Today’s post is from Zachary Cregar, a 2007 graduate of Duquesne Law School.
The Problem – And Solution – Regarding Foreign Outside Counsel Fees
As foreign corruption prosecutions increase globally, corruption schemes commensurately grow ever more sophisticated. Payments have evolved from proverbial cash-stuffed suitcases to complex schemes involving third-party intermediaries, cloaking bribes as payments for legitimate services. Among third-parties, lawyers offer the most effective method of hiding bribes, and their potential for such is overlooked. This has been brought to light in the recent allegations against Wal-Mart. Fortunately there is a solution to this inevitably proliferating problem. A foreign outside counsel expense management program should be utilized by all companies engaging foreign outside counsel. The benefit is two-fold: prevention and detection of foreign corrupt payments, and material reductions in outside counsel legal expenditures.
There should be no mistaking the fact a payment made to a law firm that in turn bribes a foreign official can be a violation of the Foreign Corrupt Practices Act and its major counter-part, the UK Anti-Bribery Act. Bribes paid through foreign outside counsel present a unique risk to detection. By the very nature of the profession, bills for legal services are often cryptic to those without specific legal training, experience with specific practice specialties, or familiarity with local jurisdictional nuances.
There are several likely scenarios in which foreign legal professionals can be used as corruption subterfuge. Consider the following; an American company hires outside counsel in a foreign country, where an employee or stakeholder of that firm is a foreign official, and is directly paid bribes under the guise of “legal fees.” Corporate compliance “know your customer” programs, in a general sense, are designed to identify these individuals and flag them to avoid improper payments.
The second and more problematic scenario lies where foreign outside counsel is used as a third-party intermediary. Here, foreign outside counsel submits invoices with bogus fees or expenses, and payments on those fees or expenses are passed on as bribes to foreign officials. An even more concerning and probative subset of this scenario lies where foreign outside counsel excessively bills for legal services legitimately performed, and skims the extra off the top to pay bribes to foreign officials. Because of the difficulty in detection, corporate anti-corruption compliance programs are unprepared to detect such risks.
Wal-Mart’s Alleged Foreign Counsel Problem
In an April 2012 exposé of Wal-Mart’s alleged foreign corruption, New York Times author David Barstow detailed how several outside lawyers retained by Wal-Mart in Mexico were used to pay nearly $8.5 million in bribes to local officials in order to expedite store expansions. Four days after the Times story broke, Wal-Mart stock dropped five percent. To-date, Wal-Mart has spent approximately ninety-nine million dollars to conduct forensic investigations of the alleged bribery.
The Times article explained how a substantial portion of the alleged bribes were paid through two attorneys acting as “gestores,” a Mexican term for quasi-lobbyist middle-men paid to carry out bribes of government officials. Over the course of several years, an executive for Wal-Mart de Mexico, Sergio Cicero Zapata, utilized two Mexican lawyers to deliver cash-stuffed envelopes to local government officials. These attorney-gestores allegedly paid off all levels of local officials to expedite, inter alia, store zoning, code and environmental issues. In fact, nearly half of all alleged bribes paid in Wal-Mart’s Mexican corruption scheme were paid through the two outside lawyers, who were in turn paid tens of thousands per permit facilitated.
Wal-Mart’s compliance regime allegedly failed to detect these payments. After word spread internally of the alleged bribes, an in-house investigative team was sent to Mexico – with the specific directive to investigate these allegations – and failed to adequately reveal the outside lawyers’ roles in the corruption scheme. It was not until Mr. Cicero’s allegations were made public that an investigative team, composed of outside counsel and auditors, independently revealed the scope of what had taken place.
A forensic recreation revealed that the Mexican lawyers handed cash over to foreign officials, and then submitted invoices to Wal-Mart with “brief, vaguely worded descriptions of their services.” The Wal-Mart de Mexico officials involved in the scheme then completed the purification of lawyer’s bribes by paying the invoices and recording them as legal fees in the company books. Because the records for these two outside lawyers were coveted secretively by just a few individuals, the subsequent team encountered strong resistance to obtaining the legal billing records. When finally obtained, the records did not look anything like legitimate legal invoices.
If true, the recent corruption allegations against Wal-Mart should erase any doubts about the importance of having a systematic foreign legal bill oversight process. In a sense, Wal-Mart de Mexico’s outside counsel bribery scheme was rudimentary. Yet the scheme evaded not only the company’s anti-corruption compliance program, but also the initial in-house investigation specifically directed to reveal this suspected program.
Pursuit of compliance policies that check for red flags and financial irregularities will have extreme difficulty in detecting the scenario, discussed supra, where outside counsel bills excessively for legitimate legal services and directs the skimmed proceeds to foreign officials. Yet this is where one of the most critical anti-bribery problems lies. Necessary compliance systems currently in place fail to reach sufficiency in this respect.
Increased Foreign Outside Counsel Spending, Increased Risk
As if the confluence of increased enforcement of global anti-corruption statutes and increasingly sophisticated corruptions schemes do not pose a serious enough risk to corporate due diligence, there are indications that U.S.-based corporations’ spending on and engagement of foreign outside counsel is on the rise. Without increased supervision of the influx of payments to foreign outside counsel, the risk of those funds finding their way into the hands of corrupt foreign officials also increases.
The Solution – Foreign Outside Counsel Expense Management Program
Companies seeking to proactively detect and prevent foreign outside counsel corruption schemes must put into place checks and balances to limit the authority of insiders’ use of foreign outside counsel, and to continually monitor counsel. Five concrete steps are immediately available. In abbreviated fashion, the steps are as follows:
1) Gatekeepers – Companies should specifically designate outside counsel gatekeepers. These employees must be granted authority to vet foreign outside counsel, and approve use of each foreign firm. With a list of approved and vetted firms in hand, gatekeepers can deny requests for use of lawyers that deviate from approved law firm panels. Retention of outside counsel must fit within specified protocols, based on type of legal work to be performed, and necessity of utilization of a firm. This is a basic protection against employees who seek to misappropriate corporate funds for legal work as a cover for foreign bribery.
2) Guidelines & Protocols – Companies should adopt explicit billing and case-handling protocols by which all foreign outside counsel law firms must abide. Guidelines are an expectation of how the firms will handle legal matters, and requires them to adhere to widely accepted ethical billing practices. Guidelines should also specifically require electronic billing of invoices and indicate that bills will be audited pre-payment and/or post-payment. Foremost for FCPA purposes, guidelines send the message to company employees and foreign law firms that legal bills are monitored by legally trained individuals capable of detecting financial irregularities.[i]
3) Electronic Billing – Outside counsel, whether domestic or international, must be required to submit legal bills electronically. Electronic legal billing software is obtainable as a service without the need for software development, and can accommodate international legal billing submissions. Electronic legal billing provides for greater adherence to FCPA record-keeping requirements, and allows for greater auditing and metrics analysis.
4) Auditing – Legal professionals familiar with the legal systems and cultural nuances of foreign jurisdictions should be utilized to review legal bills to determine reasonableness, appropriateness, and legitimacy thereof. Among other things, auditors can determine whether excessive time was billed, whether those who billed for work actually performed the work, or whether the work billed was actually performed. Again, a great deal of web-based software and services exist as ready-made platforms for legal bill auditing. Auditors can be located anywhere in the world.
5) Metrics Analysis – Finally, companies should employ legal professionals to analyze metrics and analytics derived from the electronic billing data. While legal bill auditing can make determinations about whether each legal task was reasonable or legitimate, corrupt payments can also be detected on a meta-scale. Compilations of large sets of data make possible quantification of firms’ costs-per case, effective rates, and firm-by-firm or regional comparisons. Irregularities suggesting bribes may be detected by looking at overall statistics that otherwise would remain invisible.
For some companies, all of the above tasks may be handled by one individual. For larger companies with substantial international legal operations, an in-house team may be required. And still there are other options; many insurers and third-party claim administrators already have similar domestic systems in place. The technology required is widely available, easily accessible and customizable to every company’s needs.
Steep anti-bribery pitfalls call for extraordinary preventative measures. Without foreign outside counsel management and auditing programs, companies may pay later in FCPA penalties and excessive legal bills. The allegations against Wal-Mart likely signal that a shift to using law firms in more complicated and covert bribery schemes is already underway. Companies must have a check against individuals seeking to stay a step ahead of compliance programs. While companies do not have the financial capabilities to proactively confront every conceivable FCPA risk, the scale of a foreign legal expense management program need only be relative to the scale of the engagement of international outside counsel. The relatively small expenditures required to put these programs in place can reduce some of the largest liabilities faced by companies. In a time of rising foreign legal expenditures and corruption threats, a little reassurance can go a long way.
The views expressed in the above post are my own and do not reflect those of any past or present employer or client. I may be contacted at firstname.lastname@example.org.