Archive for the ‘China’ Category

Friday Roundup

Friday, March 27th, 2015

Roundup2Is this appropriate, sentenced, scrutiny alerts and updates, quotable, a future foreign official teaser?, Brazil update, and for the reading stack.

It’s all here in the Friday roundup.

Is This Appropriate?

If this truly is an event, “Drinks With an FBI Agent – Inside Stories From the Foreign Corrupt Practices Act,” is it appropriate?

Sentenced

Chinea and DeMeneses Sentences

The DOJ announced

“Benito Chinea and Joseph DeMeneses, the former chief executive officer and former managing director of a broker-dealer Direct Access Partner “were sentenced to prison … for their roles in a scheme to pay bribes to a senior official in Venezuela’s state economic development bank, Banco de Desarrollo Económico y Social de Venezuela (Bandes), in return for trading business that generated more than $60 million in commissions.”

Chinea and DeMeneses were each sentenced to four years in prison.  They were also ordered to pay $3,636,432 and $2,670,612 in forfeiture, respectively, which amounts represent their earnings from the bribery scheme.  On Dec. 17, 2014, both defendants pleaded guilty to one count of conspiracy to violate the Foreign Corrupt Practices Act and the Travel Act.”

In the release, Assistant Attorney General Leslie Caldwell stated:

“These Wall Street executives orchestrated a massive bribery scheme with a corrupt official in Venezuela to illegally secure tens of millions of dollars in business for their firm. The convictions and prison sentences of the CEO and Managing Director of a sophisticated Wall Street broker-dealer demonstrate that the Department of Justice will hold individuals accountable for violations of the FCPA and will pursue executives no matter where they are on the corporate ladder.”

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

“Benito Chinea and Joseph DeMeneses paid bribes to an officer of a state-run development bank in exchange for lucrative business she steered to their firm. Chinea and DeMeneses profited for a time from the corrupt arrangement, but that profit has turned into prison and now they must forfeit their millions of dollars in ill-gotten gains as well as their liberty.”

Elgawhary Sentence

This previous post highlighted the DOJ enforcement action against Asem Elgawhary, a former principal vice president of Bechtel Corporation and general manager of a joint venture operated by Bechtel and an Egyptian utility company, for allegedly accepting $5.2 million in kickbacks to manipulate the competitive bidding process for state-run power contracts in Egypt.

The DOJ recently announced that Elgawhary was sentenced to 42 months in federal prison.

When the Alstom enforcement action was announced in December 2014 (see here and here for prior posts), Elgawhary was described as an Egyptian “foreign official.”

So what was Elgawhary?

A former principal vice president of Bechtel Corporation and general manager of a joint venture operated by Bechtel and an Egyptian utility company or a Egyptian “foreign official?”

Can the DOJ have it both ways?

Scrutiny Alerts and Updates

Anheuser-Busch InBev

Anheuser-Busch InBev recently disclosed in its annual report:

“We have been informed by the U.S. Securities and Exchange Commission and the U.S. Department of Justice that they are conducting investigations into our affiliates in India, including a non-consolidated Indian joint venture that we previously owned, ABInBev India Private Limited, and whether certain relationships of agents and employees were compliant with the FCPA. We are investigating the conduct in question and are cooperating with the U.S. Securities and Exchange Commission and the U.S. Department of Justice.”

Bilfinger

As highlighted in this previous post, in December 2013 German-based Bilfinger paid approximately $32 million to resolve an FCPA enforcement action concerning alleged conduct in Nigeria.  The enforcement action was resolved via a three-year deferred prosecution agreement.

As noted in the previous post, Bilfinger’s CEO described the conduct at issue as “events from the distant past.”

From the not-so distant past, Bilfinger recently announced:

“Bilfinger received internal information last year indicating that there may have been violations of the Group’s compliance regulations in connection with orders for the supply of monitor walls for security control centres in several large municipalities in Brazil. The company immediately launched a comprehensive investigation. The allegation relates to suspected bribery payments from employees of a Bilfinger company in Brazil to public officials and employees of state companies.”

See here for a follow-up announcement from the company.

As a foreign company, Bilfinger is only subject to the FCPA’s anti-bribery violations to the extent the payment scheme involves a U.S. nexus (as was alleged in the prior Bilfinger FCPA enforcement action).

IBM

Canadian media reports:

“Seven people, including Revenue Quebec employees and officials with computer companies IBM and EBR, were [recently] arrested … in connection with an alleged corruption scheme aimed at obtaining a government IT contract worth $24 million.Two Revenue Quebec employees, Hamid Iatmanene and Jamal El Khaiat, stand accused of providing privileged information about an upcoming government contract to a consortium made up of IBM and Quebec company Informatique EBR Inc.”

As highlighted here, in 2000 IBM resolved an FCPA enforcement action.

As highlighted here, in 2011 IBM resolved another FCPA enforcement action.  This enforcement action was filed in federal court (back in the day when the SEC actually filed FCPA enforcement actions in federal court vs. its preferred in-house method now) and Judge Richard Leon was concerned about the settlement process.  As highlighted here, Judge Leon approved the settlement, but his July 2013 final order states, among other things:

“[For a two year period IBM is required to submit annual reports] to the Commission and this Court describing its efforts to comply with the Foreign Corrupt Practices Act (“FCPA”), and to report to the Commission and this Court immediately upon learning it is reasonably likely that IBM has violated the FCPA in connection with either improper payments to foreign officials to obtain or retain business or any fraudulent books and records entries …””

According to media reports, Judge Leon stated: “if there’s another violation over the next two years, it won’t be a happy day.”

Quotable

In this Law360 article, Richard Grime (former Assistant Director of Enforcement at the SEC and current partner at Gibson Dunn) states regarding recent alleged FCPA violations.

“It’s not that you couldn’t intellectually [conceive of] the violation. It’s that the government is sort of probing every area where there is an interaction with government officials and then working backwards from there to see if there is a violation, as opposed to starting out with the statute … and what it prohibits.”

Given that most SEC FCPA enforcement actions are the result of voluntary disclosures, it is a curious statement.  Perhaps its companies, at the urging of FCPA Inc., that are probing every area where there is an interaction with government officials and then working backwards?

*****

As reported here:

“Greek authorities [recently] indicted 64 people to stand trial over years-old allegations of bribery involving Siemens AG, the German engineering giant … A probe of corporate dealings from 1992 to 2006 allegedly found that Greece had lost about 70 million euros in the sale of equipment from Siemens to Greek telephone operator Hellenic Telecommunications also known as OTE, which was still owned by the state at the beginning of that period … A panel of judges decided that those indicted, including both Greek and German nationals, should stand trial for bribery or money laundering. The list of suspects includes former Siemens and OTE officials.”

As noted here, Joe Kaeser (President and CEO of Siemens) reportedly stated:

“I really believe the country (Greece) can move to the future, rather than trying to find the solutions in the past.” He added that his company had a “dark history,” mentioning compliance issues. But he said it was not a “black and white story” when asked whether the indictments had been politically motivated by the current friction between the German and Greek governments. ”Looking at the past doesn’t help the future because the past is the past.”

If the U.S. brings FCPA enforcement actions based on conduct that in some instances is 10 – 15 years old, it is not surprising that Greece is doing the same.  Yet is this right?

As the U.S. Supreme Court recently stated in Gabelli:

“Statute of limitations are intended to ‘promote justice by preventing surprises through the revival of claims that have been allowed to slumber until evidence has been lost, memories have faded, and witnesses have disappeared.  They provide ‘security and stability to human affairs.  [They] are ‘vital to the welfare of society [and] ‘even wrongdoers are entitled to assume that their sins may be forgotten.’ […] It ‘would be utterly repugnant to the genius of our laws if actions for penalties could ‘be brought at any distance of time.’”

****

Since day one, I called Morgan-Stanley’s so-called declination politically motivated.  (See here and here).

I am glad to see that FCPA commentator Michael Volkov recently joined the club.  Writing on the Garth Peterson / Morgan Stanley so-called declination, Volkov states:  ”my intelligence on the case indicated that … [the] DOJ apparently wanted to demonstrate for political reasons that it could recognize a company’s compliance program to decline a case against a company.

A Future Foreign Official Teaser?

As recently reported by the Wall Street,

“China’s leadership is preparing to radically consolidate the country’s bloated state-owned sector, telling thousands of enterprises they need to rely less on state life support and get ready to list on public markets. [...] Communist Party leaders plan to release broad guidelines in the next months for restructuring the country’s more than 100,000 state-owned enterprises, according to government officials and advisers with knowledge of the deliberations. [...]  Strategically important industries such as energy, resources and telecommunications are marked for consolidation, the officials and advisers say. The merged entities would then be reorganized as asset-investment firms, with a mandate to make sure they run more like commercial operations than arms of the government. Upper management will be under orders to maximize returns and prepare many of the companies for eventual listing on stock markets, these people say.”

In U.S. v. Esquenazi, the 11th Circuit concluded that  an “instrumentality” under the FCPA is an “entity controlled by the government of a foreign country that performs a function the controlling government treats as its own.” The Court recognized that what “constitutes control and what constitutes a function the government treats as its own are fact-bound questions” and, without seeking to list all “factors that might prove relevant,” the court did list “some factors that may be relevant” in deciding issues of control and function.

As to control, the 11th Circuit listed the following factors:

“[whether] the foreign government’s formal designation of that entity; whether the government has a majority interest in the entity; the government’s ability to hire and fire the entity’s principals; the extent to which the entity’s profits, if any, go directly into the governmental fisc, and, by the same token, the extent to which the government funds the entity if it fails to break even; and the length of time these indicia have existed.”

As to function, the 11th Circuit listed the following factors:

“whether the entity has a monopoly over the function it exists to carry out; whether the government subsidizes the costs associated with the entity providing services; whether the entity provides services to the public at large in the foreign country; and whether the public and the government of that foreign country generally perceive the entity to be performing a governmental function.”

Have fun applying this test should China’s proposed changes go forward.

Brazil Update

My own cents regarding Brazil’s recent implementation of regulations regarding certain features of its Clean Companies Act (a law which provides for only civil and administrative liability of corporate entities for alleged acts of bribery) is that the regulations are a yawner for any company that is already acting consistent with FCPA best practices.

Yet, if you feel the urge to read up on Brazil’s recent regulations, comprehensive coverage can be found here from Debevoise & Plimpton and here from FCPAmericas.

For the Reading Stack

A thoughtful article here from Alexandra Wrage (President of Trace) regarding the “cult of the imperfect.”  It states:

“Sir Robert Alexander Watson-Watt is credited with saving thousands of lives in Britain during the worst days of World War II after developing Chain Home, a low-frequency radar system able to detect aircraft from about 90 miles away. He openly encouraged what he called the “cult of the imperfect” among his team. He knew that Britain didn’t need the best possible radar system in five years; the country needed a viable radar system urgently. Immediately. Watson-Watt, who was knighted shortly after the Battle of Britain, is said to have instructed his team to strive for the third-best option, because “the second-best comes too late . . . the best never comes.

[...]

Perfect due diligence risk assessments never come. And even second-best may come too late. Just get started. You’ll see more protections and benefits from good (for now) than perfect (some day, maybe . . .).”

Sound advice that I agree with and completely consistent with Congressional intent in enacting the FCPA’s internal controls provisions and even prior enforcement agency guidance.

Problem is, the DOJ and SEC wear rose-colored glasses, including as to conduct years ago, and if a company is acting consistent with FCPA best practices 99% of the time, that means 1% of the time they are not.

*****

A good weekend to all. On Wisconsin!

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

Friday, December 19th, 2014

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.

SEC Brings Another Travel And Entertainment FCPA Enforcement Action

Tuesday, December 16th, 2014

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%.

Friday Roundup

Thursday, December 4th, 2014

Roundup2Transparency International’s latest Corruption Perception Index, monitor issues, scrutiny alert, Chinese SOEs, SEC press releases, hot, and for the reading stack.  It’s all here in the Friday roundup.

Transparency International’s Latest Corruption Perceptions Index

Transparency International, a global civil society organization dedicated to the fight against corruption, released recently the 20th edition of its Corruption Perceptions Index (“CPI”).  (See here for TI’s release).  As stated by TI, the CPI “measures the perceived levels of public sector corruption worldwide” and 175 countries are ranked with Denmark, New Zealand, Finland, Sweden, Norway, and Switzerland (topping the list – i.e. low levels of perceived corruption) and South Sudan, Afghanistan, Sudan, North Korea and Somalia (on the bottom of the list – i.e. high levels of perceived corruption).

TI’s CPI is a popular tool on which many business organizations rank perceived risk, but query whether the CPI is a reliable or meaningful measure of the specific risks specific business organizations face when competing in the global marketplace?

For starters, perceptions are just that, perceptions.  To be sure, there are countless honest and ethical people living in Somalia just as there are countless dishonest and unethical people living in Denmark.  Moreover, at its core, FCPA risk is the function of specific business actors (employees and agents) coming into contact with specific foreign officials, in the context of specific foreign business conditions.  These risk points are often industry specific and within a country are often region specific.  None of these factors, or very few, are captured by the CPI.

Thus, while I enjoy each time this year looking at the CPI map, I don’t think it is a very useful tool for business organizations when adopting policies and procedures designed to minimize FCPA risk.

Monitor Issues

An interesting blurb here from Courthouse News Service.

“Siemens and a monitor charged with keeping watch over the German conglomerate’s compliance with a settlement agreement over federal corruption and bribery charges can fight to keep records of that agreement out of the hands of reporters, a federal judge ruled. (See 2014 WL 6817009). 100Reporters – a press outlet with a self-proclaimed mission to “cover corruption of all sorts” – sued the Justice Department under the Freedom of Information Act this past summer, seeking records of Siemens’ compliance with a 2008 settlement of violations of the Foreign Corrupt Practices Act. Siemens pleaded guilty and agreed to pay a precedent-setting $1.6 billion penalty to U.S. and EU authorities to settle charges that it routinely used bribes and slush funds to secure massive public works contracts around the world. Part of the settlement included four-year compliance monitoring by Dr. Theo Waigel, who was given broad access to Siemens’ confidential and commercially sensitive information and records to make annual reports to the Justice Department. The DOJ closed the compliance monitoring in 2012, determining that Siemens had “satisfied its obligations under the plea agreement.” After the Justice Department denied 100Reporters’ request for compliance monitoring documents – including the four annual reports from Waigel – and the group sued, Siemens and Waigel demanded to get involved, citing the right of intervention. For Siemens’ part, the company argued that the reports contained confidential and proprietary information not fit for public consumption. Waigel complained that his personal reputation – and the unfettered access of future compliance monitors – was on the line because he promised Siemens confidentiality while examining the company’s records and delivering his reports to the Justice Department.  Both Siemens and Waigel have a legal interest in fighting 100Reporters’ FOIA request, U.S. District Judge Rudolph Contreras held in a 31-page ruling issued Wednesday. Specifically, Contreras dismissed 100Reporters’ claims that Siemens, Waigel and the DOJ are all fighting from the same legal position. ”Requiring Siemens to monitor the DOJ’s litigation posture from the sidelines until Siemens disagrees with a decision by the agency is inefficient and impractical; indeed, Siemens likely would have limited, if any, insight into the DOJ’s strategy during the litigation, and once Siemens did learn of a hypothetical shift in the DOJ’s position, such as a decision to release a specific category of materials, it might be too late for Siemens to undue any damage done,” Contreras wrote. Furthermore, not allowing Siemens and Waigel to intervene now – and forcing them to wait months or years until the Justice Department has done its withholding analysis – would put them both in danger of missing federal filing deadlines, the judge said. The potential injury to Siemens if the documents are released is both “particularized and sufficiently imminent,” Contreras wrote. ”It is not surprising, then, that 100Reporters cannot cite a single FOIA case in which a court denied on standing grounds the application of a prospective intervenor whose own confidential materials were the clear subject of the FOIA request,” he added. Contreras also rejected calls by 100Reporters to limit Siemens’ involvement solely to FOIA exemption 4, which bars release of confidential and commercially sensitive information. ”A more functional and practical approach is required, and fatally, 100Reporters fails to offer any concrete or realistic consequences to this litigation from Siemens’s (or Waigel’s) intervention that might require the court to impose a limitation on the scope of the defenses that an intervenor may raise as this case, which still is in its infancy, proceeds to the merits,” Contreras wrote. The judge refused 100Reporters’ claims that allowing Siemens and Waigel to get involved would unnecessarily delay the proceedings, advising the group in a footnote “raise such concerns then,” if and when any delays occur.”

The California Lawyer goes in-depth in an article titled “The Secret Life of a Corporate Monitor.”

“Without naming the subjects of his monitoring, Dan Ray talked generally about the highly secretive world of government-appointed corporate monitors, where progress reports are confidential, judges rarely get involved, and the DOJ alone determines whether corporations have complied with terms of the agreements. Monitors are not government employees or agents, and they do not contract with or receive payment from the government. Fees generally are negotiated between the corporation and the monitor.”

Through some basic internet research, it is not that difficult to figure out which companies Ray monitored.  (See here, here and here).

Scrutiny Alert

The Financial Times reports:

“In a Florida court on Tuesday, a judge granted a request by US prosecutors to seize an ice cream cooler, a walk-in freezer, dozens of other pieces of catering equipment and three properties belonging to a woman called Mamadie Touré. It was just one of a ceaseless stream of such requests, through which the authorities seek forfeiture of what they say are ill-gotten assets. But this was no ordinary woman and no ordinary case. Ms Touré is the widow of Lansana Conté, a dictator who ruled the resource-rich but dirt poor west African state of Guinea for 24 years before his death in 2008. And US prosecutors’ interest in Ms Touré runs to much more than a few refrigerators and some Jacksonville real estate. Their court filing in the forfeiture request spells out the details of a two-year US investigation into one of the most wide-ranging cases of alleged corruption in recent years.  Prosecutors alleged in that filing, lodged last week and seen by the Financial Times, that Ms Touré received bribes totalling $5.3m to help a mining company win iron-ore rights in Guinea. The rights in question were to exploit the northern half of a hillside called Simandou, considered the planet’s richest virgin deposit of iron ore. The company involved is not named in the filing. But references to documents published in a Guinean inquiry, to the timing of the award of the mining rights and to a separate criminal case make it obvious that the company is BSG Resources, the mining arm of Israeli billionaire Beny Steinmetz’s family conglomerate.”

Chinese SOEs

An interesting article recently in the Wall Street Journal.  According to the article:

“At the end of 2013, China had about 155,000 firms owned by central, provincial and local governments, according to the Ministry of Finance.  Beijing itself directly controls less than 120 of the biggest and most strategically significant industrial companies, which are responsible for building the world’s largest nuclear reactors and most extensive high speed rail network, buying up mining and agricultural resources overseas, and spreading Chinese goodwill with infrastructure projects across the developing world. [...] Many smaller state-owned firms make goods with no obvious strategic significance, like spirits and toothpaste …”.

The article contains an interesting chart comparing six China SOEs with U.S. counterparts.  According to the chart, the six SOEs have approximately 2.6 million employees.

SEC Press Releases

Russell Ryan (King & Spalding and former assistant director of enforcement at the SEC ) returns to the Wall Street Journal’s opinion page with this dandy piece titled “Get the SEC Out of the PR Business.”  He begins:

“Press releases are par for the course when the Securities and Exchange Commission files a case in federal court that it must later prove to a judge or jury. But the agency is increasingly shunting cases into its own administrative proceedings, where it initiates the prosecution and ultimately decides guilt or innocence—along with the severity of any sanctions—subject to only limited review in court. Given the SEC’s peculiar quasi-judicial role in these cases, you might think the agency would refrain from gratuitously stoking prehearing publicity against the accused. Think again. The SEC now routinely issues press releases when it files charges in administrative cases it will eventually decide. This practice calls into question the agency’s ability to decide those cases fairly and impartially.”

[...]

“SEC releases also stray beyond a fair and accurate summary of agency action. Many confuse what happened by asserting—often in the headline or lead sentence—that the SEC “charged” the accused with wrongdoing. But at this initial stage only SEC staff employees, typically from the enforcement division, have “charged” any wrongdoing. Commissioners, at least in theory, have merely scheduled a hearing to determine whether the employees can prove their charges—a determination the commissioners are supposed to make after an administrative judge conducts the hearing and makes a preliminary decision. Not surprisingly, media reports often reinforce the misperception that SEC commissioners are prosecuting these cases rather than deciding them. One of the most troubling features of SEC prehearing press releases is the partiality they betray in favor of agency prosecutors over the accused. In virtually all cases, the SEC allows its prosecuting employees not only to ghostwrite the official press release but also to insert gratuitous quotations that embellish the formal accusations with more colorful words and phrases like “tricks,” “calculated fraud,” “reaping substantial profits,” and “choosing profits over compliance.” The accused is never extended similar courtesies. When the SEC initiates enforcement action administratively rather than in court, it should embrace its primary role as impartial decision maker. That means resisting the urge to stoke prehearing publicity and maintaining strict neutrality in both fact and appearance. By failing to do so, the SEC risks having administrative fines and other sanctions swept aside if a court someday concludes, quite reasonably, that agency press releases plausibly suggest prejudgment of cases or lack of impartiality. The agency may consider that scenario unlikely. But given its determination to prosecute more cases administratively, that may not be a risk worth taking.”

Hot

You probably already knew that FCPA and related practices are hot.  But just in case you need another reminder, see here.  The latest edition of “What’s Hot and What’s Not in the Legal Profession” contains the following under the “hot” category.

“Anti-corruption. Larger U.S. firms continue to increase enforcement of the Foreign Corrupt Practices Act, leading to more prosecutions. The U.K., China, Brazil and Canada have all enacted anti-bribery laws in the past few years and are now increasing investigations.”

You can elevate your FCPA knowledge and practical experience by attending the FCPA Institute in Miami (Jan. 12-13, 2015). Join other firm lawyers, in-house counsel, auditing professionals and others already registered for the FCPA Institute – Miami by clicking here to register.  CLE credit is available.

Reading Stack

The lastest edition of Debevoise & Plimpton’s always informative FCPA Report is here.

From Foley & Lardner attorney Aaron Murphy and Daniel Seltzer (Senior Director, Anticorruption for Accenture) “The End of Whac-A-Mole Compliance:  A Global Approach to Anti-Corruption Actions.”

*****

A good weekend to all.

Look In The Mirror Moments?

Thursday, October 16th, 2014

Looking in the MirrorFor some time, I have used the picture to the left in various public presentations when discussing certain public policy aspects of this new era of Foreign Corrupt Practices Act enforcement.

Two developments related to China caused me to ponder the picture once again.

The first concerns a letter recently sent by U.S. Treasury Secretary Jacob Lew to Chinese Vice Premier Wang Yang. The second concerns the general thrust of much “western” commentary concerning China’s recent enforcement action against GlaxoSmithKline.

Lew Letter

As highlighted in this recent Wall Street Journal article, Treasury Secretary Lew “warned his Chinese counterpart in a recent letter that a spate of antimonopoly investigations against foreign companies could have serious implications for relations between the two countries.”  As noted in the article, “the warning comes after international business lobbies have raised complaints over a string of monopoly and pricing probes that they say unfairly focus on foreign companies.”

Predictably, China reportedly responded to the letter and concerns by stating – as noted in the article – that foreign and domestic Chinese companies are treated equally, that foreign companies are “welcome to hire the most famous lawyers in the world” to dispute Chinese allegations, and that if foreign companies disagree with Chinese law enforcement interpretations any company is free to “take the discrepancies to court.”

Although outside the FCPA context, the trading of barbs between the U.S. and China has FCPA parallels as concerns have been raised about U.S. enforcement of the FCPA against foreign companies and similar “see you in court” type statements have been made by the DOJ in response.

It is a fact that the clear majority of the largest FCPA enforcement actions of all-time (based on settlement amounts) are against foreign companies.

It is also a fact that many of these enforcement actions have been based on spare jurisdictional allegations.  For instance and as highlighted in this prior post, the 2013 FCPA enforcement action against Total (the $398 million settlement amount was the third largest in FCPA history) was based on the following salient points:

  • The enforcement action was against a French oil and gas company for making improper payments to an Iranian Official through use of an employee of a Swiss private bank and a British Virgin Islands company.
  • The vast majority of the alleged improper conduct took place between 1995 and 1997 (that is 16 to 18 years ago prior to the enforcement action).
  • The sole U.S. jurisdictional nexus (a required legal element for an anti-bribery violation since Total is a foreign issuer) is a 1995 wire transfer of $500,000 (representing less than 1% of the alleged bribe payments at issue) from a New York based account.

Expansive FCPA enforcement theories against foreign actors made its way into the Senate’s 2010 FCPA hearing when Senator Christopher Coons stated:  ”Today we the only nation that is extending extraterritorial reach and going after the citizens of other countries, we may someday find ourselves on the receiving end of such transnational actions.”

As a matter of law, Senator Coon’s statement was technically inaccurate, there is no extraterritorial jurisdiction over foreign actors under the FCPA’s anti-bribery provisions, but the expansive jurisdictional theories are what I have called “de facto extraterritoriality.”

In any event, the concluding point is this:  aggressive enforcement of domestic laws against foreign companies raise various policy issues and can lead to “lawfare.”  At the very least, when the tables are turned it ought to cause U.S. law enforcement agencies and policy makers to look in the mirror because Secretary Lew’s recent warning letter may be viewed by some as the “pot calling the kettle black.”

China GSK Enforcement Action

As previously highlighted here, in September GSK announced that it had agreed to pay approximately $490 million to resolve a Chinese law enforcement investigation after a Chinese court ruled “that GSK China Investment Co. Ltd (GSKCI) has, according to Chinese law, offered money or property to non-government personnel in order to obtain improper commercial gains, and been found guilty of bribing non-government personnel.”

The general thrust of certain “western” reporting of the China action was critical in various respects as highlighted below.

  • “an opaque justice system ultimately controlled by the Communist Party” (here)
  • “after a one day closed hearing” (here)
  • “The bribery conviction of a GSK unit took all of one day in Chinese court” “Unlike the U.S. Department of Justice, which often allows the companies accused of bribery to spend years conducting their own internal investigations–often followed with non-prosecution agreements–these convictions came just 15 months after Chinese officials began their investigation.”  ”Chinese authorities moved very quickly to assess significant penalties in a forum that provided very little transparency”  (here)
  • “Many of us had wondered when the GSK investigation in China would end and we all found about the trial when it was announced in the newspapers last week. It certainly showed that the quality of justice in China is quite different than in the west. While it is not entirely clear how long the trial lasted, it appeared that it was [a one-day trial] …” (here)

Without in any way trying to comprehensively compare the overall U.S. legal system to the overall Chinese legal system, the following attributes of FCPA enforcement must at least be acknowledged.

The vast majority of corporate FCPA enforcement actions lack transparency and the resolution documents (whether a non-prosecution agreement, deferred prosecution agreement or civil administrative order) are the result of an opaque process ultimately controlled by the same office prosecuting or bringing the action.

As to the swiftness of FCPA enforcement actions, one can only assume that the majority of general counsels and board of directors of companies under FCPA scrutiny would be jumping for joy if the scrutiny – from start to finish – would resolve itself in 15 months rather than the typical 3-5 years (and in some instances more) of FCPA scrutiny lingering.

The concluding point is this:  before criticizing how other countries are enforcing their anti-corruption laws (something the U.S. government has been pleading for other countries to do for years), we should at least look in the mirror regarding various aspects of FCPA enforcement.