Archive for the ‘Deferred Prosecution Agreements’ Category

The SEC Gets Creative In Bringing Its First FCPA Enforcement Action Of 2015

Monday, January 26th, 2015

CreativityIn its first Foreign Corrupt Practices Act enforcement action of 2015, the SEC got creative by agreeing to a deferred prosecution agreement with a legal entity that has not existed since April 2011 and bringing a related administrative action against an individual who agreed to resolve the action without admitting or denying the SEC’s findings.  Never before has FCPA enforcement seen such a combination.

While the DOJ frequently uses NPA and DPAs to resolve corporate FCPA enforcement actions, last week’s enforcement action is only the third time the SEC has used an NPA or DPA to resolve an FCPA enforcement action.  The other two instances are Tenaris (DPA in 2011) and Ralph Lauren (NPA in 2013).

The enforcement action was against PBSJ Corporation (PBSJ), an entity acquired in October 1, 2010 by WS Atkins plc (“Atkins”) as well as Walid Hatoum, a former executive of PBS&J International, Inc. (“PBS&J Int’l, a wholly-owned subsidiary of PBSJ) concerning a relationship with an alleged Qatari official in connection with projects in Qatar and Morocco.

As highlighted in this prior post, PBSJ voluntarily disclosed its FCPA scrutiny in December 2009.

Post-acquisition, PBSJ became an indirect wholly-owned subsidiary of Atkins and in April 2011, PBSJ changed its name to The Atkins North America Holdings Corporation.

In summary fashion, the two-year DPA “alleges” that:

“The PBSJ Corporation … on or about 2009, violated [the FCPA's anti-bribery provisions, books and records and internal controls provisions] by making offers and promises of payment and other benefits to certain Qatari government officials in order to secure two multi-million dollar development contracts in Qatar and Morocco and by failing to keep accurate books and records relating to those transactions, and by failing to maintain internal accounting controls to ensure the transactions were recorded accurately and that financial statements were prepared in conformity with generally accepted accounting principles.”

According to the DPA:

“PBS&J International, Inc. (“PBS&J Int’l”) was a wholly-owned subsidiary of PBSJ headquartered and incorporated in Florida. PBS&J Int’l was a provider of engineering, architectural and planning services in international markets, including the Middle East. PBS&J Int’l currently is a subsidiary of Atkins.

The former President of PBS&J lnt’l, Walid Hatoum (“Hatoum”), is a United States citizen who initially worked for PBSJ as an engineer from 1986 until 1990. In February 2009, Hatoum was rehired to join PBS&J Int’l as its Director of lnternational Marketing, even though his prior employment file at PBSJ had been marked “Ineligible for Rehire .” Although Hatoum did not formally join PBS&J Int’l until April 2009, he assisted PBS&J lnt’l with identifying projects as early as November 2008. Hatoum was promoted to President ofPBS&J Int’l in mid-June 2009, and became an officer of PBSJ at the same time.

During 2009, PBS&J Int’l won two multi-million dollar development contracts. One contract was for work in Qatar and the other was for work in Morocco. Both were competitively solicited and approved by the Qatari Diar Real Estate Investment Company (“Qatari Diar”). Qatari Diar was established by the Qatari government to coordinate the country’s real estate development.

PBSJ and PBS&J Int’l, through Hatoum, offered bribes to the then-Director of International Projects at Qatari Diar (“Foreign Official”), to secure Qatari government contracts by planning to funnel funds to a local company the Foreign Official owned and, controlled (“Local Partner”). Foreign Official, a former business colleague of Hatoum’s at another U.S. engineering firm, worked for Qatari Diar throughout 2009, until his resignation from Qatari Diar on December 21, 2009. Prior to joining PBSJ, Hatoum and Foreign Official discussed directing business in the Middle East to Local Partner.

In return, Foreign Official provided PBS&J Int’l with access to confidential sealed-bid information and pricing information on the two government contracts that helped PBS&J Int’l tender bids that had a greater likelihood of being awarded, including a government contract for which the Foreign Official was the project manager.”

Under the heading “Offers and Promises Made to Foreign Officials,” the DPA contains two subsections: “LRT Project in Qatar” and “Design Contract in Morocco.”

As to Qatar, the DPA states:

“In November and December 2008, Hatoum began discussing potential employment with PBSJ. Even before he received a formal employment contract, Hatoum met with PBS&J Int’l to discuss opportunities to grow PBS&J Int’l business in the Middle East. Hatoum discussed projects involving Qatari Diar, including a light rail transit project in Qatar (“the LRT Project”).

In January 2009, Hatoum arranged for Foreign Official’s brother, through Local Partner, to introduce PBS&J Int’l to Qatari Diar senior executives involved in the LRT Project. Soon after that meeting, PBS&J Int’l decided to bid on the LRT Project. PBS&J Int’l added Foreign Official’s company, Local Partner, on its proposal team as a subcontractor to handle local operations such as hiring local labor, as well as complying with bonding and insurance requirements. In return, Hatoum and PBS&J Int’l agreed to pay the Foreign Official, through Local Partner, 40% of the profits realized from any LRT Project contract as well as reimburse its direct costs. The remaining profits were to be split between PBS&J Int’l (40%) and another U.S.-based subcontractor (20%), which
would perform all of the planning and engineering services for the LRT project.

At that time, Hatoum was the only person at PBS&J Int’l who had any knowledge about Foreign Official’s ownership interest in Local Partner. Had PBSJ conducted meaningful due diligence at that time, it would have discovered Foreign Official’s dual role as both government official and third-party owner/operator of Local Partner.

During the bidding process, Foreign Official gave confidential sealed bid information to PBS&J Int’l to assist it in winning the LRT Project in return for promised payments. Foreign Official also made strategic and technical decisions on many aspects of the LRT Project that favored PBS&J Int’l with Hatoum’s knowledge.

Foreign Official used a Local Partner alias to communicate that information to Hatoum and other PBSJ and PBS&J Int’l employees while disguising his involvement on multiple conference calls and in dozens of emails to the United States. Hatoum was aware that Foreign Official was using the alias in communications with PBSJ employees, officers, and directors and with Qatari Diar. Hatoum flew to the Middle East to meet with Qatari Diar officials, including Foreign Official, to discuss PBS&J Int’l’ s qualifications for the LRT Project. At the meeting, neither Foreign Official nor Hatoum informed Qatari Diar that Foreign Official was working for Local Partner and providing confidential information and other assistance to help PBS&J Int’l win the contracts.

Following its initial submission, PBS&J Int’l revised its bid, based on information and guidance provided by the Foreign Official, to best position itself to win the LRT Project and to withstand possible challenges from competitors. On or about August 3, 2009, Qatari Diar awarded the LRT Project contract worth approximately $35.6 million to PBS&J Int’l.

After the award, PBS&J Int’l opened a joint account with Local Partner that was accessible to Foreign Official’s wife. PBS&J Int’l also authorized a four-year letter of credit relating to a bank guarantee in Qatar. The letter of credit was a precondition for receipt of the first contract payment by Qatari Diar to PBS&J Int’l, an up front, 10% (approximately $3.6 million) payment, which was deposited into the joint account.

Once the award was received, Hatoum offered Foreign Official an “agency fee” to Local Partner for 1.8% of the LRT Project contract amount (equivalent to approximately $640,000). Additionally, PBS&J Int’l agreed to pay half of the salary of Foreign Official’s wife, who worked for Local Partner.”

Under the sub-heading “Design Contract in Morocco” the DPA states:

“In addition to the LRT Project, Qatari Diar opened a Morocco hotel resort development (“Morocco Project”) for competitive bid. On August 7, 2009, PBS&J Int’l emailed its Statement of Qualifications for the design contract to Foreign Official, the Qatari Diar project manager for the Morocco Project.

In October 2009, Hatoum offered payment to Foreign Official in the form of an agency fee to Local Partner to secure the Morocco Project. The Morocco Project was worth approximately $25 million to PBS&J Int’l, of which the Foreign Official was offered an agency fee of 3% of the contract amount, which equates to approximately $750,000. Hatoum instructed a PBS&J Int’l employee to hide the agency fee within the company’s bid proposal by inflating other components of the offer for the Morocco Project.

Foreign Official attended meetings with PBS&J Int’l employees to discuss the project but neither Foreign Official nor Hatoum told the employees that he was working for Local Partner. At the same time, Foreign Official, using his Local Partner alias, reviewed and made changes to PBS&J Int’l’ s original bid offer via email and phone. He also made key technical and strategic proposal decisions throughout the bidding process and instructed PBS&J Int’ l to lower its offer to a specific dollar amount. By doing so, he ensured PBS&J Int’l's final bid had a greater likelihood of being approved by Qatari Diar. On or around October 19, 2009, Qatari Diar informed PBS&J Int’l that it was awarded the Morocco Project.”

Under the heading “Red Flags,” the DPA states:

“PBSJ and PBS&J Int’l officers and employees ignored multiple red flags that should have led them to uncover the payment scheme. For example, PBS&J Int’l and PBSJ employees knew that Local Partner was providing them with confidential sealed bid information. Hatoum also informed the employees that he was obtaining information from someone that Hatoum described as a “good friend” and “top executive” at Qatari Diar. Before PBS&J Int’l submitted its bid for the Morocco Project, a PBS&J Int’l officer learned that the husband of one of the Local Partner employees was a government official working on the Morocco Project. The PBSJ Int’l officer learned of Foreign Official’s role while attending dinner with Hatoum, Foreign Official and the Foreign Official’s wife. In addition, a PBSJ employee knew that “agency fees” to Local Partner were disguised as legitimate costs within the Morocco Project bid.”

Under the heading “Discovery of the Payment Scheme,” the DPA states:

“Shortly after PBSJ Int’l was awarded the Morocco Project contract, PBSJ’ s former Chief Operating Officer commented to PBSJ’s then-general counsel that PBS&J Int’l was successful in winning two contracts in the Middle East within a fairly short period of time. PBSJ’s then-general counsel asked Hatoum how he was able to win the LRT and Morocco Project contracts over companies with far more international experience. Hatoum told PBSJ’s then-general counsel PBSJ offered “agency fees” in order to win the projects and, when asked, admitted there “would be a problem” if the agency fees were not paid. PBSJ’ s then-general counsel immediately launched an investigation of this issue.

Three weeks later, in November 2009, a Qatari government official informed Hatoum and the then-President of PBSJ that Qatari Diar had discovered Foreign Official’s involvement in Local Partner and was rescinding PBS&J Int’l's contract for the Morocco Project. Hatoum then secretly made an offer of employment to a second Qatari foreign official in return for influencing Qatari Diar to reinstate the contract. However, Qatari Diar refused to reinstate the contract and did not provide PBS&J Int’l any proceeds for the project. PBSJ suspended Hatoum in December 2009. Hatoum also began deleting emails and other records.

PBS&J Int’l and Qatari Diar negotiated a termination of the LRT Project contract effective December 31,2009. In January 2010, Qatari Diar entered into a bridge contract with PBS&J Int’l to continue work on the LRT Project (the “Bridge Contract”) until a replacement company could be found. Ultimately, the period of performance on the Bridge Contract was 16  months . PBS&J Int’l earned $2,892,504 in profits on the Bridge Contract.

PBSJ and Qatari Diar caught Hatoum’s scheme before any of the offered and authorized amounts were paid.”

Under the heading “Failure to Maintain Adequate Internal Controls,” the DPA states:

“PBSJ failed to devise and maintain an adequate system of internal accounting controls. The violations involved conduct orchestrated by a high level manager at PBS&J Int’l and numerous red flags were overlooked by PBSJ and PBS&J Int’l managers and employees. Employees were aware that they were receiving confidential information in a sealed-bid process from a foreign official and that their bids were inflated to conceal payments to Local Partner. Over a million dollars in payments were offered and authorized to Foreign Official through Local Partner without a system of internal accounting controls to identify and detect the improper transactions. PBS&J Int’l agreed to pay Local Partner 40% of the LRT Project profits without subjecting Local Partner or its employees to any meaningful due diligence. PBS&J Int’l did not request a due diligence questionnaire from Local Partner before it initiated its investigation into the matter, and asked no questions about Local Partner’s purported financial statements, work experience, ability to perform the work it was supposed to do under the contract, external auditors, or owners, despite knowing that a Local Partner employee was married to a government official at Qatari Diar. In fact, during the period, PBSJ considered but declined adopting due diligence controls over its contractors and joint venture partners.

As a result, PBS&J Int’l, through Hatoum, offered and authorized bribes to Foreign Official through Local Partner totaling approximately $1,390,000 to secure the LRT and Morocco Projects, plus a portion of any profits Local Partner realized from the LRT Project and partial salary to Foreign Official ‘s wife.

Although PBSJ offered FCPA training at PBSJ and PBS&J Int’l, the company did not ensure that its employees take the training prior to working on international matters. As a result, key PBS&J Int’l personnel on the LRT and Morocco Projects received little, if any, FCPA training during the relevant period. Hatoum received annual FCPA training from his previous employer. Hatoum was offered FCPA training by PBSJ on his first day of official employment in April 2009, but did not take it. Hatoum did not receive training from PBSJ until after Qatari Diar cancelled the Morocco Project in November 2009.”

Under the heading “Failure to Maintain Books and Records,” the DPA states:

“PBSJ, directly and through PBS&J Int’l, failed to make and keep books, records, and accounts which accurately and fairly reflected PBS&J Int’l's transactions with Local Partner intended for Foreign Official. Some of the payments offered and authorized to Foreign Official were concealed within other, legitimate categories of costs within bids, while others were improperly described in the books and records as legitimate transaction costs. PBSJ failed to accurately disclose in its books and records that the joint account entered into with Local Partner would benefit Foreign Official.”

Under the heading “Self-Report, Remediation, and Cooperation,” the DPA states:

“PBSJ conducted an internal investigation. PBSJ self-reported its preliminary findings of the conduct to staff of the Division of Enforcement (“Division”) and the Department of Justice (“DOJ”).

PBSJ also took immediate steps to end the misconduct. PBSJ suspended Hatoum in December 2009 and later reprimanded four other employees that missed red flags that should have alerted them to the illegal activity. PBSJ also withdrew all proposals in the Middle East initiated during Hatoum’s tenure with PBS&J Int’l. PBSJ reviewed its preexisting compliance program and revised and enhanced its compliance program, including, in part, adoption of: (1) a detailed due diligence questionnaire for contractors, sponsors, and agents; (2) an enhanced FCP A compliance program with mandatory annual training for employees and third-party agents; (3) an international compliance oversight committee at the corporate level; and (4) an annual FCPA compliance audit.

PBSJ ultimately provided substantial cooperation to the staff of the Division, including: voluntarily producing documents and disclosing information to the staff; voluntarily making witnesses available for interviews; and allowing its then-general counsel to interview with staff; and providing factual chronologies, timelines, internal interview summaries, and full forensic images of data.”

The DPA contains a so-called muzzle clause in which PBSJ and Atkins is prohibited from “denying, directly or indirectly, any aspect of [DPA] or creating the impression that the statements [in the DPA] are without factual basis.

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

“Hatoum offered and authorized nearly $1.4 million in bribes disguised as ‘agency fees’ intended for a foreign official who used an alias to communicate confidential information that assisted PBSJ. PBSJ ignored multiple red flags that should have enabled other officers and employees to uncover the bribery scheme at an earlier stage.  But once discovered, the company self-reported the potential FCPA violations and cooperated substantially.”

As noted in the release:

“Under the DPA, PBSJ agreed to pay disgorgement and interest of $3,032,875 and a penalty of $375,000.  PBSJ took quick steps to end the misconduct after self-reporting to the SEC, and the company voluntarily made witnesses available for interviews and provided factual chronologies, timelines, internal summaries, and full forensic images to cooperate with the SEC’s investigation.”

Based on the same core conduct “alleged” in the DPA, the SEC also brought an administrative action against Hatoum.

In summary, the Administrative Order states under the heading “Hatoum Caused PBSJ’s Inaccurate Books and Records” as follows.

“Hatoum authorized illicit payments to Foreign Official that were not accurately and fairly reflected on PBSJ’s books and records. Hatoum directed subordinates to conceal some of the payments he offered and authorized to Foreign Official within bids. Other offers and promises to pay authorized by Hatoum to Foreign Official were improperly described in the books and records as legitimate transaction costs with his knowledge.”

Under the heading “Hatoum Caused PBSJ’s Internal Accounting Control Failure,” the order states:

“On April 22, 2009, Hatoum signed a “Business Conduct Standards” agreement for PBSJ employees in which he agreed that “I will neither accept nor give bribes or kickbacks of any value for services or favorable treatment for contracts.” As a high level manager at PBS&J Int’l and later as an officer of PBSJ, Hatoum was responsible for maintaining and ensuring compliance with PBSJ’s internal accounting controls at PBS&J Int’l. Hatoum, however, repeatedly exploited the company’s internal accounting control deficiencies to offer and authorize payments to Foreign Official through Local Partner totaling approximately $1,390,000 to secure the LRT and Morocco Projects, plus 40% of any profits realized from the LRT Project and partial salary to Foreign Official’s wife. Hatoum instructed subordinates to inflate PBS&J Int’l bids by concealing payments to Local Partner intended for Foreign Official. Hatoum took advantage of PBSJ’s accounting controls system by introducing Local Partner as a “legitimate” potential partner for the LRT Project and authorized a subordinate to execute an agreement to pay Local Partner 40% of the LRT Project profits without subjecting Local Partner or its employees to any meaningful due diligence. Hatoum also knowingly executed – and caused a PBS&J Int’l employee to send a questionnaire requesting advocacy assistance from the United States Department of Commerce that included false representations about Local Partner and PBS&J Int’l. Although Hatoum did not participate in PBSJ’s FCPA training until after the scheme was uncovered, Hatoum was aware of the prohibitions of the FCPA from annual FCPA training that he received from his former employer.”

As noted in the SEC’s release:

“The SEC’s order against Hatoum finds that he violated the anti-bribery, internal accounting controls, books and records, and false records provisions of the Securities Exchange Act of 1934.  Without admitting or denying the findings, Hatoum agreed to pay a penalty of $50,000.”

PBSJ and Atkins were represented by Mark Schnapp (Greenberg Traurig).  Hatoum was represented by Michael Lamont of Wiand Guerra King.

DOJ Prosecution of Individuals – Then vs. Now

Thursday, January 22nd, 2015

Thenvs.Yesterday’s post highlighted the following statistics concerning Foreign Corrupt Practices Act individual criminal prosecutions by the DOJ.

Since NPAs and DPAs were first introduced to the FCPA context in December 2004 (see here), there have been 83 corporate DOJ FCPA criminal enforcement actions. 53 of these corporate enforcement actions were resolved solely with an NPA or DPA. In only 5 of these actions – 9% – was there related criminal charges of company employees.

More broadly, other statistics recently published on this site highlighted how in this new era of FCPA enforcement approximately 75% of corporate DOJ FCPA enforcement actions have not (at least yet) resulted in any DOJ charges against company employees.

Prior posts proposed, based on these statistics, that instead of asking the “but why was nobody charged” question in connection with most corporate DOJ FCPA criminal enforcement actions, the more appropriate question is asking whether NPAs and DPAs necessarily represent provable FCPA violations.

To best highlight how NPAs and DPAs have transformed the nature and quality of FCPA enforcement, it is useful to analyze FCPA enforcement statistics prior to the introduction of NPAs and DPAs to the FCPA context in 2004.

For starters, it must be recognized that few meaningful conclusions can be drawn when comparing early FCPA enforcement (lets say 1977 – 2004) to FCPA enforcement 2005 to the present.

Growing pains associated with a new law, and a pioneering one at that, were understandable as both business organizations and enforcement agencies alike were absorbing the law and its new expectations and challenges.  More substantively, for much of the FCPA’s history there were material differences in the law, enforcement agency policies, and the global business environment that all impacted early FCPA enforcement.  

Nor can any meaningful conclusions be drawn from comparing fine and penalty amounts in early FCPA enforcement actions to fine and penalty amounts in this new era.  For starters, the FCPA’s statutory fine and penalty amounts have changed over time.  Perhaps more significantly, criminal fine amounts in FCPA enforcement actions are rarely based on the statutory amounts, but rather based on the Alternative Fines Act, a statute passed in 2006, which can result in a fine amount up to twice the benefit the payer sought to obtain through the improper payment. Moreover, for much of the FCPA’s history, the SEC did not have authority to assess civil monetary penalties in a wide variety of securities law enforcement actions including FCPA enforcement actions, and disgorgement, a central feature of most SEC FCPA enforcement actions in this new era, was not used for most of the FCPA’s history.

Although certain historical comparisons of FCPA enforcement lack meaningful value, other comparisons are noteworthy.

For instances, while one can question how the DOJ held individuals accountable (i.e whether the criminal fines and sentences were too lenient) for most of the FCPA’s history, the DOJ did frequently hold individuals accountable when a company resolved an FCPA enforcement action.

Indeed, from 1977 to 2004, approximately 90% of DOJ criminal corporate FCPA enforcement actions RESULTED in related charges against company employees.

Compare that to FCPA enforcement in this new era when approximately 75% of DOJ criminal corporate FCPA enforcement actions HAVE NOT RESULTED (at least yet) in related charges against company employees. 

Consider also that when a DOJ criminal corporate FCPA enforcement action is resolved solely with an NPA or DPA, approximatley 90% of such actions HAVE NOT RESULTED (at least yet) in related charges against company employees.

In other words, NPAs and DPAs have significantly distorted the nature and quality of FCPA enforcement and if the statistics recently published on this site do not convince you of this, no statistics ever will.

DOJ Prosecution Of Individuals – Are Other Factors At Play?

Wednesday, January 21st, 2015

What woudl you doYesterday’s post (here) focused on DOJ FCPA individual prosecutions and highlighted the following facts and figures.

  • Since 2008, the DOJ has charged 99 individuals with FCPA criminal offenses.
  • 58% of the individuals charged by the DOJ with FCPA criminal offenses since 2008 have been in just five cases and 78% of the individuals charged by the DOJ since 2008 have been in just eleven cases.
  • There have been 67 corporate DOJ FCPA enforcement actions since 2008 and of these actions, 50 (or 75%) have not (at least yet) resulted in any DOJ charges against company employees.

These statistics should cause alarm, including at the DOJ as it has long recognized that a corporate-fine only enforcement program is not effective and does not adequately deter future FCPA violations.   For instance, in 1986 John Keeney (Deputy Assistant Attorney General, Criminal Division, DOJ) submitted written responses in the context of Senate hearings concerning a bill to amend the FCPA. He stated as follows:

“If the risk of conduct in violation of the statute becomes merely monetary, the fine will simply become a cost of doing business, payable only upon being caught and in many instances, it will be only a fraction of the profit acquired from the corrupt activity. Absent the threat of incarceration, there may no longer be any compelling need to resist the urge to acquire business in any way possible.”

In 2010 Hank Walther (Deputy Chief Fraud Section) stated that a corporate fine-only FCPA enforcement program allows companies to calculate FCPA settlements as the cost of doing business.

In 2013 Daniel Suleiman (DOJ Deputy Chief of Staff, Criminal division) stated that “there is no greater deterrent to corporate crime that the prospect of prison time … if people don’t go to prison, then enforcement can come to be seen as merely the cost of doing business.”

More recently, Patrick Stokes (DOJ FCPA Unit Chief) stated that DOJ is “very focused” on prosecuting individuals as well as companies and that “going after one or the other is not sufficient for deterrence purposes.”

Earlier this week, Deputy Assistant Attorney General Sung-Hee Suh rightly acknowledged that “corporations do not act criminally, but for the actions of individuals.”

In my 2010 Senate FCPA testimony (here), I noted that the absence of individual FCPA charges in most corporate FCPA enforcement actions causes one to legitimately wonder whether the conduct giving rise to the corporate enforcement action was engaged in by ghosts.

Others have rightly asked the “but nobody was charged” question, including James Stewart in a New York Times column highlighted in this previous post.

However, as I stated in my Senate testimony, there is an equally plausible reason why no individuals have been charged in connection with many corporate FCPA enforcement actions.  The reason has to do with the quality and legitimacy of the corporate enforcement action in the first place.

Readers know well of the prevalence of non-prosecution and deferred prosecution agreements (NPAs / DPAs)  in the FCPA context. As highlighted in this recent post, since 2010, 86% of corporate DOJ enforcement actions have involved either an NPA or DPA.

Informed observers also understand how NPAs and DPAs, not subject to any meaningful judicial scrutiny, are often agreed to by companies for reasons of ease and efficiency, and not necessarily because the conduct at issue violates the FCPA.

Indeed, prior to becoming SEC Chair, Mary Jo White stated a “fear [that] the deferred prosecution [agreement] is becoming a vehicle to show results” (here) and former Attorney General Alberto Gonzales has stated as follows.

“It is “easy, much easier quite frankly” for the DOJ to resolve FCPA inquiries with NPAs and DPAs; such resolution vehicles have “less of a toll” on the DOJ’s budget and such agreements “provide revenue” to the DOJ.  It is all “unfortunate”

“In an ironic twist, the more that American companies elect to settle and not force the DOJ to defend its aggressive interpretation of the [FCPA], the more aggressive DOJ has become in its interpretation of the law and its prosecution decisions.”

Moreover, Mark Mendelsohn (former chief of the DOJ’s FCPA Unit), has talked about the “danger” of NPAs and DPAs and how “it is tempting for the [Justice Department] or the SEC…to seek to resolve cases through DPAs or NPAs that don’t actually constitute violations of the law.” (See “Mark Mendelsohn on the Rise of FCPA Enforcement,” 24 Corporate Crime Reporter 35, September 10, 2010).

For more on the above dynamics, see my article “The Facade of FCPA Enforcement.”

Individuals, on the other hand, face a deprivation of personal liberty, and are more likely to force the DOJ to satisfy its high burden of proof as to all FCPA elements.

In other words, perhaps the more appropriate question is not “but nobody was charged,” but rather do corporate NPAs and DPAs always represent provable FCPA violations?  For a recent excellent article asking the same general question, see here.

I set out to test this with the following working hypothesis.

  • Instances in which the DOJ brings actual criminal charges against a company or otherwise insists in the resolution that the corporate entity pleads guilty to FCPA violations, represent a higher quality FCPA enforcement action (in the eyes of the DOJ) and is thus more likely to result in related FCPA criminal charges against company employees.
  • Instances in which the DOJ resolves an FCPA enforcement action solely with an NPA or DPA, represent a lower quality FCPA enforcement action and is thus less likely to result in related FCPA criminal charges against company employees given that an individual is more likely to put the DOJ to its high burden of proof.

The below statistics provide a compelling datapoint concerning the quality and legitimacy of many corporate DOJ FCPA enforcement actions.

Since NPAs and DPAs were first introduced to the FCPA context in December 2004 (see here), there have been 83 corporate DOJ FCPA enforcement actions.

  • 14 of these corporate enforcement actions were the result of a criminal indictment or resulted in a guilty plea by the corporate entity to FCPA violations.  10 of these corporate enforcement actions – 71% – resulted in related criminal charges of company employees.
  • 53 of these corporate enforcement actions were resolved solely with an NPA or DPA.  In only 5 instances – 9% – was there related criminal charges of company employees.
  • A third type of corporate FCPA enforcement action is what I will call a hybrid action in which the resolution includes a guilty plea by some entity in the corporate family – usually a foreign subsidiary – and an NPA or DPA against the parent company.  Since the introduction of NPAs and DPAs in the FCPA context, there have been 16 such corporate enforcement actions.  In 5 of these actions – 31% -  there was related criminal charges of company employees. This percentage is what one might expect compared to the two types of corporate FCPA enforcement actions discussed above, although it is interesting to note the following regarding 3 of these 5 instances.  The DOJ ended up dismissing the charges against Si Chan Wooh (Schnitzer Steel), John O’Shea (ABB) was not found not guilty, and Bobby Elkin (Alliance One) received a probation sentence after the sentencing judge questioned many aspects of the enforcement action (see here for the prior post).

Although NPAs and DPAs were first introduced to the FCPA context in 2004, their use by the DOJ was sporadic at first and such alternative resolution vehicles did not become a fixture of FCPA enforcement until approximately 2007.

Thus, in testing the above hypothesis, 2007 is perhaps the best starting point.  Since 2007, there have been 77 corporate DOJ FCPA enforcement actions.

  • 12 of these corporate enforcement actions were the result of a criminal indictment or resulted in a guilty plea by the corporate entity to FCPA violations.  9 of these corporate enforcement actions – 75% – resulted in related criminal charges of company employees.
  • 50 of these corporate enforcement actions were resolved solely with an NPA or DPA.  In only 5 instances – 10% – was there related criminal charges of company employees.
  • A third type of corporate FCPA enforcement action is what I will call a hybrid action in which the resolution includes a guilty plea by some entity in the corporate family – usually a foreign subsidiary – and an NPA or DPA against the parent company.  Since 2007, there have been 15 such corporate enforcement actions.  In 4 of these actions – 26% -  there was related criminal charges of company employees. This percentage is what one might expect compared to the two types of corporate FCPA enforcement actions discussed above.

If the above statistics do not cause one to question the quality and legitimacy of many corporate FCPA enforcement actions, no empirical data ever will.  For those who believe NPAs and DPAs always represent provable FCPA violations, the ball is now in your court to offer credible explanations for following datapoints.

Since NPAs and DPAs were introduced to the FCPA context in 2004, if a corporate DOJ FCPA enforcement action is the result of a criminal indictment or resulted in a guilty plea by the corporate entity to FCPA violations, there is a 71% chance that related criminal charges will be brought against a company employee.  If a corporate DOJ FCPA enforcement action is resolved solely with an NPA or DPA, there is a 9% chance that criminal charges will be brought against a company employee.

Since 2007, when NPAs and DPAs become a fixture of DOJ FCPA enforcement, if a corporate DOJ FCPA enforcement action is the result of a criminal indictment or resulted in a guilty plea by the corporate entity to FCPA violations, there is a 75% chance that related criminal charges will be brought against a company employee.  If a corporate DOJ FCPA enforcement action is resolved solely with an NPA or DPA, there is a 10% chance that criminal charges will be brought against a company employee.

[Note – the above data was assembled using the “core” approach as well as the definition of an FCPA enforcement action described in this prior post]

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

Friday, December 19th, 2014

AvonEarlier this week, the DOJ and SEC announced resolution of Avon’s long-standing FCPA scrutiny in China.  The conduct at issue took place between 2004 and 2008 and Avon disclosed the conduct to the enforcement agencies in 2008.

In short, the DOJ and SEC alleged that Avon’s indirect subsidiary (Avon China) provided approximately $8 million in things of value, including gifts, cash, and non-business travel, meals and entertainment, which it gave to Chinese officials in order to obtain and retain business benefits for Avon China.  Avon resolved FCPA books and records and internal controls charges related to this conduct.

Consistent with Avon’s prior disclosure, the aggregate settlement amount was $135 million.  While not a top-ten Foreign Corrupt Practices Act enforcement action, the settlement is the third-largest ever against a U.S. company.

The enforcement action included:

  • a DOJ component (a criminal information against Avon China resolved via a plea agreement and a criminal information against Avon Products resolved via a deferred prosecution agreement with an aggregate fine amount of $67.6 million); and
  • an SEC component (a civil complaint against Avon Products which it agreed to resolve without admitting or denying the allegations through payment of $67.4 million).

This post summarizes the approximately 175 pages of resolution documents.  Because all of the resolution documents have substantial overlap, the core allegations are highlighted in connection with the Avon China criminal information, yet repeated in the other resolution documents as well.

DOJ

Avon China Information

Avon Products (China) Co. Ltd. (“Avon China”) is described as an indirect subsidiary of Avon incorporated in China.  According to the information, Avon China and its affiliates manufactured and sold beauty and healthcare products through direct sales, as well as through “beauty boutiques” that were independently owned and operated.  The information states that in addition to independent sales representatives, Avon China had between 1,000 and 2,000 employees.  According to the information, Avon China’s books, records and accounts were consolidated into Avon’s books and records and reported by Avon in its financial statements.

Under the heading “The Chinese Regulatory Regime for Direct Selling” the information states:

“In or around 1998, the Chinese government outlawed direct selling in China for all companies.  In or around 2001, as a condition of its entry into the World Trade Organization, China agreed to lift its ban on direct selling.  In or around 2005, in order to test its planned regulations for direct selling, the Chinese government decided to issue one company a temporary license to conduct direct sales (the ‘test license.’). In or around March 2005, the Chinese government awarded the test license to Avon China, the defendant.  In or around late 2005, China lifted its ban on direct selling and allowed companies to apply for licenses to conduct direct sales.  Under China’s newly promulgated direct selling regulations, to conduct direct sales, a company was required to obtain a national direct selling license and approvals from each province and municipality in which it sought to conduct direct sales.  In order to obtain a license, a company was required to satisfy a number of conditions, including, in pertinent part, having a ‘good business reputation’ and a record that demonstrated no material violations of Chinese law for the preceding five years.  In or around February 2006, Avon China, the defendant, obtained its national direct selling license.  Between in or around February 2006 and in or around July 2006, Avon China, the defendant, obtained all of its provincial and municipal approvals to conduct direct selling.”

According to the information, Avon China created and maintained a Corporate Affairs Group whose duties included maintaining “guanxi (good relationships) with government officials and lobbying those officials on behalf of Avon China.”

Under the heading, “Overview of the Scheme to Falsify Books and Records,” the information states that from 2004 to 2008, Avon China, and Avon, acting through certain executives and employees, together with others, conspired to falsify Avon China’s and, thereby ultimately, Avon’s books and records in order to disguise the things of value Avon China executives and employees provided to government officials in China.

Specifically, the information alleges that from 2004 to 2008 Avon China “acting through certain executives and employees, disguised on its books and records over $8 million in things of value, including gifts, cash, and non-business travel, meals and entertainment, which it gave to Chinese officials in order to obtain and retain business benefits for Avon China.

The information alleges that:

Avon China “falsely and misleadingly described the nature and purpose of certain transactions on Avon China’s books and records, in part, because they believed that Chinese government officials did not want a paper trail reflecting their acceptance of money, gifts, travel, entertainment and other things of value from Avon China executives and employees.  The executives and employees also knew that, contrary to how the expenses were being described in Avon China’s books and records, the expenses were not incurred for legitimate business purposes.”

According to the information:

“Avon executives and employees, including high-level executives, attorneys, and internal auditors, learned that executives and employees of Avon China, the defendant, had in the past routinely provided things of value to Chinese government officials and failed to properly document it.  Instead of ensuring the practice was halted, disciplining the culpable individuals, and implementing appropriate controls at Avon and Avon China to address the problem, the Avon executives and employees, in conjunction with Avon China executives and employees, took steps to conceal the significant concerns raised about the accuracy of Avon China’s books and records and its practice of giving things of value to government officials.  These Avon and Avon China executives and employees, knowing that Avon China’s books and records would continue to be inaccurate if steps were not taken to correct Avon China’s executives and employees’ conduct, failed to take steps to correct such actions, despite knowing that Avon China’s books and records were consolidated into Avon’s books and records.”

The information then alleges various categories of payments.

Under the heading “gifts for government officials,” the information details designer wallets, bags, or watches “to obtain benefits from government officials, such as obtaining and retaining the direct selling license and requisite provincial and local approvals, avoiding fines, avoiding negative media reports, obtaining favorable judicial treatment, and obtaining government approval to sell nutritional supplements and healthcare apparel products, via direct selling, that did not meet or had yet to meet government standards.  According to the information, Avon China executives and employees, at various times, falsely or misleadingly described the gifts, including describing them as employee travel and entertainment, samples or public relations business entertainment.” Specific gifts mentioned include a $890 gift or entertainment expense, a $960 gift purchased from Louis Vuitton, a $800 Gucci Bag, and a $460 gift from Louis Vuitton.

Regarding avoiding negative media reports, the information alleges that a leading government-owned newspaper intended to run a story about Avon China improperly recruiting sales associates and that this article could cause Avon China to lose its direct selling license.  According to the information, “in order to convince the newspaper not to run the article … an Avon China employee caused Avon China to pay approximately $77,500 to become a “sponsor” of the paper at the request of a government official at the paper who was in charge of determining whether the potential article would run and who may have received a commission on monies received from sponsors.”

Under the heading “meals and entertainment,” the information alleges that Avon China “routinely entertained government officials in order to obtain the same business benefits highlighted above.  According to the information, executives and employees of Avon China, “intentionally concealed these improper meal and entertainment expenses in Avon China’s books and records by (1) intentionally omitting reference to the participation of government officials in order to conceal their participation, using descriptions like business entertainment, public relation entertainment, or no description at all; or (2) revealing the participation of government officials but intentionally describing the event inaccurately by omitting the identity or number of officials, the cost of the event, or the true purpose of the event.”

Under the heading “travel for government officials,” the information alleges that executives and employees of Avon China caused Avon China to “pay for travel expenses for government officials, and sometimes their families” in order to obtain the same improper business benefits highlighted above.  According to the information, “to conceal the true nature of these expenses, these executives and employees intentionally omitted from or concealed in Avon China’s records the name of the government officials, the fact that the travelers were government officials or relatives of government officials, and, at times, the number of travelers.”  The information also alleges that executives and employees of Avon China “intentionally falsified in Avon China’s books and records the purpose of the travel, which often was for personal, not legitimate business, purposes.  For example, the information alleges that certain personal trips for government officials (and occasionally their spouses and children) were described as “study trips” or “site visits” when the officials were instead sightseeing or taking a beach vacation.”  Specifically, the information alleges, among other trips, that Avon China paid for six officials from the Guandong Food and Drug Administration to travel to Avon’s headquarters in New York City and its research and development facility in upstate New York for a “site visit/study visit.” According to the information, the “officials never visited Avon’s headquarters, only spent one morning at Avon’s research and development facility, and spent the rest of the 18-day trip sightseeing and being entertained by an Avon China employee in New York, Vancouver, Montreal, Ottawa, Toronto, Philadelphia, Seattle, Las Vegas, Los Angeles, Hawaii, and Washington D.C.

Under the heading “cash for government officials,” the information alleges that “executives and employees of Avon China, gave cash to government officials in order to obtain benefits for Avon China and falsified Avon China’s records to conceal the true recipient of and purpose for the money.”  According to the information, “these employees accomplished this by submitting for reimbursement meal or entertainment receipts given to them by government officials and falsely claiming that the receipts reflected employee business expenses.  In truth, the employees had no such expenses, and the receipts were used to obtain cash to make payments to government officials.  The information also alleges other instances in which executives and employees of Avon China “gave cash to government officials in order to obtain business benefits for Avon China and falsely reported the payments as fine payments.”  In other instances, the information alleges that Avon China executives and employees “made payments to organizations designated by government officials.”

The information also contains a separate section regarding payments to Consulting Company A that was retained by Avon China “purportedly” to provide various services to Avon China.  The information alleges that these services “were memorialized in a scant two-page contract” and that Avon China “did not conduct any due diligence of Consulting Company A, nor did they require Consulting Company A to comply with Avon’s Code of Conduct (in particular, the provisions related to payments to government officials), even though Consulting Company A was retained specifically to interact with government officials on behalf of Avon China.”  The information alleges that executives and employees of Avon China caused Avon China to pay Consulting Company A additional monies for purportedly legitimate, though ambiguously described, services even though an Avon China executive knew Consulting Company A’s invoices were often false, and no Avon China executives or employees knew of any legitimate services being provided by Consulting Company A.

Based on the above conduct, Avon China was charged with one count of conspiracy to violate the FCPA’s books and records provisions.

The information also contains a separate section titled “Discovery of the Falsification and Cover-Up.”  In pertinent part, the information alleges:

  • In 2005, a senior audit manager in Avon’s internal audit group reported to Avon’s Compliance Committee, that executives and employees of Avon China were not maintaining proper records of entertainment for government officials and that an Avon China executive had explained that the practice was intentional because information regarding that entertainment was “quite sensitive.”
  • In 2005, Avon’s internal auditors audited the Corporate Affairs Group’s travel and entertainment and discretionary expenses and issued a draft report.
  • The Draft Audit Report, which was reviewed by various Avon executives and Avon attorneys, contained conclusions regarding the Corporate Affairs Group’s expenses including: (1) high value gifts and meals were offered to government officials on an ongoing basis; (2) the majority of the expenses related to gifts, meals, sponsorships, and travel of substantial monetary value for Chinese government officials to maintain relationships with the officials; (3) a third party consultant was paid a substantial sum of money to interact with the government but was not contractually required to follow the FCPA, was not actively monitored by Avon China, and was paid for vague and unknown services; and (4) the payments, and the lack of accurate, detailed records, may violate the FCPA and other anti-corruption laws.
  • The management team of Avon China “insisted that the internal audit team remove the discussion of providing things of value to government officials and potential FCPA violations from the Draft Audit Report.
  • Certain Avon executives agreed with executives of Avon China to delete the discussion of the Corporate Affairs Group’s conduct from the Draft Audit Report.  An Avon Executive then directed the internal audit team to either (1) retrieve every copy of the Draft Audit Report and destroy them or (2) instruct the individuals who possessed copies of the Draft Audit Report to destroy them.
  • Avon executives did not instruct any executives or employees of Avon China to stop the conduct identified in the Draft Audit Report, put in place controls to prevent the conduct or ensure the accuracy of Avon China’s books and records.
  • In 2006, Avon’s internal auditors again reviewed the Corporate Affairs Group’s travel and entertainment and discretionary expenses and found that Corporate Affairs Group executive and employees were continuing their practice of giving things of value to government officials.  Notwithstanding learning that the conduct was continuing and that the books and records of Avon China were still being falsified, no Avon or Avon China executives or employees took steps to stop or prevent the conduct from recurring, and Avon China executives and employees continued operating in the same improper manner.
  • In 2007, an Avon executive reported to the Avon Compliance Committee that the matter reported in 2005 regarding potential FCPA violations by executives and employees of Avon China had been closed as “unsubstantiated” even though the executive and others knew of Avon China’s previous – and continuing – practice of giving things of value to government officials and the ongoing failure of Avon China’s books and records to reflect accurately and fairly the nature and purpose of the transactions.
  • From 2004 to 2008, Avon China executives signed false management representation letters to Avon China’s external auditor stating that Avon China’s books and records were fair and accurate.

Avon China Plea Agreement

According to the plea agreement, the advisory Sentencing Guidelines fine range was $73.9 million to $147.9 million.  Pursuant to the plea agreement, Avon China agreed to pay a criminal fine in the amount of $67.6 million.

In the plea agreement, Avon China waived all defenses based on the statute of limitations.

Avon Products Information

The information is based on the same core conduct alleged in the Avon China information.

Under the heading “Avon’s Internal Controls,” the information alleges, in pertinent part, as follows.

“Although Avon … and certain of its subsidiaries had policies in place relating to the review and approval of employee expenses, it lacked adequate controls to ensure compliance with those policies and thus, in practice, employee expenses were not adequately vetted to ensure that they were reasonable, bona fide, or properly documented.

Avon … lacked sufficient controls to ensure the integrity of its internal audit process, particularly with regard to its review of allegations of and testing for improper payments made to foreign government officials.  Avon’s internal audit group also failed to devote adequate funding, staffing, and resources to Avon China.

Avon … did not have adequate internal accounting and financial controls designed to detect and prevent, among other things, corruption-related violations, including FCPA violations.  In particular, after senior Avon executives … learned of specific corruption issues in China related to the provision of cash, meals, gifts, travel, and entertainment to government officials, Avon failed to take the necessary steps to implement appropriate controls to address such issues and prevent such risks in the future.

Avon … had an inadequate compliance program.  In fact, Avon did not have a dedicated compliance officer or compliance personnel.  Avon’s compliance program was particularly weak with regard to risks associated with foreign bribery.  For example, even though Avon operated in over 100 countries, including many countries with high corruption risks, Avon did not have a specific anti-corruption policy, nor did it provide any stand alone FCPA-related training.  Moreover, although Avon had a code of conduct that covered all of its employees and its subsidiaries’ employees, which, among other things, prohibited paying bribes, many employees of Avon and its subsidiaries were unaware of its existence.

Avon .. did not conduct corruption-related due diligence on appropriate third parties or have effective controls for the meaningful approval of third parties.  Avon also did not require adequate documentation supporting the retention of payments to third parties.

Avon … did not undertake periodic risk assessments of its compliance program and lacked proper oversight of gifts, travel, and entertainment expenditures.  Avon’s failure to maintain an adequate compliance program significantly contributed to the company’s failure to prevent the misconduct in China.”

Based on the core conduct and the specific allegations detailed above, Avon was charged with one count of conspiracy to violate the FCPA’s books and records provisions as well as one count of violating the FCPA’s internal controls provisions for knowingly failing to implement a system of internal accounting controls sufficient to provide reasonable assurance of various aspects of its business as required by the provisions.

Avon Products DPA

Pursuant to the three year DPA, Avon admitted, accepted and acknowledged that it was responsible for the conduct alleged in the information.

Under the heading “Relevant Considerations,” the factors the DOJ considered in resolving the action were:

“(a) the Company’s cooperation, which included conducting an extensive internal investigation in China and other relevant countries; voluntarily making U.S. and foreign employees available for interviews; collecting, analyzing, translating, and organizing voluminous evidence and information for the Department; (b) the Company’s voluntary disclosure of its employees’ and its subsidiary’s employees’ misconduct to the Department, which came relatively soon after the Company received a whistleblower letter alleging misconduct but years after certain senior executives of the Company had learned of and sought to hide the misconduct in China; (c) the Company’s extensive remediation, including terminating the employment of individuals responsible for the misconduct, enhancing its compliance program and internal controls, and significantly increasing the resources available for compliance and internal audit; (d) the Company’s commitment to continue to enhance its compliance program and internal controls, including ensuring that its compliance program satisfies the minimum elements [set forth in the DPA]; and (e) the Company’s agreement to continue to cooperate with the Department …”

The DPA also states:

“The Department also considered that the Company, taking into account its own business interests, expended considerable resources on a company wide review of and enhancements to its compliance program and internal controls.  While the Company’s efforts in this regard were taken without Department request or guidance, and at times caused unintended delays in the progress of the Department’s narrower investigations, the Department recognizes that the Company’s efforts resulted in important compliance and internal controls improvements.”

Based on the conduct at issue, the DPA sets forth an advisory Sentencing Guidelines range of $84.6 million to $169.1 million.  The DPA sets forth a criminal fine amount of $67.6 million and the above-mentioned Avon China criminal fine was deducted from this amount.

Pursuant to the DPA, Avon agreed to retain an independent compliance monitor for an 18 month term and agreed to various periodic reporting obligations to the DOJ.

The DPA contains a standard “muzzle clause” in which it (or those associated with it) agreed not to make any public statements contradicting its acceptance of responsibility under the DPA.

In this release, Assistant Attorney General Leslie Caldwell stated:

“Companies that cook their books to hide improper payments will face criminal penalties, as Avon China’s guilty plea demonstrates. Public companies that discover bribes paid to foreign officials, fail to stop them, and cover them up do so at their own peril.”

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

“For years in China it was ‘Avon calling,’ as Avon bestowed millions of dollars in gifts and other things on Chinese government officials in return for business benefits. Avon China was in the door-to-door influence-peddling business, and for years its corporate parent, rather than putting an end to the practice, conspired to cover it up.  Avon has now agreed to adopt rigorous internal controls and to the appointment of a monitor to ensure that reforms are instituted and maintained.”

Assistant Director in Charge Andrew G. McCabe of the FBI’s Washington Field Office stated:

“When corporations knowingly engage in bribery in order to obtain and retain contracts, it disrupts the level playing field to which all businesses are entitled. Companies who attempt to advance their businesses through foreign bribery should be on notice.  The FBI, with our law enforcement partners, is continuing to push this unacceptable practice out of the business playbook by investigating companies who ignore the law.”

SEC

Based on the same core conduct alleged in the DOJ actions, in this civil complaint the SEC charged Avon with violating the FCPA’s books and records and internal controls provisions.  In summary, the SEC’s complaint states:

“This matter concerns violations by A von Products, Inc. (“A von”) of the corporate record keeping and internal controls provisions of the federal securities laws. [...] . From 2004 through the third quarter of 2008, Avon’s books and records failed to accurately and fairly reflect payments by Avon Products (China) Co., Ltd. (“Avon Products China”) to Chinese government officials. Avon Products China provided cash and things of value, including gifts, travel, and entertainment, to various Chinese government officials, including government officials responsible for awarding a test license, and subsequently a direct sales business license, that would allow a company to utilize direct door-to-door selling in China. Avon Products China  was, in fact, awarded a test license and, then, the first official direct selling business license in China. Avon Products China also adopted an internal “no penalty policy” and provided cash and things of value to Chinese government officials to avoid fines and other penalties in order to maintain an ostensibly pristine corporate image. Avon Products China also paid a third-party consultant for purportedly legitimate interactions with government officials, even though Avon Products China management knew the consultant’s invoices were often false and could not point to legitimate services provided by the consultant. At times , payments were made to suppress negative news in state-owned media and to obtain competitor information. In addition, Avon Products China provided cash to government officials on behalf of other Avon subsidiaries in China. Avon Products China falsified its books and records so as to conceal the cash and things of value provided to government officials.  Near the end of 2005, an Avon internal audit team reported potential issues concerning things of value provided to Chinese government officials. Nevertheless, remedial measures sufficient to address the issues were not implemented at Avon Products China. Similar issues related to Avon Products China were raised at the end of 2006. Again, responsive remedial measures were not implemented. The books and records at A von Products China were consolidated into the books and records of Avon. Avon thus violated [the books and records provisions] by failing to make and keep books, records , and accounts, which, in reasonable detail , accurately and fairly reflected the transactions and disposition of assets of the issuer. By failing to ensure that it maintained adequate internal controls sufficient to record the nature and purpose of payments, or to prevent improper payments, to government  officials, Avon failed to devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that its transactions and the disposition of its assets were recorded correctly, accurately, and in accordance with authorization of management. Avon thereby violated [the internal controls provisions]. Finally, in May 2008, Avon began a review of its compliance with the Foreign Corrupt Practices Act (“FCPA”), the U.S . legislation that, among other things, prohibits payments to foreign government officials to obtain or retain business. As a result of its review, the company instituted extensive, related reforms.”

In certain respects, the SEC’s complaint contains additional details regarding certain of the alleged conduct such as:

  • Certain of the Chinese “foreign officials” are alleged to be individuals associated with the Ministry of Commerce (“MOFCOM”) and the State Administration for Industry and Commerce (“AIC”).
  • Regarding the Draft Audit Report, “Avon’s Legal Department took the position that conclusions about potential FCPA violations fell within the purview of Legal, and not Internal Audit.”
  • Regarding Avon’s initial investigation of the matter, Avon engaged a “major law firm” but “in mid-December 2005, sent the law firm a short e-mail stating that the company had ”moved on” from the issues and asking for an estimate of the fees incurred.”
  • “In May 2008 , the Avon Products China Corporate Affairs executive who had been terminated wrote to Avon’ s Chief Executive Officer alleging improper payments to Chinese government officials over several years in the form of meals, entertainment, travel, sponsorship of cultural events, gifts of art, and cash. The letter was forwarded to A von’s Legal Department and, in tum, to the audit committee of Avon’s board of directors. The audit committee commenced an internal investigation into the allegations and, in October 2008, Avon informed the Commission and the Department of Justice.”
  • As to various things of value: (i) “The majority of these payments were for meals and entertainment expenses under $200 per occurrence, without indication as to who attended the meal/entertainment or the business purpose of the expense.” (ii) a “Pearl River cruise for 200 State and Regional AIC officials during a conference of officials with responsibility for the oversight of Avon Products China’s direct selling business license.”; (iii) “corporate boxes at the China Open tennis tournament, given to AIC and other government officials in 2004 and 2005 “to thank them for their support.” During these years, Avon Products China was a corporate sponsor of the tournament and received the tickets as part of that sponsorship . Avon Products China also provided government officials with gifts that included Louis Vuitton merchandise, Gucci bags, and Tiffany pens.” (iv) “$23,000 for travel and expenses for government journalists to attend the ceremony at which Avon Products China launched its direct selling test;” (v) “Avon Products China’s employees also made payments to government officials for conferences, and related meals, gifts, and entertainment, in 150 instances aggregating $143,000. Records for these expenses do not indicate who attended the conferences, or the business purpose of the expenses. Approximately $15,000 of this amount was for expenses related to government journalists’ attendance at an Avon Products China media event.”

As noted in this SEC release:

“Avon, which neither admitted nor denied the allegations, agreed to pay disgorgement of $52,850,000 in benefits resulting from the alleged misconduct plus prejudgment interest of $14,515,013.13 for a total of more than $67.36 million.  In the parallel criminal matter, Avon entities agreed to pay $67,648,000 in penalties.  Avon also is required to retain an independent compliance monitor to review its FCPA compliance program for a period of 18 months, followed by an 18-month period of self-reporting on its compliance efforts.  Avon would be permanently enjoined from violating the books and records and internal controls provisions of the federal securities laws.  In reaching the proposed settlement, which is subject to court approval, the SEC considered Avon’s cooperation and significant remedial measures.”

In the release, Scott Friestad (Associate Director in the SEC’s Enforcement Division) stated:

“Avon’s subsidiary in China paid millions of dollars to government officials to obtain a direct selling license and gain an edge over their competitors, and the company reaped substantial financial benefits as a result. Avon missed an opportunity to correct potential FCPA problems at its subsidiary, resulting in years of additional misconduct that could have been avoided.”

In this release, Sheri McCoy (CEO of Avon Products, Inc.) stated: ”We are pleased to have reached agreements with the DOJ and the SEC.”

Avon was represented by Evan Chesler and Benjamin Gruenstein of Cravath, Swaine & Moore.

Assistant Attorney General Caldwell’s Unconvincing Defense Of DPAs / NPAs

Monday, December 8th, 2014

As noted in this Global Investigations Review article, at a recent event in Paris in connection with the release of the OECD’s Foreign Bribery Report, Assistant Attorney General Lisa Caldwell defended the DOJ’s frequent use of DPAs and NPAs to resolve Foreign Corrupt Practices Act enforcement actions.  As stated in the article:

“Caldwell defended the Department of Justice’s (DoJ) reliance on settlements in FCPA cases. “In the United States we are often able to achieve much more through a settlement – a negotiated settlement – than we could achieve following conviction at trial,” she said. “We are able to impose reforms, impose compliance controls, and impose all sorts of behavioural change that a court would never be able to impose following even a conviction at trial.” Since 2009 over 50 companies have settled with the DoJ for alleged FCPA violations. Caldwell told the audience in Paris: “Companies cannot be sent to jail, so all a court can do is say you will pay ‘x’. We can say: ‘you will also have a monitor and will do all sorts of other things for the next five years, and if you don’t do them for the next five years then you can still be prosecuted’.” “In the United States system at least it is a more powerful tool than actually going to trial,” she said.

Post-enforcement action compliance obligations typically last 2-3 years, not 5 as Caldwell suggested.  Regardless, Caldwell’s defense of DPAs and NPAs is just as unconvincing as former Assistant Attorney General Lanny Breuer’s defense of DPAs and DPAs in September 2012 (see here for the prior post).

For starters, the function of the DOJ’s criminal division, as stated on its website, is to “serve the public interest through the enforcement of criminal statutes.”  Whether the function of the DOJ is, in addition, to “impose reform, impose compliance controls, and all impose all sorts of behavioral changes” on a business organization is a point of much disagreement. (See, e.g., “Prosecutors in the Boardroom“).

Regardless of one’s thoughts on whether the DOJ’s criminal division ought to play the role of a quasi-regulator, the notion that the DOJ is powerless to effect corporate change through old-fashion law enforcement (that is enforcing the FCPA without use of NPAs and DPAs) is plainly false.

For instance, the Siemens enforcement action did not involve the use of an NPA or DPA.  Yet, it is clear from the plea agreement, sentencing memorandum, and judgment that the DOJ was able to obtain the reforms, compliance controls and behavioral changes it wanted.  More recently in 2014, the Alcoa enforcement action was resolved without an NPA or DPA.  The plea agreement and judgment in the case (see here and here) again demonstrate that the DOJ was again able to obtain the reform, compliance controls and behavioral changes it wanted.

To return to Caldwell’s words, perhaps NPAs and DPAs are indeed a more powerful tool in FCPA enforcement actions than actually going to trial, but then again the DOJ is 0-2 in FCPA history when put to its ultimate burden of proof by a business organization in an FCPA enforcement action.

Just because the DOJ may have difficulty proving FCPA violations against business organizations and just because the DOJ is troubled – with good reason – by traditional notions of corporate criminal liability, does not mean the DOJ needs to continue to champion the alternate universe of NPAs and DPAs it has created.

*****

To read a different perspective on Caldwell’s recent remarks, see here from Tom Fox at the FCPA Compliance and Ethics Blog.