Archive for the ‘3M’ Category

The Need For An FCPA Lingua Franca

Thursday, March 7th, 2013

There is a need for a Foreign Corrupt Practices Act lingua franca.  The absence of a lingua franca has all sorts of negative effects, including an impact on the quality of FCPA enforcement and related statistics.  I previously wrote about this issue here (“What is an FCPA Enforcement Action”), here (“The Need For a Consensus ‘Declination’ Definition”) and here (“Further to the Definition of ‘Declination’”).

Several recent events have put into sharper focus the need for an FCPA lingua franca – both as to what is an FCPA enforcement action and what is a declination.

What is an FCPA Enforcement Action?

Last week, a guest post on the FCPA Blog by Marc Alain Bohn (Miller & Chevalier) contained the headline “Year’s First FCPA Enforcement Action Flies Under the Radar.”  The post concerned this February 28th SEC enforcement action against Keyuan Petrochemicals, Inc. and Aichun Li (the company’s CFO).   To be sure, it was a nice find by Bohn and I agree with his statement that the action, regardless of what it is called, is significant because it was an SEC enforcement action against a China-based company whose stock is registered with the SEC and traded in the U.S.

The enforcement action was principally based on Keyuan’s systematic failure “to disclose in its SEC filings numerous material related party transactions between the company and its CEO and controlling shareholders, entities controlled by or affiliated with these persons, and entities controlled by Kenyuan’s management or their family members.”  As alleged by the SEC, “the related party transactions took the form of sales of products, purchases of raw materials, loan guarantees and short term cash transfers for financing purposes.”

The enforcement action also included allegations that Kenyuan “operated an off-balance sheet cash account that was kept off the company books.”  According to the SEC, “the account was used to pay for various items, including cash bonuses for senior officers, fees to consultants who provided technical services to the company, and reimbursements to the CEO for business expenses, including travel, entertainment, and rent for an apartment.”  Later in the complaint, the SEC alleges as follows regarding the “off-balance sheet cash account.”

“From at least July 2008 and continuing until March 2011, Keyuan maintained an off-balance sheet cash account. Total amounts funded to and disbursed from the account were approximately $1 million. As a consequence of the use of the off-balance sheet cash account, the company’s reported balances in its financial statements for cash, receivables, construction-in progress, interest income, other income, and general and administrative expenses were misstated.  Cash disbursements from the off-balance sheet account were used to pay for various expenses. For instance, cash bonuses were paid to senior officers, including Individual A, in 2010 from the off-balance sheet cash account; Keyuan did not withhold any taxes on these bonus payments. Keyuan also paid various technical experts that provided consulting services from this account; no provision was made by Keyuan to pay local taxes in connection with these payments. The company’s CEO also received cash disbursements from the off-balance sheet cash account, including funds to cover business expenses (such as travel and entertainment) and to cover the costs of an apartment near the plant facilities.”

As detailed in this prior post,  the FCPA of course is a law much broader than its name suggests.  The FCPA’s books and records and internal control provisions are among the most generic substantive legal provisions one can find and the SEC often brings what I’ve called “non-FCPA FCPA enforcement actions.”

In the Keyuan enforcement action it is thus not surprising that the SEC charged violations of the FCPA’s books and records and internal control provisions based on the above conduct.

Yet, as Bohn correctly points out in his FCPA Blog post, the SEC complaint also did made passing reference, in detailing the off-balance sheet cash account, that it “was also used to fund gifts – both cash and non-cash – for Chinese government officials.”  Specifically, in paragraph 42 of the complaint the SEC alleges as follows.

“The off-balance sheet cash account was also used, in part, to fund gifts to Chinese government officials, typically around the Chinese New Year.  Among the recipients of the gifts were officials from the local environment, port, police, and fire departments.  Gifts ranged from household goods (such as beddings and linens) to ‘red envelope’ gifts in which cash was directly gifted to the recipients”

Of note, in the SEC’s summary paragraphs (paras. 45 and 46) titled “False Books and Records and Inadequate Internal Controls,” the SEC makes explicit reference to certain conduct, but not the above paragraph related to Chinese government officials.

So the issue becomes what to make of this one paragraph of the 18 page SEC complaint and what to call the Keyuan Petrochemicals enforcement action?

Is it an FCPA enforcement action?

In this prior post, I set forth my criteria for an FCPA enforcement action, in pertinent part, as follows.

(1) An FCPA enforcement action is an instance in which an enforcement agency (whether DOJ or SEC) charges or finds that the FCPA (whether its anti-bribery, books and records, or internal controls provisions) has been violated.

(2) As to FCPA books and records or internal control charges or findings, such actions are only FCPA enforcement actions to the extent categorized as such by either the DOJ or SEC on its FCPA websites.

In the Keyuan Petrochemicals enforcement action, the SEC did indeed charge (as it charges in many non-FCPA FCPA enforcement actions) violations of the books and records and internal controls provisions.  However, my criteria (2) is that such charges should only be considered FCPA enforcement actions to the extent categorized as such by either the DOJ or SEC or its FCPA website.  The SEC’s FCPA website (here) does not include the Keyuan Petrochemicals action.  On that basis, and consistent with my criteria, I am not going to call it an FCPA enforcement action either.

In many respects, the Keyuan Petrochemicals enforcement action is similar to the SEC’s 2012 enforcement action against former Digi International CFO Subramanian Krishnan (see here for the prior post).  That action, like the Keyuan Petrochemical action, is also not listed on the SEC’s FCPA website.

In short, what one calls an action matters.  Just using the Kenyuan example, FCPA enforcement thus far in 2013 is either 1 action with $1,025,000 collected (Keyuan agreed to pay a $1,000,000 civil penalty and Li agreed to pay a $25,000 civil penalty) or 0 actions, $0 collected.

“What is a Declination?

The good-faith debate as to the “d” word continues.  In addition, to the declination posts highlighted above in the first paragraph, see this recent FCPA Blog guest post, also by Marc Alain Bohn.

In recent weeks, the FCPA Blog (and others – there is a certain herd mentality when it comes to such things) have called the end of FCPA scrutiny for Nabors Industries, Zimmer Holdings, and 3M - declinations.  “Nabors Wins Declination” – “Double Declination for Zimmer” – “Declination for 3m.”

I again respectfully disagree and ask why are some calling these instances of FCPA scrutiny declinations?  In doing so, I am guided by my definition of a declination as being an instance in which an enforcement agency has concluded that it could bring a case, consistent with its burden of proof as to all necessary elements, yet decides not to pursue the action.  (Others have offered the same definition – see here for a Wilmer Hale Client Alert -”the concept of a declination is supposed to be reserved for instances in which the offense is chargeable but the government declines in its own discretion to bring a case”).

The FCPA scrutiny of both Nabors and Zimmer can be analyzed together because both companies were the subject of FCPA scrutiny because of an industry sweep.

In its February 20th SEC filing, Nabors stated, in pertinent part, as follows.

“We previously disclosed that on July 5, 2007, we received an inquiry from the U.S. Department of Justice relating to its investigation of one of our vendors [Panalpina] and compliance with the Foreign Corrupt Practices Act. The inquiry related to transactions with and involving Panalpina, which provided freight forwarding and customs clearance services to some of our affiliates. In 2012, the SEC advised us that it had concluded its review of the matter and did not intend to recommend any enforcement action against us. On February 15, 2013, the Department of Justice likewise advised us that it has concluded its inquiry, also without recommending any enforcement action against us.”

In its February 27th SEC filing, Zimmer stated, in pertinent part, as follows.

“In September 2007, the Staff of the U.S. Securities and Exchange Commission (SEC) informed us that it was conducting an investigation regarding potential violations of the Foreign Corrupt Practices Act (FCPA) in the sale of medical devices in a number of foreign countries by companies in the medical device industry. In November 2007, we received a letter from the U.S. Department of Justice (DOJ) requesting that any information provided to the SEC also be provided to the DOJ on a voluntary basis. In the first quarter of 2011, we received a subpoena from the SEC seeking documents and other records pertaining to our business activities in substantially all countries in the Asia Pacific region where we operate. We produced documents responsive to the subpoena and reported to the government concerning the results of our own reviews regarding FCPA compliance. During a meeting in December 2012, representatives from the agencies informed us that the SEC and the DOJ planned to close their investigation without pursuing any enforcement action against us. The DOJ and SEC formally notified us through letters of declination dated December 19, 2012 and February 1, 2013, respectively, that the agencies have closed their inquiries into this matter. While we are pleased with the government’s declination decision in this matter, we are committed to continuing to enhance our global anti-corruption compliance program.”

Using the above definition of declinations, I previously stated that anything less ought not be termed a ”declination” and noted that it is really no different that saying a police officer “declined” to issue a speeding ticket in an instance in which the driver was not speeding.  This is not a declination, it is what the law commands, and such reasoning applies in the FCPA context as well.

Sticking with the law enforcement analogy, calling an instance of FCPA scrutiny resulting from an industry sweep that does not result in an enforcement action a declination, is like saying the police “declined” to charge one with drunk driving if a sober driver successfully passes through a law enforcement sobriety checkpoint.  That is not a declination, it is what the law commands, and such reasoning applies in the FCPA context as well.

In its February 14th SEC filing, 3M stated, in pertinent part, as follows.

“In November 2009, the Company contacted the Department of Justice (DOJ) and Securities and Exchange Commission (SEC) to voluntarily disclose that the Company was conducting an internal investigation as a result of reports it received about its subsidiary in Turkey, alleging bid rigging and bribery and other inappropriate conduct in connection with the supply of certain reflective and other materials and related services to Turkish government entities. The Company also contacted certain affected government agencies in Turkey. In September 2012, the Turkish Competition Authority issued its decision finding that there was insufficient evidence obtained in the investigation to find that 3M Turkey or the other companies investigated violated the Turkish competition law.  The Company retained outside counsel to conduct an assessment of its policies, practices, and controls and to evaluate its overall compliance with the Foreign Corrupt Practices Act (FCPA), including a review of its practices in certain other countries and acquired entities. As part of its review, the Company has also reported to the DOJ and SEC issues arising from transactions in other countries. In January 2013, the DOJ and SEC each notified the Company that they are terminating their investigations into possible violations of the FCPA without taking any action or imposing any fines against the Company. Among the reasons cited by the DOJ for closing its investigation included the Company’s voluntary disclosure and cooperation, the Company’s thorough investigation, and the steps the Company has taken to enhance its anti-corruption compliance program.”

There is nothing in this disclosure to suggest that the definition of declination has been met.  Indeed, given that Turkish authorities concluded that there was “insufficient evidence” as to certain of the disclosed conduct, speaks to perhaps the quality of information 3M initially received as to its subsidiary.

Of course, if my declination proposal (see here from August 2010) were to be adopted, we would likely know the answer as to why the DOJ and SEC did not bring an enforcement action as a result of 3M’s voluntary disclosure.

*****

Further to declination issues, I could not help but notice in the U.S.’s recent ((Jan. 28, 2013) “Final Follow-Up to Phase 3 Report and Recommendations” (a document that, to my knowledge has yet to be covered elsewhere) the U.S. acknowledged that it “has declined to bring criminal charges in some cases, in part due to lack of admissible evidence obtained prior to the statute of limitations.”  This reason for “declining” is self-obvious, but there was no mention of it in the November 2012 FCPA Guidance section on declinations, likely because it did not advance the enforcement agencies’ policy positions.

Finally, if you have not yet read “Legal Limbo – Seeking Clarity In How and When The Department of Justice Declines to Prosecute” by George Terwilliger and Matthew Miner, put it on your reading stack.  Like my 2010 declination proposal and the policy rationales behind it, Legal Limbo states, in pertinent part, as follows.

“While the cases DOJ elects to prosecute are well known, better understanding of the parameters of its decisions to forego prosecution can add significantly to the body of guidance available to the business community. In addition, fundamental fairness dictates that decisions not to prosecute be communicated to affected parties as soon as possible.”

“Legal Limbo” notes that a “little bit of daylight on the declination process could help light corporations’ way to improved compliance with legal requirements and enforcement expectations within their operations” and it proposes as follows.

 ”First [...], notice of declinations be issued presumptively, rather than permissively following a declination decision. This practice could be subject to clearly-stated and narrowly defined exceptions that are necessary to protect the Department’s interests in ongoing investigations.

Second [...], the Department publish an annual report summarizing the circumstances or key factors underlying major declination decisions. Such a report should be drafted with the goal of providing maximum guidance as to the factors underlying the Department’s declination determinations by case category, while also protecting the identities of those who had been investigated. Such a reform could be presented in a categorical fashion so that companies facing investigations are provided a better understanding of the types of conduct leading to a declination decision.”

Recent Disclosures Raise Many Questions

Friday, August 12th, 2011

Deere & Co., Goldman, Pfizer, News Corp, Parametric Technology, Bruker, Diebold, Watts Water Technologies, 3M Corp. The flurry of public company disclosures of FCPA inquiries (some new, some merely updates) in recent days raise many questions.

Has the increase in FCPA enforcement done anything to deter future FCPA violations?

Why in this era of increased FCPA compliance does there seem to be more, not less, FCPA inquiries?  Does effective compliance reduce FCPA scrutiny or does effective compliance uncover more FCPA issues?  If the latter, does that argue in favor of a compliance defense?

If every company hired FCPA counsel to do a thorough review of its world-wide operations would – given the enforcement agencies theories of interpretation - 50% of companies find technical FCPA violations?  75%?  95%?  If the answer is any one of these numbers is that evidence of how corrupt business has become or is that evidence of how unhinged FCPA enforcement theories have become?

Other than plaintiffs’ firms representing certain investors in (some would say opportunistic) securities class actions or derivative claims, do investors even care about these disclosures?

What do these recent disclosures – involving companies in diverse industries operating in diverse countries – say about the FCPA itself?  Is it working?  Does it need reform?

Ponder these questions while browsing the latest disclosures.

Goldman

From the company’s August 9th 10-Q:

“[The company] and certain of its affiliates are subject to a number of investigations and reviews, certain of which are industry-wide, by various governmental and regulatory bodies and self-regulatory organizations relating to the sales, trading and clearance of corporate and government securities and other financial products, including compliance with the SEC’s short sale rule, algorithmic and quantitative trading, futures trading, securities lending practices, trading and clearance of credit derivative instruments, commodities trading, private placement practices, compliance with the U.S. Foreign Corrupt Practices Act and the effectiveness of insider trading controls and internal information barriers.”

As noted in this prior post, Goldman’s FCPA scrutiny relates to its relationship with Libya’s sovereign wealth fund.

Pfizer

The company stated as follows in its August 11th 1o-Q:

“The Company has voluntarily provided the DOJ and the U.S. Securities and Exchange Commission (SEC) with information concerning potentially improper payments made by Pfizer and by Wyeth in connection with certain sales activities outside the U.S. We are in discussions with the DOJ and SEC regarding a resolution of these matters. In addition, certain potentially improper payments and other matters are the subject of investigations by government authorities in certain foreign countries, including a civil and criminal investigation in Germany with respect to certain tax matters relating to a wholly owned subsidiary of Pfizer.”

News Corp.

News Corp.’s  FCPA exposure has been detailed in several prior posts (see here for instance) and in the company’s August 10th  8-K it stated as follows.

“In July 2011, the Company announced that it would close its publication, News of the World, after allegations of phone hacking and payments to police. As a result of these allegations, the Company is subject to several ongoing investigations by U.K. and U.S. regulators and governmental authorities, including investigations into whether similar conduct may have occurred at the Company’s subsidiaries outside of the U.K. The Company is fully cooperating with these investigations. In addition, the Company has admitted liability in a number of civil cases related to the phone hacking allegations and has settled a number of cases. The Company has taken steps to solve the problems relating to News of the World including the creation and establishment of an independent Management & Standards Committee, which will have oversight of, and take responsibility for, all matters in relation to the News of the World phone hacking case, police payments and all other connected issues at News International Group Limited (“News International”), including as they may relate to other News International publications.”

Parametric Technology Corp.

In a new disclosure, the company stated as follows in its August 10th 10-Q:

“In the third quarter of 2011, we identified certain payments by certain business partners in China that raised questions of compliance with laws, including the Foreign Corrupt Practices Act, and/or compliance with our business policies. We are conducting an internal investigation and have voluntarily disclosed this matter to the United States Department of Justice and the Securities and Exchange Commission. We are unable to estimate the potential penalties and/or sanctions, if any, that might be assessed in connection with this matter. If we determine that the replacement of certain employees and/or business partners is necessary, it could have an impact on our level of sales in China until such replacements are in place and productive. Revenue from China has historically represented 6% to 7% of our total revenue.”

Bruker Corp.

In a new disclosure, the company stated as follows in its August 9th 10-Q:

“The Company has received certain anonymous communications alleging improper conduct in connection with the China operations of its Bruker Optics subsidiary. In response, the Audit Committee of the Company’s Board of Directors initiated an investigation of those allegations, with the assistance of independent outside counsel and an independent forensic consulting firm. The investigation is ongoing and includes a review of compliance by Bruker Optics and its employees in China with the requirements of the Foreign Corrupt Practices Act (“FCPA”) and other applicable laws and regulations. To date, the investigation has found evidence indicating that payments were made that improperly benefit employees or agents of government-owned enterprises in China. The Company voluntarily contacted the United States Securities and Exchange Commission and the United States Department of Justice to advise both agencies that an internal investigation is underway. It is the intent of the Audit Committee and the Company to cooperate with both agencies in connection with any investigation that may be conducted in this matter. In 2010, the China operations of Bruker Optics accounted for less than 2.5 percent of the Company’s consolidated net sales and less than 1.0 percent of its consolidated total assets. The internal investigation being conducted by the Audit Committee is ongoing and no conclusions can be drawn at this time as to its outcome; however, the FCPA and related statutes and regulations do provide for potential monetary penalties as well as criminal and civil sanctions in connection with FCPA violations. It is possible that monetary penalties and other sanctions could be assessed by the Federal government in connection with this matter. The nature and amount of any monetary penalty or other sanctions cannot reasonably be estimated. We have not recorded any provision for monetary penalties related to criminal and civil sanctions at this time.”

Diebold Inc.

In its August 8th 10-Q the company stated as follows.

“The Company’s global Foreign Corrupt Practices Act (FCPA) review remains on schedule with no material developments during the three months ended June 30, 2011:  During the second quarter of 2010, while conducting due diligence in connection with a potential acquisition in Russia, the Company identified certain transactions and payments by its subsidiary in Russia (primarily during 2005 to 2008) that potentially implicate the FCPA, particularly the books and records provisions of the FCPA. As a result, the Company is conducting an internal review and collecting information related to its global FCPA compliance. In the fourth quarter of 2010, the Company identified certain transactions within its Asia Pacific operation over the past several years which may also potentially implicate the FCPA. The Company’s current assessment indicates that the transactions and payments in question to date do not materially impact or alter the Company’s consolidated financial statements in any year or in the aggregate. The Company’s internal review is ongoing, and accordingly, there can be no assurance that this review will not find evidence of additional transactions that potentially implicate the FCPA. The Company has voluntarily self-reported its findings to the SEC and the DOJ and is cooperating with these agencies in their review. The Company was previously informed that the SEC’s inquiry has been converted to a formal, non-public investigation. The Company also received a subpoena for documents from the SEC and a voluntary request for documents from the DOJ in connection with the investigation. The Company expects to complete its internal review of these matters by the end of 2011. Once the Company completes its internal review, it will begin discussions with the SEC and the DOJ to resolve this matter. At this time, the Company cannot predict the results of the government investigations and therefore cannot estimate the potential loss or range of loss it may incur with respect to these investigations or their potential impact on the consolidated financial statements. Future resolution of these matters with the DOJ and SEC could result in a material impact to the Company’s consolidated financial statements.”

Watts Water Technologies Inc.

In an August 3rd 8-K filing, the company provided this update:

“In the second quarter of 2011, the Company recorded income of $0.05 per share in discontinued operations related to a reserve adjustment for the previously disclosed FCPA investigation. The adjustment reflects management’s best estimate of a possible charge in connection with this matter based on ongoing discussions with SEC staff. There is no definitive agreement for resolution of this matter at this time.”

3M Company

In an August 4th 10-Q filing, the company provided this update:

“On November 12, 2009, the Company contacted the Department of Justice (DOJ) and Securities and Exchange Commission (SEC) to voluntarily disclose that the Company was conducting an internal investigation as a result of reports it received about its subsidiary in Turkey, alleging bid rigging and bribery and other inappropriate conduct in connection with the supply of certain reflective and other materials and related services to Turkish government entities. The Company also contacted certain affected government agencies in Turkey. The Company retained outside counsel to conduct an assessment of its policies, practices, and controls and to evaluate its overall compliance with the Foreign Corrupt Practices Act, including an ongoing review of our practices in certain other countries and acquired entities. The Company continues to cooperate with the DOJ and SEC and government agencies in Turkey in the Company’s ongoing investigation of this matter. The Company cannot predict at this time the outcome of its investigation or what regulatory actions may be taken or what other consequences may result.”

Deere & Co.

In addition to the above disclosures, the Wall Street Journal Corruption Currents, among others, reported this week that Deere & Co.  “received an inquiry from regulators last month regarding payments made in Russia and nearby countries.”  In a statement, Deere stated as follows.  “On July 25, 2011, Deere received a request from the SEC that it voluntarily produce documents relating to Deere’s activities, and those of third parties, in certain foreign countries. Deere is cooperating with the SEC’s requests.”