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Regarding Monitors …

Monitoring

Some things written about the Foreign Corrupt Practices Act and related topics in recent years are nothing short of bewildering. In certain instances, there seems to be little understanding of context and little regard for actual facts.

As highlighted below, a recent example is this recent Forbes article by Robert Anello (a lawyer at Morvillo Abramowitz Grand Iason & Anello) titled “Who Watches the Store? Drastic Decline of Corporate Monitors Under Trump.”

To begin, the article uses the recent FCPA enforcement action against Herbalife (see here, here and here for prior posts) and states that the enforcement action “is the latest in a string of enforcement actions under the Trump Administration that identified violations of the Foreign Corrupt Practices Act but noticeably did not also impose an independent corporate compliance monitor.” Later in the article, Anello states that the Trump administration has “abandon[ed] monitorships.”

Let’s pause right here for some actual statistics.

Highlighted below are the percentage of DOJ corporate FCPA enforcement actions in recent years that have involved monitors.

  • in 2019 50% of DOJ corporate FCPA enforcement actions resulted in a formal corporate monitor;
  • in 2018 12% of enforcement actions resulted in a formal corporate monitor;
  • in 2017 33% of enforcement actions resulted in a formal corporate monitor;
  • in 2016 54% of enforcement actions resulted in a formal corporate monitor;
  • in 2015 50% of enforcement actions resulted in a corporate monitor;
  • in 2014 14% of enforcement actions resulted in a corporate monitor;
  • in 2013 57% of enforcement actions resulted in a corporate monitor;
  • in 2012 33% of enforcement actions resulted in a corporate monitor;
  • in 2011 9% of enforcement actions resulted in a corporate monitor; and
  • in 2010 41% of enforcement actions resulted in a corporate monitor.

As the above statistics indicate, the percentage of corporate monitors imposed in DOJ FCPA enforcement actions varies in any given year (and sometimes widely given that the “denominator” is generally between 10-15 DOJ corporate enforcement actions per year).

Regardless, the above statistics clearly show that corporate monitors imposed in DOJ FCPA enforcement actions have not “drastically declined” much less been “abandoned” during the Trump administration.

In reviewing the above statistics over the past few years, keep in mind that in certain enforcement actions against foreign companies the DOJ did not formally impose a monitor because a monitor was imposed upon the company in a related foreign law enforcement action. For instance, in the 2018 Petrobras enforcement action the DOJ stated that among the reasons a DOJ imposed monitor was unnecessary was because the Brazilian company will be “subject to oversight by Brazilian authorities, including Brazil’s Tribunal de Contas da Uniao and Comissao de Valores Mobiliarios.”

Returning to Anello’s article, he next asserts:

“Herbalife neatly illustrates the recent paradigm shift inside the DOJ, as the stipulated facts and extensive nature of the illicit scheme outlined in the deferred prosecution agreement are of the caliber that in previous days likely would have led to the imposition of an independent monitor.”

For starters, Herbalife was not ever charged by the DOJ with violating the FCPA’s anti-bribery provisions or internal controls provisions. Rather, the DOJ charged Herbalife with conspiracy to violate the FCPA’s books and records provisions. Of further note, the SEC (a civil law enforcement agency) did not even find that Herbalife violated the FCPA’s anti-bribery provisions.

Moreover, not mentioned in Anello’s article is that the Herbalife enforcement action was based largely on the conduct of two individuals: Yanliang Li (a citizen of China and former Managing Director of a Chinese division of Herbalife) and Hongwei Yang (a citizen of China and former head the External Affairs Department of a Chinese division of Herbalife). These individuals were previously criminally charged by the DOJ and in that enforcement action the DOJ alleged that Li and Yang (the “Defendants”):

  • Defendants circumvented Herbalife’s internal controls.
  • Defendants submitted “fraudulent reimbursement requests.”
  • Defendants “obtained reimbursement for the bribes from China Subsidiary through false expense claims designed to conceal the true nature of the expenditures at issue.”
  • Defendants “circumvented Herbalife’s internal accounting controls related to EA’s [the China Subsidiary’s External Affairs Department] expenditure on gifts and entertainment for Chinese government officials. These internal accounting controls, among other things, prohibited the payment of bribes; established limits on the value, frequency, and nature of expenditures on government officials; and required EA employees to provide receipts and other specific information, including the names of the government official involved, to obtain approval and reimbursement for their expenditures.”
  • Defendants “conceal[ed] their fraud from Herbalife’s Internal Audit department.”
  • Defendants instructed “two EA employees to falsely submit reimbursement requests.”
  • Defendants “in order to prevent the scheme from being detected by Herbalife’s Internal Audit Department” directed others to “provide certain instructions to another colleague” and not to use company e-mail.
  • Defendants expenditures “violated, among other things, Herbalife’s policies and controls prohibiting entertaining relatives of government officials.”
  • Li “furthered the scheme and concealed the scheme by, among other things, routinely creating false records and certifications disclaiming any knowledge of fraud or circumvention of internal accounting controls.
  • Over a nearly ten year period, Li signed certifications titled “Statement Regarding Facts and Circumstances Relating to Exchange Act Filings” which Li caused to be sent to Herbalife’s U.S. headquarters. “In these certifications, which Herbalife relied upon in the preparation of its public filings with the SEC, Li falsely certified that ‘nothing came to my attention that made me question the effectiveness of [the company’s] disclosure controls and procedures’ and that ‘I am not aware of any fraud, whether or not material, that involves management or other employees who have a significant role in Herbalife’s internal controls.”
  • “During the time period relevant” to the indictment, the defendants “each participated in more than ten in-person and online trainings related to Herbalife’s anti-fraud and anti-corruption policies. Furthermore, Li and Yang both certified repeatedly that they understood and would adhere to Herbalife’s Code of Business Conduct and Ethics, which, among other things, required compliance with the FCPA.”
  • Defendants instructed others to rewrite expenses reports to conceal the nature of payments
  • Defendants coached others to give false stories to internal audit
  • Defendants gave false assurances to internal audit
  • Li falsely assured internal audit that he was otherwise committed to improving compliance of Herbalife’s internal FCPA and internal accounting controls.”
  • Li “fasley assured internal audit that he would discipline and train employees to improve compliance of China subsidiary policies.”

In short, the Herbalife enforcement action – based on the actual charges and allegations – was hardly the “caliber that in previous days likely would have led to the imposition of an independent monitor.”

In terms of relevant context, consider certain FCPA enforcement actions brought by the DOJ during the Obama administration.

  • In 2016 JPMorgan (and related entities) resolved a $202 million parallel DOJ/SEC enforcement action in which an agency found violations of the FCPA’s anti-bribery provisions. In the words of the DOJ: “U.S. businesses cannot lawfully seek to gain a business advantage by corruptly influencing foreign government officials. The common refrain that this is simply how business is done overseas is no defense.  In this case, JPMorgan employees designed a program to hire otherwise unqualified candidates for prestigious investment banking jobs solely because these candidates were referred to the bank by officials in positions to award business to the bank.”
  • In 2014 HP (and related entities) resolved a $108 million parallel DOJ/SEC enforcement action in which the agencies found violations of the FCPA’s anti-bribery provisions. In the words of the DOJ: ““Hewlett-Packard subsidiaries created a slush fund for bribe payments, set up an intricate web of shell companies and bank accounts to launder money, employed two sets of books to track bribe recipients, and used anonymous email accounts and prepaid mobile telephones to arrange covert meetings to hand over bags of cash.”
  • In 2014 Alcoa (and related entities) resolved a $384 million parallel DOJ/SEC enforcement action in which the agencies found violations of the FCPA’s anti-bribery provisions. In the words of the DOJ the enforcement action involved ” a corrupt international underworld in which a middleman, secretly held offshore bank accounts, and shell companies were used to funnel bribes to government officials in order to secure business.”

The DOJ did not impose a corporate monitor upon the companies in any of these enforcement actions.

The use of corporate monitors in FCPA enforcement actions (whether they are used to frequently or not frequently enough) is a worthy policy discussion to have.

However, as highlighted above several assertions in Anello’s article lack relevant context and/or are inconsistent with actual facts … like much FCPA commentary in recent years.

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