Archive for the ‘Compliance Defense’ Category

Friday Roundup

Friday, May 1st, 2015

Roundup2Exasperated, skittish, checking in, scrutiny alerts and updates, and for the reading stack.  It’s all here in the Friday roundup.

Exasperated

This recent post highlighted Assistant Attorney General Leslie Caldwell’s recent speech in which she stated – in reference to FCPA internal investigations – “we do not except companies to aimlessly boil the oil.”

This recent Law360 article notes that some attorneys are exasperated by Caldwell’s remarks.  The article states:

“[D]efense attorneys have balked at the idea that they’re spending too much time or money on investigations they’re conducting in large part for the government’s sake, saying they’re not willfully adding unnecessary work to an FCPA probe.

Many companies still feel like they’re being forced to walk the fine line between investigating problems thoroughly enough to satisfy the government without making it seem like they’re holding something back or impeding an investigation, according to Day Pitney LLP partner Bob Appleton.

“On the one hand they’re saying, ‘Be fast and don’t do an over-thorough job,’ but on the other hand, they’re saying, ‘If you only partially disclose you’ll get in trouble,’” said Appleton, a former assistant U.S. attorney.

And the costs of an investigation aren’t just limited to what a company self-reports, since the government will often then ask how the company can be sure the problem isn’t popping up anywhere else, according to Colleen P. Mahoney, partner at Skadden Arps Slate Meagher & Flom LLP.

“One of the biggest challenges is the expense after it starts,” Mahoney said about FCPA investigations at a Practicing Law Institute event Friday.

At the PLI event, SEC enforcement chief Andrew Ceresney said it was up to a company to decide what law firm to retain and how deep to investigate a potential bribery matter.

“We’re not micromanaging your internal investigation,” he said.”

Numerous posts on FCPA Professor have highlighted the staggering amount of pre-enforcement action professional fees and expenses (see also “FCPA Ripples“).

Speaking of which, Key Energy Services disclosed yesterday $18 million in expenses – for the first quarter of 2015 -”related to the previously disclosed Foreign Corrupt Practices Act (“FCPA”) investigations.”

I’ve had several conversations with FCPA practitioners about this issue.  For what it is worth, the common response is something along the following lines: FCPA practitioner agrees that pre-enforcement action professional fees and expenses have spun out of control in many instances, but FCPA practitioner insists that his/her firm is not part of the problem.

Other practitioners are also pushing back as to other aspects of Caldwell’s recent speech – namely “what cooperation looks like”.  In this recent post on the FCPA Blog an anonymous contributor states:

 ”When client companies and I have opted to cooperate early on and open up all information and records to the DOJ investigative units, I have seen the FCPA investigative team to be less interested in whether facts or evidence show violations or point to evidence raising red flags, as to how the client (and lawyer also) is bowing and mewling in anguish and sorrow before the government.

Provided the client is willing to genuflect and cry out mea culpa and beg for mercy (all three are required) there can be a happy and acceptable outcome in correcting corporate deficiencies and reaching an early valid resolution.

Executives who have somewhat less capacity to grovel underfoot are punished with the promise of crippling expansions of the process including raids and countless subpoenas to uninvolved officers, employees, consultants and accountants.

My experience is that this is not based on early findings of probable cause, but rather a haughty outrage that there was insufficient willingness to self-immolate.”

Skittish

Much has been written about whether the FCPA and its enforcement deters foreign investment.  (See here for instance).

Companies obviously make foreign investment decisions based on a host of legal and non-legal risks and thus empirically separating and measuring the impact of FCPA enforcement on foreign investment decisions is difficult.  Moreover, despite the general rise in FCPA enforcement concerning conduct in certain high risk jurisdictions such as China, India, and Brazil, there continues to be vast amounts of foreign direct investment in those countries by companies subject to the FCPA prohibitions.

Any “evidence” that the FCPA and its enforcement deters foreign investment thus tends to be anecdotal.

Following up on this prior post regarding Cambodia, the Phnom Penh Post reports:

“Despite high-profile US companies like Coca-Cola announcing plans to expand their footprint in the Kingdom, foreign investment from the US remains low compared to regional heavyweights. Large US businesses appear reluctant in setting up in the Kingdom due to corruption concerns, an unpredictable regulatory environment, and a lack of economic attractiveness that allows US interests to thrive.

[...]

Corruption remains one of the major factors keeping US companies away. According to an American Chamber of Commerce survey for 2015, 82 per cent of American businesses in Cambodia were dissatisfied with corruption – the second highest in the region after Laos.”

Checking In

Way back in 2010, Steven Jacobs, the former President of Macau Operations for Las Vegas Sands Corp., filed a civil lawsuit against Las Vegas Sands (LVS) in which Jacobs alleged various improprieties at LVS including in the FCPA context.

As noted in this Bloomberg article, Sheldon Adelson, the billionaire founder and chairman of LVS, recently testified in open court about the case and stated, among other things, that “after four years of investigating, they [the DOJ and SEC]  haven’t found a shred of evidence yet.”

Scrutiny Alerts and Updates

CSC / ServiceMesh

CSC is a Virginia-based IT company and in October 2013 it acquired acquire ServiceMesh, a cloud management company.  Various reports note that Eric Pulier, the former CEO of ServiceMesh, and head of the ServiceMesh division within CSC since ServiceMesh was acquired by that company, has left the company.

CSC sent the following statement to media about Pulier’s departure:

“On March 26, 2015 Eric Pulier was notified that his actions involving payments from the ACE Foundation—an organization founded by Mr. Pulier and not related to CSC—to former IT executives of Commonwealth Bank of Australia, a CSC client, violated CSC’s code of conduct related to conflicts of interests and appearance of improprieties. Mr. Pulier was further notified that these violations were grounds for termination of his employment.”

PTC

In this release, PTC stated:

“We have, since making a voluntary disclosure to the U.S. Securities and Exchange Commission and the Department of Justice, been cooperating to provide information to those agencies concerning expenditures by certain of our business partners in China and by our China business, including for travel and entertainment, that apparently benefitted employees of customers regarded as state owned enterprises in China. This matter involves issues regarding compliance with laws, including the U.S. Foreign Corrupt Practices Act. Negotiations with the SEC to reach a resolution of its investigation have begun but have not been concluded. We expect to begin negotiations with the Department of Justice to resolve its investigation in the near future. Resolution of this matter is likely to include fines and penalties. Given the uncertainty regarding whether settlements can be reached and, if reached, on what terms, we are not able to estimate a range of reasonably possible loss with regard to any such settlements and have not recorded any liability in connection with this matter. If settlements are reached, we believe that the associated financial liability could be material to our results of operations for the fiscal period in which the liability is recorded. Further, any settlement or other resolution of this matter could have collateral effects on our business in China, the United States and elsewhere.”

Braskem SA

Brazil-based Braskem recently disclosed in an SEC filing:

“In the context of anti-corruption allegations against certain individuals and entities in Brazil, including Petrobras, we were mentioned in allegations of improper payments made in order to receive favorable treatment in connection with certain contracts that we are party to with Petrobras. We have not received notice of any proceeding or investigation involving us that has been commenced in Brazil or the United States in connection with these allegations.

Although we have certain procedures in place, we have implemented additional procedures and controls to monitor our compliance with applicable anti-corruption laws and as a result of the recent allegations against us, have engaged Brazilian and U.S. legal counsel to conduct a voluntary internal investigation of this matter.  If any of these allegations prove to be true, or if we or any of our subsidiaries, or joint venture partners fails to comply with any of these laws, we could be subject to applicable civil or criminal penalties, which could adversely affect our overall performance.”

[…]

In early March 2015, declarations made by defendants in lawsuits filed against third parties were made public, in which Braskem and two of its former executive officers were cited in allegations of supposed improper payments between 2006 and 2012 to benefit the Company in raw-material supply agreements entered into with Petrobras. As of April 24, 2015, to the knowledge of the management, Braskem has not received any notification of the filing of any proceeding or investigation by Brazilian or U.S. authorities.

In light of such facts, the Company’s Management and Board of Directors approved in April the internal plan for investigation into the allegations (“Investigation”) to be carried out by law firms experienced in similar cases in the United States and in Brazil.  The law firms will work under the coordination of an ad hoc committee formed by members of its Board of Directors, specially created for this purpose.

In addition, the following measures have already been taken:

i)    Voluntary announcement about the Investigation and periodical updates sent to regulatory agencies of capital markets in Brazil (Securities and Exchange Commission of Brazil – CVM) and the United States (Securities and Exchange Commission – SEC, and the Department of Justice – DOJ);

ii)    Publication of two Material Fact notices and one Notice to the Market to clarify the news reports and to keep shareholders and the market informed of actions taken by the Company;

iii)   Updating the Audit Board and external auditors about the progress of the Investigation and of the actions already taken.

Braskem and its subsidiaries are subject to a series of anticorruption and anti-bribery laws in the countries where they operate. To reduce the likelihood of infringement of such laws, a series of procedures and controls were implemented and are continuously being improved.

On the other hand, if any of the allegations proves to be true, the Company may be subject to material penalties envisaged in law. At this moment, the Company Management believes that it is not possible to estimate the duration or outcome of the Investigation and, consequently, whether it will have any impact on future financial statements.

The Management is committed to taking all the necessary measures to clarify the facts and will keep the market informed of any progress on this matter.”

United Technologies

Recently, the company disclosed:

“As previously disclosed, in December 2013 and January 2014, UTC made voluntary disclosures to the United States Department of Justice (DOJ), the Securities and Exchange Commission (SEC) Division of Enforcement and the United Kingdom’s Serious Fraud Office to report the status of its internal investigation regarding a non-employee sales representative retained by United Technologies International Operations, Inc. (UTIO) and IAE for the sale of Pratt & Whitney and IAE engines and aftermarket services, respectively, in China.  On April 7, 2014, the SEC notified UTC that it was conducting a formal investigation and issued a subpoena to UTC.  UTC continues to cooperate fully with the investigations and has responded to requests for documents and information.  The DOJ and SEC also continue to request information, and the SEC issued a second subpoena on March 9, 2015 seeking documents related to internal allegations of alleged violations of anti-bribery laws from UTC’s aerospace and commercial businesses, including but not limited to Otis businesses in China.  Because the investigations are ongoing, we cannot predict the outcome or the consequences thereof at this time.”

For the Reading Stack

The NY Times goes in depth regarding the U.S’s attempt to extradite Dmitry Firtash, a Ukrainian national criminally indicted in April 2014 along with others (see here for the prior post).  According to the article:

“An Austrian judge will issue a crucial ruling in the case on Thursday at an extradition hearing here, where Mr. Firtash’s lawyers will argue that his arrest — on charges of bribing officials in India to secure a titanium mining deal that never materialized — was really an effort by the United States to remove him from public life in Ukraine, where he controls major business interests and still holds considerable clout. The Justice Department has repeatedly declined to discuss the case because it is an active prosecution, but the United States attorney’s office in Chicago, which led the investigation, has flatly denied any political motivations.

[...]

Andras Knopp, a Hungarian businessman and longtime associate of Mr. Firtash’s who is also charged in the case, said that the United States authorities had made no effort to extradite him, or even to talk to him about the case, even though he was at the center of the Indian titanium deal …”.

*****

The most recent edition of the always informative Debevoise & Plimpton FCPA Update is here.  Among the topics discussed are developments in India including potential amendments to the Prevention of Corruption Act providing for liability for a commercial organizations whose employees bribe but also creating a defense for a commercial organization commercial organization if it can prove it had “adequate procedures” in place to prevent bribery.

*****

This Bloomberg article (“The Dinner Proposal That Led United Into Corruption Probe”) begins:

“United Airlines Inc. was seeking hundreds of millions of dollars in public investment for the airport in Newark when its chief executive dined with New Jersey Governor Chris Christie’s top Port Authority official in September 2011.

Jeffery Smisek, United’s chief executive officer, wanted funding for several projects, including an estimated $600 million extension of the PATH train from downtown Newark to the airport, as the airline worked through its merger with Continental Airlines.

Halfway through dinner at Novita, an Italian restaurant in Manhattan, Port Authority Chairman David Samson surprised the group with a request of his own. He complained that he and his wife had grown weary of the trip to their weekend home in Aiken, South Carolina, because the best flight out of Newark was to Charlotte, North Carolina, 150 miles away. Until 2009, Continental had run direct service from Newark to Columbia, South Carolina, 100 miles closer.

In a tone described by one observer as “playful, but not joking,” Samson asked: Could United revive that route? An awkward silence fell over the table.

Though the United CEO didn’t agree to the request at the dinner, according to the accounts of some who attended, the airline ultimately added the money-losing route that became known as “the chairman’s flight.” Now federal prosecutors are looking into whether its genesis crossed the line from legitimate bargaining into illegal activity.”

*****

A good weekend to all.

Wal-Mart’s Recent Disclosures

Monday, April 27th, 2015

Wal-MartLast week, Wal-Mart made several disclosures that touched upon its Foreign Corrupt Practices Act scrutiny and compliance enhancements.

This post highlights FCPA and related information in Wal-Mart’s Global Compliance Program Report  on FY 2015; its proxy statement; and its annual report.

Walmart’s Global Compliance Program Report on FY 2015

The report covers a number of topics including FCPA and related anti-corruption matters.

In its recent annual report, Wal-Mart disclosed spending approximately $220 million over the past three years in global compliance program and organizational enhancements.

This significant investment in FCPA compliance should be relevant as a matter of law in the future if a non-executive employee or agent acts contrary to Wal-Mart’s policies and procedures and in violation of the FCPA.  (See my article “Revisiting a Foreign Corrupt Practices Act Compliance Defense“).

Compliance defense detractors say that such a defense will promote “check-a-box compliance” and a “race to the bottom.”

There is nothing “check-a-box” about spending approximately $220 million over the past threeyears on FCPA compliance enhancements nor can one credibly argue that if other companies follow Wal-Mart’s enhancements and approach that this is a “race to the bottom.”

The key policy issue is this.

Wal-Mart has engaged in FCPA compliance enhancements in reaction to its high-profile FCPA scrutiny.

Perhaps if there was a compliance defense more companies would be incentivized to engage in compliance enhancements pro-actively.

A compliance defense is thus not a “race to the bottom” it is a “race to the top”  (see here for the prior post) and it is surprising how compliance defense detractors are unable or incapable of grasping this point.

In the recent Global Compliance Program Report, under the heading “People,” the report states in pertinent part:

“Anti-corruption is a particular area of emphasis for our compliance program. During FY15, we continued to develop our internal anti-corruption resources. For example, we supplemented our anti-corruption leadership team by recruiting anti-corruption directors in the eCommerce businesses at Walmart.com.br (Brazil) and Yihaodian.com (China). Working with Walmart’s global anti-corruption team, these new directors conduct due diligence, develop and provide anti-corruption training, and oversee the implementation of anti-corruption policies and procedures.

Also in FY14, Walmart began to appoint teams of compliance monitors in each of our international retail markets. These monitors (known as Continuous Improvement Teams) regularly visit our stores, assess the effectiveness of our compliance controls at store level, train our managers and associates on proper compliance procedures, and assist the operators in correcting any issues identified. During FY15, the Continuous Improvement Team completed over 5,500 assessments at our retail locations, identified any deviations from our policies and processes, and collaborated with our store operators to correct over 90% of those issues by year end.

In FY15 we expanded this concept by beginning to carry out a multi-year plan to establish teams of compliance monitors focused on anti-corruption policies and our related financial controls. As with the existing Continuous Improvement Teams, these monitors are designed to constantly assess and improve our performance. We began the process of appointing these internal anti-corruption monitors in FY14 and the monitors conducted their first assessments in FY15.

In light of the progress in building our internal anti-corruption capabilities, in FY15 we transitioned to our internal staff a number of activities that external consultants had been handling. This increases the capabilities of our internal anti-corruption team, which is critical to the effectiveness and long-term sustainability of our anti-corruption program.”

Under the heading “Policies and Processes,” the report states in pertinent part:

“[I]n FY14 the company designed an enhanced global anti-corruption training and communication program to further define target audiences for anti-corruption messaging and to more effectively teach anti-corruption principles. This program came to life over the past year in several ways, including:

Developing simplified anti-corruption messaging for use in our stores in five key markets;

Providing anti-corruption training to our associates around the world in seven languages;

Delivering communications from business leaders in each international market regarding integrity and anti-corruption;

Enhancing the ways in which we track our anti-corruption training efforts; and

Expanding our anti-corruption training beyond our associates to include key third parties who do business with Walmart. In FY15, we provided anti-corruption training to third-party partners in 10 international markets.”

Under the heading “Systems and Analytics,” the report states in pertinent part:

“With many retail locations and associates throughout the world, we have a wealth of data available to help us anticipate and identify compliance risks. Efficiently collecting and utilizing those data can be a challenge. In FY14, the company launched an ambitious effort to develop and deploy a number of global systems to assist with this task. In FY15, the company spent more than $40 million USD carrying out this effort and made significant progress in installing and utilizing these technologies. This included technology to:

Conduct due diligence research on third parties that may interact with governmental entities on our behalf. The technology, for instance, collects information from the third parties about their businesses and key personnel; it then searches various databases to identify adverse news stories, litigation, government sanctions, and politically exposed persons relating to the third parties and their key personnel.

Centralize the oversight of our license and permit applications and renewals. In FY15, we extended a global license-management system into 11 of our international retail markets. The expanded management system organizes the licensing and permitting requirements in each market, simplifies the process for applying for licenses, and provides a single repository for documentation associated with our licensing obligations. Our associates now have critical licensing information at their fingertips, along with analytics to predict and prepare for our licensing needs.”

*****

In its recent proxy statement, Wal-Mart disclosed as follows.

“The Audit Committee held 15 meetings in fiscal 2015, seven of which related primarily to its ongoing FCPA-related investigation and compliance matters.”

[...]

“[E]ach member of the Audit Committee received an additional fee during fiscal 2015. Since 2011, the Audit Committee has been conducting an internal investigation into, among other things, alleged violations of the [FCPA] and other alleged crimes or misconduct in connection with certain foreign subsidiaries, and whether prior allegations of such violations and/or misconduct were appropriately handled by Walmart. The Audit Committee and Walmart have engaged outside counsel from a number of law firms and other advisors who are assisting in the ongoing investigation of these matters. This investigation continues to result in a significant increase in the workload of the Audit Committee members, and during fiscal 2015, the Audit Committee conducted seven additional meetings primarily related to the investigation. Audit Committee members also received frequent updates regarding the investigation via conference calls and other means of communication with outside counsel and other advisors. In light of this continuing significant additional time commitment, in November 2014, the [ Compensation, Nominating and Governance Committee] and Board approved an additional fee of $37,500 payable to each Audit Committee member other than the Audit Committee Chair, and an additional fee of $50,000 payable to the Audit Committee Chair. These additional fees may be received in the form of cash, Shares (with the number of Shares determined based on the closing price of Shares on the NYSE on the payment date), deferred in stock units, or deferred into an interest-credited cash account.”

*****

In its recent annual report, Wal-Mart disclosed as follows.

“The Audit Committee (the “Audit Committee”) of the Board of Directors of the Company, which is composed solely of independent directors, is conducting an internal investigation into, among other things, alleged violations of the U.S. Foreign Corrupt Practices Act (“FCPA”) and other alleged crimes or misconduct in connection with foreign subsidiaries, including Wal-Mart de México, S.A.B. de C.V. (“Walmex”), and whether prior allegations of such violations and/or misconduct were appropriately handled by the Company. The Audit Committee and the Company have engaged outside counsel from a number of law firms and other advisors who are assisting in the on-going investigation of these matters.

The Company is also conducting a voluntary global review of its policies, practices and internal controls for FCPA compliance. The Company is engaged in strengthening its global anti-corruption compliance program through appropriate remedial anti-corruption measures. In November 2011, the Company voluntarily disclosed that investigative activity to the U.S. Department of Justice (the “DOJ”) and the Securities and Exchange Commission (the “SEC”). Since the implementation of the global review and the enhanced anti-corruption compliance program, the Audit Committee and the Company have identified or been made aware of additional allegations regarding potential violations of the FCPA. When such allegations are reported or identified, the Audit Committee and the Company, together with their third party advisors, conduct inquiries and when warranted based on those inquiries, open investigations. Inquiries or investigations regarding allegations of potential FCPA violations have been commenced in a number of foreign markets where the Company operates, including, but not limited to, Brazil, China and India.

The Company has been informed by the DOJ and the SEC that it is also the subject of their respective investigations into possible violations of the FCPA. The Company is cooperating with the investigations by the DOJ and the SEC. A number of federal and local government agencies in Mexico have also initiated investigations of these matters. Walmex is cooperating with the Mexican governmental agencies conducting these investigations. Furthermore, lawsuits relating to the matters under investigation have been filed by several of the Company’s shareholders against it, certain of its current directors, certain of its former directors, certain of its current and former officers and certain of Walmex’s current and former officers.

The Company could be exposed to a variety of negative consequences as a result of the matters noted above. There could be one or more enforcement actions in respect of the matters that are the subject of some or all of the on-going government investigations, and such actions, if brought, may result in judgments, settlements, fines, penalties, injunctions, cease and desist orders, debarment or other relief, criminal convictions and/or penalties. The shareholder lawsuits may result in judgments against the Company and its current and former directors and officers named in those proceedings. The Company cannot predict at this time the outcome or impact of the government investigations, the shareholder lawsuits, or its own internal investigations and review. In addition, the Company has incurred and expects to continue to incur costs in responding to requests for information or subpoenas seeking documents, testimony and other information in connection with the government investigations, in defending the shareholder lawsuits, and in conducting the review and investigations. These costs will be expensed as incurred. For the fiscal years ended January 31, 2015, 2014 and 2013, the Company incurred the following third-party expenses in connection with the FCPA investigation and related matters:

WalMart Expenses

 

 

 

 

These matters may require the involvement of certain members of the Company’s senior management that could impinge on the time they have available to devote to other matters relating to the business. The Company expects that there will be on-going media and governmental interest, including additional news articles from media publications on these matters, which could impact the perception among certain audiences of the Company’s role as a corporate citizen.

The Company’s process of assessing and responding to the governmental investigations and the shareholder lawsuits continues. While the Company believes that it is probable that it will incur a loss from these matters, given the on-going nature and complexity of the review, inquiries and investigations, the Company cannot reasonably estimate any loss or range of loss that may arise from these matters. Although the Company does not presently believe that these matters will have a material adverse effect on its business, given the inherent uncertainties in such situations, the Company can provide no assurance that these matters will not be material to its business in the future.”

“Without Law or Limits: The Continued Growth Of The Shadow Regulatory State”

Thursday, April 16th, 2015

ShadowJames Copeland and others at the Manhattan Institute have written some good pieces about the DOJ’s use of non-prosecution and deferred prosecution agreements.

See here for the 2012 post discussing “The Shadow Regulatory State:  The Rise of Deferred Prosecution Agreements.”

See here for the 2014 post discussing “The Shadow Lengthens:  The Continuing Threat of Regulation by Prosecution.”

If you are interested in NPAs and DPAs (and you should be if you follow the FCPA given that since 2010 approximately 85% of corporate DOJ enforcement actions have involved either an NPA or DPA), you should check out Copeland’s latest titled “Without Law or Limits: The Continued Growth of the Shadow Regulatory State.

The introduction states:

This report focuses on DPAs and NPAs reached between the U.S. government and businesses or individuals in 2014. [...]

Through specific case studies, this report explores three key issues that arise under the shadow regulatory state:

  1. Enforcement efforts can undermine compliance. As shown through a plea agreement, a DPA, an NPA, and a cease-and-desist settlement entered into between the U.S. government and Hewlett-Packard [see prior posts here and here] and its foreign subsidiaries, federal prosecutors often punish companies notwithstanding extensive compliance programs, even when the companies self-report offenses and even when “rogue” employees go to extraordinary lengths to hide misconduct from their employers. Such a “strict liability” enforcement strategy may deter companies from developing effective compliance regimes.
  2. The DPA-NPA process lacks definite terms and judicial oversight. As shown through the federal government’s decision to extend a two-year DPA with Standard Chartered Bank for an additional three-year term, without any proffered evidence of additional wrongdoing, federal prosecutors’ authority in the DPA-NPA process is supreme. These agreements typically grant prosecutors the sole authority to determine whether an agreement has been breached. Indeed, the Department of Justice argues that federal judges have no authority over DPAs, beyond ensuring that such agreements comply with the terms of the Speedy Trial Act. [For prior posts examining this issue, see here and here].
  3. The DPA-NPA process is ill-suited for application to individuals. One concern about the increased use of DPAs and NPAs by the federal government is that they give prosecutors broad powers over businesses, notwithstanding that, more often than not, no individual is ever prosecuted for any underlying offense alleged in the agreement. [For prior post containing FCPA-specifics on this issue, see here and here]. The recent decision of the Securities and Exchange Commission to apply DPAs and NPAs to individuals—acquiring significant authority over people’s lives and retaining the ability to prosecute, essentially at prosecutors’ discretion—is a troubling new application of this power. The NPA reached with an unnamed individual in a 2014 insider-trading investigation exemplifies these concerns, as the alleged misconduct itself most likely does not constitute insider trading under current law.

Notwithstanding the lack of judicial oversight in the shadow regulatory state, two judges asserted new authority over this process in 2014—continuing a trend observed in 2013. Ultimately, however, reforming the shadow regulatory state requires legislative action. Part IV of this report discusses one proposed solution, the Accountability in Deferred Prosecution Act, sponsored by U.S. Representative Bill Pascrell, Jr. (D-N.J.). Although this proposed legislation does not go far enough to address some of the serious problems with DPAs and NPAs, the legislation would add substantial clarity, transparency, and oversight, as compared with current practice, and is a great starting point for much-needed reform.”

Numerous posts have highlighted the problems of NPAs and DPAs in the FCPA context. (See here for example.  For a more comprehensive analysis see “The Facade of FCPA Enforcement“).

My long-standing, two-fold FCPA reform proposal is to amend the FCPA to include compliance defense and couple this with abolishing NPA and DPAs.  (Among other prior posts, see here).

Should this occur, the resulting enforcement landscape would look as follows.

If a payment is made in violation of the FCPA’s anti-bribery provisions within a business organization, two issues will be relevant.

First, if the payment was made, authorized or condoned by a director or executive officer, the business organization will not be able to avail itself of an FCPA compliance defense.  Second, if the payment was made by any employee or agent in the absence of pre-existing FCPA compliance policies consistent with the best practices, the business organization will not be able to avail itself of an FCPA compliance defense.  In these scenarios involving corrupt directors or executive officers or business organizations without a commitment to FCPA compliance, the enforcement agencies will have two choices:  do not prosecute or prosecute the business organization for violating the FCPA.  This is a just and reasonable result and the third option of an NPA or DPA is not needed in such a scenario. As even the DOJ has acknowledged and empirical research has demonstrated, it is extremely unlikely that actual criminal prosecution of such a business organization will result in its demise.

Conversely, if the payment at issue is made by a non-executive employee or agent contrary to the business organization’s pre-existing FCPA compliance policies, the organization will be able to avail itself of an FCPA compliance defense.  Thus, as a matter of law, no FCPA prosecution of the organization will be able to proceed.  This too is a just and reasonable result and aligns FCPA enforcement with enforcement regimes in several other peer countries.

The above FCPA reforms will take courage, both by Congress in amending the FCPA and by the enforcement agencies in abolishing the resolution vehicles they created.  The reform proposals may indeed result in less hard FCPA enforcement actions as certain business organizations will be able to avail itself of the compliance defense and as enforcement agencies are once again mindful of their burdens of proof in prosecuting alleged FCPA violations.

However, more FCPA enforcement is not necessarily an inherent good and ought not be the singular goal of the FCPA.  The goal ought to be constructing an enforcement regime that best promotes compliance, reduces improper conduct, best advances the FCPA’s objective of reducing bribery, increases transparency and better aligns FCPA enforcement with rule of law principles.

The above two-fold FCPA reform proposal will accomplish these goals as well as increase public confidence in FCPA enforcement.  The proposals will also allow the enforcement agencies to better allocate limited prosecutorial resources to cases involving corrupt business organizations and the individuals who actually engage in the improper conduct. (See here for the prior post).

Spain Becomes The Latest Country To Adopt A Compliance Defense

Tuesday, April 14th, 2015

SpainThe article “Revisiting a Foreign Corrupt Practices Act Compliance Defense” highlights, among other things, that several countries like the United States that are signatories to the Organization for Economic Cooperation and Development Convention on Combating Bribery of Foreign Public Officials in International Business Transactions (OECD Convention), have a compliance-like defense in their domestic laws.

The article discussed compliance-like defense concepts in the laws of the following OECD Convention countries: United Kingdom, Australia, Chile, Germany, Hungary, Italy, Japan, Korea, Poland, Portugal, Sweden, and Switzerland.

As noted in the article:

“That additional OECD Convention signatory countries [do not have compliance defense concepts] does not mean that those countries rejected compliance-like defenses relevant to their “FCPA-like” law. Rather, in many OECD Convention countries the concept of legal person criminal liability (as opposed to natural person criminal liability) is non-existent. Further, in many OECD Convention countries that recognize legal person criminal liability, such legal person liability can only result from the actions of high-level personnel or other so-called “controlling minds” of the legal person. If a foreign country does not provide legal person liability, there is no need for a compliance defense, and the rationale for a compliance defense is less compelling if legal exposure of the legal person can only result from the conduct of high-level executive personnel or other “controlling” minds of the legal person.”

“Revisiting a Foreign Corrupt Practices Act Compliance Defense” was published in January 2012 and since then several other OECD Convention countries (and other countries) have adopted or are considering adopting compliance-like defense concepts in their domestic laws.

Prior posts here and here highlighted developments in Singapore and Ireland.

The point is – a compliance-like defense applicable to the offense of bribery of foreign officials is not novel, risky, or dangerous as the DOJ and others have argued.

The latest country to recognize this – and become smart as to enforcement of anti-bribery laws – is Spain.

In this recent post published on Global Compliance News (a news platform moderated by Baker & McKenzie), Brian Whisler and Rafael Jimenez-Gusi write:

“Pursuant to amendments to the Spanish Criminal Code approved on March 26, 2015 by the Spanish Congress and scheduled to take effect on July 1, 2015, a company’s directors are legally obligated to adopt a compliance program and the program must be supervised by a body or individual authorized to exercise high-level control. The amended code provides companies with an exemption from criminal liability for crimes committed by their officers or employees, provided the company meets certain requirements set forth under the new law. Specifically, Article 33 of the amended code exempts companies from criminal liability under the following conditions:

  1. the directors have adopted a compliance program that meets the legal requirements under Spanish law,
  2. the supervision of the program is entrusted to a company´s body or individual with authorized powers of initiative and control (Compliance Body),
  3. the officers or the employees have committed a crime by intentionally violating the compliance program, and
  4. the Compliance Body did not neglect its duties of supervision, oversight and control.

The amended Spanish code also lists six key elements that a compliance program must include in order to insulate a company from criminal liability (provided that the compliance program has been adopted before a crime was committed by any of its officers or employees). These six elements, as enumerated in Article 33 bis 5, are:

  1. Risk assessment,
  2. Standards and controls to mitigate any criminal risks detected,
  3. Financial controls to prevent the crimes,
  4. Obligation to report to the Compliance Body any violations of the standards and controls (a whistleblowing channel),
  5. Disciplinary system to sanction violations of the compliance program by officers and employees, and
  6. Periodic review of the compliance program, making the necessary adjustments when serious violations occur or when the company undergoes organizational, structural or economic changes.

Since the amended code requires an effective compliance program, companies will also need to demonstrate that their officers and employees have received proper training.

Prior to this development, in 2010, Spanish legislation introduced corporate liability for a number of crimes, including corruption. Directors could be held criminally liable if a crime was committed that could have been avoided. However, that legislation did not address the consideration a judge could give to a company’s compliance program. The 2015 Spanish legislation now places great weight on effective compliance programs, following the global trend toward mandating compliance programs reflecting core elements for such programs.

Additionally, much like in the U.K., the recent Spanish legislation is designed to provide an affirmative compliance defense for companies that can demonstrate the six elements of an effective compliance program described in the new law.”

A Look Back At 2014

Monday, February 23rd, 2015

Today’s post is short on written words, but long on content.

Recently, I had the pleasure to again visit with Thomas Fox for his Foreign Corrupt Practices Act Compliance and Ethics Report.

In this episode I discuss:

  • 2014 FCPA enforcement statistics;
  • The variety of actions brought by the DOJ and SEC in 2014;
  • 2014 enforcement actions that should cause concern;
  • The top FCPA story from 2014;
  • 2014 FCPA opinion procedure releases;
  • Enforcement agency policy speeches from 2014; and
  • How a compliance defense can assist the enforcement agencies in accomplishing their objectives (see here for the prior post).