Archive for the ‘Enforcement Agency Policy’ Category

Friday Roundup

Friday, May 8th, 2015

Roundup2The anti-bribery business, quotable, scrutiny alerts and updates, and for the reading stack.  It’s all here in the Friday Roundup.

“The Anti-Bribery Business”

Several articles have been written about FCPA Inc., a term I coined in April 2010 (see here), as well as the “facade of FCPA enforcement” (see here for my 2010 article of the same name).

The articles have included: “Cashing in on Corruption” (Washington Post); “The Bribery Racket” (Forbes); and “FCPA Inc. and the Business of Bribery” (Wall Street Journal).

I talked at length with The Economist about the above topics and certain of my comments are included in this recent article “The Anti-Bribery Business.”

“The huge amount of work generated for internal and external lawyers and for compliance staff is the result of firms bending over backwards to be co-operative, in the hope of negotiating reduced penalties. Some are even prepared to waive the statute of limitations for the conclusion of their cases. They want to be sure they have answered the “Where else?” question: where in the world might the firm have been engaging in similar practices?

In doing so, businesses are egged on by what Mr Koehler calls “FCPA Inc”. This is “a very aggressively marketed area of the law,” he says, “with no shortage of advisers financially incentivised to tell you the sky is falling in.” Convinced that it is, the bosses of accused companies will then agree to any measure, however excessive, to demonstrate that they have comprehensively answered the “Where else?” question. So much so that even some law enforcers have started telling them to calm down. Last year Leslie Caldwell, head of the DOJ’s criminal division, said internal investigations were sometimes needlessly broad and costly, delaying resolution of matters. “We do not expect companies to aimlessly boil the ocean,” she said.

Her words have provided scant comfort: defence lawyers say that their clients feel that if they investigate problems less exhaustively, they risk giving the impression that they are withholding information. Some say the DOJ is maddeningly ambiguous, encouraging firms to overreact when allegations surface.”

Quotable

Assistant Attorney General Leslie Caldwell is spot-on in this recent Q&A in Fraud Magazine as to the importance of uniquely tailored compliance.

“I think companies have to tailor their compliance programs and their investigative mechanisms to their businesses. There’s no one-size-fits-all compliance program. Different businesses have different risks. And a company needs to do an assessment that’s very tailored to their risks and game out what could go wrong and figure out how to prevent that from happening.”

She is less than clear though when describing when the DOJ would like companies to voluntarily disclose:

“We don’t want a company to wait until they’ve completed their own investigation before they come to us. We’ll give them room to do that, but there may be investigative steps that we want to take that maybe the company is not even capable of taking. We definitely don’t want to send a message that the company should complete its own investigation and then come to us. However, we obviously don’t expect a company to report to us as soon as it receives a hotline report that it hasn’t even checked into yet.”

For your viewing pleasure, here is the video of a recent speech by Caldwell (previously highlighted here) along with Q&A.

Scrutiny Alerts and Updates

Bilfinger

Reuters reports:

“German engineering firm Bilfinger has become the first international company to disclose to Brazil that it may have paid bribes as it seeks leniency under a new anti-corruption law, Comptroller General Valdir Simão said on Thursday. By reporting potential graft to the comptroller, known by the acronym CGU, Bilfinger hopes to continue operating in Brazil, Simão said, though it may still pay damages. ”The company knows it will be punished in Brazil; it is not exempt from fines,” Simao said at a conference in Sao Paulo adding that in exchange the company could be guaranteed the right to keep operating in Brazil. Companies that are convicted for bribery could be banned from future contracts in Brazilunder the law, which took effect in January 2014. Bilfinger said in March that it may have paid 1 million euros to public officials in Brazil in connection with orders for large screens for security control centers during the 2014 soccer World Cup. It is conducting an internal investigation and collaborating with Brazilian authorities, Bilfinger said in a statement at the time. Five companies are pursuing leniency deals with the CGU, Simao said, adding that such deals are “quite new” for the country. Four are tied to a scandal at Brazil’s state-run oil firm Petroleo Brasileiro SA, he said.”

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

Siemens

Reuters reports:

“A Chinese regulator investigated Siemens AG last year over whether the German group’s healthcare unit and its dealers bribed hospitals to buy expensive disposable products used in some of its medical devices, three people with knowledge of the probe told Reuters. The investigation, which has not previously been reported, follows a wide-reaching probe into the pharmaceutical industry in China that last year saw GlaxoSmithKline Plc fined nearly $500 million for bribing officials to push its medicine sales. China’s State Administration for Industry and Commerce (SAIC) accused Siemens and its dealers of having violated competition law by donating medical devices in return for agreements to exclusively buy the chemical reagents needed to run the machines from Siemens, the people said.”

In 2008, Siemens paid $800 million to resolve DOJ and SEC FCPA enforcement actions that were widespread in scope.  The enforcement action remains the largest of all-time in terms of overall settlement amount.

Dun & Bradstreet

The company recently disclosed the following update regarding its FCPA scrutiny.

“On March 18, 2012, we announced we had temporarily suspended our Shanghai Roadway D&B Marketing Services Co. Ltd. (“Roadway”) operations in China, pending an investigation into allegations that its data collection practices may have violated local Chinese consumer data privacy laws. Thereafter, the Company decided to permanently cease the operations of Roadway. In addition, we have been reviewing certain allegations that we may have violated the Foreign Corrupt Practices Act and certain other laws in our China operations. As previously reported, we have voluntarily contacted the Securities and Exchange Commission (“SEC”) and the United States Department of Justice (“DOJ”) to advise both agencies of our investigation, and we are continuing to meet with representatives of both the SEC and DOJ in connection therewith. Our investigation remains ongoing and is being conducted at the direction of the Audit Committee.

During the three months ended March 31, 2015 , we incurred $0.4 million of legal and other professional fees related to matters in China, as compared to $0.3 million of legal and other professional fees related to matters in China for the three months ended March 31, 2014.

As our investigation and our discussions with both the SEC and DOJ are ongoing, we cannot yet predict the ultimate outcome of the matter or its impact on our business, financial condition or results of operations. Based on our discussions with the SEC and DOJ, including an indication from the SEC in February and March 2015 of its initial estimate of the amount of net benefit potentially earned by the Company as a result of the challenged activities, we continue to believe that it is probable that the Company will incur a loss related to the government’s investigation. We will be meeting with the Staff of the SEC to obtain and to further understand the assumptions and methodologies underlying their current estimate of net benefit and will subsequently provide a responsive position. The DOJ also advised the Company in February 2015 that they will be proposing terms of a potential settlement, but we are unable to predict the timing or terms of any such proposal. Accordingly, we are unable at this time to reasonably estimate the amount or range of any loss, although it is possible that the amount of such loss could be material.”

Bio-Rad

The company disclosed as follows concerning civil litigation filed in the aftermath of its November 2014 FCPA enforcement action (see here for the prior post).

“On January 23, 2015, the City of Riviera Beach General Employees’ Retirement System filed a new shareholder derivative lawsuit in the Superior Court of Contra Costa County against three of our current directors and one former director. We are also named as a nominal defendant. In the complaint, the plaintiff alleges that our directors breached their fiduciary duty of loyalty by failing to ensure that we had sufficient internal controls and systems for compliance with the FCPA; that we failed to provide adequate training on the FCPA; and that based on these actions, the directors have been unjustly enriched. Purportedly seeking relief on our behalf, the plaintiff seeks an award of restitution and unspecified damages, costs and expenses (including attorneys’ fees). We and the individual defendants have filed a demurrer requesting dismissal of the complaint in this case.

On January 30, 2015, we received a demand pursuant to Section 220 of the Delaware General Corporation Law from the law firm of Scott + Scott LLP on behalf of International Brotherhood of Electrical Workers Local 38 Pension Fund to inspect certain of our books and records. The alleged purpose of the demand is to investigate potential wrongdoing, mismanagement, and breach of fiduciary duties by our directors and executive officers in connection with the matters relating to our FCPA settlement with the SEC and DOJ, and alleged lack of internal controls. We objected to the demand on procedural grounds by letter. On May 1, 2015, International Brotherhood of Electrical Workers Local 38 Pension Fund filed an action against us in the Delaware Court of Chancery to compel the inspection of the requested books and records.

On March 13, 2015, we received a demand pursuant to Section 220 of the Delaware General Corporation Law from the law firm of Kirby McInerney LLP on behalf of Wayne County Employees’ Retirement System to inspect certain of our books and records. The alleged purpose of the demand is to investigate potential wrongdoing, mismanagement, and breach of fiduciary duties by our directors and executive officers in connection with the matters relating to our FCPA settlement with the SEC and DOJ, and alleged lack of internal controls. We objected to the demand on procedural grounds by letter. On April 21, 2015, Wayne County Employees’ Retirement System filed an action against us in the Delaware Court of Chancery to compel the inspection of the requested books and records.”

Nortek

The company disclosed its FCPA scrutiny earlier this year and stated as follows in its recent quarterly filing:

“For the first quarter of 2015 approximately $1 million was recorded for legal and other professional services incurred related to the internal investigation of this matter. The Company expects to incur additional costs relating to the investigation of this matter throughout 2015.”

For the Reading Stack

From Global Compliance News by Baker & McKenzie titled “When a DPA is DOA:  What The Increasing Judicial Disapproval of Corporate DPAs Means for Corporate Resolutions With the U.S. Government.”

“The legal setting in which corporations are negotiating with U.S. regulators is always evolving. Federal judges’ increasing willingness to second-guess negotiated settlements between the government and corporations is likely to encourage government attorneys to seek even more onerous settlements to ensure that judges do not reject them or criticize the agency in open court. Companies and their counsel should be ready to push back, using the judicial scrutiny to their advantage where possible.”

*****

A good weekend to all.

Assessing DOJ Transparency

Wednesday, April 29th, 2015

FoggyRecently Assistant Attorney General Leslie Caldwell gave this speech at an event hosted by New York University Law School’s Program on Corporate Compliance and Enforcement.

The focus of the speech, as stated by Caldwell, was “the Criminal Division’s efforts to increase transparency in its corporate prosecutions.”  It is an important topic as transparency is a fundamental tenet of the rule of law.

Caldwell’s speech was mostly forward-looking so time will tell how transparent the DOJ will be in the future including in the FCPA context.

This post assesses DOJ transparency as it relates to Foreign Corrupt Practices Act enforcement over the past several years and highlights that DOJ transparency is as foggy as the road in the picture.

When reading the below excerpts from Caldwell’s speech, you may want to keep the following points in mind.

Since 2010, the DOJ has used NPAs or DPAs to resolve approximately 85% of corporate FCPA enforcement actions. These resolution vehicles are negotiated behind closed doors in Washington, D.C. and thus are anything but transparent.

Caldwell states in her speech that “the factual statements filed with resolution documents typically include a detailed recitation of the misconduct, as publicly admitted by the company.”  However, you can judge for yourself whether the following FCPA NPAs contain “a detailed recitation of the misconduct”.

Ralph Lauren NPA (3 page statement of facts most of which identifies relevant parties);

NORDAM Group NPA (2.5 page statement of facts most of which identifies the relevant parties);

Lufthansa Technik NPA (no statement of facts relevant to the entity).

In any event, kudos to Caldwell for recognizing that “opaque” enforcement “carries little deterrent effect.”

The article “The Facade of FCPA Enforcement” highlights four pillars which contribute to the “facade” of FCPA enforcement.  One pillar highlighted was “same facts, different result.”  The article used what were substantively carbon-copy enforcement actions against Lucent Technologies and UTStarcom, which nevertheless led to materially different charges and penalties, to make the point that FCPA charging decisions are not based solely on the facts and law, but less transparent factors as well.

In any event, kudos to Caldwell for recognizing that “unreasoned” enforcement “carries little deterrent effect.”

Further to the point that FCPA charging decisions seem not to be based solely on the facts and law, but less transparent factors as well, consider the BAE enforcement action. Despite the DOJ alleging conduct that clearly implicated the FCPA’s anti-bribery provisions, BAE (a large U.S. defense contractor) was not charged with violating the FCPA.

Consider also the mysterious conclusion to James Giffen enforcement action. Giffen was criminally charged with making more than $78 million in unlawful payments to two senior officials of the Republic of Kazakhstan in connection with certain oil transactions in which various American oil companies acquired valuable rights in Kazakhstan.” However, Giffen’s defense was that his actions were made with the knowledge and support of the CIA, the National Security Council, the Department of State and the White House. In 2010, the enforcement action took a sudden and mysterious turn when Giffen agreed to plead guilty to a one-paragraph superseding indictment charging a misdemeanor tax violation.  Perhaps one day the reasoning behind the sudden turn of events will become transparent.

Consider also certain subtle statements in the FCPA Guidance relevant to transparency.

Footnote 379 of the Guidance states as follows.  “Historically, DOJ had, on occasion, agreed to DPAs with companies that were not filed with the court.  That is no longer the practice of DOJ.”

Page 75 of the Guidance suggests that the DOJ has used NPAs in individual FCPA-related cases (e.g., “If an individual complies with the terms of his or her NPA, namely, truthful and complete cooperation and continued law-abiding conduct, DOJ will not pursue criminal charges.” The Guidance also states that “in circumstances where an NPA is with a company for FCPA-related offenses, it is made available to the public through DOJ’s website.” (emphasis added).  This statement suggests that when an NPA is with an individual for FCPA-related offenses, the agreement is not made public.

Indeed, as highlighted in the prior post “Secret FCPA Enforcement” there have been whispers in the FCPA bar for years about secret FCPA enforcement.  As noted in the prior post, not once, not twice, but three times I sought clarification from the DOJ of the above Guidance statements.

In each instance there was no response. So much for that transparency thing.

Indeed, a key qualifier in Caldwell’s recent speech about transparency was the following statement:  ”we [the DOJ] usually publicly announce corporate resolutions and pleas, and make the documents available on our website”) (emphasis added).

Last, but not least before turning to actual excerpts from Caldwell’s speech, is the topic of so-called DOJ declinations.  As evidence of the DOJ’s purported transparency, Caldwell states that the FCPA Guidance “has a section on declinations and provides anonymized examples of real FCPA cases in which we declined to bring a prosecution.”

However, as highlighted in the article “Grading the FCPA Guidance“ the Guidance declination examples raise more questions than answers. For instance, in three of the examples, it is not even clear based on the information provided that the FCPA was violated.  Moreover, in all the declination examples in the Guidance, the factors motivating the declination decision—such as voluntary disclosure and cooperation, effective remedial measures, small improper payments—can often be found in many instances in which FCPA enforcement actions were brought.

At last to the excerpts in Caldwell’s speech.

“One of my priorities in the Criminal Division is to increase transparency regarding charging decisions in corporate prosecutions.  I know that many corporate counsel have concerns about what they perceive as a lack of transparency in how the department decides when to bring charges, or to seek some lesser resolution.

Greater transparency benefits everyone.  The Criminal Division stands to benefit from being more transparent in part because if companies know the benefits they are likely to receive from self-reporting or cooperating in the government’s investigation, we believe they will be more likely to come in and disclose wrongdoing and cooperate.  And on the flip side, companies can better evaluate the consequences they might face if they do not receive cooperation credit.  Transparency also helps to reduce any perceived disparity, in that companies can compare themselves, as best as possible, to other similarly-situated companies engaged in similar misconduct.

There are often limits to how much we can disclose about our investigations and prosecutions—particularly for investigations in which no charges were brought—but we are trying to be more clear about our expectations for corporate cooperation and the bases for our corporate pleas and resolutions.

One of the themes of today’s program is the shaping of corporate culture.  Shaping corporate culture through deterrence is an area where the Criminal Division plays an important role.  One important purpose of criminal prosecution of corporations is the deterrence of future would-be wrongdoers.  But to achieve deterrence, the Criminal Division must transparently communicate its expectations and the consequences of corporate misconduct.  An opaque or unreasoned enforcement action carries little deterrent effect.

We recognize the productive role we can play in influencing corporate conduct, and we take seriously the effects of our enforcement actions.  Wherever possible, we try to communicate clear guidance to the corporate community through our criminal resolutions, our interactions with companies and their counsel during an investigation or prosecution and other channels such as conferences like this one.

During my first year in leading the Criminal Division, we have tried to make as clear as possible what we expect from those companies that choose to cooperate.  Put simply, if a company wants cooperation credit, we expect that company to conduct a thorough internal investigation and to turn over evidence of wrongdoing to our prosecutors in a timely and complete way.  Perhaps most critically, we expect cooperating companies to identify culpable individuals—including senior executives if they were involved—and provide the facts about their wrongdoing.

As this sophisticated audience knows, there is no “off the rack” internal investigation that can be applied to every situation at every company.  Effective investigations must be tailored to the unique misconduct at issue and the circumstances of each company.  But, there are hallmarks of all good internal investigations.  Chief among them is the identification of wrongdoers.  Prosecuting individuals, including corporate executives, for their criminal wrongdoing is a top priority for the Criminal Division.  Corporations seeking cooperation credit should conduct their internal investigations with those principles in mind.

The mere voluntary disclosure of corporate misconduct—by itself—is not enough.  All too often, corporations expect cooperation credit for voluntarily disclosing and describing the corporate entities’ misconduct, and issuing a corporate mea culpa.  True cooperation, however, requires identifying the individuals actually responsible for the misconduct—be they executives or others—and the provision of all available facts relating to that misconduct.

Investigations must also be independent and designed to uncover the facts, not to spread company talking points or whitewash the truth.  We expect that the complete facts about the wrongdoing will be provided, and in a timely way.  As we work to be transparent, we expect transparency in return.  Transparency is a two-way street, and we expect companies that are claiming to cooperate to walk the walk.

The Criminal Division, meanwhile, will conduct its own investigation.  We will pressure test a company’s internal investigation with the facts we gather on our own, and we will consider the adequacy of an internal investigation when we evaluate a company’s claim of cooperation.

Let me be clear, however, the Criminal Division does not dictate how a company should conduct an investigation.  If a company decides to conduct an internal investigation and seek cooperation credit, that company must determine how best to conduct its own internal investigation.  Although we can provide guideposts, the manner in which an internal investigation is conducted is an internal corporate decision.

[...]

We recognize that information about the bases for our corporate guilty pleas and resolutions is an important reference point for companies that are evaluating whether to self-disclose a violation or cooperate.  Corporations may wish for a formula or definitive matrix that could be applied in this context.  But, while a rote formula might bring certainty and consistency, it would do so at the expense of the individualized justice that comes with thoughtful and nuanced prosecutorial decision-making.

For decades, the department has disclosed the factors that prosecutors must evaluate when considering corporate criminal charges and resolutions.  The corporate prosecution principles were originally adopted two decades ago—in the Holder Memo, issued when now Attorney General Holder was the Deputy Attorney General—and have been refined through the years into the current Filip Memo, otherwise known as the Principles of Prosecution of Business Organizations.

This audience is no doubt versed in the comprehensive considerations laid out in the nine Filip factors, which are publicly available on the Internet.  When applied to a particular case against a business organization, the factors could lead to charges, a deferred prosecution agreement or a non-prosecution agreement—known as DPAs and NPAs—or a declination.

Arriving at a corporate resolution requires a unique balancing of the Filip factors in each case.  But this balancing does not take place in a prosecutorial vacuum.  In virtually every instance, we invite company counsel to make a presentation regarding the application of the Filip factors in the case at hand before we make a charging decision.  Again, wherever possible, we encourage an open and transparent dialogue between the company and our prosecutors at every stage.

In each of our corporate resolutions—be it a guilty plea, NPA or DPA—we provide an explanation of the key factors that led to our decision.  The factual statements filed with resolution documents typically include a detailed recitation of the misconduct, as publicly admitted by the company.  The actual agreements outline the factors that were significant in determining the type of resolution, such as the corporation’s cooperation—if any—and remedial measures.  We usually publicly announce corporate resolutions and pleas, and make the documents available on our website.

In the future, you should expect that our resolutions will include even more detailed explanations of our considerations.  This is a priority of mine.  While these documents already provide significant insight into our thought processes, they will soon provide an even greater explanation of our analysis and conclusions.

In addition to their use as enforcement tools, our plea agreements, DPAs and NPAs provide a transparent explanation of the department’s expectations when it comes to compliance programs.  Companies seeking to measure their own compliance programs need look no further than many of the resolutions we have made publicly available.

DPAs and NPAs provide explicit roadmaps for companies to get back on track, sometimes under the watchful eye of a monitor or court.  There is perhaps no more transparent guidance to a specific corporation than the terms in a DPA or NPA, especially when we set forth remedial or compliance measures we expect.

These agreements have real teeth.  When companies subject to a NPA or DPA are required to cooperate and fail to do so, or where they engage in other criminal conduct during the term of the agreement, the Criminal Division will not hesitate to tear up a DPA or NPA and file criminal charges, where such action is appropriate and proportional to the breach.  The Criminal Division’s role is not just to set guideposts for companies that have engaged in significant misconduct, but to prosecute those corporations when they ignore those guideposts.  Just as with individuals, companies are expected to learn from their mistakes.  A company that is already subject to a DPA or NPA for violating the law should not expect the same leniency when it crosses the line again.

Over the course of my career, I have found that when it comes to affecting corporate conduct, nothing has a more powerful impact than concrete examples.  Such examples have traditionally stemmed from publicized corporate prosecutions, as it is more challenging to publicize investigations in which we decline to file charges.  The department has maintained a long-standing practice not to discuss non-public information on matters it has declined to prosecute, based in large part on concerns about the privacy rights and interests of uncharged parties.  There are serious privacy concerns inherent in publicly identifying an individual who was implicated in our criminal investigation if we eventually decide not to bring charges.  Indeed, internal department policy prohibits us from publicly identifying those individuals who have been investigated, but not charged.

Likewise, companies often strongly oppose publicity that they were under Justice Department scrutiny, even if we ultimately declined to prosecute.

The challenge we are currently working to address is how to publicize these cases while taking into consideration the legitimate concerns of the companies and individuals who were under investigation.  We are looking for ways to better inform the community about cases in which we decline to prosecute, as there is often as much to learn from a decision not to bring charges as a decision to prosecute.  We seek not just to prosecute, but to encourage and reward good corporate citizenship, and increasing transparency can play an important role in achieving that goal.

A significant example of our efforts in this regard is the Foreign Corrupt Practices Act Resource Guide published by the Criminal Division and the Securities and Exchange Commission.  The Guide has a section on declinations and provides anonymized examples of real FCPA cases in which we declined to bring a prosecution.  Although each potential case is based on its own unique circumstances and facts, the examples in the Guide provide useful insight into the circumstances of real-world declination decisions.

The Criminal Division’s FCPA website continues this effort at transparency by posting relevant enforcement actions and opinion letters.  The department responds to opinion requests concerning enforcement intent about prospective actions that might violate the anti-bribery provisions of the FCPA.  This procedure enables companies and individuals to request a determination in advance as to whether proposed conduct would constitute a violation of the FCPA.  These opinion letters are publicly available on our website.  While they are binding only on the party that makes the request, they provide significant guidance on the department’s approach to enforcing the FCPA.

Through these and other steps, the Criminal Division has prioritized increased transparency in our corporate investigations and prosecutions.  We strive to disclose more information, to the extent we can, while protecting ongoing investigations and privacy rights.  And we encourage companies to do the same—to self-disclose criminal violations and to cooperate with our investigations—or risk the consequences.”

Assistant Attorney General Caldwell – “We Do Not Expect Companies To Aimlessly Boil The Ocean”

Monday, April 20th, 2015

Boiling the Ocean

The article “Foreign Corrupt Practices Act Ripples” discusses how settlement amounts in an actual FCPA enforcement action are often only a relatively minor component of the overall financial consequences that can result from FCPA scrutiny or enforcement.

The largest component of FCPA enforcement or scrutiny tends to be pre-enforcement action professional fees and expenses.  Where an analysis is possible (it is not possible in all cases because not all companies disclose pre-enforcement action professional fees and expenses) the ratio of pre-enforcement action professional fees and expenses to settlement amount is often 3, 5, 7 times (or even higher) actual settlement amounts.

In the minds of many, pre-enforcement action professional fees and expenses have spiraled out of control and have become a boondoggle for FCPA Inc.

As highlighted in “A Foreign Corrupt Practices Act Narrative,” in 2013 Charles Duross (at the time the DOJ’s FCPA Unit Chief) called out the industry at an American Bar Association event. Duross suggested that often company lawyers are seeking to over-do-it through a global search of operations for FCPA issues. He discussed a case in which a company and its professional advisors came to a meeting with a global search plan and he said “no, no, no, that is not what I want.” He indicated that the lawyers and other professional advisors in the room ‘looked unhappy,’ but that the general counsel of the company was happy.”

The above “Narrative” article also highlighted calls for greater restraint from various FCPA lawyers.

As highlighted in this prior post, one of most interesting portions of the December 2014 Avon deferred prosecution agreement was the following statement by the DOJ.

“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.”

Against this backdrop, last week Assistant Attorney General Leslie Caldwell gave this speech at an event hosted by New York University Law School’s Program on Corporate Compliance and Enforcement.  As relevant to the topic of this post, Caldwell stated:

“All too often, criticism is leveled against the Justice Department for purportedly causing companies to spend years, and many millions of dollars, investigating potential violations.  This is particularly true in the FCPA context where the need for international evidence can add to the expense and burden of an investigation.  Critics wrongly question the wisdom of disclosing misconduct and cooperating with the government in light of what they perceive to be the department’s requirement that companies then must conduct unnecessarily costly, time consuming and widespread investigations.

There is no question that some cooperating companies spend large sums of money investigating potential misconduct and correcting internal controls issues that allowed the misconduct to occur.  The decision to incur those costs, however, is one made by those companies, not a requirement of the department.  When a company chooses to cooperate with the government, the manner in which the company approaches its cooperation, and its own investigation of the conduct, can significantly affect the length of the investigation and the costs incurred by the company.

Although we expect internal investigations to be thorough, we do not expect companies to aimlessly boil the ocean.  Indeed, there have been some instances in which companies have, in our view, conducted overly broad and needlessly costly investigations, in some cases delaying our ability to resolve matters in a timely fashion.

For example, if a company discovers an FCPA violation in one country, and has no basis to suspect that violations are occurring elsewhere, we would not necessarily expect it to extend its investigation beyond the conduct in that country.  On the other hand, if the same people involved in the violation also operated in other countries, we likely would expect the investigation to be broader.

This example is not intended to suggest the proper scope of an investigation of any given matter.  My point instead is that, to receive cooperation credit, we expect companies to conduct appropriately tailored investigations designed to root out misconduct, identify wrongdoers and provide all available facts.  To the extent a company decides to conduct a broader survey of its operations, that decision, and any attendant delay and cost, are the result of the company’s choices, not the department’s requirement.

To assist cooperating companies in appropriately targeting their investigations, to the extent possible, we will make clear to those companies our areas of interest.  I tell my prosecutors that where possible, if it would not compromise our own investigation, we should share information about our investigation with a cooperating company to help focus the company’s internal inquiry.  I encourage an open dialogue between company counsel and our prosecutors about the progress of the internal investigation.  Companies that truly demonstrate a commitment to cooperation will find that this dialogue comes easily.”

Friday Roundup

Friday, April 17th, 2015

Roundup2In-depth, scrutiny alert, further Alstom-developments, quotable, and for the reading stack.  It’s all here in the Friday roundup.

In-Depth

In November 2014, Dutch-based SBM Offshore resolved an enforcement action in the Netherlands.  With a settlement amount of $240 million, the SBM Offshore enforcement action was one of the largest bribery-related enforcement actions of 2014 – regardless of country.

This recent article titled “The Cover-Up at Dutch Multinational SBM” in Vrij Nederland (a Dutch magazine) goes in-depth as to SBM’s scrutiny.  The article has largely escaped the attention of Western media and the FCPA-related blogosphere, but is worth the time to read.  The article begins as follows.

“The corruption scandal at Dutch multinational SBM Offshore, which in November reached a $240 million out-of-court settlement with the Dutch Public Prosecutor (OM), is much larger than thought, as testimony of a former employee now shows. The company has actively pursued a strategy of “containment” and has consistently misled the market. So why did the OM settle?”

Among other things, the article highlights the role of U.S. lawyers and law firms involved in the SBM representation.

Scrutiny Alert

In this recent article, the L.A. Times details, based on obtained documents, the expenditures involved in filming the movie Sahara. Among the expenditures, according to the article - ”local bribes” within the Kingdom of Morocco.  The article states:

“Courtesy payments,” “gratuities” and “local bribes” totaling $237,386 were passed out on locations in Morocco to expedite filming. A $40,688 payment to stop a river improvement project and $23,250 for “Political/Mayoral support” may have run afoul of U.S. law, experts say.

[...]

According to Account No. 3,600 of the “Sahara” budget, 16 “gratuity” or “courtesy” payments were made throughout Morocco. Six of the expenditures were “local bribes” in the amount of 65,000 dirham, or $7,559.

Experts in Hollywood accounting could not recall ever seeing a line item in a movie budget described as a bribe.

[...]

The final budget shows that “local bribes” were handed out in remote locations such as Ouirgane in the Atlas Mountains, Merzouga and Rissani. One payment was made to expedite the removal of palm trees from an old French fort called Ouled Zahra, said a person close to the production who requested anonymity.

Other items include $23,250 for “Political/Mayoral support” in Erfoud and $40,688 “to halt river improvement project” in Azemmour. The latter payment was made to delay construction of a government sewage system that would have interrupted filming.”

Further Alstom Developments

Yesterday, the U.K. Serious Fraud Office announced:

“Charges have been brought by the SFO against Alstom Network UK Ltd and an Alstom employee in phase three of its ongoing investigation.

Alstom Network UK Ltd, formerly called Alstom International Ltd, a UK subsidiary of Alstom, has been charged with a further two offences of corruption contrary to section 1 of the Prevention of Corruption Act 1906, as well as two offences of conspiracy to corrupt contrary to section 1 of the Criminal Law Act 1977.

Michael John Anderson, 54, of Kenilworth in Warwickshire, who was working as a business development director for Alstom Transport SA in France, has been charged with the same offences.

The alleged offences are said to have taken place between 1 January 2006 and 18 October 2007 and concern the supply of trains to the Budapest Metro.

The first hearing in this case will take place at Westminster Magistrates’ Court on 12 May 2015.”

Quotable

In this recent speech, DOJ Assistant Attorney General Leslie Caldwell stated:

“Through deferred prosecution agreements and non-prosecution agreements – or DPAs and NPAs – in cases against companies, we are frequently able to accomplish as much as, and sometimes even more than, we could from even a criminal conviction.  We can require remedial measures and improved compliance policies and practices.  We also can require companies to cooperate in ongoing investigations, including investigations of responsible individuals.  To ensure compliance with the terms of the agreements and to help facilitate companies getting back on the right track, we can impose monitors and require periodic reporting to courts that oversee the agreements for their terms.

Some of these outcomes may resemble remedies that can be imposed by regulators. But these agreements have several features that cannot be achieved by regulatory or civil resolutions.

Criminal Division resolutions require that an entity admit to its misconduct.  Commerzbank, for example, admitted responsibility and agreed to a detailed statement of facts that was filed with the court.  Whereas some regulators permit “no admit, no deny” resolutions – for legitimate reasons of their own – we require that individuals and entities acknowledge their criminal culpability if they are entering into a NPA, DPA or pleading guilty.

Where we enter into DPAs, a criminal information is filed with the court and prosecution of the information is deferred for the time of the agreement.  Where a company fails to live up to the terms of its agreement, an information is already filed, and we can tear up the agreement and prosecute based on the admitted statement of facts.  That’s a powerful incentive to live up to the terms of the agreements.

When we suspect or find non-compliance with the terms of DPAs and NPAs, we have other tools at our disposal, too.  We can extend the term of the agreements and the term of any monitors, while we investigate allegations of a breach, including allegations of new criminal conduct.  Where a breach has occurred, we can impose an additional monetary penalty or additional compliance or remedial measures.  And let me be clear: the Criminal Division will not hesitate to tear up a DPA or NPA and file criminal charges, where such action is appropriate and proportional to the breach.

Obviously, not every breach of a DPA warrants the same penalty.  We are committed to pursuing an appropriate remedy in each case, and we will calibrate the penalty we pursue to fit the nature of the violation and the corporation’s history and culture.  And we will do so transparently, with an explanation of what factors led to the resolution in each case.

[...]

[C]riminal prosecution is the best manner in which to punish culpable individuals.  And the seriousness of potential or actual punishment for felony criminal convictions, including incarceration for individuals, and the stigma and reputational harm associated with criminal charges or convictions, serve as powerful deterrents.”

For the Reading Stack

This Wall Street Journal Risk & Compliance post suggests that the ongoing corruption investigations in Brazil are becoming full-employment events for FCPA Inc.  According to the article:

“Multinationals with operations in Brazil are making frightened calls to their lawyers, as the country’s spreading corruption scandal reaches more companies.

[...]

Attorneys say companies with operations in Brazil are scrambling to assess whether they could get swept up in the probe. “They are very worried,” said Ruti Smithline, an anti-bribery specialist at Morrison & Foerster LLP. “The investigation is so widespread. If you have business in Brazil, the likelihood that this is going to touch you in some way is very high.”

Companies are racing to discover questionable activities before authorities in Brazil do. “They are asking: ‘Is our house clean? If authorities look at these relationships what are they going to find?’” Ms. Smithline said.”

The WSJ post asserts:

“[Brazil's  new anti-corruption law, the Clean Companies Act] holds companies to even higher standards and stricter liability than the U.S. Foreign Corrupt Practices Act. For example, unlike the FCPA, under the Brazilian law a company can be prosecuted for corruption even if didn’t realize it was paying a bribe and had a great compliance program in place.”

This is a most off-target statement as Brazil law does not even provide for corporate criminal liability like the FCPA.  Moreover, business organizations are often the subject of FCPA enforcement actions even though the company had in place pre-existing compliance policies and procedures.

*****

Miller & Chevalier’s FCPA Spring Review 2015 is here.

*****

A good weekend to all.

Analyzing The SEC’s Recent FCPA Pharma Speech

Thursday, March 5th, 2015

Pharm SpeechIn November 2009, then DOJ Assistant Attorney General Lanny Breuer delivered this Foreign Corrupt Practices Act speech at a pharmaceutical industry conference.  In the speech, Breuer warned the audience as follows.

“[C]onsider the possible range of “foreign officials” who are covered by the FCPA: Some are obvious, like health ministry and customs officials of other countries. But some others may not be, such as the doctors, pharmacists, lab technicians and other health professionals who are employed by state-owned facilities. Indeed, it is entirely possible, under certain circumstances and in certain countries, that nearly every aspect of the approval, manufacture, import, export, pricing, sale and marketing of a drug product in a foreign country will involve a “foreign official” within the meaning of the FCPA.”

In the speech, Breuer also talked about “the importance [of] rigorous FCPA compliance polic[ies] that are faithfully enforced” and reminded the audience as follows.

“[A]ny pharmaceutical company that discovers an FCPA violation should seriously consider voluntarily disclosing the violation and cooperating with the Department’s investigation. If you voluntarily disclose an FCPA violation, you will receive meaningful credit for that disclosure. And if you cooperate with the Department’s investigation, you will receive a meaningful benefit for that cooperation—without any request or requirement that you disclose privileged material. Finally, if you remediate the problem and take steps to ensure that it does not recur, you will benefit from that as well.”

Over five years and ten FCPA enforcement actions against pharma/healthcare companies later, Andrew Ceresney (Director of the SEC’s Enforcement Division) delivered a nearly identical speech earlier this week.

The below post excerpts Ceresney’s speech.

When reviewing the speech, you may want to keep the following in mind.

As highlighted in this prior post, the enforcement theory that physicians, lab personnel, etc. are “foreign officials” under the FCPA was first used in 2002 and has since been used in 17 corporate enforcement actions.

Even even though Ceresney’s speech contains several citations, it is telling that the following assertion lacks any citation “doctors, pharmacists, and administrators from public hospitals in foreign countries … are often are classified as foreign officials for purposes of the FCPA.”

There is no citation for this assertion because it is one of the most dubious enforcement theories of this new era of FCPA enforcement and an enforcement theory that finds no support in the FCPA’s extensive legislative history.  (See here for “The Story of the Foreign Corrupt Practices Act“).

Of further note, despite extracting hundreds of millions of dollars from risk averse corporations based on this “foreign official” theory, the DOJ and SEC have never used this enforcement theory to charge any individual.

Another issue to consider.

As highlighted in this recent post, despite the continued foreign scrutiny of the pharma and healthcare industry, the corporate dollars continue to flow to U.S. physicians and other healthcare workers.  It is one of the more glaring double standards when it comes to FCPA enforcement and enforcement of U.S. domestic bribery laws.

With that necessary information, to Ceresney began his speech as follows.

“Pursuing FCPA violations is a critical part of our enforcement efforts.  International bribery has many nefarious impacts, including sapping investor confidence in the legitimacy of a company’s performance, undermining the accuracy of a company’s books and records and the fairness of the competitive marketplace.  Our specialized FCPA unit as well as other parts of the Enforcement Division continue to do remarkable work in this space, bringing significant and impactful cases, often in partnership with our criminal partners.

Now, our FCPA focus obviously covers many industries.  For example, we have conducted a recent sweep in the financial services industry that will yield a number of important cases.  But the pharma industry is one on which we have been particularly focused in recent years.  A few factors combine to make it a high-risk industry for FCPA violations.  Pharmaceutical representatives have regular contact with doctors, pharmacists, and administrators from public hospitals in foreign countries.  Those people often are classified as foreign officials for purposes of the FCPA, and they often decide what products public hospitals or pharmacies will purchase.  This influence over the awarding of contracts is true for virtually every country around the globe.

There have been three types of misconduct that we have seen arise most often in our pharma FCPA cases.  One is “Pay-to-Prescribe”; another is bribes to get drugs on the approved list or formulary; and the third is bribes disguised as charitable contributions.  Let me discuss each of these in turn.

In “Pay-to-Prescribe” cases, we see public official doctors and public hospitals being paid bribes in exchange for prescribing certain medication, or other products such as medical devices.  Some of our cases involve simple cash payments to doctors and other medical officials. But we have also seen some more innovative schemes created for the purposes of rewarding prescribing physicians.  For example, in our 2012 action against Pfizer, subsidiaries in different countries found a variety of illicit ways to compensate doctors. In China, employees invited “high-prescribing doctors” in the Chinese government to club-like meetings that included extensive recreational and entertainment activities to reward doctors’ past product sales or prescriptions.  Pfizer China also created various “point programs” under which government doctors could accumulate points based on the number of Pfizer prescriptions they wrote.  The points were redeemed for gifts ranging from medical books to cell phones, tea sets, and reading glasses. In Croatia, Pfizer employees created a “bonus program” for Croatian doctors who were employed in senior positions in Croatian government health care institutions.  Once a doctor agreed to use Pfizer products, a percentage of the value purchased by a doctor’s institution would be funneled back to the doctor in the form of cash, international travel, or free products.  Each of these schemes violated the FCPA by routing money to foreign officials in exchange for business.

Let me turn to a second form of bribery, which is aimed at getting products on a formulary.  Of course, getting your company’s drugs on formularies is important to success in this industry.  But the FCPA requires that you do this without paying bribes, and we have taken action where companies have crossed that line.  We brought a case against Eli Lilly that included such violations.  There, the company’s subsidiary in Poland made payments totaling $39,000 to a small foundation started by the head of a regional government health authority.  That official, in exchange, placed Lilly drugs on the government reimbursement list.  That action involved a variety of other FCPA violations and Eli Lilly paid $29 million to settle the matter.

The Eli Lilly case brings me to my third point, which concerns bribes disguised as charitable contributions.  As you might know, the FCPA prohibits giving “anything of value” to a foreign official to induce an official action to obtain or retain business, and we take an expansive view of the phrase “anything of value.”  The phrase clearly captures more than just cash bribes, and Eli Lilly is not the only matter where we have brought an action arising out of charitable contributions.

For example, in Stryker, we charged a medical technology company after subsidiaries in five different countries paid bribes in order to obtain or retain business. Stryker’s subsidiary in Greece made a purported donation of nearly $200,000 to a public university to fund a laboratory that was the pet project of a public hospital doctor.  In return, the doctor agreed to provide business to Stryker.  Stryker agreed to pay $13.2 million to settle these and other charges.

Similarly, in Schering-Plough, we brought charges against the company arising out of $76,000 paid by its Polish subsidiary to a charitable foundation.  The head of that foundation was also the director of a governmental body that funded the purchase of pharmaceutical products and that influenced the purchase of those products by other entities, such as hospitals.  In settling our action, Schering-Plough consented to paying a $500,000 penalty.

The lesson is that bribes come in many shapes and sizes, and those made under the guise of charitable giving are of particular risk in the pharmaceutical industry.  So it is critical that we carefully scrutinize a wide range of unfair benefits to foreign officials when assessing compliance with the FCPA – whether it is cash, gifts, travel, entertainment, or charitable contributions.  We will continue to pursue a broad interpretation of the FCPA that addresses bribery in all forms.”

Under the heading “Compliance Program,” Ceresney stated:

“The best way for a company to avoid some of the violations that I have just described is a robust FCPA compliance program.   I can’t emphasize enough the importance of such programs.  This is a message that I think has started to get through in the past 5 years.

The best companies have adopted strong FCPA compliance programs that include compliance personnel, extensive policies and procedures, training, vendor reviews, due diligence on third-party agents, expense controls, escalation of red flags, and internal audits to review compliance.  I encourage you to look to our Resource Guide on the FCPA that we jointly published with the DOJ, to see what some of the hallmarks of an effective compliance program are.  I’ll highlight just a couple.

First, companies should perform risk assessments that take into account a host of factors listed in the guide and then place controls in these risk areas.  The pharmaceutical industry operates in virtually every country, including many high risk countries prone to corruption.  The industry also comes into contact with customs officials and may need perishable medicines and other goods cleared through customs quickly.  They may also come into contact with officials involved in licensing and inspections.  These are just a few examples of risk factors that a risk assessment should be focused on in this particular sector.

A healthy compliance program should also include third-party agent due diligence.  In addition to using third-party agents, many pharmaceutical companies use distributors.  This creates the risk that the distributor will use their margin or spread to create a slush fund of cash that will be used to pay bribes to foreign officials.  Because of this added layer of cash flow, companies frequently improperly account for bribes as legitimate expenses.  To properly combat against these abuses, a compliance program must thoroughly vet its third-party agents to include an understanding of the business rationale for contracting with the agent.  Appropriate expense controls must also be in place to ensure that payments to third-parties are legitimate business expenses and not being used to funnel bribes to foreign officials.”

Under the heading, “Self-Reporting and Cooperation,” Ceresney stated:

“The existence of FCPA compliance programs place companies in the best position to detect FCPA misconduct and allow the opportunity to self-report and cooperate.  There has been a lot of discussion recently about the advisability of self-reporting FCPA misconduct to the SEC.  Let me be clear about my views – I think any company that does the calculus will realize that self-reporting is always in the company’s best interest.  Let me explain why.

Self-reporting from individuals and entities has long been an important part of our enforcement program.  Self-reporting and cooperation allows us to detect and investigate misconduct more quickly than we otherwise could, as companies are often in a position to short circuit our investigations by quickly providing important factual information about misconduct resulting from their own internal investigations.

In addition to the benefits we get from cooperation, however, parties are positioned to also help themselves by aggressively policing their own conduct and reporting misconduct to us.  We recognize that it is important to provide benefits for cooperation to incentivize companies to cooperate.  And we have been focused on making sure that people understand there will be such benefits.  We continue to find ways to enhance our cooperation program to encourage issuers, regulated entities, and individuals to promptly report suspected misconduct.  The Division has a wide spectrum of tools to facilitate and reward meaningful cooperation, from reduced charges and penalties, to non-prosecution or deferred prosecution agreements in instances of outstanding cooperation. For example, we announced our first-ever non-prosecution agreement in an FCPA matter with a company that promptly reported violations and provided real-time, extensive cooperation in our investigation. And just six weeks ago, we entered into a deferred prosecution agreement with another company that self-reported misconduct.

More commonly, we have reflected the cooperation in reduced penalties.  Companies that cooperate can receive smaller penalties than they otherwise would face, and in some cases of extraordinary cooperation, pay significantly less.  One recent FCPA matter in this sector illustrates the considerable benefits that can flow from coming forward and cooperating.  Our joint SEC-DOJ FCPA settlement with Bio-Rad Laboratories for $55 million reflected a substantial reduction in penalties due to the company’s considerable cooperation in our investigation. In addition to self-reporting potential violations, the company provided translations of numerous key documents, produced witnesses from foreign jurisdictions, and undertook extensive remedial actions.  There, the DOJ imposed a criminal fine of only $14 million, which was equivalent to about 40% of the disgorgement amount – a large reduction from the typical ratio of 100% of the disgorgement amount.

In fact, we have recently announced FCPA matters featuring penalties in the range of 10 percent of the disgorgement amount, an even larger discount than the case I just mentioned. And in the Goodyear case we announced last week, we imposed no penalty.  In those cases, the companies received credit for doing things like self-reporting; taking speedy remedial steps; voluntarily making foreign witnesses available for interviews; and sharing real-time investigative findings, timelines, internal summaries, English language translations, and full forensic images with our staff.

The bottom line is that the benefits from cooperation are significant and tangible.  When I was a defense lawyer, I would explain to clients that by the time you become aware of the misconduct, there are only two things that you can do to improve your plight – remediate the misconduct and cooperate in the investigation.  That obviously remains my view today.  And I will add this – when we find the violations on our own, and the company chose not to self-report, the consequences are worse and the opportunity to earn significant credit for cooperation often is lost.

This risk of suffering adverse consequences from a failure to self-report is particularly acute in light of the continued success and expansion of our whistleblower program.  The SEC’s whistleblower program has changed the calculus for companies considering whether to disclose misconduct to us, knowing that a whistleblower is likely to come forward.  Companies that choose not to self-report are thus taking a huge gamble because if we learn of the misconduct through other means, including through a whistleblower, the result will be far worse.”