July 29th, 2014

Stung By The Sting – Smith & Wesson Resolves FCPA Scrutiny That Originated With The Africa Sting

In January 2010 when highlighting the manufactured Africa Sting enforcement action, I predicted that the public company employing one of the defendants was likely going to be the subject of Foreign Corrupt Practices Act scrutiny not only based on the alleged conduct in the Africa Sting case, but also other conduct as well because the indicted individual was the “Vice President−Sales, International & U.S. Law Enforcement” for the company.  That company, it soon was learned, was Smith & Wesson and indeed in July 2010 Smith & Wesson disclosed its FCPA scrutiny (see here).

In an instructive example of a dynamic I highlight in my recent article “Foreign Corrupt Practices Act Ripples” (that is every instance of FCPA scrutiny has a point of entry – in other words, a set of facts that give rise to the scrutiny in the first place – and this point of entry is often the beginning of a long and expensive journey for the company under scrutiny as the company – to answer the frequently asked “where else” question and to demonstrate its cooperation – will conduct a world-wide review of its operations), yesterday the SEC announced this administrative FCPA enforcement action against Smith & Wesson.

The conduct has nothing to do with the manufactured (and failed) Africa Sting case, but does involve Smith & Wesson’s former Vice President of International Sales and another individual referred to as the Regional Director of International Sales.  The SEC states in summary fashion as follows.

“This matter concerns violations of the anti-bribery,books and records and internal controls provisions of the Foreign Corrupt Practices Act (“FCPA”) by Smith & Wesson. The violations took place from 2007 through early 2010, when a senior employee and other employees and representatives of Smith & Wesson made, authorized, and offered to make improper payments  and/or to provide gifts to foreign officials in an attempt to win contracts to sell firearm products to foreign military and law enforcement departments. During this period, Smith & Wesson’s international business was in its developing stages and accounted for approximately 10% of the company’s revenues. Smith & Wesson’s employees and representatives engaged in a systemic pattern of making, authorizing and offering bribes while seeking to expand the company’s overseas business.

The bribe payments were inaccurately recorded in Smith & Wesson’s books and records as legitimate sales commissions or other business expenses. Despite its push to make sales in new and high risk markets overseas, Smith & Wesson failed to establish an appropriate compliance program or devise and maintain an adequate system of internal accounting controls, which allowed the repeated improper offers and payments to continue undetected for years.”

According to the SEC:

“Smith & Wesson does not have any international subsidiaries and conducts its international business directly and through brokering agents. Much of Smith & Wesson’s international business involves the sale of firearms to foreign law enforcement and  military departments.  [...] From 2007 through early 2010, as Smith & Wesson sought to break into international markets and increase sales, certain of the company’s employees and representatives engaged in a pervasive practice of making, authorizing and offering improper payments to foreign government officials as a means of obtaining or retaining international business. Although only one of the contracts was fulfilled before the unlawful activity was identified, company employees made or authorized the making of improper payments in connection with multiple ongoing or contemplated international sales.”

The SEC’s order contains factual allegations regarding the following countries: Pakistan, Indonesia, Turkey, Nepal and Bangladesh.

As to Pakistan, the SEC order states:

“In 2008, for example, Smith & Wesson retained a third-party agent in Pakistan to assist the company in obtaining a deal to sell firearms to a Pakistani police department. Even after the agent notified the company that he would be providing guns valued in excess of $11,000 to Pakistani police officials in order to obtain the deal, and that he would be making additional cash payments to the officials, the company authorized the agent to proceed with the deal. Smith & Wesson’s Vice President of International Sales and its Regional Director of International Sales authorized the sale of the guns to the agent to be used as improper gifts and authorized payment of the commissions to the agent, while knowing or consciously disregarding the fact that the agent would be providing the guns and part of his commissions to Pakistani officials as an inducement for them to award the tender to the company. Smith & Wesson ultimately sold 548 pistols to the Pakistani police for $210,980 and profited from the corrupt deal in the amount of $107,852.”

As to Indonesia, the SEC order states:

“In 2009, Smith & Wesson attempted to win a contract to sell firearms to a Indonesian police department by making improper payments to its third party agent in Indonesia, who indicated that part of the payment would be provided to the Indonesian police officials under the guise of legitimate firearm lab testing costs. On several occasions, Smith & Wesson’s third-party agent indicated that the Indonesian police expected Smith & Wesson to pay them additional amounts above the actual cost of testing the guns as an inducement to enter the contract. The agent later notified Smith & Wesson’s Regional Director of International Sales that the price of “testing” the guns had risen further. Smith & Wesson’s Vice President of International Sales and its Regional Director of International Sales authorized and made the inflated payment, but a deal was never consummated.”

As to Turkey, Nepal and Bangladesh, the SEC order states:

Similarly, Smith &Wesson made improper payments in 2009 to its third party agent in Turkey, who indicated that part of the payments would be provided to Turkish officials in an attempt to secure two deals in Turkey for sale of handcuffs to Turkish police and firearms to the Turkish military. Neither of these interactions resulted in the shipment of products, as Smith & Wesson was unsuccessful bidding for the first deal, while the latter deal was ultimately canceled. Similarly, Smith & Wesson authorized improper payments to third party agents who indicated that parts of these payments would be provided to foreign officials in Nepal and Bangladesh in unsuccessful attempts to secure sales contracts in those countries. Although these contemplated deals in Nepal and Bangladesh were never consummated in each case, the company had obtained or attempted to obtain the contract by using third party agents as a conduit for improper payments to government officials.”

The SEC’s order then states:

“Despite making it a high priority to grow sales in new and high risk markets overseas, the company failed to design and implement a system of internal controls or an appropriate FCPA compliance program reasonably designed to address the increased risks of its new business model. The company did not perform any anti-corruption risk assessment and conducted virtually no due diligence of its third-party agents regardless of the perceived level of corruption in the country in which Smith & Wesson was seeking to do business. Smith & Wesson  failed to devise adequate policies and procedures for commission payments, the use of samples for test and evaluation, gifts, and commission advances. The Vice President of International Sales had almost complete authority to conduct the company’s international business, including the sole ability to approve most commissions. Smith & Wesson’s FCPA policies and procedures, and its FCPA-related training and supervision also were inadequate. As a result of these compliance and internal controls failures, Smith & Wesson’s Vice President of International Sales and the Regional Director of International Sales were able to cause the company to pay and/or authorize improper payments in numerous countries around the globe for a period of several years.”

Under the headline “Remedial Measures,” the SEC order states:

“Smith & Wesson took prompt action to remediate its immediate FCPA issues, including: conducting an internal investigation, terminating its entire international sales staff; terminating pending international sales transactions; and re-evaluating the markets in which it sought international sales. In addition, Smith & Wesson implemented a series of significant measures to improve its internal controls and compliance processes, including: implementing new internal audit procedures to identify FCPA issues; creating more robust controls on payments, gifts, and other transactions in connection with international business activity; enhancing its FCPA compliance policies and procedures; and creating a Business Ethics and Compliance Committee.”

Based on the above findings, the SEC found that Smith & Wesson violated the FCPA’s anti-bribery provisions, books and records provisions and internal controls provisions.  As to the later, the SEC order states:

“Smith & Wesson failed to devise and maintain sufficient internal controls with respect to its international sales operations. While the company had a basic corporate policy prohibiting the payment of bribes, it failed to implement a reasonable system of controls to effectuate that policy. For example, Smith & Wesson failed to devise adequate policies and procedures with regard to commission payments, the use of samples for test and evaluation, gifts, and commission advances. Further, Smith & Wesson’s FCPA policies and procedures, and its FCPA-related training and supervision were inadequate.”

As highlighted in the SEC’s order, Smith & Wesson agreed to “report to the Commission staff on the status of [its] remediation and implementation of compliance measures at six-month to twelve-month intervals during a two-year term.” In addition, Smith & Wesson agreed to conduct an initial review – and two follow-up reviews – “setting forth a complete description of its remediation efforts to date, its proposals reasonably designed to improve the policies and procedures of Respondent for ensuring compliance with the FCPA and other applicable anticorruption laws, and the parameters of the subsequent reviews.”

In the SEC order, Smith & Wesson was ordered to cease and desist from future FCPA violations and agreed to pay $2,034,892 …  including $107,852 in disgorgement, $21,040 in prejudgment interest, and a civil monetary penalty of $1,906,000.”  In resolving its FCPA scrutiny, Smith & Wesson did not admit nor deny the SEC’s findings.

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

“This is a wake-up call for small and medium-size businesses that want to enter into high-risk markets and expand their international sales. When a company makes the strategic decision to sell its products overseas, it must ensure that the right internal controls are in place and operating.”

In this release, Smith & Wesson President and CEO James Debney stated:

“We are pleased to have concluded this matter with the SECand believe that the settlement we have agreed upon is in the best interests of Smith & Wesson and its shareholders.  Today’s announcement brings to conclusion a legacy issue for our company that commenced more than four years ago, and we are pleased to now finally put this matter behind us.”

Smith & Wesson’s stock price was down approximately .7% on the day of the SEC’s announcement of the enforcement action.





July 28th, 2014

Wal-Mart Delaware Action – Much To Do About Little

There are certain topics in the FCPA space that are over-hyped.

The document request dispute in connection with a Wal-Mart derivative action is certainly one example.

By way of background, in the aftermath of Wal-Mart’s Foreign Corrupt Practices Act scrutiny, shareholders (as is fairly typical in instances of FCPA scrutiny) filed derivative actions against the company and various current or former officers and directors alleging, among other things, breach of fiduciary duties.  Derivative actions are subject to specific pleading rules and in connection with its filed complaint the Indiana Electrical Workers Pension Trust Fund (“Plaintiff”) made certain demands on Wal-Mart under Section 220 of the Delaware General Corporation Law.  Titled ”Inspection of Books and Records,,” Section 220 governs a stockholder’s right to inspect certain corporate books and records.

In response to Plaintiff’s Section 220 Demand, Wal-Mart agreed to make certain documents available, but declined to provide documents that it determined were not necessary and essential to the stated purposes in the Demand or that were protected by the attorney-client privilege or work-product doctrine.  To resolve the disputed document request issues, the Delaware Court of Chancery (a trial court) ordered Wal-Mart to produce certain additional documents.

Wal-Mart disagreed with the Court of Chancery’s order and filed an appeal with the Delaware Supreme Court arguing that the trial court erred in ordering Wal-Mart to produce documents that far exceeded the proper scope of Section 220 requests.

Despite the rather pedestrian nature of the document request dispute, some saw (or perhaps were hoping to see) monumental issues.

This FCPA Blog post sought to explain “why the issues before the Delaware Supreme Court are important to all compliance officers and corporate stakeholders, and how the outcome could influence compliance programs globally for decades to come.” Why was the Wal-Mart dispute, according to the FCPA Blog commentator, so important?

“Because at the heart of the appeal is the question of what misconduct by directors so taints them that shareholders are allowed to proceed with a civil complaint. When can directors be absolved from directing an internal FCPA investigation? And when can they ignore red flags of overseas misconduct and conduct business as usual?”

As highlighted below, none of these issues were on appeal to the Delaware Supreme Court.

Further, this FCPA Blog post stated that Wal-Mart’s appeal “could be the right forum for landmark changes to guide executives, directors, and compliance professionals for decades” and the commentator was hoping for the Delaware Supreme Court to “seize the opportunity to paint on the largest canvas possible, to illuminate new roles for those we’ve put in charge of compliance.”

As highlighted below, this did not happen either.

Hype aside, as framed by the Delaware Supreme Court in its decision, ”the sole issue presented for judicial determination was whether Wal-Mart produced all of the documents that were responsive to [Plaintiff's] Demand.”  Under the “necessary and essential” test applicable to Section 220 proceedings, and reviewing the Court of Chancery’s order under the abuse of discretion standard, the Supreme Court determined that all issues on appeal (both issues raised by Wal-Mart as well as Plaintiffs) were without merit and therefore affirmed the Court of Chancery order.

Specifically, as to the Plaintiff’s demand for officer-level documents, the court concluded that “officer-level documents are necessary and essential to determining whether and to what extent mismanagement occurred and what information was transmitted to Wal-Mart’s directors and officers.”

In its decision, the Supreme Court also addressed certain pedestrian issues such as the relevant dates of production, disaster recovery tapes for two document custodians, and the precision and specificity of certain document requests.

The Delaware Supreme Court also addressed an issue on appeal not presented to the Court of Chancery concerning the so-called Garner doctrine (a fiduciary exception to the attorney-client privilege in which stockholders are allowed to invade the corporation’s attorney-client privilege in order to prove fiduciary breaches by those in control of the corporation upon showing good cause).

In its decision, the Supreme Court acknowledged its previous dicta statements in which it endorsed the Garner doctrine in a Section 220 proceeding and agreed with previous Court of Chancery decisions applying the Garner doctrine in a Section 220 proceeding.

Applying the Garner doctrine to the Plaintiffs’ Section 220 demand, the Supreme Court agreed with the Court of Chancery that the Plaintiffs established good cause to order the privileged documents be produced because the Plaintiffs “had demonstrated a colorable claim against Wal-Mart” and that the information sought was not available via other means.  In short, the Supreme Court stated:

“The record supports the Court of Chancery’s conclusion that the documentary information sought in the Demand should be produced by Wal-Mart pursuant to the Garner fiduciary exception to the attorney-client privilege.”

The Supreme Court further found that the Court of Chancery properly ruled that Plaintiffs’ demands for certain work-product documents were legitimate under a relevant Court of Chancery rule because the relevant Garner factors overlapped with the required showings necessary under the rule.

In short, the issues presented to the Delaware Supreme Court, and the Court’s decision, merely concerned document issues relevant to pre-trial pleading requirements in a derivative action – hardly the momentous issues some had reported or predicted.

Moreover, although the Delaware Supreme Court appeal was viewed as Wal-Mart’s appeal, as a matter of fact, the Plaintiff also filed cross-appeals which the Supreme Court also deemed to be without merit.  The Supreme Court denied the Plaintiffs request that Wal-Mart should collect documents from additional custodians and also denied the Plaintiffs’ challenge to the Court of Chancery’s order requiring it to return to Wal-Mart certain privileged documents that were delivered to its counsel by an anonymous source.

For oral argument of the Delaware Supreme Court hearing, see here.

Posted by Mike Koehler at 12:02 am. Post Categories: Related Civil LitigationWal-Mart




July 25th, 2014

Friday Roundup

The U.K. SFO flexes its pre-Bribery Act muscle in criminally charging an Alstom subsidiary, other scrutiny alerts and updates, nominate, double standard, quotable, and for the reading stack.  It’s all here in the Friday roundup.

Alstom

As has been widely reported (see here and here for instance), the U.K. Serious Fraud Office announced:

“Alstom Network UK Ltd, formerly called Alstom International Ltd, a UK subsidiary of Alstom, has been charged with three offences of corruption contrary to section 1 of the Prevention of Corruption Act 1906, as well as three offences of Conspiracy to Corrupt contrary to section 1 of the Criminal Law Act 1977. The alleged offences are said to have taken place between 1 June 2000 and 30 November 2006 and concern large transport projects in India, Poland and Tunisia.”

According to the release, “the SFO investigation commenced as a result of information provided to the SFO by the Office of the Attorney General in Switzerland concerning the Alstom Group, in particular Alstom Network UK Ltd.”

I inquired with the SFO press office regarding any original source charging documents and was informed as follows.  ”Beyond our press release today, the nearest date for documents likely to be made available would be the charge sheet at the first court hearing – presently arranged for 9 September, at Westminster Magistrates’ Court.”

As readers likely know, since April 2013 the DOJ has charged four individuals associated with Alstom Power Inc., a subsidiary of Alstom, in connection with an alleged bribery scheme involving the Tarahan coal-fired steam power plant project in Indonesia. (See more below for a recent guilty plea).

As was the case in the U.S. – U.K. enforcement action against BAE (see here for the prior post) there may have been and/or currently is turf war issues between the agencies as to which agency is going to prosecute alleged conduct occurring in various countries.

Speaking of the DOJ action against various individuals associated with Alstom Power, last week, the DOJ announced that William Pomponi, a former vice president of regional sales at Alstom Power, pleaded guilty to a criminal information charging him with conspiracy to violate the FCPA in connection with the awarding of the Tarahan power project in Indonesia.

Assistant Attorney General Leslie R. Caldwell stated:

“The Criminal Division of the Department of Justice will follow evidence of corruption wherever it leads, including into corporate boardrooms and corner offices.  As this case demonstrates, we will hold both companies and their executives responsible for criminal conduct.”

As noted in the DOJ release:

“Pomponi is the fourth defendant to plead guilty to charges stemming from this investigation.   Frederic Pierucci, the vice president of global boiler sales at Alstom, pleaded guilty on July 29, 2013, to one count of conspiracy to violate the FCPA and one count of violating the FCPA; and, David Rothschild, a former vice president of regional sales at Alstom Power Inc., pleaded guilty to conspiring to violate the FCPA on Nov. 2, 2012.  Marubeni Corporation, Alstom’s consortium partner on the Tarahan project, pleaded guilty on March 19, 2014, to one count of conspiracy to violate the FCPA and seven counts of violating the FCPA, and was sentenced to pay a criminal fine of $88 million.   FCPA and money laundering charges remain pending against Lawrence Hoskins, the former senior vice president for the Asia region for Alstom, and trial is scheduled for June 2, 2015.”

See here for the original post highlighting the enforcement action against the individuals associated with Alstom and here for the original post regarding the Marubeni enforcement action.

Scrutiny Alerts and Updates

SEC Enforcement Action Against Former Magyar Telekom Executives

From Law360:

“The SEC has slimmed down its FCPA case against three former Magyar Telekom PLC executives, dropping claims they bribed government officials in Montenegro, according to a new complaint …  The amended complaint alleged former Magyar CEO Elek Straub and two other former executives, Andras Balogh and Tamas Morvai, authorized bribe payments to government officials in the Republic of Macedonia in exchange for regulations designed to hurt a competitor. The SEC, in its initial complaint in December 2011, had also alleged the defendants engaged in a second bribery scheme in Montenegro.  The agency said in a July 14 court filing that it would “continue to pursue the same legal causes of action alleged in its original complaint,” but without the claims related to Montenegro.  The SEC previously advised the court and defense attorneys in January 2014 of its intention to narrow the suit.”

Interesting, isn’t it, what happens when the SEC is put to its burden of proof.

Kowalewski Pleads Guilty

The DOJ announced:

“Bernd Kowalewski, the former President and CEO of BizJet, pleaded guilty … to conspiracy to violate the Foreign Corrupt Practices Act (FCPA) and a substantive violation of the FCPA in connection with a scheme to pay bribes to officials in Mexico and Panama in exchange for those officials’ assistance in securing contracts for BizJet to perform aircraft maintenance, repair and overhaul services.”

Assistant Attorney General Leslie Caldwell stated:

“The former CEO of BizJet, Bernd Kowalewski, has become the third and most senior Bizjet executive to plead guilty to bribing officials in Mexico and Panama to get contracts for aircraft services.  While Kowalewski and his fellow executives referred to the corrupt payments as ‘commissions’ and ‘incentives,’ they were bribes, plain and simple.  Though he was living abroad when the charges were unsealed, the reach of the law extends beyond U.S. borders, resulting in Kowalewski’s arrest in Amsterdam and his appearance in court today in the United States.  Today’s guilty plea is an example of our continued determination to hold corporate executives responsible for criminal wrongdoing whenever the evidence allows.”

U.S. Attorney Danny Williams (N.D. Okla.) stated:

“I commend the investigators and prosecutors who worked together across borders and jurisdictions to vigorously enforce the Foreign Corrupt Practices Act. Partnership is a necessity in all investigations. By forging and strengthening international partnerships to combat bribery, the Department of Justice is advancing its efforts to prevent crime and to protect citizens.”

See here and here for posts regarding the 2012 DOJ enforcement action against BizJet and here and here for the 2013 DOJ enforcement action against Kowalewski and others associated with BizJet.

Cilins Sentenced

As noted in this prior post, in April 2013 the DOJ announced (here) that “Frederic Cilins a French citizen, has been arrested and accused of attempting to obstruct an ongoing investigation into whether a mining company paid bribes to win lucrative mining rights in the Republic of Guinea.”  The Criminal Complaint charged Cilins with one count of tampering with a witness, victim, or informant; one count of obstruction of a criminal investigation; and one count of destruction, alteration, and falsification of records in a federal investigation.  Cilins was linked to Guernsey-based BSG Resources Ltd and in March 2014 the DOJ announced that Cilins pleaded guilty “to obstructing a federal criminal investigation into whether a mining company paid bribes to win lucrative mining rights in the Republic of Guinea.”  (See this prior post).

Last week, the DOJ announced that Cilins was sentenced to 24 months in prison.  In the DOJ release, U.S. Attorney Preet Bharara said:

“Frederic Cilins went to great lengths to thwart a Manhattan federal grand jury’s investigation into an alleged bribery scheme in the Republic of Guinea. In an effort to prevent the federal authorities from learning the truth, Cilins paid a witness for her silence and to destroy key documents. Today, Cilins learned that no one can manipulate justice.”

Assistant Attorney General Leslie Caldwell said:

“Cilins offered to bribe a witness in an FCPA investigation to stop the witness from talking to the FBI. Today’s sentence holds Cilins accountable for his effort to undermine the integrity of our justice system, and sends a message that those who interfere with federal investigations will be prosecuted and sent to prison.”

FBI Assistant Director-in-Charge George Venizelos said:

“Cilins obstructed the efforts of the FBI during the course of this investigation. His guilty plea and sentence demonstrate our shared commitment with the U.S. Attorney’s Office to hold accountable those who seek to interfere with the administration of justice. This case should be a reminder to all those who try to circumvent the efforts of a law enforcement investigation: the original crime and the cover-up both lend themselves to prosecution.”

According to the release, Cilins was also ordered to pay a fine of $75,000 and to forfeit $20,000.

GSK

From Reuters:

“GlaxoSmithKline faces new allegations of corruption, this time in Syria, where the drugmaker and its distributor have been accused of paying bribes to secure business, according to a whistleblower’s email reviewed by Reuters. Britain’s biggest drugmaker said on Thursday it was investigating the latest claims dating back to 2010, which were laid out in the email received by the company on July 18. The allegations relate to its former consumer healthcare operations in Syria, which were closed down in 2012 due to the worsening civil war in the country.  [...]  GSK has been rocked by corruption allegations since last July, when Chinese authorities accused it of funneling up to 3 billion yuan ($480 million) to doctors and officials to encourage them to use its medicines. The former British boss of the drugmaker’s China business was accused in May of being behind those bribes.  Since then, smaller-scale bribery claims have surfaced in other countries and GSK is now investigating possible staff misconduct in Poland, Iraq, Jordan and Lebanon. Syria is the sixth country to be added to the list. The allegations there center on the company’s consumer business, including its popular painkiller Panadol and oral care products. Although rules governing the promotion of non-prescription products are not as strict as for prescription medicines, the email from a person familiar with GSK’s Syrian operations said alleged bribes in the form of cash, speakers’ fees, trips and free samples were in breach of corruption laws. The detailed 5,000-word document, addressed to Chief Executive Andrew Witty and Judy Lewent, chair of GSK’s audit committee, said incentives were paid to doctors, dentists, pharmacists and government officials to win tenders and to obtain improper business advantages.”

Separately, this Reuters article states that the U.K. SFO  ”is working with authorities in China in a first for such Anglo-Chinese cooperation as it carries out its own investigation into alleged corruption at GSK.”  The article quotes SFO Director David Green as follows:  ”Certainly, so far as I am aware it is the first time we have had cooperation with the Chinese on an SFO case.”

Separately, in the U.S. this Wall Street Journal article states:

“Federal Bureau of Investigation agents have been interviewing current and former GSK employees in connection with bribery allegations made against the drug maker in China, according to a person familiar with the matter, as fresh claims of corruption surfaced against Glaxo’s operations in Syria. The interviews have taken place in Washington, D.C., in the past few months and are part of a Justice Department investigation into GSK’s activities in China, the person added. The U.S. Securities and Exchange Commission also is investigating the company’s business in China, according to people familiar with the matter.”

Key Energy Services

The company stated as follows in its Second Quarter 2014 Update and Earnings Release.

“Pre-tax expenses of approximately $5 million were incurred in connection with the previously disclosed Foreign Corrupt Practices Act investigations.”

Nominate

If FCPA Professor adds value to your practice or business or otherwise enlightens your day and causes you to contemplate the issues in a more sophisticated way, please consider nominating FCPA Professor for the ABA Journal’s Blawg 100 list (see here).

Double Standard

Beginning in 2009, I began writing about the “double standard” and how – despite the similarities between the FCPA and 18 USC 201 (the domestic bribery statute) – a U.S. company’s interaction with a “foreign official” is subject to more scrutiny and different standards than interaction with a U.S. official.  Since 2009, approximately 30 posts have appeared under the “double standard” subject matter tag.

Against this backdrop, I was happy to see another individual tackle the same general topic.  See here from the Global AntiCorruption Blog – “Is U.S. Campaign Finance Law More Permissive of Corruption Than the FCPA?”

Quotable

In this Corporate Crime Reporter interview, former U.S. Attorney Neil MacBride (E.D. Va.) says the following regarding the use of non-prosecution and deferred prosecution agreements:  “The Department now has the ability to reach more ambiguous conduct where it might be more difficult to prove a criminal conviction in court.”

Wait a minute!

If the conduct is ambiguous and the DOJ would have a difficult time to prove a criminal conviction in court, there should be no non-prosecution or deferred prosecution agreement.  Period.  End of story. The rule of law commands such a result.

Reading Stack

Over at the FCPA Compliance & Ethics blog, Tom Fox recently published a three-part series on M&A issues and the FCPA.  See Part I, Part II, and Part III.

Sherman & Sterling’s mid-year FCPA Digest, including its “Trends and Patterns” is here.  Among the trends and patterns:

“Recent paper victories by the SEC could be perceived as setbacks in the Commission’s actions against
individual defendants; and

The SEC has continued its practice of pursuing its theory of strict liability against a parent corporation
for the acts of its corporate subsidiaries.”

Kudos to Sherman & Sterling for adopting the “core” approach to keeping FCPA statistics.  (See here for the prior post regarding my suggested “core” approach).  The Digest states:

“We count all actions against a corporate “family” as one action. Thus, if the DOJ  charges a subsidiary and the SEC charges a  parent issuer, that counts as one action. In  addition, we count as a “case” both filed  enforcement actions (pleas, deferred prosecution agreements, and complaints)  and other resolutions such as  non-prosecution agreements that include  enforcement-type aspects, such as financial  penalties, tolling of the statute of  limitations, and compliance requirements.”

The most recent edition of Miller & Chevalier’s FCPA Update is here.  Debevoise & Plimpton’s always informative FCPA Update is here and Mayer Brown’s FCPA mid-year update is here.

Warning, the enforcement statistics cited in certain of the above updates will cause confusion because they do not adopt the “core” approach.

*****

A good weekend to all.





July 24th, 2014

Why The Meaning Of “Foreign Official” Matters

In the aftermath of the 11th Circuit’s recent “foreign official” decision, some appear perplexed why the meaning of “foreign official” even matters.

This commentator stated:

“If your are trying to figure out whether a company is a private company or an “instrumentality” of a foreign government under the Foreign Corrupt Practices Act you are already in trouble. To reach that point in the FCPA analysis you’ve already paid a bribe, or are thinking of paying a bribe. (If you’re just thinking about it; Don’t do it.) Otherwise you’ll end up in the position of Joel Esquenazi and Carlos Rodriguez.”

Such comments are not new.

For instance, as highlighted in this 2011 post in advance of the U.S. House’s June 2011 FCPA hearing, various civil society organizations asked – regarding calls for clarification of the “foreign official” element:  ”Greater certainty of what? Greater certainty of who [companies] are permitted to bribe and who they are not permitted to bribe.”

I respectfully submit that such comments (both then and now) are entirely off-base and not the main reason why the meaning of “foreign official” matters.

To be sure, the meaning of “foreign official” mattered to Esquenazi and Rodriguez in the narrow context of their case and more broadly for the obvious rule of law reasons implicated in criminal law enforcement.

Numerous previous posts have analyzed the 11th Circuit’s “foreign official” decision (see here for the first reporting of the decision; here for the key language of the decision; here for “foreign official” – the current landscape; here for a “foreign official roundup,  here for a perspective on the court’s flawed reasoning; and here for the 193 different meanings of foreign official).

This post highlights why “foreign official” matters to the entire business community.

For starters, to say that the meaning of “foreign official” matters only to those intent on engaging in bribery is like saying the drinking laws matter only to those intent on drunk driving.  Sure, the drinking laws can certainly capture those engaged in drunk driving, yet the reality is the underlying activity – drinking – is legal and socially acceptable in most other situations.

The same is true when it comes to the meaning of “foreign official.”

The FCPA’s anti-bribery provisions are, generally speaking, implicated when money or something of value is offered or provided to a “foreign official” in connection with a business purpose.  But guess what?  The underlying activity, offering or providing money or something of value in connection with a business purpose is legal and socially acceptable in most other situations.  In fact, in most circles it is called effective sales and marketing, wining and dining the customer, or maintaining good will.

The point is companies competing in good faith in the global marketplace can legally provide things of value to one category of person in connection with a business purpose, yet providing the same thing of value to a different category of person can be a crime.

In other words, the meaning of “foreign official” expands regulation of business interactions with a “well-defined group of persons” (as correctly noted by the 5th Circuit in U.S. v. Castle – see here) to an ill-defined, practically boundless category of persons as found by the 11th Circuit in Esquenazi.

How is a company supposed to know what category of person it can safely provide things of value to in connection with a business purpose and the category of person where providing things of value may be deemed a crime?  As highlighted in this prior post, it is difficult to comprehend how a business organization could legitimately find answers to many of the factors identified by the 11th Circuit as being relevant to the “instrumentality” analysis.

As even the 11th Circuit recognized:  it will be a “difficult task – involving divining subjective intentions of a foreign sovereign, parsing history, and interpreting significant amounts of foreign law – to decide what functions a foreign government considers core and traditional.”  Moreover, the 11th Circuit recognized ”there may be entities near the definitional line for ‘instrumentality’ that may raise a vagueness concern.”

At this point, I can hear certain readers screaming, come on, FCPA enforcement actions are about bribery, not providing mere things of value to “foreign officials.”  If that is your view of FCPA enforcement, then you are clearly not reading the actual enforcement agency resolution documents which frequently contain references to such things of value as handbags, tea sets, karaoke bars, flowers, and yes even cigarettes.

Again, the reason why “foreign official” matters is because providing such things of value to one category of person in connection with a business purpose is often perfectly acceptable and legitimate, yet providing such things of value to another category of person – as evidenced by FCPA enforcement actions – is labeled a crime by the enforcement agencies.

At this point, I can also hear certain readers saying, well, the Travel Act can cover providing such things of value to non-”foreign officials,” and regardless, the FCPA’s books and records and internal control provisions are implicated in connection with all expenditures by issuers.  If that is your position, I say please highlight any Travel Act enforcement action or non-FCPA, FCPA books and records and internal controls enforcement action  focused on karaoke bars, flowers and cigarettes.

One may be inclined to dismiss corporate concern about providing such inconsequential things of value to certain categories of persons as over-reaction and paranoia.  However, this reaction is understandable because of what the DOJ and SEC are choosing to include in FCPA enforcement action resolution documents and based on DOJ policy statements that the business community should look to resolution documents (including NPAs and DPAs) as evidence of what improper conduct is under the FCPA.

In short, the vast majority of companies competing in good faith in the global marketplace are struggling with the definition of “foreign official” not because they want to bribe anybody.  But rather because such companies are legitimately and legally providing things of value to customer x, but fearful that providing the same thing of value to customer y will be deemed a crime.

The resulting compliance reality is that risk averse companies are acting contrary to sensible enforcement agency guidance.  For instance, in the FCPA Guidance the DOJ/SEC warned about “devoting a disproportionate amount of time policing modest entertainment and gift-giving.”  Likewise, in the SEC’s most-extensive FCPA guidance, the agency cautioned companies that “thousands of dollars ordinarily should not be spent conserving hundreds.”

For the above reasons, the meaning of “foreign official” matters.

Posted by Mike Koehler at 12:03 am. Post Categories: Foreign Official




July 23rd, 2014

How “Respect Your Elder” Can Present Compliance Difficulties

Among the reasons Foreign Corrupt Practices Act compliance is difficult for even the most well-managed business organization operating in the global marketplace is the obvious fact that a company is not a computer on auto-pilot.

Rather, as highlighted in “Revisiting an FCPA Compliance Defense,”

“Doing business in international markets often requires hiring local workers who are products of different cultures and experiences, speak different languages, and are located in different time zones from corporate headquarters. While bribery is prohibited by the written laws of every country and while a suitcase full of cash to a government official to obtain or retain a government contract is a universal wrong regardless of culture, language, or experience, this is where the consensus often ends. Even with gold-standard compliance policies and procedures, the practical reality of monitoring and supervising this vast and diverse network of individuals is difficult and even gold-standard compliance policies and procedures are not foolproof.”

FCPA scrutiny is best minimized when, among other things, employees (regardless of rank, title or position) are able to spot FCPA risk and report concerns or suspicions to the appropriate personnel within the company.

Problem is we are all taught from an early age to “respect our elders” and this cultural norm is even more pronounced in certain cultures outside of the U.S.  In many countries, this cultural norm permeates all facets of life including the workplace.  In short, the same cultural diversity that so enriches a business organization can present compliance difficulties.

From my FCPA practice experience conducting internal investigations abroad, I have direct knowledge of certain instances of FCPA scrutiny that arose in Asian countries where the conduct under investigation focused on the “patriarch” of the office (in other words the elder male), yet under circumstances where the traditional gatekeepers in the company  (in-house counsel, finance and auditing professionals, etc.) were either younger males, or more often, younger females who appeared culturally paralyzed to voice their concern or suspicion regarding the “patriarch.”

The “respect your elder” dynamic, which is positively viewed in other aspects of life, presented compliance difficulties for this particular company, and no doubt many other companies operating in Asia where this cultural value is most revered.

While outside the FCPA context, this recent post “Learning to Speak Up When You’re from a Culture of Deference,” on a Harvard Business Review site by Professor Andy Molinsky is spot-on.  He writes:

“Many of us are uncomfortable speaking with people of higher status. We can feel self-conscious, unsure of what to say, and afraid what we’re going to say — or what we’re saying — is the wrong thing. After these conversations, we often replay in our heads what we said, analyze what we shouldn’t have said, or realize what we should have said but didn’t. But imagine what communicating up the hierarchy is like for people from countries and cultures where notions of hierarchy are much deeper and much more ingrained than ours. Where even as a small child you are taught to speak only when spoken to, and that in the presence of authority figures, like your parents, your teachers, or your boss, you should remain quiet, put your head down, do solid work, and hope to be noticed.”

In the article, Professor Molinsky offers advice that “organizations and particularly leaders of organizations [can] do to lessen the brunt of this liability of deference for their employees from other cultures.”  Much of the practical advise seems self-obvious at first blush, yet – as in other aspects of compliance – sometimes the self-obvious is not so self-obvious.

Moreover, recognizing the existence of a hidden problem (in other words how the “respect your elder” dynamic – so noble in other aspects of life – can present compliance difficulties) is often the first step to crafting company specific responses to counteract the problem.

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