates for greater transparency, accountability, and oversight in the financial system) recently filed this complaint for declaratory and injunctive relief against the DOJ and Attorney General Eric Holder. While the complaint reads more like a policy paper than a complaint, it nevertheless calls the $13 billion settlement between the DOJ and JPMorgan a “mere contract” and alleges in pertinent part:
“Yet, this contract was the product of negotiations conducted entirely in secret behind closed doors, in significant part by the Attorney General personally, who directly negotiated with the CEO of JP Morgan Chase, the bank’s “chief negotiator.” No one other than those involved in those secret negotiations has any idea what JP Morgan Chase really did or got for its $13 billion because there was no judicial review or proceeding at all regarding this historic and unprecedented settlement. However, it is known that JP Morgan Chase’s $13 billion did result in almost complete nondisclosure by the DOJ regarding JP Morgan Chase’s massive alleged illegal conduct.
Thus, the Executive Branch, through DOJ, acted as investigator, prosecutor, judge, jury, sentencer, and collector, without any review or approval of its unilateral and largely secret actions. The DOJ assumed this all-encompassing role even though the settlement amount is the largest with a single entity in the 237 year history of the United States and even though it provides civil immunity for years of illegal conduct by a private entity related to an historic financial crash that has cause economic wreckage affecting virtually every single American. The Executive Branch simply does not have the unilateral power or authority to do so by entering a mere contract with the private entity without any constitutional checks and balances.”
The complaint seeks a declaration that, among other things,
“the DOJ violated the separation of powers doctrine by unilaterally finalizing the $13 billion Agreement without seeking judicial review and approval”
“the DOJ acted in excess of its statutory authority by unilaterally finalizing the $13 billion Agreement without seeking judicial review and approval”
“the DOJ acted arbitrarily and capriciously by unilaterally finalizing the $13 billion Agreement without seeking judicial review and approval.”
I agree with Professor Peter Henning who recently stated in his New York Times Dealbook column:
“The lawsuit faces substantial hurdles that make it unlikely to succeed. As a general matter, private parties do not have standing to challenge a decision by the government to settle a case. The Justice Department has broad discretion in how it chooses to exercise its authority, and courts rarely intervene to scrutinize a decision unless there is evidence involving improper discrimination.
Nevertheless, the frustration expressed by Better Markets about the process for determining what JPMorgan should have paid to resolve multiple investigations is fair.”
Reading Stack
For more on princelings and the hiring practices of certain financial institutions in China, see here from Bloomberg.
A dandy article here from Jon Eisenberg (K&L Gates) titled “Brother Can You Spare $8.9 Billion? Making Sense of SEC Civil Money Penalties.” In pertinent part, the article is about:
“Other than negotiations about the wording of settlement documents, agreeing to the amount of the money penalty is often the last barrier to resolution. And it’s one of the most frustrating because the amounts proposed may appear untethered to any principle or precedent.
In an effort to provide more clarity on SEC money penalties, we look at four sources that should inform the negotiations about those penalties: first, the explosive growth in the SEC’s authority to impose civil money penalties; second, the relevant statutory language since the SEC’s authority to impose civil money penalties comes from and is limited by Congress; third, two recent D.C. Circuit decisions making clear that there are meaningful limits on the Commission’s discretion in assessing money penalties; and fourth, the outcome in recent cases before SEC administrative law judges in which the amount of the penalties was contested.”
The article is not FCPA specific, but very much FCPA relevant, particularly given the SEC’s increased interest in resolving corporate FCPA enforcement actions via administrative actions. In short, Eisenberg’s article is excellent. Read it.
*****
A good weekend to all.
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.”
*****
A good weekend to all.