Archive for the ‘Compliance’ Category

Friday Roundup

Friday, October 31st, 2014

Roundup2Scrutiny updates, the story of the FCPA, keep it simple, and for the reading stack. It’s all here in the Friday roundup.

Scrutiny Updates

Goodyear

Goodyear Tire & Rubber Co. has been under FCPA scrutiny for approximately three years concerning conduct in Kenya and Angola. Earlier this week the company disclosed:

“In June 2011, an anonymous source reported, through our confidential ethics hotline, that our majority-owned joint venture in Kenya may have made certain improper payments. In July 2011, an employee of our subsidiary in Angola reported that similar improper payments may have been made in Angola. Outside counsel and forensic accountants were retained to investigate the alleged improper payments in Kenya and Angola, including our compliance in those countries with the U.S. Foreign Corrupt Practices Act. We do not believe that the amount of the payments in question in Kenya and Angola, or any revenue or operating income related to those payments, are material to our business, results of operations, financial condition or liquidity.

As a result of our review of these matters, we have implemented, and are continuing to implement, appropriate remedial measures and have voluntarily disclosed the results of our initial investigation to the U.S. Department of Justice and the Securities and Exchange Commission, and are cooperating with those agencies in their review of these matters. As a result of ongoing discussions with the government, we have recorded a charge of $16 million in connection with these matters in the third quarter of 2014. While we currently estimate that the most likely amount of the loss associated with these matters is approximately $16 million, the actual amount of the loss could vary, and the timing of any resolution and payment cannot yet be determined.”

Key Energy Services

Here is what the company disclosed about its third quarter expenses associated with its FCPA investigation.

“The results for the third quarter include a pre-tax charge of $60.8 million, or $0.25 per share, for an impairment of the Company’s U.S. assets and pre-tax costs of $16.1 million, or $0.07 per share, related to the previously disclosed Foreign Corrupt Practices Act (“FCPA”) investigations.”

Doing the math, that is approximately $243,000 in professional fees and expenses per working day.

Avon

Avon has been under FCPA scrutiny since June 2008.  As highlighted here, in May 2014 the company disclosed that it and the DOJ/SEC reached an agreement in principle to resolve FCPA enforcement actions for an aggregate amount of $135 million. Approximately six months later, there has still yet to be an enforcement action.  Yesterday, Avon disclosed:

“As previously reported, we have reached an understanding with respect to terms of settlement with each of the DOJ and the staff of the SEC. Based on these understandings, the Company would, among other things: pay aggregate fines, disgorgement and prejudgment interest of $135 with respect to alleged violations of the books and records and internal control provisions of the FCPA, with $68 payable to the DOJ and $67 payable to the SEC; enter into a deferred prosecution agreement (“DPA”) with the DOJ under which the DOJ would defer criminal prosecution of the Company for a period of three years in connection with alleged violations of the books and records and internal control provisions of the FCPA; agree to have a compliance monitor which, with the approval of the government, can be replaced after 18 months by the Company’s agreement to undertake self monitoring and reporting obligations for an additional 18 months. If the Company remains in compliance with the DPA during its term, the charges against the Company would be dismissed with prejudice. In addition, as part of any settlement with the DOJ, a subsidiary of Avon operating in China would enter a guilty plea in connection with alleged violations of the books and records provision of the FCPA. The expected terms of settlement do not require any change to our historical financial statements.

Final resolution of these matters is subject to preparation and negotiation of documentation satisfactory to all the parties, including approval by our board of directors and, in the case of the SEC, authorization by the Commission; court approval of the SEC settlement; and court approval of the DPA and acceptance of the expected guilty plea by an Avon subsidiary operating in China. We can provide no assurances that satisfactory final agreements will be reached, that authorization by the Commission or the court approvals will be obtained or that the court will accept the guilty plea or with respect to the timing or terms of any such agreements, authorization, and approvals and acceptance.”

The Story of the FCPA

Assistant Attorney General Leslie Caldwell’s recent speech (see here for the prior post) has generated follow-up discussion at the FCPA Blog (here and here), including as to the motivation of Congress in passing the law.

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

Keep it Simple

Over at thebriberyact.com, this post begins:

“Three years ago Bribery Inc. went mad.  Every law firm, accounting firm and uncle Tom Cobley and all got into the anti bribery business. Many detailed anti-bribery policies were sold, placed on corporate intranets and training given. Three years on and many are reviewing their policies and looking back at how they’ve been operating for the last three years.  This is a sensible thing to do. Many anti-bribery policies are extensive. [...] We could go on.  And many policies do. And this is where they go wrong. Because the longer they are the less likely it is anyone will read them or even know where to find them.”

Referencing comments made by U.K. Serious Fraud Office Director David Green, the post states:

“The SFO Director said that he doesn’t really like long anti-bribery policies.  Broadly speaking he is concerned that they probably won’t be read or understood by employees. The obvious consequence of the anti-bribery policy not being read is that it is unlikely to be followed. His observation and the concern which underpins it resonates with us.”

It resonates with me as well.  (See this previous post titled “Compliance Fatigue?”).

That is why my global anti-bribery online training course (created in conjunction with Emtrain) keeps things simple. To see how the course engages employees in a business organization and inspires them to spot risk (see this video). To see how the course trains gatekeepers in a business organization to minimize risk (see this video).

Reading Stack

Thomas Fox (FCPA Compliance and Ethics Blog) is out with a new book titled “Doing Compliance: Design, Create, and Implement an Effective Anti-Corruption Compliance Program.”  (See here for more information).

The latest FCPA Update from Debevoise & Plimpton is here.

Dorsey & Whitney’s Anti-Corruption Digest (Oct. 2014) is here.

Sidley & Austin’s Anti-Corruption Quarterly is here.

*****

A good weekend to all.

 

A Q&A With CREATe.org

Thursday, October 30th, 2014

For today’s post, I send you over to the Center for Responsible Enterprise And Trade.

In a two-part Q&A, I respond to questions about a Foreign Corrupt Practices Act compliance defense and related issues, enforcement of FCPA-like laws in other countries, and the future of FCPA enforcement.

See here for Part I, here for Part II.

Items Of Interest From The Layne Christensen Company Enforcement Action

Wednesday, October 29th, 2014

Yesterday’s post dived deep into the Layne Christensen Company SEC FCPA enforcement action.

This post continues the analysis by highlighting various issues associated with the enforcement action.

4 for 4

In 2014, there have been four SEC corporate FCPA enforcement actions (Layne Christensen, Smith & Wesson, Alcoa, and HP).  All have been resolved via the SEC’s administrative process.

My recent article, “A Foreign Corrupt Practices Act Narrative,” (see pgs. 991-995) discusses this trend and how it is troubling as it places the SEC in the role of regulator, prosecutor, judge and jury all at the same time.  As Judge Rakoff recently observed, “from where does the constitutional warrant for such unchecked and unbalanced administrative power derive?”

Another noticeable feature of the Layne Christensen action was that the company resolved the SEC’s action without admitting or denying the SEC’s findings.  Smith & Wesson likewise resolved its FCPA enforcement action in this way.

$4

It is reasonable to assume that the SEC included findings in its order for a specific reason (and not just to practice its typing skills).

It is therefore noteworthy that the SEC’s order includes this finding:

“Layne Christensen made more than $10,000 in small payments to foreign officials through various customs and clearing agents that it used in Tanzania, Burkina Faso, Mali, Mauritania, and the DRC. These payments ranged from $4 to $1,700 and were characterized in invoices submitted by the agents as, among other things, “intervention,” “honoraires,” “commissions,” and “service fees.”

Stay tuned for (I predict) coming law firm client alerts and memos on this $4 payment.

As highlighted in this prior post, if the DOJ and SEC are genuine in their message that they are only “focused on bribes of consequence,” on payments of “real and substantial value” and in companies spending compliance dollars in the “most sensible way,” there is something very easy and practical for the enforcement agencies to do.

Only allege conduct that actually determines the ultimate outcome of the enforcement action.

Same Process, Different Results

Does voluntary disclosure and cooperation result in:

An SEC administrative cease and desist order?  Yes, see Layne Christensen.

An SEC non-prosecution agreement?  Yes, see Ralph Lauren.

An SEC deferred prosecution agreement?  Yes, see Tenaris.

An SEC civil complaint?  Yes, see Archer Daniels Midland Company.

Granted, the facts of each FCPA enforcement action are unique, but what drives FCPA practitioners and their clients crazy about the FCPA enforcement process is a lack of transparency and predictability of outcomes.

What Would Have Happened Had The SEC Been Put To Its Burden Of Proof?

Pardon me for being “that guy,” but what would have happened had the SEC been put to its burden of proof on its finding that Layne Christensen violated the FCPA’s anti-bribery provisions?  The SEC’s allegations all concerned payments outside the context of government procurement but rather to allegedly secure favorable tax treatment, customs clearance, work permits, relief from regulatory inspections, etc.

It is a matter of fact, that the SEC has been put to its ultimate burden of proof only once concerning alleged payments outside the context of government procurement and it lost that case.  (See here for the discussion of SEC v. Mattson and Harris). For a broader discussion of this issue, including DOJ actions, see this article.

Moreover, many of the SEC’s findings would seem to potentially implicate the FCPA’s facilitating payments exception.  On that score, in SEC v. Jackson & Ruehlen, a court ruled that the SEC has the burden of negating this statutory exception, something the SEC was unable to do in that case (based on certain similar facts as alleged in the Layne Christensen action) which resulted in a defendant-friendly settlement on the eve of trial.  (See here).

Finally, no doubt Layne Christensen as part of its cooperation likely agreed to toll statute of limitations or waive statute of limitations defenses altogether.  Yet it is worth highlighting that the bulk of the SEC’s findings concern conduct that allegedly occurred between 2005 and July 2009; in other words, beyond the FCPA’s typical 5 year statute of limitations.

Timeline

As highlighted in this 2010 post, Layne Christensen initially disclosed its FCPA scrutiny in Fall 2010.  The company’s first disclosure stated, in pertinent part:

“In connection with the Company updating its Foreign Corrupt Practices Act (“FCPA”) policy, questions were raised internally in late September 2010 about, among other things, the legality of certain payments to customs clearing agents in connection with importing equipment into the Democratic Republic of Congo (“DRC”) and other countries in Africa.  [...] Although the Company has had a long-standing published policy requiring compliance with the FCPA and broadly prohibiting any improper payments by the Company to foreign or U.S. officials, the Company has adopted additional policies and procedures to enhance compliance with the FCPA and related books and records requirements. Further measures may be required once the investigation is concluded.”

In short, Layne Christensen’s FCPA scrutiny – from point of first public disclosure to resolution – lasted approximately 4 years.

The “Three Buckets” 

In my article, “Foreign Corrupt Practices Act Ripples,” I coin the term “three buckets” of FCPA financial exposure and demonstrate how settlement amounts in an actual FCPA enforcement action (“bucket #1) are often not the most expensive aspect of FCPA scrutiny and enforcement.

In nearly every case in which a comparison can be made, “bucket #1″ (pre-enforcement action professional fees and expenses) is the most expensive aspect of FCPA scrutiny.

The numbers in Layne Christensen serve as another instructive reminder.

Bucket #1 = in excess of $10 million (based on the company’s disclosures)

Bucket #12 = $5.1 million

Bukcet #3 (post enforcement action professional fees and expenses) are to be determined.  A noticeable aspect of the Layne Christensen action (one based on a voluntary disclosure and cooperation) is that the company has a reporting obligation imposed upon it.  As stated in the SEC’s order, Layne Christensen shall “report to the Commission periodically, at no less than nine-month internals during a two-year term, the status of its FCPA and anti-corruption related remediation and implementation of compliance measures.”

Compliance Enhancements, Etc.

During its period of FCPA scrutiny, Layne Christensen previously disclosed the following compliance enhancements.

  • contracted with a third party forensics accounting team to conduct an in-depth review of the operations in Africa and to make recommendations for improvement to the internal control systems;
  • reviewing existing arrangements with third parties interacting with government officials in international locations in an effort to assure that contracts and agreements include anti-corruption terms and conditions;
  • performing due diligence on third parties interacting with government officials in international locations and implementing a process to assess potential new third parties;
  • terminated certain agency and business relationships;
  •  established a separate position of, and appointed, a chief compliance officer, effective March 30, 2011, under the supervision of our Senior Vice President, General Counsel and Secretary to facilitate implementation and maintenance of compliance policies, procedures, training, reporting and internal reviews, with indirect reporting responsibility to the audit committee;
  • developed new procedures to improve the controls over cash handling and record retention;
  • conducting a company-wide risk assessment, including an employee survey, to ascertain whether similar issues may exist elsewhere in the Company;
  • initiated an enhanced company-wide, comprehensive training of Company personnel in the requirements of the FCPA, including training with respect to those areas of the Company’s operations that are most likely to raise FCPA compliance concerns; and
  • continued to enhance our training of management, including our operations managers, to emphasize further the importance of setting the proper tone within their organization to instill an attitude of integrity and control awareness and the use of a thorough and proper analysis of proposed transactions.

 

Friday Roundup

Friday, October 10th, 2014

A tribute, resource alert, bureaucratic brazennessscrutiny alerts and updates, a bushel, quotable, and for the reading stack. It’s all here in the Friday roundup.

James McGrath

I join Tom Fox (FCPA Compliance and Ethics Blog) in paying tribute to James McGrath.  Owner of his own Ohio-based firm McGrath & Grace and founder and editor of his own Internal Investigations Blog, McGrath was a bear of a man as Fox wrote.  Yet a gentle and kind bear and I will remember Jim for his desire to learn and engage with students.  He was an occasional contributor to FCPA Professor (see here) and his candid wit resulted in this classic post.  I last communicated with Jim a few weeks ago and he was excited to share some new things in his life and I was happy and excited for him.  Moreover, Jim paid me a visit in Southern Illinois this past spring which is no small feat as one has to make a big of effort to get here.  I enjoyed our visit and discussion.

You will be missed Jim, rest in peace.

Resource Alert

The University of Houston Law Center announced:

“[Release of] a searchable database that contains the compliance codes for Fortune 500 companies.  The project was led by Houston attorney Ryan McConnell, an adjunct professor at the University of Houston Law Center. McConnell worked with a team of recent graduates and current students to develop the database, which covers 42 different topics. “The free database allows any company to conduct benchmarking on virtually every compliance area covered in a code of conduct and to spot compliance trends within their industry,” McConnell explained. “In addition to proactively building a program, when compliance failures occur, whether a foreign bribery violation or environmental issue, stakeholders – whether they are shareholders in a lawsuit or criminal investigators – frequently scrutinize the company’s compliance program.  This database provides a powerful tool for anyone to evaluate the strength of a company’s compliance program, including subject matters addressed in the code and the organization’s core values.”

Bureaucratic Brazenness

This recent Wall Street Journal column “The New Bureaucratic Brazenness” caught my eye.

“We’re all used to a certain amount of doublespeak and bureaucratese in government hearings. That’s as old as forever. But in the past year of listening to testimony from government officials, there is something different about the boredom and indifference with which government testifiers skirt, dodge and withhold the truth. They don’t seem furtive or defensive; they are not in the least afraid. They speak always with a certain carefulness—they are lawyered up—but they have no evident fear of looking evasive. They really don’t care what you think of them. They’re running the show and if you don’t like it, too bad.

[...]

Everything sounds like propaganda. That will happen when government becomes too huge, too present and all-encompassing. Everything almost every level of government says now has the terrible, insincere, lying sound of The Official Line, which no one on the inside, or outside, believes.

[...]

We are locked in some loop where the public figure knows what he must pronounce to achieve his agenda, and the public knows what he must pronounce to achieve his agenda, and we all accept what is being said while at the same time everyone sees right through it. The public figure literally says, “Prepare my talking points,” and the public says, “He’s just reading talking points.” It leaves everyone feeling compromised. Public officials gripe they can’t break through the cynicism. They cause the cynicism.”

I sort of feel this way when I hear DOJ and SEC FCPA enforcement attorneys speak.  Do you?

For instance, last year I attended an event very early in tenure of a high-ranking SEC enforcement official.  This person – who came to the SEC from private practice – candidly stated something to the effect that given his very new position he did not yet know what he was supposed to say.

Scrutiny Alerts and Updates

Sanofi

As recently reported in this Wall Street Journal article:

“Sanofi said it has told U.S. authorities about allegations of improper payments to health-care professionals in the Mideast and East Africa, joining a lineup of pharmaceutical companies that have faced similar claims. Among the allegations are that Sanofi employees made improper payments to doctors in Kenya and other East African nations, handing out perks based on whether the doctors prescribed or planned to prescribe Sanofi drugs, according to the firm and e-mails from a tipster The Wall Street Journal viewed. The French pharmaceutical company said it hired New York law firm Weil Gotshal & Manges LLP to look into the claims and the investigation is continuing. “At this stage, it is too early to draw conclusions,” a company spokesman said. “Sanofi takes these allegations seriously.”

[...]

“The Sanofi investigation began after the firm received a series of anonymous allegations that wrongdoing occurred between 2007 and 2012 in parts of the Middle East and East Africa, the company said. One allegation was that employees of subsidiary Sanofi Kenya bribed medical professionals, a claim made via emails sent to Sanofi senior management last October and in March and viewed by the Journal. Sanofi paid for influential medical professionals to attend conferences, many of which were abroad, and gave them cash and gifts at its own events to win business, the emails allege. Copies of letters the tipster said were sent to Sanofi Kenya by medical professionals, as well as what the emails describe as other Sanofi documents, which were also reviewed by the Journal, indicate that doctors would request money from Sanofi Kenya to attend conferences and events and that Sanofi employees would take into account the applicant’s value to Sanofi’s business before deciding whether to sponsor them or not.”

As highlighted in this August 2013 post, Sanofi’s conduct in China has also been under scrutiny.

GSK

As recently reported in this Reuters article:

“GlaxoSmithKline, which was slapped with a record $489 million fine for corruption in China last month, said on Tuesday it was looking into allegations of corruption in the United Arab Emirates. Britain’s biggest pharmaceuticals group confirmed the investigation following allegations of improper payments set out in a whistleblower’s email sent to its top management on Monday. The email, purporting to be from a GSK sales manager in the Gulf state, was seen by Reuters. The company is already investigating alleged bribery in a number of Middle East countries, including Lebanon, Jordan, Syria and Iraq, as well as Poland. ”As we have already said, we are undertaking an investigation into our operations in the Middle East following complaints made previously. This investigation continues and these specific claims were already being investigated as part of this process,” a GSK spokesman said.”

DynCorp

The Washington Times reports here

“State Department investigators uncovered evidence that agents working for one of the largest U.S. military contractors paid tens of thousands of dollars in bribes to Pakistani officials to obtain visas and weapons licenses, but records show the government closed the case without punishing DynCorp.

[...]

But investigators closed the case after deciding they couldn’t prove or disprove the company had the “requisite corrupt” intent required to prove a violation of the Foreign Corrupt Practices Act (FCPA), which bars U.S. companies from bribing foreign officials.

“There was no evidence to support the allegations that DynCorp or its employees had specific knowledge of bribes paid Pakistani government officials,” an investigator wrote in a memo closing out the case last year.

Still, investigators concluded there were violations of the FCPA involving both Speed-Flo and Inter-Risk, both of which are based in Islamabad.”

AgustaWestland / Finmeccanica Related

As noted in this Wall Street Journal article:

“An Italian court found Giuseppe Orsi, the former chief executive of defense firm Finmeccanica, not guilty of international corruption, absolving him of the most serious charge he faced in connection with a 560-million-euro contract won in 2010 to supply the Indian government with 12 helicopters. The three judge panel found Mr. Orsi, 68, guilty of falsifying invoices and sentenced him for that crime to two years in prison, a penalty that was immediately suspended. “A nightmare is over for me and my family,” a visibly relieved Mr. Orsi told reporters after the judge had read the verdict. Italian prosecutors had argued that Mr. Orsi, who at the time of the alleged corruption was CEO of Finmeccanica unit AgustaWestland, directed a plan to pay tens of millions of dollars to Indian officials, including the former top officer in the Indian air force, to win the helicopter-supply competition. Mr. Orsi rose to become CEO of Finmeccanica in 2011 and resigned last year when the corruption charges surfaced. The court also absolved Bruno Spagnolini, who followed Mr. Orsi as CEO of AgustaWestland, of corruption while finding him guilty of falsifying invoices. In reading the verdict, the judge said that while prosecutors had proven that fake invoices had been issued, there was no corruption. Prosecutors had argued there was a direct connection between the false invoices and the payment of kickbacks.”

A Bushel

Matthew Fishbein (Debevoise & Plimpton) was awarded an FCPA Professor Apple Award for this this recent article titled “Why Aren’t Individuals Prosecuted for Conduct Companies Admit.”  Fishbein continues with his spot-on observations in this recent Corporate Crime Reporter Q&A.  For additional reading on the same topics see:

The Facade of FCPA Enforcement“ (2010)

My 2010 Senate FCPA testimony (“The lack of individual prosecutions in the most high-profile egregious instances of corporate bribery causes one to legitimately wonder whether the conduct was engaged in by ghosts. [...]  However, a reason no individuals have been charged in [most FCPA] enforcement actions may have more to do with the quality of the corporate enforcement action than any other factor. As previously described, given the prevalence of NPAs and DPAs in the FCPA context and the ease in which DOJ offers these alternative resolution vehicles to companies subject to an FCPA inquiry, companies agree to enter into such resolution vehicles regardless of the DOJ’s legal theories or the existence of valid and legitimate defenses. It is simply easier, more cost efficient, and more certain for a company … to agree to a NPA or DPA than it is to be criminally indicted and mount a valid legal defense – even if the DOJ’s theory of prosecution is questionable …”.

But Nobody Was Charged” (2011)

“DOJ Prosecution of Individuals – Are Other Factors At Play?” (2011) (2013) (2014)

Why You Should Be Alarmed by the ADM Enforcement Action” (2014).

Quotable

In this recent speech, SEC Chair Mary Jo White stated:

“In fiscal year 2013, we brought more than 675 enforcement actions and obtained orders for $3.4 billion in total penalties and disgorgement.  We will soon be announcing the results for our 2014 fiscal year, which ended yesterday.  It was another very productive year as those numbers will show. But numbers only tell part of the story. The quality and breadth of actions are really the more meaningful measure of an effective enforcement program. (emphasis added).”

As to international cooperation, White stated:

“International cooperation is essential to the SEC’s enforcement program, and indeed, to all of our enforcement programs.  In today’s global marketplace, fraudulent schemes and other misconduct commonly have cross-border elements, and the need for seamless cooperation among us has never been greater.

The SEC’s investigations and enforcement actions often involve witnesses and evidence in different countries around the world.  And I know that the same is true in your investigations and enforcement cases.

Faced with this simple reality, if we are to continue to conduct these investigations successfully, and prosecute the offenses and wrongdoers to the fullest extent of our laws, broad and effective use of the MMoU, and our bilateral agreements, is more important than ever.

No one knows that better than the SEC.  Virtually every week, I meet with my fellow Commissioners to decide which cases to bring.  Rarely is there a week when one or more of the cases recommended by the enforcement staff does not involve critical international assistance.  In fact, in the last fiscal year, the SEC made more than 900 requests for international assistance and, as a result, we were able to obtain critical evidence that helped us prosecute wrongdoers for a vast array of serious offenses.

In one recent FCPA case, for example, the SEC obtained valuable evidence — bank and other corporate records — from German prosecutors. [HP] And, we received great support from regulators in Australia, Guernsey, Liechtenstein, Norway, Canada, Switzerland, and the United Kingdom in another major FCPA action. [Alcoa].”

From the Houston Chronicle, a Q&A with former Deputy Attorney General – and current FCPA practitioner – George Terwilliger.

Q: How will enforcement of the Foreign Corrupt Practices Act (FCPA) hinder U.S. energy companies from doing business abroad?

A: Notwithstanding all the good things that are happening with energy upstream production in the United States, the real growth opportunities remain overseas. And a lot of them are in places that are ethically challenged at best in terms of their business and legal cultures. Two things cause problems for companies subject to U.S. law.

One, ambiguities are in the law itself. What is a foreign official? What organizations are covered as entities of foreign governments that are state-owned enterprises three times removed?

Then there’s the uncertainty of the parameters of enforcement policy. Why is this case prosecuted and that one isn’t? Why does this case settle for this much money and that one for that much money? There’s not a lot of transparency, and it’s not apparent to the people who work at this all the time exactly where those parameters are.

Q: Why is that a problem?

A: A company subject to U.S. law that is looking at an opportunity overseas looks at what the profitability model is and then they look at the risk inherent in doing business in that environment. The least little thing that comes up in that process — there’s a piece of real estate they want us to use as a staging area that’s owned by the brother-in-law of the cousin of the oil minister — and they look at it and go, “You know what? We’re not going to do that. It’s not worth the risk.”

Q: Are companies passing up business opportunities because of those risks?

A: Yes, that happens. Companies forgo economic opportunities because the uncertainties are perceived to be too great given the potential return on the investment. The objective of the law is to have a corruption-free level playing field. Most American business people I think believe that given a level playing field they can compete very well, particularly with foreign competitors. The problem is when that playing field is knocked out of kilter by the influence of corruption. Perhaps companies from other countries don’t operate under these constraints, then the playing field isn’t level anymore.

Q: What can mitigate those risks and balance the playing field for U.S. companies abroad?

A: For some time I have advocated some kind of corporate amnesty for companies that investigate themselves, fix their problems and disclose them to the government. If companies become aware of corrupt activity, I think given an incentive to report that they would do it. And that will help the government and help the objectives of this program rather than playing a kind of gotcha game.

Q: Are there any incentives now for companies to disclose potential violations?

A: The Securities Exchange Commission and the Justice Department have articulated policies that whatever the penalty should be for some wrongdoing, it will be less if you self-report, cooperate with an investigation and so forth. I don’t think that’s widely believed in the U.S. corporate community. And it’s almost impossible to measure. I have represented companies where we have made voluntary disclosures that have not been prosecuted. And the government has said the reason they are not prosecuting is because of internal investigation and cooperation. So I’m not saying it doesn’t happen. At the end of the day, companies wrestle with the question of, “Is it really worth it?” All the heartache that’s going to flow from a voluntary disclosure, particularly on something that may be marginal as a violation, is it worth what that’s going to cost? In terms of damage to reputation, shareholder issues, management issues with the board and so forth, is that going to be worth it in terms of what a company might get in terms of some forbearance of penalty?

Reading Stack

“It’s as if the FCPA Super Bowl just ended in a tie.”  (See here from Bracewell & Giuliani attorneys Glen Kopp and Kedar Bhatia regarding the Supreme Court recently declining to hear the “foreign official” challenge in U.S. v. Esquenazi).   

A legitimate concern or a bluff?  (See here from The Globe and Mail – “The head of Canadian engineering giant SNC-Lavalin Group Inc. says any move by authorities to charge the company in connection with an extensive bribery scandal would immediately threaten its future and could force it to close down.”).

An interesting video on Bloomberg’s “Market Matters” regarding the DOJ’s approach to prosecuting alleged corporate crime. The FCPA is not specifically discussed, although the issues discussed are FCPA relevant.

From the Economist “The Kings of the Courtroom:  How Prosecutors Came to Dominate the Criminal-Justice System.” (“The prosecutor has more control over life, liberty and reputation than any other person in America,” said Robert Jackson, the attorney-general, in 1940. As the current attorney-general, Eric Holder, prepares to stand down, American prosecutors are more powerful than ever before. Several legal changes have empowered them. The first is the explosion of plea bargaining, where a suspect agrees to plead guilty to a lesser charge if the more serious charges against him are dropped. Plea bargains were unobtainable in the early years of American justice. But today more than 95% of cases end in such deals and thus are never brought to trial.”).

*****

A good weekend to all.

Recent DOJ Speeches

Thursday, October 9th, 2014

Speaking8Previous posts here and here highlighted recent speeches by top Department of Justice officials on topics relevant to the Foreign Corrupt Practices Act.

This post highlights additional recent speeches by Assistant Attorney General for the Criminal Division Leslie Caldwell on October 1st and by Principal Deputy Assistant Attorney General for the Criminal Division Marshall Miller on October 7th.  The speeches are near carbon-copies of each other, but both are excerpted below in one space for ease of reference.  Moreover, Caldwell’s speech further expounds on cooperation issues previously articulated in Miller’s September 17th speech.

Before excerpting the speeches, it is worth noting that the DOJ officials (as prior DOJ officials have in the past) made several important acknowledgments relevant to the difficulties of FCPA compliance and in support of the policy rationales for an FCPA compliance defense.  (See here for the article “Revisiting a Foreign Corrupt Practices Act Compliance Defense”).  In pertinent part, the DOJ officials stated:

“While the Justice Department is often the last line of defense against fraud and corruption, all of you [compliance professionals] are the first.  Criminal prosecutions can and do deter future bad behavior, but they most often serve as an after-the-fact sanction for misconduct.  Your collective work is designed to ensure corporate compliance and ethical practices from the outset.”

“[W]e recognize that even with proper support of a compliance program by management, perfect compliance in this increasingly global economy is incredibly difficult.  Compliance departments are asked to monitor business units that are spread about the globe.”

“Every company hires human beings who, when they are in a tough and maybe unfamiliar situation with no clear guidance about what is expected, will sometimes choose the wrong path.  And that becomes even harder when they are operating in countries with business cultures very different from their own.”

“Corporations do not act, but for the actions of individuals.  In all but a few cases, an individual or group of individuals is responsible for the corporation’s criminal conduct.”

“Compliance must be incentivized.”

“Although increasingly rare in this day and age – more than a decade after the passage of the Sarbanes Oxley Act – we are still encountering prominent companies with no real compliance programs. Hard to believe, but true.”

“[E]ven companies with strong compliance programs can and do detect and report criminal misconduct by employees.”

“While the Justice Department is often the last line of defense against fraud and corruption, all of you who work in compliance are the first. Criminal prosecutions can and do deter future bad behavior, but your work can prevent that conduct before it happens.”

For additional writing and videos on many of the same points discussed in the DOJ speeches see:

Assistant Attorney General Caldwell’s October 1st Speech

“While the Justice Department is often the last line of defense against fraud and corruption, all of you are the first. Criminal prosecutions can and do deter future bad behavior, but they most often serve as an after-the fact sanction for misconduct.

Your collective work is designed to ensure corporate compliance and ethical practices from the outset. The importance of your work cannot be overstated: it serves to protect the integrity of our public markets, the country’s financial systems, our intellectual property, the retirement accounts of our hardworking citizens, and our taxpayer dollars used to fund healthcare programs and government and military contracts.

A very large part of the mission of the Criminal Division is fighting major corporate fraud and corruption. Our Fraud Section employs approximately 100 prosecutors who are experienced in investigating health care fraud, defense procurement fraud, securities and financial fraud, and violations of the Foreign Corrupt Practices Act.

Our Asset Forfeiture and Money Laundering Section investigates and prosecutes international money laundering and violations of U.S. sanctions laws, and it recovers the proceeds of foreign official corruption by kleptocrats.

Unfortunately, in our fraud, corruption, money laundering, and sanctions cases, we have seen too many failures of corporate compliance.

In this day and age – more than a decade after the Sarbanes-Oxley Act – we come across very few companies that do not have any compliance program. In fact, we have seen a marked improvement in compliance programs over the years. In years past, it was not uncommon to see companies with only rudimentary compliance programs.

That situation is illustrated by a case resolved just last year, involving Weatherford International, a Swiss oil services company that trades on the New York Stock Exchange. Three subsidiaries of Weatherford International pleaded guilty to violating the anti-bribery provisions of the Foreign Corrupt Practices Act and export controls violations.

Before 2008, the company had little more than a weak paper compliance program. The subsidiaries admitted that the company did not have a dedicated compliance officer or compliance personnel, did not conduct anti-corruption training, and did not have an effective system for investigating employee reporting of ethics and compliance violations. Weatherford companies paid $252 million in penalties and fines.

It is increasingly rare that we encounter circumstances in which a company has such a feeble compliance program. And I doubt that anyone in this audience works for a company like that, or you probably would not be here.

More often, we encounter companies with compliance programs that are strong on paper, but much weaker in practice.”

[...]

“Now, we recognize that even with proper support of a compliance program by management, perfect compliance in this increasingly global economy is incredibly difficult. Compliance departments are asked to monitor business units that are spread about the globe.

More than the geographic divide, however, there often are cultural divides from country-to-country that you must bridge.”

[...]

“There is no doubt that monitoring compliance on a global scale is a difficult, but difficulty cannot be used as an excuse to turn a blind eye to problematic business practices. Compliance programs must be put into place and—more importantly—communicated repeatedly and enforced properly throughout the entire organization.

The emphasis on compliance must be heard not only in the executive suites at headquarters, but wherever the company operates around the globe.

When considering criminal action against a company, one factor that the Justice Department evaluates is the company’s compliance program.

Under the department’s internal guidance, the Principles of Federal Prosecution of Business Organizations, prosecutors must consider “the existence and effectiveness of the corporation’s pre-existing compliance program.”

As all of you know, the United States Sentencing Guidelines also expressly include a company’s corporate compliance program as a factor in corporate sentencing in criminal cases.

There is, of course, no “off the rack” compliance program that can be installed at every company. Effective compliance programs must be tailored to the unique needs and risks faced by each company.

But there are hallmarks of good compliance programs. The department includes many of these in our non-prosecution agreements and deferred prosecution agreements, and I’d like to discuss them with you.

1. High-level commitment. A company must ensure that its directors and senior management provide strong, explicit, and visible commitment to its corporate compliance policy. Stated differently, and again, “tone from the top.”

This means that the importance of compliance should be communicated from the very top of the company. I once heard of a large company whose prominent CEO refused to put his signature on a company-wide communication announcing the company’s new compliance program.

When asked why not, he replied: “Because we don’t hire those kinds of people.” Well, he could not have been more wrong. Every company hires “those kinds of people.”

Every company hires human beings who, when they are in a tough and maybe unfamiliar situation with no clear guidance about what is expected, will sometimes choose the wrong path. And that becomes even harder when they are operating in countries with business cultures very different from our own.

2. Written Policies. A company should have a clearly articulated and visible corporate compliance policy memorialized in a written compliance code. Again, employees need to know what to do–or not do–when faced with a tough judgment call involving business ethics. Companies need to make that as easy as possible for their employees.

3. Periodic Risk-Based Review. A company should periodically evaluate these compliance codes on the basis of a risk assessment addressing the individual circumstances of the company. Companies change over time through natural growth, mergers, and acquisitions.

Compliance policies should be live organisms that also change and grow with the company. You are only as strong as your weakest flank.

I once represented a company that had an A+ compliance program. But then they acquired a Chinese subsidiary and for several years failed to communicate to their new—and then not-so new–Chinese employees the need for FCPA compliance.

The predictable result: the Chinese employees continued doing business in the way that was familiar to them. And the US parent found itself in deep violation of the FCPA.

4. Proper Oversight and Independence. A company should assign responsibility to senior executives for the implementation and oversight of the compliance program.

Those executives should have the authority to report directly to independent monitoring bodies, including internal audit and the Board of Directors, and should have autonomy from management. Compliance programs needed to be funded; they need to have resources.

And they need to have teeth and respect within the company. For years, Wall Street banks housed their compliance programs across the Hudson River, in New Jersey. They were out of sight, out of mind. They were underpaid. And nobody paid much attention to them.

Compliance programs need to have an appropriate stature within the company, or compliance will be the last thing on the mind of an employee tempted to engage in wrongdoing.

5. Training and Guidance. A company should implement mechanisms designed to ensure that its compliance code is effectively communicated to all directors, officers, employees. This means repeated communication, frequent and effective training, and an ability to provide guidance when issues arise.

And as I said before, employees should see that the importance of compliance is being communicated from the top—whether the CEO, the Board, the General Counsel, or some other very highly respected senior-level figure within the company.

6. Internal Reporting. A company should have an effective system for confidential, internal reporting of compliance violations. I know that many companies have multiple mechanisms, which is good.

7. Investigation. A company should establish an effective process with sufficient resources for responding to, investigating, and documenting allegations of violations. What this means on the ground will depend on the company. A sophisticated multi-national corporation obviously will be expected to have more resources devoted to compliance than a small regional company.

8. Enforcement and Discipline. A company should implement mechanisms designed to enforce its compliance code, including appropriately incentivizing compliance and disciplining violations.

And the response to a violation must be even-handed. Too often, we see situations where low level employees who may have implemented the bad conduct are fired, but their boss, who saw what they were doing and did nothing—and maybe even the directed the conduct—is left in place.

This should not happen. Not only from a department perspective, but from a business perspective. Leaving in place senior managers who sanction bad behavior sends a very wrong message about the company’s true commitment to compliance and ethics.

People watch what people do much more carefully than what they say. When it comes to compliance, you must both say and do.

9. Third-Party Relationships. A company should institute compliance requirements pertaining to the oversight of all agents and business partners.

I cannot emphasize strongly enough the need to sensitize third parties, like vendors, agents, and consultants, to the importance of not compliance.

And these partners need to understand that the company really expects its partners to be compliant. This often means more than just including a boilerplate paragraph in a contract in which the partner promises to comply with the law and company policies. It means warning, and even terminating, relationships with partners who fail to behave in a compliant manner.

10. Monitoring and Testing. A company should conduct periodic reviews and testing of its compliance code to improve its effectiveness in preventing and detecting violations. Kick the tires regularly. As I said, compliance programs must evolve with changes in the law, business practices, technology and culture.

As I said, there is no “one-size fits all” compliance program. But these are guideposts that we consider important to the success of a strong program.

And as important as the compliance program itself is implementation. When we investigate a case, we look at the messages about compliance that are given to employees.

More than just reading the paper program or the code of conduct, we look at what employees are told in their day-to-day work.

We are looking at e-mails, chats, and recorded phone calls. We are talking to witnesses about the messages they received from their supervisors and management – did they receive messages about compliance, or about making money at all costs.

And we examine the incentives that a company provides to encourage compliant behavior – or not. If a company is actually encouraging compliance, if its values are to be ethical and within the law, then that message must be conveyed to employees in a meaningful way. Otherwise, the Department of Justice will not view the compliance program as credible.

And sometimes, effective implementation of a compliance program means standing apart from the other companies in your industry. We have seen significant misconduct taking place throughout an industry.

But the excuse that “everyone else is doing it” didnd’t work in grade school, and it sure won’t work when federal agents come knocking at your door.”

[...]

“Effective compliance programs must be embedded in a company’s culture. And they need to be applied even in the face of misconduct by other companies in the same industry, even if that might mean a short-term competitive disadvantage.

A company’s executives can choose to rise above the rest — or race to the bottom. I am telling you that the Criminal Division will hold responsible companies and individuals that knowingly violate the law, no matter if the excuse is that “everyone” was doing it.

Now what should you do when your robust compliance program fails? Or, when it works, allowing you to discover criminal misconduct? I encourage you to conduct a thorough investigation and to disclose potentially criminal misconduct to the Justice Department.

When criminal misconduct is discovered, a critical factor in the department’s prosecutorial decision making is the extent and nature of the company’s cooperation.

The department’s Principles of Federal Prosecution of Business Organizations provides that prosecutors should consider “the corporation’s timely and voluntary disclosure of wrongdoing and its willingness to cooperate in the investigation of its agents.”

Now let me flesh out the often discussed, but sometimes poorly understood, concept of cooperation.

Most companies now understand the benefits of voluntarily disclosing the misconduct before we come asking, and the benefits of conducting an internal investigation and providing facts about the misconduct to the government.

But companies all too often tout what they view as strong cooperation, while ignoring that prosecutors specifically consider “the company’s willingness to cooperate in the investigation of its agents.”

Corporations do not act, but for the actions of individuals. In all but a few cases, an individual or group of individuals is responsible for the corporation’s criminal conduct. The prosecution of culpable individuals – including corporate executives – for their criminal wrongdoing continues to be a high priority for the department.

For a company to receive full cooperation credit following a self-report, it must root out the misconduct and identify the individuals responsible, even if they are senior executives.

We are not asking that you become surrogate FBI agents or prosecutors, or that you use law enforcement tactics like body wires. And we do not need to hear you say that executive A violated a particular criminal law. All we are saying is that we expect you to provide us with facts. We will take it from there.

But a company that interviews its employees in an effort to whitewash the facts or spread the company’s narrative spin risks receiving any cooperation credit.

Additionally, for a company to receive full cooperation credit, the company must provide relevant documents and evidence, and should do so in a timely fashion.

We find that global companies are increasingly hasty to invoke foreign data privacy laws to avoid providing evidence to the department. While we recognize that some of these laws pose real challenges to data access and transfer, many do not.

As a result, we are looking closely – with an ever more skeptical eye – to ensure that these claims are honest and not obstructionist. A company that reads foreign data protection laws expansively, to restrict its disclosure of documents, when it could be read more narrowly, is in dangerous territory if it wants to receive full cooperation credit.

Although the department welcomes and encourages corporate cooperation, we do not rely upon it. We conduct our own robust investigations – often alongside that of the company – to build our own criminal cases and to pressure-test corporate claims of cooperation.

Companies claiming to cooperate while conducting lackluster investigations with little results should not be surprised when they do not get credit for their supposed efforts. And they should not be surprised when they face the consequences of our own investigations.

The benefits of corporate cooperation are clear. We often explicitly describe the benefits when we reach resolutions with companies. As just one example, earlier this year, the department announced Alcoa World Alumina’s guilty plea to FCPA charges stemming from its payment of millions of dollars in bribes to officials of the Kingdom of Bahrain.

As part of the plea, Alcoa paid $223 million in criminal fines and forfeiture. The department publicly commended Alcoa for its cooperation, which included conducting an extensive internal investigation, making proffers to the government, voluntarily making current and former employees available for interviews, and providing relevant documents to the department.

Alcoa’s cooperation was mentioned specifically as a factor that lowered the size of the criminal fine. In fact, absent cooperation, Alcoa could have faced a fine of more than $1 billion. Many people, however, want concrete examples of cases where we decided not to pursue charges at all in light of a company’s cooperation. The department is not typically in a position to disclose these declinations, and indeed many companies do not want the world to know that they were under department scrutiny.”

[...]

“The Criminal Division is more committed than ever to investigating corporate fraud and corruption. We will investigate regardless whether a company choses to cooperate.

But for a company to receive credit for its compliance program, it must have demonstrated effectiveness, with messages about compliance that come from the top and echo throughout the corporate hallways.

And for a company to receive full cooperation credit, it must uncover the misconduct, identify the responsible individuals, and fully disclose the facts to the department.”

Deputy Attorney General Miller’s October 7th Speech

“I suspect that everybody in this room is familiar with the Principles of Federal Prosecution of Business Organizations, or the Filip factors, upon which we base our corporate charging and resolution decisions. One of those factors expressly directs us to consider “the existence and effectiveness of the corporation’s pre-existing compliance program” in deciding whether to charge a corporation with a crime.

In fact, one is hard-pressed to find a corporate resolution with the Justice Department that does not contain a prominent reference – positive or negative – to the corporation’s compliance program. The existence of an effective compliance program can make all the difference when a corporation is in the Justice Department’s sights.

Today, I would like to highlight a few primary strengths and weaknesses that we have observed in corporate compliance programs of late. As an overarching theme, the failure to expand compliance programs to meet the needs of growing corporations – particularly global corporations – drives many of the compliance problems we have seen. On the flip side, compliance programs that have widespread prophylactic and training mechanisms – as well as procedures designed to uncover wrongdoing and expose individuals responsible for criminal behavior – are the most effective.

A corporation’s ability to use compliance to uncover misconduct and, just as importantly, identify wrongdoers is central to the Justice Department’s evaluation of a compliance program.

As you know, there is no off-the-rack, one-size-fits-all compliance program. Companies must tailor compliance programs to manage their unique risks. There are, however, characteristics that should be present in each program.

In 2012, the Justice Department and the SEC published the Foreign Corrupt Practices Act, or FCPA, Resource Guide, which contains an entire section entitled, “Hallmarks of Effective Compliance Programs.” While the hallmarks in the FCPA Guide are focused on anti-corruption compliance programs, the principles identified apply universally.

Now, I’m not going to go through all the hallmarks with you today – but I will make a couple of overarching points. First, the Justice Department’s hallmarks are designed to encourage a ‘culture of compliance,’ which begins – but doesn’t end – with ‘a tone from the top,’ and extends to actions throughout a company’s ranks.

So hallmark # 1 is high-level commitment. When employees truly understand that a company’s leadership is committed to compliance – even when it runs up against profits – only then does a company truly have a successful compliance program. The quickest way to check on that commitment is to take a look at corporate structure. If you see compliance executives sitting in true positions of authority at a corporation, reporting directly to independent monitoring bodies, like internal audit committees or boards of directors, you likely are looking at a strong compliance program. Compliance programs also need to be resourced; they need to have teeth and respect. By contrast, for years, Wall Street banks housed their compliance programs across the Hudson River, in New Jersey. They were out of sight, out of mind. Compliance programs need to have appropriate stature within corporations.

Another key hallmark is whether the program grows with the company. Any good compliance program needs to be periodically evaluated, using risk assessment models aimed at the individual circumstances of the company. As companies change over time, so must compliance policies.

A strong compliance program must also involve enforcement and discipline. It is human nature to pay more attention to what people do than to what they say. Compliance must be incentivized; violations disciplined. And the response must be even-handed. Too often we see low-level employees who implemented bad conduct fired, but bosses, who did nothing to stop the conduct – and may even have directed it – left in place without sanction.

Although increasingly rare in this day and age – more than a decade after the passage of the Sarbanes Oxley Act – we are still encountering prominent companies with no real compliance programs. Hard to believe, but true.

Just last year, three subsidiaries of Weatherford International, a Swiss oil services company listed on the New York Stock Exchange, pleaded guilty to FCPA and export control violations. Over a period of many years, Weatherford subsidiaries in Africa, the Middle East, and Iraq paid bribes to foreign officials in exchange for lucrative contracts and inside information about competitors. Some of Weatherford’s international subsidiaries also illegally exported oil and gas drilling equipment to countries under United States sanctions – countries like Cuba, Iran, Sudan, and Syria.

But more important to this audience than Weatherford’s conduct itself may be the admissions it made regarding the state of its compliance programs. Weatherford admitted that prior to 2008, the company did not have a dedicated compliance officer or compliance personnel, did not conduct anti-corruption training, and did not have an effective system for investigating employee reporting of ethics and compliance violations.

The most glaring failures occurred in its overseas offices and subsidiaries. Let me give you a revealing example: Despite its global presence, Weatherford did not even bother to translate its compliance policy into languages other than English. Think about that for a second. Weatherford had subsidiaries and operations in more than 100 countries across the globe. It operated in the high-risk environment that is the oil extraction industry. And yet Weatherford didn’t even bother to make its compliance program intelligible to many of its employees – in languages they could understand.

And there’s more. Though in 2004 it began circulating an ethics questionnaire asking if employees were aware of payments to foreign officials, Weatherford had no process to investigate affirmative responses. Indeed, Weatherford did not conduct any follow-up investigation in response to allegations of corruption.

Put simply, Weatherford’s compliance policy was a program in name only. It wasn’t worth the paper it was written on. Had Weatherford employed even a basic compliance program, it may not have found itself paying over $252 million in penalties and fines.

Just last year, three subsidiaries of Weatherford International, a Swiss oil services company listed on the New York Stock Exchange, pleaded guilty to FCPA and export control violations. Over a period of many years, Weatherford subsidiaries in Africa, the Middle East, and Iraq paid bribes to foreign officials in exchange for lucrative contracts and inside information about competitors. Some of Weatherford’s international subsidiaries also illegally exported oil and gas drilling equipment to countries under United States sanctions – countries like Cuba, Iran, Sudan, and Syria.

But more important to this audience than Weatherford’s conduct itself may be the admissions it made regarding the state of its compliance programs. Weatherford admitted that prior to 2008, the company did not have a dedicated compliance officer or compliance personnel, did not conduct anti-corruption training, and did not have an effective system for investigating employee reporting of ethics and compliance violations.

The most glaring failures occurred in its overseas offices and subsidiaries. Let me give you a revealing example: Despite its global presence, Weatherford did not even bother to translate its compliance policy into languages other than English. Think about that for a second. Weatherford had subsidiaries and operations in more than 100 countries across the globe. It operated in the high-risk environment that is the oil extraction industry. And yet Weatherford didn’t even bother to make its compliance program intelligible to many of its employees – in languages they could understand.

And there’s more. Though in 2004 it began circulating an ethics questionnaire asking if employees were aware of payments to foreign officials, Weatherford had no process to investigate affirmative responses. Indeed, Weatherford did not conduct any follow-up investigation in response to allegations of corruption.

Put simply, Weatherford’s compliance policy was a program in name only. It wasn’t worth the paper it was written on. Had Weatherford employed even a basic compliance program, it may not have found itself paying over $252 million in penalties and fines.”

[...]

While the Justice Department is often the last line of defense against fraud and corruption, all of you who work in compliance are the first. Criminal prosecutions can and do deter future bad behavior, but your work can prevent that conduct before it happens.”