Archive for the ‘Enforcement Agency Policy’ Category

Ipse Dixit

Tuesday, April 8th, 2014

This post last week highlighted the recent activity in SEC v. Mark Jackson & James Ruehlen (a Foreign Corrupt Practices Act enforcement action scheduled for trial this summer).  As noted in the post, among other things, the SEC is seeking to exclude various defense expert witnesses on a variety of issues including internal controls issues.

If you read the SEC’s motions (see here – condensed into one document) you will see that a primary basis for exclusion is the SEC’s argument that the experts are merely offering their own naked ipse dixit.

I must confess – arcane latin phrases not being in my strike zone – I had to look up the meaning of ipse dixit.

Ipse Dixit – Latin for He himself said it – an unsupported statement that rests solely on the authority of the individual who makes it.

The term ipse dixit appears approximately 30 times in the SEC’s motions – and related to it – is the SEC’s argument that the experts’ internal controls opinions should be excluded because the experts fail to define certain terms and/or there is no discernible methodology underlying their opinions.

For instance, in seeking to exclude Alan Bell (CPA – regarding, among other things, internal controls) the SEC states:

“Bell could not define what constitutes a “circumvention” of an internal control.”

“Bell concedes that there are no written standards to evaluate what constitutes, in his view, a “circumvention” of an internal control.”

“Bell’s opinions are not the product of a reliable methodology applied to the facts of this case. In fact, Bell employed no methodology at all; instead, his opinions are “based on [his] 40 years of experience.”

In seeking to exclude Gary Goolsby (CPA – regarding, among other things, internal controls issues) the SEC states:

“There is also no discernible methodology underlying his opinion on Jackson’s purported reliance [on Noble's internal controls], other than Goolsby’s own naked ipse dixit. Goolsby’s methodology reduces to the proposition that “I know what I’m looking at.” Yet, in deposition, he could not explain what his opinion means, as a practical matter, with reference to the conduct at issue in this case. Goolsby’s testimony thus confirms what is apparent from his report – his factual findings are based on nothing more than his subjective say-so.”

In seeking to exclude Lowell Brown (regarding various FCPA compliance issues) the SEC states:

“There is no discernible analysis or methodology underlying Brown’s opinion as to Jackson’s purported reliance, other than Brown’s own naked ipse dixit – a manifestly improper basis for expert testimony.”

In seeking to exclude Professor Ronald Gilson (regarding, among other things, internal controls issues) the SEC states:

“There is no genuine methodology here, other than Gilson’s own ipse dixit based on his subjective interpretation of the evidence

In the final analysis, Gilson is an advocate for the defense who proffers nothing but his ipse dixit in the place of rigorous analytical connection between his deficient methodology (reading deposition transcripts and exhibits) and his expert conclusion (the inference that if Ruehlen told others at Noble what he was doing, he lacked the corrupt intent to violate the FCPA, as opposed to simply colluding to bribe foreign officials).”

The irony of course is that while attacking the defendants’ experts for their own ipse dixit, many of the SEC’s FCPA internal controls enforcement theories are nothing more than ipse dixit.

For instance, as noted in this prior post, the SEC alleged that Oracle violated the FCPA’s internal control provisions. The only allegations against Oracle itself is that it failed to audit distributor margins against end user prices and that it failed to audit third party payments made by distributors.  The SEC did not allege any red flags to suggest why Oracle should have done this.  Thus, how did Oracle violate the FCPA’s internal controls provisions?  What was the methodology the SEC used?

Ipse dixit.

Indeed, in a pointed critique of the SEC’s Oracle enforcement theory, the former Assistant Chief of the DOJ’s FCPA unit stated:

“Oracle is the latest example of the SEC’s expansive enforcement of the FCPA’s internal controls provision, and it potentially paints a bleak picture—one in which the provision is essentially enforced as a strict liability statute that means whatever the SEC says it means (after the fact).”  (See here for the prior post).

In many SEC FCPA enforcement actions, the SEC merely makes conclusory statements for why the company allegedly violated the FCPA’s internal controls provisions.  For instance, in the Philips enforcement action (see here for the prior post) the SEC states:

“Philips failed to devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that transactions were properly recorded by Philips in its books and records. Philips also failed to implement an FCPA compliance and training program commensurate with the extent of its international operations. Accordingly, Philips violated [the internal control provisions].”

Source?  Methodology?

Ipse dixit.

As noted in my recent article “Why You Should Be Alarmed by the ADM FCPA Enforcement Action” one reason, among others, why you should be alarmed by the action is because of the “failure to prevent” standard invoked by the SEC for why ADM violated the FCPA’s internal controls provisions.  As noted in the article, this standard  does not even exist in the FCPA and is inconsistent with actual legal authority.  (See here for the previous post regarding SEC v. World-Wide Coin – the only judicial decision to directly address the FCPA’s internal controls provisions).

Moreover, as noted in the article, the “failure to prevent standard” is inconsistent with SEC guidance relevant to the internal-controls provisions.  (See also this prior post).  The SEC’s most extensive guidance on the internal controls provisions states, in pertinent part, as follows:

“The Act does not mandate any particular kind of internal controls system. The test is whether a system, taken as a whole, reasonably meets the statute’s specified objectives. ‘‘Reasonableness,’’ a familiar legal concept, depends on an evaluation of all the facts and circumstances.

Private sector decisions implementing these statutory objectives are business decisions. And, reasonable business decisions should be afforded deference. This means that the issuer need not always select the best or the most effective control measure. However, the one selected must be reasonable under all the circumstances.

Inherent in this concept [of reasonableness] is a toleration of deviations from the absolute. One measure of the reasonableness of a system relates to whether the expected benefits from improving it would be significantly greater than the anticipated costs of doing so. Thousands of dollars ordinarily should not be spent conserving hundreds. Further, not every procedure which may be individually cost-justifiable need be implemented; the Act allows a range of reasonable judgments.

The test of a company’s internal control system is not whether occasional failings can occur. Those will happen in the most ideally managed company. But, an adequate system of internal controls means that, when such breaches do arise, they will be isolated rather than systemic, and they will be subject to a reasonable likelihood of being uncovered in a timely manner and then remedied promptly.”

What is the source for the “failure to prevent” standard in ADM?  What is the methodology?

Ipse dixit.

In short, while attacking the defendants’ experts for their lack of defined methodology regarding internal controls issues, the SEC itself has long recognized that the FCPA’s internal controls lack a defined methodology.

As noted in this post, in a 2013 speech SEC Chair Mary Jo White reminded us why trials are important.  Among other things, White stated that “trials allow for more thoughtful and nuanced interpretations of the law in a way that settlements and summary judgments cannot.”

The SEC’s enforcement action against Jackson and Ruehlen represents an extremely rare instance in which the SEC is being forced to articulate its FCPA positions in the context of an adversary proceeding.

The SEC’s motions seeking to exclude defendants’ experts – while primarily based on ipse dixit – reminds us that a large portion of the SEC’s (and DOJ’s) FCPA enforcement program is nothing more than ipse dixit – and subjective say so.

Friday Roundup

Friday, April 4th, 2014

Contorted, interesting, deserving?, scrutiny alerts and updates, and for the reading stack.  It’s all here in the Friday Roundup.

Contorted

One of the most contorted words in the FCPA vocabulary is “declination” (see here among other posts).

This K&L Gates report contains a useful summary of DOJ and SEC comments at a recent conference.  It states:

“Mr. Knox [DOJ Criminal Division Fraud Section Chief] stated that companies continue to request specific information regarding the Department’s declinations, but that it is the Department’s long-standing practice not to publish details of declinations without a company’s permission, which is rarely given.  According to Mr. Knox, however, over the last two years, the Department has declined to prosecute dozens of cases.  Notably, Mr. Knox stated that, aside from finding no evidence of criminal conduct, the Department may issue a declination when a case involves an isolated incident, the company had a strong compliance program, and the problem was remediated.”

Newsflash.

If the DOJ does not find evidence of criminal conduct and therefore does not bring a case, this is not a “declination,” it is what the law commands.

On the topic of voluntary disclosure, the K&L Gates report states:

“Mr. Cain [SEC FCPA Unit Deputy Chief] started by stating “there is no perfect compliance program;” therefore, companies will always have some “background issues” which need to be addressed, especially as business and risk profiles change.  Mr. Cain does not expect companies to disclose these “normative” problems; however, companies should disclose “significant problems.”  These “significant problems” are the types of issues which may end up being enforcement actions if the SEC learns of them through means other than self-disclosure.”

“Mr. Knox took the position that it would be “very reckless and foolish” for him “to try and draw a line between matters which should be self-disclosed and matters which shouldn’t.”  In making the decision of whether to self-disclose, he advised companies and counsel to apply “common sense” and ask whether this is “something that [the Department] would be interested in hearing about?”  According to Mr. Knox, if the answer to that question is “yes,” then the Department would “probably want [a company] to self-disclose it.”  Nonetheless, there are instances which are not worthy of self-disclosure because the conduct is “minor” and “isolated” or the allegation of wrongdoing is “much too vague.”  Mr. Knox advised companies to “be thoughtful” when making disclosure decisions and carefully document any decision not to disclose.”

If the above leaves you scratching your head, join the club.

Interesting

My article “Why You Should Be Alarmed by the ADM FCPA Enforcement Action” highlights how ADM and its shareholders were victims of a corrupt Ukrainian government in that the government refused to give ADM something even the DOJ and SEC acknowledged ADM was owed – VAT refunds.  Among other things, the article discusses how VAT refund refusals were well-known and frequently criticized prior to the ADM enforcement action in late 2013.

Fast forward to the present day and VAT refund refusals remain a problem in Ukraine.  Recently the International Monetary Fund issued this release concerning a potential aid package for Ukraine.  Among the conditions is that Ukraine  adopt “reforms to strengthen governance, enhance transparency, and improve the business climate” such as taking “measures to facilitate VAT refunds to businesses.”

Deserving?

Earlier this week, the African Development Bank Group (AfDB) released this statement

“Kellogg Brown & Root LLC, Technip S.A. and JGC Corp. agree to pay the equivalent of US $17 million in financial penalties as part of Negotiated Resolution Agreements with the African Development Bank following admission of corrupt practices by affiliated companies in relation to the award of services contracts for liquefied natural gas production plants on Bonny Island, Nigeria, from 1995 until 2004.”

The Director of the AfDB’s Integrity and Anti-Corruption Department stated:

“This settlement demonstrates a strong commitment from the African Development Bank to ensure that development funds are used for their intended purpose.  At the same time, it is a clear signal to multinational companies that corrupt practices in Bank-financed projects will be aggressively investigated and severely sanctioned. These ground-breaking Negotiated Resolution Agreements substantially advance the Bank’s anti-corruption and governance agenda, a strategic priority of our institution.”

Pardon me for interrupting this feel good moment (i.e. a corporation paying money to a development bank), but why is AfDB deserving of any money from the companies?  As noted here, AfDB’s role in the Bonny Island project was relatively minor as numerous banks provided financing in connection with the project.  Moreover, as noted here, the AfDB “invested in the oil and gas sector through a USD 100 million loan to NLNG [Nigeria LNG Limited] to finance the expansion of a gas liquefaction plant located on Bonny Island.”

As alleged in the U.S. Bonny Island FCPA enforcement actions, the above-mentioned companies allegedly made corrupt payments to, among others, NLNG officials.  And for this, the specific companies paid $579 million (KBR, et al), $338 million Technip, and $219 million (JGC).

Why is the bank that loaned money to NLNG deserving of anything?  Is there any evidence to suggest that the $100 million given to NLNG was not used for its “intended purpose” of building the Bonny Island project?

Scrutiny Alerts and Updates

SBM Offshore, Sweett Group, Citigroup, Cisco, and Societe Generale.

SBM Offshore

The Netherlands-based company (with ADRs traded in the U.S. that provides floating production solutions to the offshore energy industry) has been under FCPA scrutiny for approximately two years.  It recently issued this statement which states, in summary, as follows.

“SBM Offshore presents the findings of its internal investigation, which it started in the first quarter of 2012, as the investigators have completed their investigative activities. The investigation, which was carried out by independent external counsel and forensic accountants, focused on the use of agents over the period 2007 through 2011. In summary, the main findings are:

  • The Company paid approximately US$200 million in commissions to agents during that period of which the majority relate to three countries: US$18.8 million to Equatorial Guinea, US$22.7 million to Angola and US$139.1 million to Brazil;
  • In respect of Angola and Equatorial Guinea there is some evidence that payments may have been made directly or indirectly to government officials;
  • In respect of Brazil there were certain red flags but the investigation did not find any credible evidence that the Company or the Company’s agent made improper payments to government officials (including state company employees). Rather, the agent provided substantial and legitimate services in a market which is by far the largest for the Company;
  • The Company voluntarily reported its internal investigation to the Dutch Openbaar Ministerie and the US Department of Justice in April 2012. It is presently discussing the disclosure of its definitive findings with the Openbaar Ministerie, whilst simultaneously continuing its engagement with the US Department of Justice. New information could surface in the context of the review by these authorities or otherwise which has not come up in the internal investigation to date;
  • At this time, the Company is still not in a position to estimate the ultimate consequences, financial or otherwise, if any, of that review;
  • Since its appointment in the course of 2012 the Company’s new Management Board has taken extensive remedial measures in respect of people, procedures, compliance programs and organization in order to prevent any potential violations of applicable anti-corruption laws and regulations. Both it and the Company’s Supervisory Board remain committed to the Company conducting its business activities in an honest, ethical, respectful and professional manner.”

The SBM Offshore release contains a detailed description of the scope and methodology of its review, as well as remedial measures the company has undertaken.  For this reason, the full release is an instructive read.

Sweett Group

As noted in this prior post, in June 2013 Sweett Group Ltd. (a U.K. based construction company) was the subject of a Wall Street Journal article titled “Inside U.S. Firm’s Bribery Probe.” The focus of the article concerned the construction of a hospital in Morocco and allegations that the company would get the contract if money was paid to “an official inside the United Arab Emirates President’s personal foundation, which was funding the project.”

Earlier this week, the company issued this release which stated:

“[T]here have been further discussions with the Serious Fraud Office (SFO) in the UK and initial discussions with the Department of Justice (DOJ) in the USA.  The Group is cooperating with both bodies and no proceedings have so far been issued by either of them.  The Group has commissioned a further independent investigation which is being undertaken on its behalf by Mayer Brown LLP.  Whilst this investigation is at an early stage and is ongoing, to date still no conclusive evidence to support the original allegation has been found.  However, evidence has come to light that suggests that material instances of deception may have been perpetrated by a former employee or employees of the Group during the period 2009 – 2011.  These findings are being investigated further.”

Citigroup

When first discussing Citigroup’s “FCPA scrutiny” I noted the importance of understanding that the FCPA contains generic books and records and internal controls provisions that can be implicated in the absence of any FCPA anti-bribery issues. (See here for a prior post on this subject).  As highlighted in this recent New York Times Dealbook article, this appears to be what Citigroup’s scrutiny involves.  According to the article:

“Federal authorities have opened a criminal investigation into a recent $400 million fraud involving Citigroup’s Mexican unit, according to people briefed on the matter …  The investigation, overseen by the FBI and prosecutors from the United States attorney’s office in Manhattan, is focusing in part on whether holes in the bank’s internal controls contributed to the fraud in Mexico. The question for investigators is whether Citigroup — as other banks have been accused of doing in the context of money laundering — ignored warning signs.”

Cisco

BuzzFeed goes in-depth as to Cisco’s alleged conduct in Russia that has resulted in FCPA scrutiny for the company. The article states, in pertinent part:

“[T]he iconic American firm is facing a federal investigation for possible bribery violations on a massive scale in Russia. At the heart of the probe by the Department of Justice and the Securities and Exchange Commission, sources tell BuzzFeed, are allegations that for years Cisco, after selling billions of dollars worth of routers, communications equipment, and networks to Russian companies and government entities, routed what may have amounted to tens of millions of dollars to offshore havens including Cyprus, Tortola, and Bermuda.”

“Two former Cisco insiders have described to BuzzFeed what they say was an elaborate kickback scheme that used intermediary companies and went on until 2011. And, they said, Cisco employees deliberately looked the other way.”

“No one is suggesting that Cisco bribed Russia’s top leaders. Instead, the investigation is centered on day-to-day kickbacks to officials who ran or helped run major state agencies or companies. Such kickbacks, according to the allegations, enabled the firm to dominate Russia’s market for IT infrastructure.”

“Last year, according to sources close to the investigation, a whistleblower came forward to the SEC, sketching out a vast otkat [kickback] scheme and providing documents as evidence.”

“The two former Cisco executives laid out for BuzzFeed how the alleged scheme worked:  In Cisco’s Russia operations, funds for kickbacks were built into the large discounts Cisco gave certain middleman distributors that were well-connected in Russia. The size of the discounts are head-turning, usually 35% to 40%, but sometimes as high as 68% percent off the list price.  And there was a catch: Instead of discounting equipment in the normal way, by lowering the price, parts of the discounts were often structured as rebates: Cisco sent money back to the middlemen after a sale. Some intermediaries were so close to the Russian companies and government agencies — Cisco’s end customers — that these intermediaries functioned as their agents. These middleman companies would direct the rebate money to be sent to bank accounts in offshore havens such as Cyprus, the British Virgin Islands, or Bermuda.”

According to the article, WilmerHale is conducting the internal investigation.

Societe Generale

Like other financial services company, Societe Generale has come under FCPA scrutiny for business dealings in Libya.  (See here for the prior post).  As noted in this recent article in the Wall Street Journal, in a U.K. lawsuit the Libyan Investment Authority has alleged that the company “paid a middleman $58 million in alleged bribes to secure almost $2 billion in business … during the final years of dictator Moammar Gadhafi’s rule.”

Reading Stack

The most recent issue of the always informative FCPA Update from Debevoise & Plimpton contains a useful analysis of the DOJ’s recent opinion procedure release (see here for the prior post).  Among other things, the Update states:

“[W]hy did it take eight months for the DOJ to issue an Opinion which could have simply cited [a prior Opinion Release]? The delay does not appear to be related to the DOJ’s heavy workload or bureaucratic inertia, as “significant backup documentation” was provided and “several follow up discussions” took place during the eight months.”

*****

A good weekend to all.  On Wisconsin!

Friday Roundup

Friday, March 21st, 2014

A happy holiday to all, scholars program, scrutiny alerts and updates, departing speech, spot-on and inexcusable.  It’s all here in the Friday roundup.

Happy Holiday

Readers often encourage me to “share” more about myself and background.  I have obliged in part, by going off-topic once a year to share my Ironman triathlon results.

I will oblige once again, particularly since it is March Madness.

Happy Mike Koehler Day!

That’s right, on this day 21 years ago (gosh that is hard to believe) my hometown of Elkhart Lake, Wisconsin retired my #21 basketball jersey and proclaimed it “Mike Koehler Day.”  No facilitating payments were necessary.  I ended my high school basketball career, and still remain, the third leading scorer in the history of Wisconsin high school basketball (#1 leading scorer in the history of the state that did not play for their dad)!  A poorly timed illness ended my high school career without that “one shining moment” I dreamed of, and while I was  academic all-conference at the University of South Dakota, my college basketball career was uneventful.

So there you have it, you now know something more about me.

Back to the task at hand.

Scholars Program

Kudos to Trace International for launching a new scholars program.  The Trace Scholars Program is aimed at developing exceptional leaders in the field of anti-corruption who are committed to advancing commercial transparency. The TRACE Scholar Program will fully fund, with tuition, lodging and travel, two international LLM students from developing countries to pursue studies related to strategies and tools for increasing transparency and reducing corruption. TRACE Scholars will spend an academic year at one of two universities (the University of Washington School of Law or the University of Maryland Francis King Carey School of Law) followed by a paid summer internship at TRACE headquarters in Annapolis, Maryland.

Scrutiny Alerts and Updates

Och-Ziff Capital Management Group, SL Industries, SciClone Pharmaceuticals, TeliSonera and a clarification regarding Beny Steinmetz.

Och-Ziff Capital Management Group

Och-Ziff Capital Management Group stated in its recent annual report as follows:

“Beginning in 2011, and from time to time thereafter, we have received subpoenas from the SEC and requests for information from the U.S. Department of Justice (the “DOJ”) in connection with an investigation involving the FCPA and related laws.  The investigation concerns an investment by a foreign sovereign wealth fund in some of our funds in 2007 and investments by some of our funds, both directly and indirectly, in a number of companies in Africa.  At this time, we are unable to determine how the investigation will be resolved and what impact, if any, it will have.  An adverse outcome could have a material effect on our business, financial condition or results of operations.”

A day after the company’s annual report, the company’s stock closed down approximately 3.5% and you can rest assured plaintiffs firms will soon be announcing “investigations” and/or filing civil suits.  For more see here from Bloomberg.

SL Industries

As noted in this Wall Street Journal Risk & Compliance Journal post has disclosed:

“During 2012, the Company conducted an investigation to determine whether certain employees of SL Xianghe Power Electronics Corporation, SL Shanghai Power Electronics Corporation and SL Shanghai International Trading Corporation, three of the Company’s indirect wholly-owned subsidiaries incorporated and operating exclusively in China, may have improperly provided gifts and entertainment to government officials (the “China Investigation”). The Company had retained outside counsel and forensic accountants to assist in the China Investigation. Based upon the China Investigation, the estimated amounts of such gifts and entertainment were not material to the Company’s financial statements. Such estimates did not take into account the costs to the Company of the China Investigation itself, or any other additional costs.

The China Investigation included determining whether there were any violations of laws, including the U.S. Foreign Corrupt Practices Act (“FCPA”). The Company’s outside counsel contacted the DOJ and the Securities and Exchange Commission (the “SEC”) voluntarily to disclose that the Company was conducting an internal investigation, and agreed to cooperate fully. Additionally, the Company hired outside consultants to provide assistance in implementing a mandatory FCPA compliance program for all of its employees which is now completed by such employees annually. Also, during the first and second quarters of 2013 the Company engaged outside consultants to perform FCPA compliance tests at its operations in China and Mexico, which, going forward, will be performed by the Company annually. On September 26, 2013, the DOJ notified the Company that it had closed its inquiry into this matter without filing criminal charges. The Company has not received an update from the SEC regarding the status of its inquiry. The Company cannot predict at this time whether any action may be taken by the SEC.”

SciClone Pharmaceuticals

SciClone Pharmaceuticals has been under FCPA scrutiny since August 2010 (see here for the prior post).  In its most recent annual report, the company disclosed:

“For the year ended December 31, 2013, we determined that a payment of $2.0 million to the government in penalties, fines and/or other remedies is probable. Accordingly, we have recorded $2.0 million of operating expense in our 2013 results of operations to reflect our estimate of a probable loss incurred related to potential penalties, fines and/or other remedies in the ongoing investigations with the SEC and DOJ.”

Once again highlighting that any actual enforcement action fines and penalties are just the tip of the iceberg in terms of a company’s overall financial exposure due to FCPA scrutiny, SciClone also disclosed:

“Additional increases in general and administrative expenses for the year ended December 31, 2013, included higher professional expenses of approximately $5.3 million related to legal matters associated with the ongoing government investigation and our ongoing improvements to our FCPA compliance efforts …”.

TeliaSonera

Various media have reported (see here from the Wall Street Journal for instance) that the DOJ and SEC have opened investigations of Swedish telecommunications company TeliaSonera.  According to the reports:

“[The DOJ and SEC] have requested documents relating to the acquisition of an Uzbekistan wireless data license and spectrum frequencies in 2007. The deals were done with a Gibraltar-based holding company with alleged ties to Uzbekistan’s authoritarian regime.  The U.S. DOJ and the SEC join several authorities investigating the transactions. The scrutiny was sparked after a Swedish television program in 2012 alleged TeliaSonera may have been involved in corruption when it bought its Uzbeki telecom license.”

Steinmetz

Regarding Beny Steinmetz, the founder of BSG Resources, the 100 Reporters story that identified him as a “target” of a DOJ investigation has been amended as follows.

“After this story was published, the source informed 100Reporters that the source had mischaracterized the letter in question as a “target letter.” Later conversations and further reporting suggested that the letter had instead indicated that Steinmetz was a subject and not a target of the investigation.”

Departing Speech

As highlighted in this February post concerning the announced departure of Mythili Raman as Acting Assistant Attorney, Raman carried forward much of the same rhetoric former Assistant Attorney General Lanny Breuer frequently articulated concerning the DOJ’s FCPA enforcement program.  (See here for my article “Lanny Breuer and Foreign Corrupt Practices Act Enforcement).

Like other DOJ FCPA officials before her, Raman frequently highlighted certain enforcement statistics, yet conveniently ignored the most telling enforcement statistic of all – the DOJ’s dismal record when actually put to its burden of proof in FCPA enforcement actions.  In short, for a long time the DOJ’s FCPA Unit has had a distorted view of success.

During his last day as head of the Criminal Division, Raman delivered this speech before an FCPA audience and the critique remains the same.  Among other things, Raman stated:

“[The DOJ's] successful foreign bribery prosecutions speaks for itself …”

“These efforts and these successes are the product of the skill, hard work and determination of the talented prosecutors in our Fraud Section’s FCPA Unit, working in tandem with federal prosecutors across the country at many of the 94 U.S. Attorney’s Offices.”

“We have been successful in our efforts to prosecute individuals in part because we are using all of the law enforcement techniques that are at our disposal.”

Spot-On

I’ve written a number of times that trade barriers and distortions are often the root causes of bribery and a reduction in bribery will not be achieved without a reduction in trade barriers and distortions.  Few in the anti-bribery space seem to grasp this basic issue, perhaps because it is just easier to pound the pavement for more enforcement or blame everything on those evil corporations.

However, Evelyn Suarez (Williams Mullen) gets it.  In this recent piece about the pending Trade Facilitation Agreement (“FTA”), she writes:

“There can be no trade facilitation when border officials solicit bribes and grant favorable treatment to those who pay such bribes.  The demand side of corruption has generally been overlooked, and the implementation of TFA  provides an excellent and even funded opportunity to address the problem.  Thus, measures to ensure public integrity must be adopted along with the trade facilitation measures specified in TFA.”

Spot-on.

Inexcusable

Did you know that NCR Corp. has “paid FCPA penalties in 2014″?

Did you know that Avon has “paid FCPA penalties in 2014?”

Did you know that in 2013 the “U.S. government handed down .. just five FCPA enforcement actions”?

Of course you did not know this, because every one of the above statements are false.

Yet every one of the above statements is included in just one paragraph in this recent Inside Counsel article.

Simply inexcusable, and once again not the media’s finest FCPA moment.  (See herehere and here for prior posts).

*****

A good weekend to all – and good luck with your brackets.

FCPA Readings

Wednesday, March 12th, 2014

If your idea of a good time is cuddling up with an entire law journal volume devoted to the Foreign Corrupt Practices Act, then this post is for you.

Even if that is not your idea of a good time, if you are the least bit interested in the FCPA and its evolution, then you owe it to yourself to get your hands on the Fall 1982 edition of the Syracuse Journal of International Law and Commerce, a symposium volume titled “The Foreign Corrupt Practices Act:  Domestic and International Implications.”

This post previously highlighted the speech by Richard Shine (Chief, Multinational Fraud Branch, Criminal Division, U.S. Department of Justice – the name given to the DOJ’s then de facto FCPA Unit) in the volume.

This recent post highlighted the speech by Frederick Wade (Chief Counsel, SEC Enforcement Division) in the volume.

The remainder of this post highlights notable aspects of other articles found in the Fall 1982 edition of the Syracuse Journal of International Law and Commerce.

In “An Overview of the FCPA,” Wallace Timmeny (the former Deputy Director, SEC Division of Enforcement and at the time a lawyer in private practice) rightly identified the foreign policy concerns which motivated Congress to pass the FCPA:

“Concerns were expressed that our government was faced with foreign policy determinations and decisions made by American corporations.  In other words, some of our corporations were affecting foreign policy and there was also the overriding concern that the whole idea of foreign payments or corruption in business was really putting an arrow in the bow of the countries that oppose our system.”

For more on this primary motivation of Congress in enacting the FCPA, and how the FCPA was thus not a purely altruistic act, see my article “The Story of the Foreign Corrupt Practices Act.”

In “An Examination of the Accounting Provisions of the FCPA,” Lloyd Feller (the former Associate Director of the SEC’s Division of Market Regulation and at the time a lawyer in private practice) nicely touched upon the FCPA’s books and records and internal controls provisions and how they created much controversy at the time.

“Let me try to put into context the controversy surrounding the accounting provisions.  First, it is important to understand that the accounting provisions are part of the Securities Exchange Act of 1934, and apply to all issuers which register securities with the SEC.  The provisions apply to all such issuers, whether or not they do business overseas.  The Act, as it is applied through the accounting provisions, has absolutely nothing to do with foreign corrupt practices; it has to do with accounting, including the maintenance of books and records, and the establishment and maintenance of a system of internal accounting controls.”

“I think it is important to start with the understanding of how the Act was presented to the corporate community at the time it was passed, because the context in which the words were used and the purpose for which the accounting provisions were intended create the great controversy.  It is important to understand that people who never heard of the bribery of foreign officials woke up one day and found that an Act had just been passed which applied to them in very significant ways.  This was an Act which they had never heard of, had never thought involved them, had never paid any attention to, and had never understood.  They listened to the lawyers and accountants explain it to them and still did not understand.”

In “The SEC Interpretative and Enforcement Program Under the FCPA,” John Sweeny (former Assistant General Counsel of the SEC and at the time a lawyer in private practice) rightly noted:

“The SEC did not actively support the bribery provisions of the Foreign Corrupt Practices Act.  Indeed, it’s not entirely clear that they have any interest in prohibiting bribery per se.”

Sweeny also nicely touched upon a prosecutorial common law issue that remains today.

“The corporate community cannot sit back and wait to see how the law develops.  Because it makes sound business sense to comply with federal regulatory authorities without a public clamor, corporations must confirm their activity in ways which the agency requires.  To do otherwise would mean that the corporations would be risking substantial litigation expenses and adverse publicity.”

In ”International Aspects of the Control of Illicit Payments,” Professor Seymour Rubin assessed the then current state of the FCPA.

“The course of events in this particular area has been long, but it has not yielded much in the way of result.  Whether the FCPA has yielded a great deal in the way of results, I leave to all of you who have considered the matter.  Certainly it has yielded much in the way of instruction to people in various corporations.  I am somewhat impressed by the amount of paper which has been produced on this subject.  It reminds me again of the old saying to the effect that when the weight of the paper equals the weight of the airplane, the airplane will fly.”

Professor Rubin also rightly identified bribery and corruption as a trade issue and particularly how Senate Resolution 265 sponsored by Senator Ribicoff during the FCPA’s legislative debate was the most promising way to deal with the bribery and corruption problem.  For more on Senate Resolution 265, see the Story of the Foreign Corrupt Practices Act (pgs. 982-984).

“[Senator Ribicoff's proposal - Senate Resolution 265] was more realistic than some of the other proposals.  In particular, Senator Ribicoff argued that bribes, as well as similar practices, represent distortions of proper trade practices.  Under this premise, the members of the General Agreement on Tariffs and Trade would be the appropriate group to consider the question of illicit payments and bribes that distort the fair competition desirable in the field of international trade.  In other words, just as dumping and subsidization distort normal competition, so too does the practice of making illicit payments.  This premise served as the basis upon which the issue was to be presented at the GATT conference.  But when a special trade representative presented Senator Ribicoff’s proposal before the GATT conference, he was greeted with polite silence.  The GATT, in 1979, concluded a multilateral trade negotiation.  Among other things, this multilateral trade negotiation dealt with trade-distorting practices such as nontariff barriers, the question of government procurement, dumping codes, and the anti-subsidy or subsidies and countervailing duties.  It would seem that the multilateral trade negotiation would have been a legitimate arena in which to discuss the subject, as being one more example of a trade distortion which ought to be regulated.”

“I think if one were to rexamine the idea presented in Senate Resolution 265 and adopt this in the area of trade, one would be addressing the problem of illicit payments in more meaningful and significant terms.  When a large contract is lost by an American corporation because somebody else paid a bribe, a trade distortion results.  Clearly, if one were really serious about achieving a meaningful agreement in the area of international control of illicit payments, the peg on which to hang it would be trade policy and not morality.”

In “The Foreign Corrupt Practices Act:  Implications for the Private Practitioner,” Robert Primoff (a lawyer in private practice) called the FCPA a “prosecutor’s paradise” and observed:

“The target is always guilty of the violation.  The government has the option of deciding whether or not to prosecute.  For practitioners, however, the situation is intolerable.  We must be able to advise our clients as to whether their conduct violates the law, not whether this year’s crop of administrators is likely to enforce a particular alleged violation.  That would produce, in effect, a government of men and women rather than a government of law.”

If the Fall 1982 edition of the Syracuse Journal of International Law and Commerce does not completely fill your FCPA belly, you might also want to check out Volume 18, Number 2 of the Northwestern Journal of International Business (Winter 1998).

It is a symposium edition titled “A Review of the Foreign Corrupt Practices Act on Its Twentieth Anniversary:  Its Application, Defense and International Aftermath.“  The articles are rather pedestrian, but Stanley Sporkin’s (the former Director of the SEC’s Enforcement Division during Congress’s consideration and deliberation of the FCPA) article “The Worldwide Banning of Schmiergeld:  A Look at the Foreign Corrupt Practices Act On Its Twenieth Birthday” is worth a read as he provides a first-person account of the origins of the FCPA. [In case you are wondering Schmiergeld is the German word for bribe].

See here for a prior post detailing articles in a 2012 symposium edition of the Ohio State Law Journal “The FCPA At Thirty-Five and Its Impact on Global Business.”

Telling And Inexcusable

Monday, March 3rd, 2014

Compliance monitors as a condition of resolving a Foreign Corrupt Practices Act enforcement action are:

(a) a necessary post-enforcement action condition of settlement because the conduct at issue in the enforcement action suggests that the company had deficient internal controls and/or an inadequate committment to FCPA compliance; or

(b) a unncessary, reactionary, more form over substance post-enforcement action condition of settlement that borders on a government required transfer of shareholder wealth to FCPA Inc.

If (a) is the correct response, and if a company’s internal controls are so deficient and if the company so lacks a genuine committment to FCPA compliance, it would seem that a compliance monitor should actually begin work as soon as the ink is dry on the resolution documents.

However, that rarely happens and the delay between when a compliance monitor actually begins work is telling.

For instance and as highlighted in this previous post regarding the Faro Technologies enforcement action, it took the DOJ and the company two years from the date of the enforcement action to agree on a compliance monitor.

While the next example has a way to go to reach two years, the same thing is currently happening in regards to the Diebold monitor.

As highlighted in this prior post, on October 22, 2013 Diebold agreed to resolve related DOJ and SEC enforcement actions.  Pursuant to the DPA, Diebold was required to engage a compliance monitor for ”a period of not less than 18 months from the date the monitor is selected.”  As stated in the DPA, selection of the monitor shall be “prompt” and the DPA stated that the DOJ and Diebold “will use their best efforts to complete the [monitor] selection process within 60 days” of executing the DPA.

Despite this language, 60 days have passed.  90 days have passed.  Still no Diebold monitor.

Rather, Diebold’s VP Global Finance and Principal Financial Officer stated in the company’s February 13th earnings call as follows:  we “are in the process of working with the government agencies to identify the compliance monitor.”

This is telling and goes directly to the introductory question regarding the need and necessity of corporate monitors in many FCPA enforcement actions.

It is also inexcusable.

If the DOJ wants its FCPA enforcement program to be viewed as credible and effective by the business community, it owes the business community an obligation not to proceed at a glacial pace.  For instance, the gray cloud of FCPA scrutiny often lingers far too long (2-4 years tends to be the average from the point of first disclosure to any actual enforcement action with 6-8 years not uncommon).  When cooperation is the name of the game, and because of this black-letter legal concepts such as statute of limitations do not matter, this is the end result.  The revolving door that has come to infect DOJ and SEC FCPA enforcement also contributes to the glacial pace.

Likewise, if the DOJ wants its FCPA enforcement program to be viewed as credible and effective by the business community, monitors must be appointed promptly after an enforcement action as monitors represent costs, risks, and uncertainty.