December 19th, 2014

Avon Resolves Long-Standing FCPA Scrutiny By Agreeing To $135 Million Settlement

AvonEarlier this week, the DOJ and SEC announced resolution of Avon’s long-standing FCPA scrutiny in China.  The conduct at issue took place between 2004 and 2008 and Avon disclosed the conduct to the enforcement agencies in 2008.

In short, the DOJ and SEC alleged that Avon’s indirect subsidiary (Avon China) provided approximately $8 million in things of value, including gifts, cash, and non-business travel, meals and entertainment, which it gave to Chinese officials in order to obtain and retain business benefits for Avon China.  Avon resolved FCPA books and records and internal controls charges related to this conduct.

Consistent with Avon’s prior disclosure, the aggregate settlement amount was $135 million.  While not a top-ten Foreign Corrupt Practices Act enforcement action, the settlement is the third-largest ever against a U.S. company.

The enforcement action included:

  • a DOJ component (a criminal information against Avon China resolved via a plea agreement and a criminal information against Avon Products resolved via a deferred prosecution agreement with an aggregate fine amount of $67.6 million); and
  • an SEC component (a civil complaint against Avon Products which it agreed to resolve without admitting or denying the allegations through payment of $67.4 million).

This post summarizes the approximately 175 pages of resolution documents.  Because all of the resolution documents have substantial overlap, the core allegations are highlighted in connection with the Avon China criminal information, yet repeated in the other resolution documents as well.

DOJ

Avon China Information

Avon Products (China) Co. Ltd. (“Avon China”) is described as an indirect subsidiary of Avon incorporated in China.  According to the information, Avon China and its affiliates manufactured and sold beauty and healthcare products through direct sales, as well as through “beauty boutiques” that were independently owned and operated.  The information states that in addition to independent sales representatives, Avon China had between 1,000 and 2,000 employees.  According to the information, Avon China’s books, records and accounts were consolidated into Avon’s books and records and reported by Avon in its financial statements.

Under the heading “The Chinese Regulatory Regime for Direct Selling” the information states:

“In or around 1998, the Chinese government outlawed direct selling in China for all companies.  In or around 2001, as a condition of its entry into the World Trade Organization, China agreed to lift its ban on direct selling.  In or around 2005, in order to test its planned regulations for direct selling, the Chinese government decided to issue one company a temporary license to conduct direct sales (the ‘test license.’). In or around March 2005, the Chinese government awarded the test license to Avon China, the defendant.  In or around late 2005, China lifted its ban on direct selling and allowed companies to apply for licenses to conduct direct sales.  Under China’s newly promulgated direct selling regulations, to conduct direct sales, a company was required to obtain a national direct selling license and approvals from each province and municipality in which it sought to conduct direct sales.  In order to obtain a license, a company was required to satisfy a number of conditions, including, in pertinent part, having a ‘good business reputation’ and a record that demonstrated no material violations of Chinese law for the preceding five years.  In or around February 2006, Avon China, the defendant, obtained its national direct selling license.  Between in or around February 2006 and in or around July 2006, Avon China, the defendant, obtained all of its provincial and municipal approvals to conduct direct selling.”

According to the information, Avon China created and maintained a Corporate Affairs Group whose duties included maintaining “guanxi (good relationships) with government officials and lobbying those officials on behalf of Avon China.”

Under the heading, “Overview of the Scheme to Falsify Books and Records,” the information states that from 2004 to 2008, Avon China, and Avon, acting through certain executives and employees, together with others, conspired to falsify Avon China’s and, thereby ultimately, Avon’s books and records in order to disguise the things of value Avon China executives and employees provided to government officials in China.

Specifically, the information alleges that from 2004 to 2008 Avon China “acting through certain executives and employees, disguised on its books and records over $8 million in things of value, including gifts, cash, and non-business travel, meals and entertainment, which it gave to Chinese officials in order to obtain and retain business benefits for Avon China.

The information alleges that:

Avon China “falsely and misleadingly described the nature and purpose of certain transactions on Avon China’s books and records, in part, because they believed that Chinese government officials did not want a paper trail reflecting their acceptance of money, gifts, travel, entertainment and other things of value from Avon China executives and employees.  The executives and employees also knew that, contrary to how the expenses were being described in Avon China’s books and records, the expenses were not incurred for legitimate business purposes.”

According to the information:

“Avon executives and employees, including high-level executives, attorneys, and internal auditors, learned that executives and employees of Avon China, the defendant, had in the past routinely provided things of value to Chinese government officials and failed to properly document it.  Instead of ensuring the practice was halted, disciplining the culpable individuals, and implementing appropriate controls at Avon and Avon China to address the problem, the Avon executives and employees, in conjunction with Avon China executives and employees, took steps to conceal the significant concerns raised about the accuracy of Avon China’s books and records and its practice of giving things of value to government officials.  These Avon and Avon China executives and employees, knowing that Avon China’s books and records would continue to be inaccurate if steps were not taken to correct Avon China’s executives and employees’ conduct, failed to take steps to correct such actions, despite knowing that Avon China’s books and records were consolidated into Avon’s books and records.”

The information then alleges various categories of payments.

Under the heading “gifts for government officials,” the information details designer wallets, bags, or watches “to obtain benefits from government officials, such as obtaining and retaining the direct selling license and requisite provincial and local approvals, avoiding fines, avoiding negative media reports, obtaining favorable judicial treatment, and obtaining government approval to sell nutritional supplements and healthcare apparel products, via direct selling, that did not meet or had yet to meet government standards.  According to the information, Avon China executives and employees, at various times, falsely or misleadingly described the gifts, including describing them as employee travel and entertainment, samples or public relations business entertainment.” Specific gifts mentioned include a $890 gift or entertainment expense, a $960 gift purchased from Louis Vuitton, a $800 Gucci Bag, and a $460 gift from Louis Vuitton.

Regarding avoiding negative media reports, the information alleges that a leading government-owned newspaper intended to run a story about Avon China improperly recruiting sales associates and that this article could cause Avon China to lose its direct selling license.  According to the information, “in order to convince the newspaper not to run the article … an Avon China employee caused Avon China to pay approximately $77,500 to become a “sponsor” of the paper at the request of a government official at the paper who was in charge of determining whether the potential article would run and who may have received a commission on monies received from sponsors.”

Under the heading “meals and entertainment,” the information alleges that Avon China “routinely entertained government officials in order to obtain the same business benefits highlighted above.  According to the information, executives and employees of Avon China, “intentionally concealed these improper meal and entertainment expenses in Avon China’s books and records by (1) intentionally omitting reference to the participation of government officials in order to conceal their participation, using descriptions like business entertainment, public relation entertainment, or no description at all; or (2) revealing the participation of government officials but intentionally describing the event inaccurately by omitting the identity or number of officials, the cost of the event, or the true purpose of the event.”

Under the heading “travel for government officials,” the information alleges that executives and employees of Avon China caused Avon China to “pay for travel expenses for government officials, and sometimes their families” in order to obtain the same improper business benefits highlighted above.  According to the information, “to conceal the true nature of these expenses, these executives and employees intentionally omitted from or concealed in Avon China’s records the name of the government officials, the fact that the travelers were government officials or relatives of government officials, and, at times, the number of travelers.”  The information also alleges that executives and employees of Avon China “intentionally falsified in Avon China’s books and records the purpose of the travel, which often was for personal, not legitimate business, purposes.  For example, the information alleges that certain personal trips for government officials (and occasionally their spouses and children) were described as “study trips” or “site visits” when the officials were instead sightseeing or taking a beach vacation.”  Specifically, the information alleges, among other trips, that Avon China paid for six officials from the Guandong Food and Drug Administration to travel to Avon’s headquarters in New York City and its research and development facility in upstate New York for a “site visit/study visit.” According to the information, the “officials never visited Avon’s headquarters, only spent one morning at Avon’s research and development facility, and spent the rest of the 18-day trip sightseeing and being entertained by an Avon China employee in New York, Vancouver, Montreal, Ottawa, Toronto, Philadelphia, Seattle, Las Vegas, Los Angeles, Hawaii, and Washington D.C.

Under the heading “cash for government officials,” the information alleges that “executives and employees of Avon China, gave cash to government officials in order to obtain benefits for Avon China and falsified Avon China’s records to conceal the true recipient of and purpose for the money.”  According to the information, “these employees accomplished this by submitting for reimbursement meal or entertainment receipts given to them by government officials and falsely claiming that the receipts reflected employee business expenses.  In truth, the employees had no such expenses, and the receipts were used to obtain cash to make payments to government officials.  The information also alleges other instances in which executives and employees of Avon China “gave cash to government officials in order to obtain business benefits for Avon China and falsely reported the payments as fine payments.”  In other instances, the information alleges that Avon China executives and employees “made payments to organizations designated by government officials.”

The information also contains a separate section regarding payments to Consulting Company A that was retained by Avon China “purportedly” to provide various services to Avon China.  The information alleges that these services “were memorialized in a scant two-page contract” and that Avon China “did not conduct any due diligence of Consulting Company A, nor did they require Consulting Company A to comply with Avon’s Code of Conduct (in particular, the provisions related to payments to government officials), even though Consulting Company A was retained specifically to interact with government officials on behalf of Avon China.”  The information alleges that executives and employees of Avon China caused Avon China to pay Consulting Company A additional monies for purportedly legitimate, though ambiguously described, services even though an Avon China executive knew Consulting Company A’s invoices were often false, and no Avon China executives or employees knew of any legitimate services being provided by Consulting Company A.

Based on the above conduct, Avon China was charged with one count of conspiracy to violate the FCPA’s books and records provisions.

The information also contains a separate section titled “Discovery of the Falsification and Cover-Up.”  In pertinent part, the information alleges:

  • In 2005, a senior audit manager in Avon’s internal audit group reported to Avon’s Compliance Committee, that executives and employees of Avon China were not maintaining proper records of entertainment for government officials and that an Avon China executive had explained that the practice was intentional because information regarding that entertainment was “quite sensitive.”
  • In 2005, Avon’s internal auditors audited the Corporate Affairs Group’s travel and entertainment and discretionary expenses and issued a draft report.
  • The Draft Audit Report, which was reviewed by various Avon executives and Avon attorneys, contained conclusions regarding the Corporate Affairs Group’s expenses including: (1) high value gifts and meals were offered to government officials on an ongoing basis; (2) the majority of the expenses related to gifts, meals, sponsorships, and travel of substantial monetary value for Chinese government officials to maintain relationships with the officials; (3) a third party consultant was paid a substantial sum of money to interact with the government but was not contractually required to follow the FCPA, was not actively monitored by Avon China, and was paid for vague and unknown services; and (4) the payments, and the lack of accurate, detailed records, may violate the FCPA and other anti-corruption laws.
  • The management team of Avon China “insisted that the internal audit team remove the discussion of providing things of value to government officials and potential FCPA violations from the Draft Audit Report.
  • Certain Avon executives agreed with executives of Avon China to delete the discussion of the Corporate Affairs Group’s conduct from the Draft Audit Report.  An Avon Executive then directed the internal audit team to either (1) retrieve every copy of the Draft Audit Report and destroy them or (2) instruct the individuals who possessed copies of the Draft Audit Report to destroy them.
  • Avon executives did not instruct any executives or employees of Avon China to stop the conduct identified in the Draft Audit Report, put in place controls to prevent the conduct or ensure the accuracy of Avon China’s books and records.
  • In 2006, Avon’s internal auditors again reviewed the Corporate Affairs Group’s travel and entertainment and discretionary expenses and found that Corporate Affairs Group executive and employees were continuing their practice of giving things of value to government officials.  Notwithstanding learning that the conduct was continuing and that the books and records of Avon China were still being falsified, no Avon or Avon China executives or employees took steps to stop or prevent the conduct from recurring, and Avon China executives and employees continued operating in the same improper manner.
  • In 2007, an Avon executive reported to the Avon Compliance Committee that the matter reported in 2005 regarding potential FCPA violations by executives and employees of Avon China had been closed as “unsubstantiated” even though the executive and others knew of Avon China’s previous – and continuing – practice of giving things of value to government officials and the ongoing failure of Avon China’s books and records to reflect accurately and fairly the nature and purpose of the transactions.
  • From 2004 to 2008, Avon China executives signed false management representation letters to Avon China’s external auditor stating that Avon China’s books and records were fair and accurate.

Avon China Plea Agreement

According to the plea agreement, the advisory Sentencing Guidelines fine range was $73.9 million to $147.9 million.  Pursuant to the plea agreement, Avon China agreed to pay a criminal fine in the amount of $67.6 million.

In the plea agreement, Avon China waived all defenses based on the statute of limitations.

Avon Products Information

The information is based on the same core conduct alleged in the Avon China information.

Under the heading “Avon’s Internal Controls,” the information alleges, in pertinent part, as follows.

“Although Avon … and certain of its subsidiaries had policies in place relating to the review and approval of employee expenses, it lacked adequate controls to ensure compliance with those policies and thus, in practice, employee expenses were not adequately vetted to ensure that they were reasonable, bona fide, or properly documented.

Avon … lacked sufficient controls to ensure the integrity of its internal audit process, particularly with regard to its review of allegations of and testing for improper payments made to foreign government officials.  Avon’s internal audit group also failed to devote adequate funding, staffing, and resources to Avon China.

Avon … did not have adequate internal accounting and financial controls designed to detect and prevent, among other things, corruption-related violations, including FCPA violations.  In particular, after senior Avon executives … learned of specific corruption issues in China related to the provision of cash, meals, gifts, travel, and entertainment to government officials, Avon failed to take the necessary steps to implement appropriate controls to address such issues and prevent such risks in the future.

Avon … had an inadequate compliance program.  In fact, Avon did not have a dedicated compliance officer or compliance personnel.  Avon’s compliance program was particularly weak with regard to risks associated with foreign bribery.  For example, even though Avon operated in over 100 countries, including many countries with high corruption risks, Avon did not have a specific anti-corruption policy, nor did it provide any stand alone FCPA-related training.  Moreover, although Avon had a code of conduct that covered all of its employees and its subsidiaries’ employees, which, among other things, prohibited paying bribes, many employees of Avon and its subsidiaries were unaware of its existence.

Avon .. did not conduct corruption-related due diligence on appropriate third parties or have effective controls for the meaningful approval of third parties.  Avon also did not require adequate documentation supporting the retention of payments to third parties.

Avon … did not undertake periodic risk assessments of its compliance program and lacked proper oversight of gifts, travel, and entertainment expenditures.  Avon’s failure to maintain an adequate compliance program significantly contributed to the company’s failure to prevent the misconduct in China.”

Based on the core conduct and the specific allegations detailed above, Avon was charged with one count of conspiracy to violate the FCPA’s books and records provisions as well as one count of violating the FCPA’s internal controls provisions for knowingly failing to implement a system of internal accounting controls sufficient to provide reasonable assurance of various aspects of its business as required by the provisions.

Avon Products DPA

Pursuant to the three year DPA, Avon admitted, accepted and acknowledged that it was responsible for the conduct alleged in the information.

Under the heading “Relevant Considerations,” the factors the DOJ considered in resolving the action were:

“(a) the Company’s cooperation, which included conducting an extensive internal investigation in China and other relevant countries; voluntarily making U.S. and foreign employees available for interviews; collecting, analyzing, translating, and organizing voluminous evidence and information for the Department; (b) the Company’s voluntary disclosure of its employees’ and its subsidiary’s employees’ misconduct to the Department, which came relatively soon after the Company received a whistleblower letter alleging misconduct but years after certain senior executives of the Company had learned of and sought to hide the misconduct in China; (c) the Company’s extensive remediation, including terminating the employment of individuals responsible for the misconduct, enhancing its compliance program and internal controls, and significantly increasing the resources available for compliance and internal audit; (d) the Company’s commitment to continue to enhance its compliance program and internal controls, including ensuring that its compliance program satisfies the minimum elements [set forth in the DPA]; and (e) the Company’s agreement to continue to cooperate with the Department …”

The DPA also states:

“The Department also considered that the Company, taking into account its own business interests, expended considerable resources on a company wide review of and enhancements to its compliance program and internal controls.  While the Company’s efforts in this regard were taken without Department request or guidance, and at times caused unintended delays in the progress of the Department’s narrower investigations, the Department recognizes that the Company’s efforts resulted in important compliance and internal controls improvements.”

Based on the conduct at issue, the DPA sets forth an advisory Sentencing Guidelines range of $84.6 million to $169.1 million.  The DPA sets forth a criminal fine amount of $67.6 million and the above-mentioned Avon China criminal fine was deducted from this amount.

Pursuant to the DPA, Avon agreed to retain an independent compliance monitor for an 18 month term and agreed to various periodic reporting obligations to the DOJ.

The DPA contains a standard “muzzle clause” in which it (or those associated with it) agreed not to make any public statements contradicting its acceptance of responsibility under the DPA.

In this release, Assistant Attorney General Leslie Caldwell stated:

“Companies that cook their books to hide improper payments will face criminal penalties, as Avon China’s guilty plea demonstrates. Public companies that discover bribes paid to foreign officials, fail to stop them, and cover them up do so at their own peril.”

U.S. Attorney Preet Bharara of the Southern District of New York stated:

“For years in China it was ‘Avon calling,’ as Avon bestowed millions of dollars in gifts and other things on Chinese government officials in return for business benefits. Avon China was in the door-to-door influence-peddling business, and for years its corporate parent, rather than putting an end to the practice, conspired to cover it up.  Avon has now agreed to adopt rigorous internal controls and to the appointment of a monitor to ensure that reforms are instituted and maintained.”

Assistant Director in Charge Andrew G. McCabe of the FBI’s Washington Field Office stated:

“When corporations knowingly engage in bribery in order to obtain and retain contracts, it disrupts the level playing field to which all businesses are entitled. Companies who attempt to advance their businesses through foreign bribery should be on notice.  The FBI, with our law enforcement partners, is continuing to push this unacceptable practice out of the business playbook by investigating companies who ignore the law.”

SEC

Based on the same core conduct alleged in the DOJ actions, in this civil complaint the SEC charged Avon with violating the FCPA’s books and records and internal controls provisions.  In summary, the SEC’s complaint states:

“This matter concerns violations by A von Products, Inc. (“A von”) of the corporate record keeping and internal controls provisions of the federal securities laws. [...] . From 2004 through the third quarter of 2008, Avon’s books and records failed to accurately and fairly reflect payments by Avon Products (China) Co., Ltd. (“Avon Products China”) to Chinese government officials. Avon Products China provided cash and things of value, including gifts, travel, and entertainment, to various Chinese government officials, including government officials responsible for awarding a test license, and subsequently a direct sales business license, that would allow a company to utilize direct door-to-door selling in China. Avon Products China  was, in fact, awarded a test license and, then, the first official direct selling business license in China. Avon Products China also adopted an internal “no penalty policy” and provided cash and things of value to Chinese government officials to avoid fines and other penalties in order to maintain an ostensibly pristine corporate image. Avon Products China also paid a third-party consultant for purportedly legitimate interactions with government officials, even though Avon Products China management knew the consultant’s invoices were often false and could not point to legitimate services provided by the consultant. At times , payments were made to suppress negative news in state-owned media and to obtain competitor information. In addition, Avon Products China provided cash to government officials on behalf of other Avon subsidiaries in China. Avon Products China falsified its books and records so as to conceal the cash and things of value provided to government officials.  Near the end of 2005, an Avon internal audit team reported potential issues concerning things of value provided to Chinese government officials. Nevertheless, remedial measures sufficient to address the issues were not implemented at Avon Products China. Similar issues related to Avon Products China were raised at the end of 2006. Again, responsive remedial measures were not implemented. The books and records at A von Products China were consolidated into the books and records of Avon. Avon thus violated [the books and records provisions] by failing to make and keep books, records , and accounts, which, in reasonable detail , accurately and fairly reflected the transactions and disposition of assets of the issuer. By failing to ensure that it maintained adequate internal controls sufficient to record the nature and purpose of payments, or to prevent improper payments, to government  officials, Avon failed to devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that its transactions and the disposition of its assets were recorded correctly, accurately, and in accordance with authorization of management. Avon thereby violated [the internal controls provisions]. Finally, in May 2008, Avon began a review of its compliance with the Foreign Corrupt Practices Act (“FCPA”), the U.S . legislation that, among other things, prohibits payments to foreign government officials to obtain or retain business. As a result of its review, the company instituted extensive, related reforms.”

In certain respects, the SEC’s complaint contains additional details regarding certain of the alleged conduct such as:

  • Certain of the Chinese “foreign officials” are alleged to be individuals associated with the Ministry of Commerce (“MOFCOM”) and the State Administration for Industry and Commerce (“AIC”).
  • Regarding the Draft Audit Report, “Avon’s Legal Department took the position that conclusions about potential FCPA violations fell within the purview of Legal, and not Internal Audit.”
  • Regarding Avon’s initial investigation of the matter, Avon engaged a “major law firm” but “in mid-December 2005, sent the law firm a short e-mail stating that the company had ”moved on” from the issues and asking for an estimate of the fees incurred.”
  • “In May 2008 , the Avon Products China Corporate Affairs executive who had been terminated wrote to Avon’ s Chief Executive Officer alleging improper payments to Chinese government officials over several years in the form of meals, entertainment, travel, sponsorship of cultural events, gifts of art, and cash. The letter was forwarded to A von’s Legal Department and, in tum, to the audit committee of Avon’s board of directors. The audit committee commenced an internal investigation into the allegations and, in October 2008, Avon informed the Commission and the Department of Justice.”
  • As to various things of value: (i) “The majority of these payments were for meals and entertainment expenses under $200 per occurrence, without indication as to who attended the meal/entertainment or the business purpose of the expense.” (ii) a “Pearl River cruise for 200 State and Regional AIC officials during a conference of officials with responsibility for the oversight of Avon Products China’s direct selling business license.”; (iii) “corporate boxes at the China Open tennis tournament, given to AIC and other government officials in 2004 and 2005 “to thank them for their support.” During these years, Avon Products China was a corporate sponsor of the tournament and received the tickets as part of that sponsorship . Avon Products China also provided government officials with gifts that included Louis Vuitton merchandise, Gucci bags, and Tiffany pens.” (iv) “$23,000 for travel and expenses for government journalists to attend the ceremony at which Avon Products China launched its direct selling test;” (v) “Avon Products China’s employees also made payments to government officials for conferences, and related meals, gifts, and entertainment, in 150 instances aggregating $143,000. Records for these expenses do not indicate who attended the conferences, or the business purpose of the expenses. Approximately $15,000 of this amount was for expenses related to government journalists’ attendance at an Avon Products China media event.”

As noted in this SEC release:

“Avon, which neither admitted nor denied the allegations, agreed to pay disgorgement of $52,850,000 in benefits resulting from the alleged misconduct plus prejudgment interest of $14,515,013.13 for a total of more than $67.36 million.  In the parallel criminal matter, Avon entities agreed to pay $67,648,000 in penalties.  Avon also is required to retain an independent compliance monitor to review its FCPA compliance program for a period of 18 months, followed by an 18-month period of self-reporting on its compliance efforts.  Avon would be permanently enjoined from violating the books and records and internal controls provisions of the federal securities laws.  In reaching the proposed settlement, which is subject to court approval, the SEC considered Avon’s cooperation and significant remedial measures.”

In the release, Scott Friestad (Associate Director in the SEC’s Enforcement Division) stated:

“Avon’s subsidiary in China paid millions of dollars to government officials to obtain a direct selling license and gain an edge over their competitors, and the company reaped substantial financial benefits as a result. Avon missed an opportunity to correct potential FCPA problems at its subsidiary, resulting in years of additional misconduct that could have been avoided.”

In this release, Sheri McCoy (CEO of Avon Products, Inc.) stated: ”We are pleased to have reached agreements with the DOJ and the SEC.”

Avon was represented by Evan Chesler and Benjamin Gruenstein of Cravath, Swaine & Moore.





December 18th, 2014

The FCPA Turns 37

37This weekend, our favorite statute, the Foreign Corrupt Practices Act, turns 37.

President Jimmy Carter’s December 20, 1977 signing statement stated in full as follows.

“I am pleased to sign into law S. 305, the Foreign Corrupt Practices Act of 1977 and the Domestic and Foreign Investment Improved Disclosure Act of 1977. During my campaign for the Presidency, I repeatedly stressed the need for tough legislation to prohibit corporate bribery. S. 305 provides that necessary sanction. I share Congress’s belief that bribery is ethically repugnant and competitively unnecessary. Corrupt practices between corporations and public officials overseas undermine the integrity and stability of governments and harm our relations with other countries. Recent revelations of widespread overseas bribery have eroded public confidence in our basic institutions. This law makes corrupt payments to foreign officials illegal under United States law. It requires publicly held corporations to keep accurate books and records and establish accounting controls to prevent the use of ‘off-the-books’ devices, which have been used to disguise corporate bribes in the past. The law also requires more extensive disclosure of ownership of stocks registered with the [SEC]. These efforts, however, can only be fully successful in combating bribery and extortion if other countries and business itself take comparable action. Therefore, I hope progress will continue in the United Nations toward the negotiation of a treaty on illicit payments. I am also encouraged by the International Chamber of Commerce’s new Code of Ethical Business Practices.”

S. 305, of course, did not fall out of the sky onto President Carter’s desk thirty-seven years ago today.  Rather, S. 305 was the result of more than two years of Congressional investigation, deliberation, and consideration.

If the FCPA is your cup of tea, you owe it to yourself to read the most extensive piece ever written about the FCPA’s history – “The Story of the Foreign Corrupt Practices Act.”

The article weaves together information and events scattered in the FCPA’s voluminous legislative record to tell the FCPA’s story through original voices of actual participants who shaped the law.

Among other things, you will learn: (i) how the foreign corporate payments problem was discovered, specific events that prompted congressional concern, and the policy ramifications of those events which motivated Congress to act; (ii) how seeking new legislative remedies to the foreign corporate payments problem was far from a consensus view of the U.S. government and the divergent views as to a solution; (iii) the many difficult and complex issues Congress encountered in seeking a new legislative remedy; (iv) the two main competing legislative responses to the problem—a disclosure approach as to a broad category of payments and a criminalization approach as to a narrow category of payments, and why Congress opted for the later; and (v) how Congress learned of a variety of foreign corporate payments to a variety of recipients and for a variety of reasons, but how and why Congress  intended and accepted in passing the FCPA to capture only a narrow category of such payments.

Posted by Mike Koehler at 12:03 am. Post Categories: Legislative History




December 17th, 2014

The FCPA Need Not Be The Grinch That Steals The Holiday Spirit

GrinchMedia sources (as well as FCPA practitioners) are always looking for fresh angles regarding Foreign Corrupt Practices Act topics.  So as the holidays approach, it was not surprising to find articles (here ”Making a List and Checking It Twice … Compliance Tips for Holiday Business Gifts” and here ”7 Potential FCPA Pitfalls For the Holiday Season”) discussing the FCPA risks of holiday gift giving.

Yes, certain FCPA enforcement actions have involved gift giving, including in connection with holidays and festivals – such as Chinese New Year and India’s Diwali Festival.

However, as previously highlighted in this post (a review of the book “Suspicious Gifts“), throughout human history, gifts have been a respected and legitimate form of gratitude and generosity, serving as a social glue important to any cohesive society. However, and invoking a concept from the book, in this new era of anti-corruption enforcement, everything it seems is viewed through a “bribery gaze.”

  • When you want to be generous – it could be bribery!
  • When you want to be friendly – it could be bribery!
  • When you allow yourself to be invited – it could be a bribe!
  • When you accept a present or prize – it could be a bribe!

This “bribery gaze” has social and public policy consequences. As the author of the book argued:

“Campaigns to eliminate these gift exchanges are at the same time campaigns to restrict the gamut of courtesy or ritual exchanges. The manifestations of courtesy, gratitude, and social bonds, which are so important as social glue in any cohesive society, are not just called into question, but criminalized.”

The holiday season ought not be gift-less because of the FCPA or any other similar law.

Indeed, as the DOJ/SEC issued FCPA Guidance states:

“A small gift or token of esteem or gratitude is often an appropriate way for business people to display respect for each other. Some hallmarks of appropriate gift-giving are when the gift is given openly and transparently, properly recorded in the giver’s books and records, provided only to reflect esteem or gratitude, and permitted under local law.  [...] The FCPA does not prohibit gift-giving. Rather, just like its domestic bribery counterparts, the FCPA prohibits the payments of bribes, including those disguised as gifts.”

My own two cents on the FCPA risks of gift giving around the holidays is as follows.

During this upcoming season of giving, I think it would be wise for companies not to view everything through a bribery gaze, but with a sense of practicality. The corporate community – which is frequently bombarded with doomsday scenario after scenario by FCPA Inc. – sometimes needs to take a step back to realize that in order to violate the FCPA’s anti-bribery provisions there has to be corrupt intent. While it may seem a bit counterintuitive, gift giving during the holidays can actually be less risky because it is the holiday season and gestures of good will are common.  Companies should be more concerned with a gift that occurs outside the normal periods of gift giving.

Posted by Mike Koehler at 12:03 am. Post Categories: Corrupt IntentGifts




December 16th, 2014

SEC Brings Another Travel And Entertainment FCPA Enforcement Action

World TourYesterday, the SEC brought its 7th Foreign Corrupt Practices Act enforcement action of 2014.  Like the previous 6 enforcement actions (5 against companies and 1 against individuals), the enforcement action was resolved via the SEC’s administrative process.

Yesterday’s enforcement action against life-sciences company Bruker Corporation was primarily based on excessive travel and entertainment benefits provided to alleged Chinese “foreign officials.”  The same core conduct was the basis of the SEC’s other most recent FCPA enforcement (see here).

In summary fashion, the SEC’s order sates:

“This matter concerns violations of the books and records and internal controls provisions of the Foreign Corrupt Practices Act (“FCPA”) by Bruker. The violations took place from at least 2005 through 2011 and occurred throughout Bruker’s China operations. Employees of the China offices of four Bruker subsidiaries (collectively, the “Bruker China Offices”) made unlawful payments of approximately $230,938 to government officials (“Chinese government officials”) who were employed by state owned entities (“SOEs”) in China that were Bruker customers. These payments were made to obtain or retain business from the SOEs for the Bruker China Offices. Specifically, all of the Bruker China Offices provided non-business related travel to Chinese government officials, and one Bruker China Office also paid Chinese government officials under “research cooperation” ventures and “collaboration” agreements (collectively, the “Collaboration Agreements”) for which there was no legitimate business purpose. Bruker realized approximately $1.7 million in profits from sales contracts with SOEs whose officials received the improper payments.

The payments to the Chinese government officials were recorded as legitimate business and marketing expenses in the Bruker China Offices’ books and records, when in fact they were improper payments designed to personally benefit the officials. The Bruker China Offices’ books and records were consolidated into Bruker’s books and records, thereby causing Bruker’s books and records to be inaccurate. Bruker failed to devise and maintain an adequate system of internal accounting controls sufficient to prevent and detect the improper payments that occurred over several years.”

According to the SEC order:

‘Bruker manages its China operations through the Shanghai and Beijing representative offices of the Asia-based subsidiaries of four Bruker divisions: Bruker Optics, Bruker BioSpin, Bruker Daltonics, and Bruker Materials (formerly Bruker AXS).”

Under the heading “The Bruker China Offices Improperly Funded Leisure Travel for Chinese Government Officials,” the Order states:

“The Bruker China Offices funded leisure travel for Chinese government officials to visit the United States, the Czech Republic, Norway, Sweden, France, Germany, Switzerland and Italy. These leisure trips typically followed business-related travel funded by the Bruker China Offices. The Chinese government officials who went on the trips often authorized the purchase of products from the Bruker China Offices. For example, during 2006, as part of a sales contract with an SOE, a Bruker China Office paid for purported training expenses for a Chinese government official (who signed the sales contract on behalf of the SOE). In fact, the payment included reimbursement for sightseeing, tour tickets, shopping and other leisure activities in Frankfurt and Paris. Also, in 2007, a Bruker China Office paid for three Chinese government officials to visit Sweden for a conference, but included as part of the travel, several days of sightseeing in Sweden, Finland, and Norway.

The Bruker China Offices also funded certain trips for Chinese government officials that had no legitimate business component. For example, during 2009, a Bruker China Office paid for two Chinese government officials to travel to New York, despite the lack of any Bruker facilities there, and to Los Angeles, where they engaged in sightseeing activities. Also during 2009, a Bruker China Office paid for three Chinese government officials to visit destinations in Europe for sightseeing. In another instance, during 2010, a Bruker China Office paid for three Chinese government officials to visit Frankfurt, Heidelberg, Stuttgart, and Munich, in Germany, as well as Salzburg, Liz, Innsbruck, Graz, and Vienna, in Austria. And in 2011, a Bruker China Office paid for Chinese government officials from seven SOEs to go on sightseeing visits to Europe, including Austria, France, Switzerland, Italy, and the Czech Republic. In certain cases, the Chinese government officials who went on these trips were involved in purchasing products from the Bruker China Offices.

Overall, from 2005 through 2011, the Bruker China Offices paid approximately $119,710 to fund 17 trips for Chinese government officials that were for the most part not related to any legitimate business purpose. These trips were recorded in Bruker’s books and records as business expenses, without any indication that they were primarily for sightseeing and other nonbusiness related activities. Bruker improperly profited by $1,131,740 from contracts obtained from the SOEs whose officials participated on these trips.”

Under the heading, “A Bruker China Office Improperly Funneled Payments to Officials of SOEs Under the Guise of Collaboration and Research Agreements,” the Order states:

“From 2008 through 2011, a Bruker China Office paid $111,228 to Chinese government officials pursuant to 12 suspect Collaboration Agreements. Generally, under these Collaboration Agreements, the SOEs had to provide research on Bruker products, or had to use Bruker products in demonstration laboratories. However, the Collaboration Agreements did not specify the work product that the SOEs had to provide to be paid, and no work product was in fact provided to the Bruker China Office by the SOEs. Also, certain Collaboration Agreements were executed directly with a Chinese government official, rather than the SOE itself; in some cases, the Bruker China Office paid the Chinese government official directly. And at times, the Chinese government officials who signed the Collaboration Agreements or obtained payments under the Agreements were involved in purchasing products from the Bruker China Office. Bruker profited by approximately $583,112 from contracts improperly obtained from the SOEs whose officials received payments under the Collaboration Agreements.”

Under the heading, “Bruker Failed to Implement an Adequate Internal Controls System,” the Order states:

“From at least 2005 through 2011, Bruker failed to implement an adequate internal controls system to address the potential FCPA problems posed by its ownership of the Bruker China Offices, which sold their products primarily to SOEs. For example, Bruker did not translate its training presentations on FCPA, ethics, or compliance issues into local languages, including Mandarin. And although Bruker implemented an FCPA policy in 2006, it failed to translate that policy into Mandarin and relied mainly on its China-based managers to ensure that employees understood the potential FCPA implications of doing business with SOEs. Also, while Bruker periodically distributed its Code of Conduct (containing its gifts and entertainment policies) and employee handbook to employees worldwide, it again failed to translate these documents into local languages, including Chinese. Likewise, Bruker’s toll free employee hotline, which employees were to use to report complaints anonymously, was not provided in Mandarin, limiting its efficacy.

Bruker also failed to adequately monitor and supervise the senior executives at the Bruker China Offices to ensure that they enforced anti-corruption policies or kept accurate records concerning payments to Chinese government officials. The Bruker China Offices had no independent compliance staff or an internal audit function that had authority to intervene into management decisions and, if appropriate, take remedial actions. Bruker also failed to tailor its preapproval processes for conditions in China, instead allowing the Bruker China Offices approval over items such as nonemployee travel and changes to contracts. As a result, senior employees of the Bruker China Offices had unsupervised control over the compliance process; these employees in turn abused their privileges, approving suspect payments to Chinese government officials for non-business related travel and for purported Collaboration Agreements.”

Based on the above findings, the SEC’s Order finds that Bruker violated the FCPA’s books and records and internal controls provisions.

Under the heading, “Discovery, Internal Investigation, and Self-Reporting,” the Order states:

“Bruker discovered the improper payments to Chinese government officials during 2011 while investigating the misappropriation of company funds by certain employees of a Bruker China Office. Upon learning about these payments, Bruker’s board of directors promptly initiated an investigation, with the assistance of independent outside counsel and an independent forensic consulting firm. Bruker self-reported the preliminary results of its internal investigation to both the staff of the Commission and to the Department of Justice. Thereafter, Bruker, on its own initiative, undertook a broad review of the China operations of its other divisions. To the extent this internal review identified additional issues of concern, Bruker fully shared its findings with the staff.

As part of its internal review and investigation, Bruker promptly undertook significant remedial measures including terminating the senior staff at each of the Bruker China Offices. Bruker also revised its pre-existing compliance program, updated and enhanced its financial accounting controls and its compliance protocols and policies, and implemented those enhancements in China, and thereafter around the world. These steps included: (1) instituting preapproval processes for nonemployee travel and significant changes to contracts; (2) establishing a new internal audit function and hiring a new director of internal audit who is charged with oversight over Bruker’s global compliance program, including FCPA compliance; (3) adopting an amended FCPA policy translated into local languages; (4) implementing an enhanced FCPA training program, which includes training programs in local languages as well as mandatory online employee training programs regarding ethics and FCPA compliance; (5) enhancing due diligence procedures for third-parties; and (6) implementing a new global whistleblower hotline.

Throughout the process, Bruker provided extensive, thorough, and real-time cooperation with the Commission. In addition to self-reporting to the Commission shortly after discovering the FCPA violations, Bruker voluntarily provided the Commission with real-time reports of its investigative findings; shared its analysis of important documents and summaries of witness interviews; expanded the scope of the investigation at the Commission’s request; and responded to the Commission’s requests for documents and information in a timely manner. These actions assisted the Commission in efficiently collecting valuable evidence, including information that may not have been otherwise available to the staff.”

In this SEC release, Kara Brockmeyer (Chief of the SEC’s FCPA Unit) stated:

“Bruker’s lax internal controls allowed employees in its China offices to enter into sham ‘collaboration agreements’ to direct money to foreign officials and send officials on sightseeing trips around the world. The company has since taken significant remedial steps to revise its compliance program and enhance internal controls over travel and contract approvals.”

As noted in the release:

“The SEC’s order finds that Bruker violated the internal controls and books and records provisions of the [FCPA].  The company agreed to pay $1,714,852 in disgorgement, $310,117 in prejudgment interest, and a $375,000 penalty.  Bruker consented to the order without admitting or denying the findings, and the SEC considered the company’s significant remedial acts as well as its self-reporting and cooperation with the investigation when determining a settlement.”

Todd Cronan (Goodwin Procter) represented Bruker.

According to Bruker’s public disclosures, the company has spent approximately $22 million in pre-enforcement action professional fees and expenses.  For more on this dynamic, and how settlement amounts in an FCPA enforcement action are often only a relatively minor component of the overall financial consequences of FCPA scrutiny, see “Foreign Corrupt Practices Act Ripples.”

Yesterday, Bruker’s stock price fell 1.8%.

Posted by Mike Koehler at 12:11 am. Post Categories: 2014 Enforcement ActionsBrukerChinaInvestigative FeesMedical Device IndustrySEC Enforcement ActionTravel and Entertainment




December 16th, 2014

Go Back To “School” This January At The FCPA Institute – Miami

FCPA InstituteLearning a new topic or elevating your knowledge and practical skills in a topic is not just for formal students in formal educational settings. Professionals in the workplace can benefit from back to “school” moments as well.  For professionals in the FCPA space – or wishing to join the FCPA space – the FCPA Institute serves this objective.

Begin 2015 by elevating your Foreign Corrupt Practices Act knowledge and practical skills in Miami, Florida at the FCPA Institute on January 12th-13th.  The FCPA Institute – Miami also provides participants the opportunity to earn CLE credit as well as a value-added professional credential.

The FCPA Institute is different than a typical FCPA conference.  At the FCPA Institute, information is presented in an integrated and cohesive manner by an expert instructor with FCPA practice and teaching experience.

Moreover, the FCPA Institute promotes active learning by participants through issue-spotting video exercises, skills exercises, small-group discussions and the sharing of real-world practices and experiences. To best facilitate the unique learning experience that the FCPA Institute represents, attendance at each FCPA Institute is capped at 30 participants.

In short, the FCPA Institute elevates the FCPA learning experience for a diverse group of professionals and is offered as a refreshing and cost-effective alternative to a typical FCPA conference. The goal of the FCPA Institute is simple: to develop and enhance fundamental skills relevant to the FCPA, FCPA enforcement, and FCPA compliance best practices in a stimulating and professional environment with a focus on learning.

The FCPA Institute presents the FCPA not merely as a legal issue, but also as a business, finance, accounting, and auditing issue. The FCPA Institute is thus ideal for a diverse group of professionals such as in-house and outside counsel; compliance professionals; finance, accounting, and auditing professionals; and others seeking sophisticated knowledge and enhanced skills relevant to the FCPA.

Click here to see what these diverse professionals are saying about the FCPA Institute.

FCPA Institute participants not only gain knowledge, practical skills and peer insight, but will also have their knowledge assessed and can earn a certificate of completion upon passing a written assessment tool. In this way, successful completion of the FCPA Institute represents a value-added credential for professional development.  In addition, attorneys who complete the FCPA Institute are also eligible to receive Continuing Legal Education (“CLE”) credits.  (The FCPA Institute – Miami has been approved for 15 general CLE credits in Florida and 13.5 general CLE credits in Georgia.  Attorneys may be eligible to receive CLE credit through reciprocity or attorney self-submission in other states as well).

Join other firm lawyers, in-house counsel, auditing professionals and others already registered for the FCPA Institute – Miami by clicking here to register.

Posted by Mike Koehler at 12:04 am. Post Categories: Uncategorized