Archive for the ‘Facilitating Payments’ Category

When It Comes To Employee FCPA Training, Companies Should Consider Omitting Reference To The FCPA’s Facilitating Payments Exception And Affirmative Defenses

Thursday, June 19th, 2014

Employee FCPA training is obviously an essential component of an effective Foreign Corrupt Practices Act compliance program. Yet when it comes to employee training, companies should consider omitting reference to the FCPA’s facilitating payments exception and affirmative defenses.

You may be asking in your best Gary Coleman impersonation “whatcha talkin bout.”

What I am talking about begins with a parenting analogy.  Would a parent best achieve compliance with the command “clean your room” if the parent spent much time telling a child why they should clean their room, but then ended the conversation by telling the child various “outs” not to clean their room?

Of course not, and the same logic applies to rank-and-file employee FCPA training.

By including the FCPA’s facilitating payments exception and the FCPA’s affirmative defenses (the local law affirmative defense and the reasonable and bona fide expenditures affirmative defense) in employee training, companies are providing employees with concepts and words of art that employees can use to justify their conduct – conduct that could expose the company to FCPA scrutiny and enforcement based on enforcement agency theories.

By training rank-and-file employees on the FCPA’s facilitating payments exception – and its guiding principle of “routine government action” – companies are inviting employees to make discretionary, subjective calls as to what “routine government action” is.

By training rank-and-file employees on the FCPA’s local law affirmative defense, companies are inviting employees to justify their conduct if the conduct is accepted or condoned in a foreign country (even though the local law affirmative defense only applies to conduct lawful under the written laws and regulations of a foreign country).

By training rank-and-file employees on the FCPA’s reasonable and bona fide expenditures affirmative defense companies are inviting employees to make discretionary, subjective calls as to what “reasonable’ and “bona fide” mean as well as whether such an expense is “directly related” to business purposes specifically set forth in the affirmative defense.

A company with best-in-class FCPA compliance policies and procedures does not want rank-and-file employees making these discretionary, subjective calls in the global marketplace.

The point of employee FCPA training is to provide employees with “FCPA goggles” so that they can spot FCPA risk and report it to designated experts in the company to allow the experts to decide issues that could potentially implicate the FCPA’s facilitating payment exception and/or the FCPA’s affirmative defenses.

Many FCPA training courses in the marketplace contain discussion of the FCPA’s facilitating payments exception and affirmative defenses in rank-and-file employee training and thereby actually increase the company’s overall risk exposure.

The Global Anti-Bribery Course I have developed in partnership with Emtrain takes a different approach and best assists companies in reducing their overall risk exposure by omitting reference to the FCPA’s facilitating payments exception and affirmative defenses in rank-and-file employee training.  (Such concepts are – as is appropriate – included in the executive / manager version of the course).

To learn more about the course, see here.

To read what others are saying about the course, see here.

Much Activity In SEC Enforcement Action Against Jackson & Ruehlen

Monday, March 31st, 2014

If you enjoy reading pleadings in Foreign Corrupt Practices Act enforcement actions, then your week is already off to a great start as there is much to read.

In advance of a scheduled July 9th trial in SEC v. Mark Jackson & James Ruehlen (an enforcement action filed in the S.D. of Tex. in February 2012 and highlighted in last Friday’s post), both parties filed numerous motions last Friday.

The SEC filed: (1) a motion for partial summary judgment on the inapplicability of the facilitating payment exception, and (2) a motion for a determination of foreign law pursuant to Federal Rule of Civil Procedure 44.1.  The SEC also filed 5 motions seeking to exclude defendants’ expert witnesses.  Both Jackson and Ruehlen filed separate motions for summary judgment as well as 3 motions seeking to exclude the SEC’s expert witnesses.

This post provides an overview of the motions.

SEC Motion for a Determination of Foreign Law

In pertinent part, the SEC states as follows:

“Questions of Nigerian law pervade this bribery case for two reasons. First, findings on threshold questions of Nigerian law are necessary for the jury to determine whether Defendants induced foreign officials “to do or omit to do any act in violation of the lawful duty of such foreign official[s]” in violation of Section 30A of the Securities Exchange Act of 1934 (the “Exchange Act”), an element of the SEC’s bribery claims. 15 U.S.C. §78dd-1(a)(3)(A)(ii) (emphasis added).  Questions of Nigerian law are also necessary to determine whether the payments at issue in this case fit within the narrow “facilitating payment” exception under the
Foreign Corrupt Practices Act (the “FCPA”).

These questions of Nigerian law include: (i) whether the grant of a Temporary Import Permit (“TIP”) – a concession that allows an importer to avoid the payment of import duties – was discretionary; (ii) what was the permissible duration of a TIP and whether and to what extent a TIP may be extended; and (iii) whether Nigerian customs officials could lawfully accept payments to approve a TIP based on false paperwork showing that Noble’s rigs in Nigeria had been exported and re-imported, when the rigs in fact had never moved out of Nigerian waters. These questions of Nigerian law are, like questions of U.S. law, questions of law for the Court to decide, and each defines the scope of Nigerian customs officials’ “lawful duty” in connection with granting the TIPs and TIP extensions at issue in this case.

Second, rulings on these issues of Nigerian law are necessary in light of the Defendants’ purported expert evidence. Defendants intend to introduce expert evidence asserting that, among other things, the payment of bribes to civil servants in Nigeria “is common – and even expected”; the submission of falsified documents to Nigerian governmental agencies is “satisfactory” or “acceptable” from the Nigerian government’s perspective; that laws governing the issuance of temporary import permits are not laws but “internal rules or policies”; and that compliance with Nigerian law is unclear. Thus, the Defendants’ experts intend to opine directly or indirectly on what is allegedly “permissible” in Nigeria notwithstanding clear and undisputed provisions of Nigerian law to the contrary. Because foreign law is for the Court, not the jury, these issues of Nigerian law should be resolved by the Court.”

SEC Motion Regarding  Inapplicability of Facilitating Payment Exception

As noted in this prior post, in December 2012 Judge Ellison concluded, in what was believed to be an issue of first impression, that the SEC must bear the burden of negating the facilitation payments exception.

In its motion, the SEC states as follows.

“The SEC seeks partial summary judgment on the limited question of whether the payments to Nigerian government officials that Defendants authorized to secure Temporary Import Permits (“TIPs”) and TIP extensions fit within the narrow “facilitating payment” exception under the Foreign Corrupt Practices Act (the “FCPA”).

The SEC alleges that the Defendants violated the anti-bribery and accounting provisions of the FCPA by authorizing the payment of bribes on behalf of their employer – Noble Corporation – to Nigerian government officials to influence or induce these officials to grant Noble TIPs and TIP extensions. These TIPs allowed Noble to avoid paying import duties on oil drilling rigs that it operated in Nigeria. Because TIPs provide only a temporary exemption from import duties, at the expiration of a TIP and its allowable extension, Noble had an obligation to either pay the import duties due on the drilling rigs or export them out of Nigeria. Using bribes and other means, Defendants secured serial TIPs and TIP extensions, which enabled Noble to keep its rigs operating continuously in Nigeria well beyond the time period allowed under Nigerian law.

The FCPA broadly prohibits corrupt payments to foreign officials to influence any official act or induce any official to violate a lawful duty. See 15 U.S.C. § 78dd-1(a). But there is a narrow exception to that broad prohibition: Under subsection 78dd-1(b), the FCPA permits certain “facilitating or expediting payments” made “to expedite or to secure the performance of a routine governmental action.” 15 U.S.C. § 78dd-1(b). This so-called facilitating payment exception does not apply in this case, as a matter of law.

Summary judgment is appropriate for three reasons:

First, the law of decision is clear and binding. This Court previously held that payments to government officials for discretionary or illegal TIPs and TIP extensions are not permissible facilitating payments.

Second, the applicable foreign law is clear and undisputed. As demonstrated in the SEC’s Motion for a Determination of Foreign Law Pursuant to Federal Rule of Civil Procedure 44.1 (“Rule 44.1 Motion”), the relevant provisions of Nigerian law are clear and undisputed. First, under Nigerian law, customs officials have discretion to grant or deny TIPs and TIP extensions; these TIPs and extensions are a discretionary exemption from import duties, not an entitlement. Second, Nigerian law prohibits both the use of false paperwork to secure TIPs and payments to government officials to secure TIPs and TIP extensions. Third, Nigerian law provides that an initial TIP may not exceed twelve months and may only be extended once for up to an additional twelve months. These provisions of Nigerian law are clear and undisputed, and must be determined as a matter of law by the Court.

Third, the material facts are not in genuine dispute. The payments to Nigerian government officials at issue in this case were themselves illegal in Nigeria and were authorized to obtain import duty exemptions that were (i) discretionary and (ii) in certain cases, illegal under Nigerian law. Specifically, each of the payments to Nigerian government officials at issue was authorized in connection with obtaining a valuable and discretionary government benefit – i.e., import duty exemptions for Noble’s rigs. Certain of the payments were made to obtain TIPs on false pretenses, in violation of Nigerian law. And, some of the payments were authorized to obtain TIP extensions that exceeded the number and duration of TIP extensions allowed under Nigerian law.

For these reasons, the SEC respectfully requests that the Court grant its motion for partial summary judgment that the facilitating payment exception is not applicable in this case.”

SEC Expert Motions

In addition to the above motions, the SEC also filed 5 motions seeking to exclude defendants’ experts:  (1) Alan Bell (CPA – regarding internal controls and books and records issues); (2) Gary Goolsby (CPA – regarding corporate governance and internal controls issues; (3) John Campbell (former U.S. ambassador to Nigeria – regarding Nigeria specific issues; (4) Professor Ronald Gilson (regarding various corporate governance and internal controls issues); and (5) H. Lowell Brown (regarding various FCPA compliance issues).

Jackson’s Motion for Summary Judgment

The motion, signed by David Krakoff (BuckeySandler) , states as follows.

“This case is entirely about Mr. Jackson’s state of mind: Did he act “corruptly” in violation of the FCPA when he approved certain payments to Nigerian customs officials? In denying the Defendants’ Motions to Dismiss, the Court held that an act is done corruptly when it is “done with an evil motive or wrongful purpose of influencing a foreign official to misuse his position.”  It is the SEC’s burden to prove that “Defendants acted corruptly.”

The SEC failed to come close to carrying that burden. Put simply, discovery revealed only one thing: Undisputed evidence that Mr. Jackson acted with the “good faith” belief that Noble’s payments facilitated getting temporary import permits and extensions to which Noble was entitled.  But as the Court observed regarding permit extensions, to establish corrupt intent the SEC must show “that Defendants knew they were not entitled to extensions as a matter of right upon satisfying certain basic threshold requirements.”

Mr. Jackson was repeatedly advised by Noble management that Noble was entitled to those permits and extensions. He was advised by management and PricewaterhouseCoopers that as long as the rigs had contracts to drill oil for the benefit of the Nigerian government, the rigs could stay in the country to perform those contracts. He was advised and observed that legal and audit experts were reviewing Noble’s FCPA compliance and, specifically, compliance in its Nigerian operations. And he was advised that Noble’s Nigerian lawyer had counseled that the use of the so-called “paper process,” where rigs obtained new permits without leaving the country, was legal in Nigeria.

The SEC has no evidence to prove Mr. Jackson’s state of mind was anything different. Despite many promises in the SEC’s pleadings, promises proved false by discovery, there was no evidence that Mr. Jackson believed Nigerian officials had discretion to deny Noble these permits and extensions. There was no evidence that he knew the “paper process” was illegal in Nigeria, so that any payments related to it had to be corrupt. And there was no evidence that he misled anyone – not the Audit Committee, not auditors, not anyone – about any of Noble’s facilitating payments. Instead, what he knew was that Noble’s legal counsel and internal auditors did not question the propriety of payments to Nigerian customs officials. No reasonable jury could conclude that Mark Jackson acted with the state of mind requisite for a violation of the FCPA. The SEC has not met its burden and the Court should grant summary judgment on all claims.”

Ruehlen’s Motion for Summary Judgment

The motion, signed by Nicola Hanna and Joseph Warin (Gibson Dunn), states as follows.

“The Complaint portrays Jim Ruehlen as a “rogue” employee who, shortly after being promoted to the first management-level position of his career, embarked on an intricate scheme to bribe Nigerian officials to obtain illegal temporary import permits for Noble’s rigs; routinely flouted company policy; ignored directions from Noble’s Audit Committee; and concealed illicit payments in Noble’s books and records. At the motion to dismiss stage, the Court was required to accept those allegations as true. Since then, 15 months of discovery have laid bare the utter falsity of the SEC’s narrative.

The undisputed evidence establishes that Mr. Ruehlen—a diligent and hardworking operations employee with an impeccable reputation for honesty and integrity—at all times acted  in good faith and under the close supervision of Noble’s most senior executives. At no point did he attempt to conceal any conduct or circumvent controls or company processes. To the contrary, it was Mr. Ruehlen who in 2004 first reported Noble’s use of the so-called “paper process”—the central focus of the SEC’s claims in this matter. And it was Mr. Ruehlen who received approval for every one of the payments at issue from Noble’s senior management, executives who had access to experts to assess the nature and propriety of those payments. It is undisputed that none of those executives or experts ever raised concerns to Mr. Ruehlen about the payments. The evidence also shows that Mr. Ruehlen, who had no accounting or legal training, had no role in determining how the payments—which were well known within Noble’s corporate hierarchy—were recorded in Noble’s books. And to compound the irony of the SEC’s charges against Mr. Ruehlen, it was Mr. Ruehlen who independently raised new concerns regarding the temporary import process in early 2007, prompting Noble’s internal investigation and voluntary disclosure to the U.S. government.

Notwithstanding this evidence—much of which was known to the SEC well before it filed this action—the SEC charged Mr. Ruehlen with violating the FCPA’s books and records and internal accounting control provisions (collectively, the “accounting provisions”) “under every stretched legal theory imaginable.” Purportedly to “streamline the presentation of evidence to the jury,” the SEC—on the eve of summary judgment—voluntarily dismissed two of those claims (that Mr. Ruehlen failed to “implement” a system of internal accounting controls and aided and abetted Noble’s alleged failure to “devise and maintain” such a system). But the SEC’s remaining FCPA accounting provision claims fail for the same reasons as the claims it now tacitly admits lacked merit—Mr. Ruehlen simply had no responsibility for or authority over the accounting function at Noble, and had no role in determining how the payments at issue were recorded. Moreover, the SEC failed to develop any evidence during discovery to support the numerous—and illogical—ways that Mr. Ruehlen allegedly “circumvented” Noble’s system of internal accounting controls. The Court should grant summary judgment on these claims in light of the undisputed evidence.

The Court should also grant summary judgment on the SEC’s claims for violations of the FCPA’s anti-bribery provisions. Whether the SEC can prove these claims turns entirely on Mr. Ruehlen’s state of mind—i.e., whether he acted “corruptly.” The undisputed evidence shows that Mr. Ruehlen, like many others within the company, believed in good faith that the payments were to secure or expedite temporary import permits to which Noble was entitled.”

In addition to the above motions, the defendants also jointly filed 3 motions seeking to exclude SEC experts:  (1) Jeffrey Harfenist (CPA – as to various internal controls issues); (2) Wayne Kelley (as to various customs and practices in the oil and gas industry); and (3) Kofo Olugbesan (a former official of the Nigerian Customs Service).

Friday Roundup

Friday, November 22nd, 2013

Another acknowledgment of the logic, whistleblower statistics, a guilty plea, and for the reading stack.  It’s all here in the Friday roundup.

Another Acknowledgment of the Logic

Previous posts here and here have highlighted recent speeches by top SEC officials in which they acknowledge the underlying logic supporting a compliance defense.  Deputy Attorney General James Cole did the same in this recent speech before a bank compliance officer crowd.

“At the Department of Justice, we know that compliance officers within financial institutions, and the lawyers, bankers, and others who work with them, are the first line of defense against abuse within these institutions.  Compliance officers are critical to protecting both a bank’s reputation and its bottom line.  They’re essential when it comes to preventing criminal activity – and if that effort is not entirely successful, detecting and reporting such conduct.  It is not an exaggeration to say that compliance is fundamental to protecting the security of our financial institutions and is essential to the integrity of our entire financial system. Despite, and in some ways because of, this crucial role, I know that working in compliance is often difficult.  Compliance is seldom thought of as a ‘money-maker’ for any bank, and it may be challenging to get sufficient resources and authority to do the job well.  To some, compliance may not seem to fit within the culture of a fast-moving, cutting-edge institution.  And at times, certain business units or managers may seem downright hostile toward the compliance function. We at the Department of Justice understand this reality.  And we appreciate that, despite these challenges, you and your colleagues are fully committed to helping protect the integrity of your institutions and our financial system.”

[...]

The notion that compliance must be firmly embedded in a corporation’s culture has been raised before, including at this conference, by many government officials.  You’ve heard a great deal about the importance of ‘tone at the top.’  Indeed, companies regularly argue during negotiations that they have taken various steps to set the right tone at the highest levels of their institutions.  But based on what we have seen, we cannot help but feel that the message is not getting through often enough or clearly enough. Despite years of admonitions by government officials that compliance must be an important part of a corporation’s culture, we continue to see significant violations of law at banks, inadequate compliance programs, and missed opportunities to prevent and detect crimes.”

In “Revisiting a Foreign Corrupt Practices Act Compliance Defense,” I argue, among other things, that a compliance defense will better incentivize corporate compliance and reduce improper conduct.  Compliance is a cost center within business organizations and expenditure of finite resources on FCPA compliance is an investment best sold if it can reduce legal exposure, not merely lessen the impact of legal exposure.

In short, an FCPA compliance defense will best allow compliance professionals in the FCPA context to – in the words of Cole – “get sufficient resources and authority to do the job well.”

Will the DOJ and SEC ever be capable of realizing that a compliance defense is a race to the top, not a race to the bottom?  (See here for the prior post).  Will the DOJ and SEC ever have the courage to realize that a compliance defense can best help the enforcement agencies accomplish its laudable goals? (See here for the prior post).

Whistleblower Statistics

The Dodd-Frank Act enacted in July 2010 contained whistleblower provisions applicable to all securities law violations including the Foreign Corrupt Practices Act.  In this prior post from July 2010, I predicted that the new whistleblower provisions would have a negligible impact on FCPA enforcement.  As noted in this prior post, my prediction was an outlier (so it seemed) compared to the flurry of law firm client alerts that predicted that the whistleblower provisions would have a significant impact on FCPA enforcement.  So anxious was FCPA Inc. for a marketing opportunity to sell its compliance services, some even called the generic whistleblower provision the FCPA’s “new” whistleblower provisions.

So far, there have not been any whistleblower awards in connection with FCPA enforcement actions.  Given that enforcement actions (from point of first disclosure to resolution) typically take between 2-4 years, it still may be too early to effectively analyze the impact of the whistleblower provisions on FCPA enforcement.

Whatever your view, I previously noted that the best part of the new whistleblower provisions were that its impact on FCPA enforcement can be monitored and analyzed because the SEC is required to submit annual reports to Congress.  Recently, the SEC released (here) its annual report for FY2013.

Of the 3,238 whisteblower tips received by the SEC in FY2013, 4.6% (149) related to the FCPA.  As noted in this similar post from last year, of the 3,001 whisteblower tips received by the SEC in FY2012, 3.8% (115) related to the FCPA.  In FY2011 (a partial reporting year)  3.9% of the 334 tips received by the SEC related to the FCPA.

Yes, there will be in the future a whistleblower award made in the context of an FCPA enforcement action.  Yes, there will be much ink spilled on this occasion and wild predictions about this “new trend.”  Yet, I stand by my prediction – now 3.5 years old, that Dodd-Frank’s whistleblower provisions will have a negligible impact on FCPA enforcement.

“Foreign Official” Pleads Guilty

Earlier this week, the DOJ announced that Maria Gonzalez, the alleged “foreign official” at the center of the FCPA enforcement actions against individuals associated with broker-dealer Direct Access Partners LLC, pleaded guilty to “conspiring to violate the Travel Act and to commit money laundering, as well as substantive counts of these offenses.”  Gonzalez (V.P. of Finance / Executive Manager of Finance and Funds Administration at Bandes – an alleged state-run economic development bank in Venezuela) is to be sentenced on August 15, 2014.

As noted in the DOJ’s release:

“Previously, three former employees of the Broker-Dealer – Ernesto Lujan, Jose Alejandro Hurtado, and Tomas Alberto Clarke Bethancourt – each pleaded guilty in New York federal court to conspiring to violate the Foreign Corrupt Practices Act (FCPA), to violate the Travel Act and to commit money laundering, as well as substantive counts of these offenses, relating, among other things, to the scheme involving bribe payments to Gonzalez.  Sentencing for Lujan and Clarke is scheduled for Feb. 11, 2014, before U.S. District Judge Paul G. Gardephe.  Hurtado is scheduled for sentencing before U.S. District Judge Harold Baer Jr. on March 6, 2014.”

Reading Stack

An interesting read from a Vietnam media source regarding the notion that – just like in tango – it takes two in a bribery scheme and that many instances of bribery are the result of harassment by foreign officials and extortion-like demands.  When passing the FCPA in 1977, Congress fully recognized and understood this reality and that is why it did not seek to capture facilitation payments in the FCPA.  (See here for more reading).

*****

A good weekend to all.

Friday Roundup

Friday, November 1st, 2013

Scrutiny alerts and updates, quotable, and for the reading stack.  It’s all here in the Friday Roundup.

Scrutiny Alerts And Updates

Avon

Yesterday, Avon’s stock dropped approximately 22% to $17.50.  The company disclosed a drop in third quarter sales and weaker than expected earnings.  Avon also disclosed, in pertinent part, the following regarding its long-running FCPA scrutiny:

“As previously reported in our Quarterly Report on Form 10-Q for the period ending June 30, 2013, we made an offer of settlement to the DOJ and the SEC in June 2013 that, among other terms, would have included payment of monetary penalties of approximately $12. Although our offer was rejected by the DOJ and the staff of the SEC, we accrued the amount of our offer in the second quarter of 2013.

In September 2013, the staff of the SEC proposed terms of potential settlement that included monetary penalties of a magnitude significantly greater than our earlier offer. We disagree with the SEC staff’s assumptions and the methodology used in its calculations and believe that monetary penalties at the level proposed by the SEC staff are not warranted. We anticipate that the DOJ also will propose terms of potential settlement, although they have not yet done so and we are unable to predict the timing or terms of any such proposal. If the DOJ’s offer is comparable to the SEC’s offer and if the Company were to enter into settlements with the SEC and the DOJ at such levels, we believe that the Company’s earnings, cash flows, liquidity, financial condition and ongoing business would be materially adversely impacted.

Although we are working to resolve the government investigations through settlement, our discussions are at early stages and at this point we do not know if those efforts will be successful and, if they are, what the timing or terms of any such settlements would be. We expect any such settlements will include civil and/or criminal fines and penalties, and may also include non-monetary remedies, such as oversight requirements and additional remediation and compliance requirements. We may be required to incur significant future costs to comply with the non-monetary terms of any settlements with the SEC and the DOJ. If we are able to reach settlements with the SEC and the DOJ, the Company believes that such settlements are likely to include monetary penalties that would be material to its earnings and cash flows in the relevant fiscal period and could, depending on the amounts of the settlements, materially adversely impact the Company’s liquidity, financial condition and ongoing business.

There can be no assurance that our efforts to reach settlements with the government will be successful.  If we do not reach settlements with the SEC and/or the DOJ, we cannot predict the outcome of any subsequent litigation with the government but such litigation could have a material adverse effect on our earnings, cash flow, liquidity, financial condition and ongoing business.>We have not recorded an additional accrual beyond the amount recorded in the second quarter of 2013 because at this time, in light of the early stages of our discussions of possible settlement terms with the government, the magnitude of the difference between our offer and the amount proposed by the SEC and the absence of a proposal from the DOJ, and our inability to predict whether we will be able to reach settlements with the government, we cannot reasonably estimate the amount of additional loss above the amount accrued to date.

Until these matters are resolved, either through settlement or litigation, we expect to continue to incur costs, primarily professional fees and expenses, which may be significant, in connection with the government investigations. Furthermore, under certain circumstances, we may also be required to advance and/or reimburse significant professional fees and expenses to certain current and former Company employees in connection with these matters.”

In certain respects, Avon’s disclosure was similar to its August disclosure (see here for the prior post) in which it stated “we made an offer of settlement to the DOJ and the SEC that, among other terms, included payment of monetary penalties of approximately $12 [million]. The DOJ and the SEC have rejected the terms of our offer.”

The fact that there is a negotiation and back and forth between the SEC and a company concerning an FCPA settlement number is not unusual, what is a bit unusual is that this back and forth is being aired in public via the company’s SEC filings.

Embraer

Previous posts here and here have profiled Embraer’s FCPA scrutiny.  In an article titled “Plane Maker Embraer Faces Bribery Inquiries,” the Wall Street Journal reports:

“U.S. and Brazilian authorities are investigating whether aircraft maker Embraer SA bribed officials in the Dominican Republic in return for a $90 million contracts to furnish the country’s armed forces with attack planes.”

According to the article, U.S. authorities say they have “evidence – including bank records and e-mails – that they believe shows that Embraer executives had approved a $3.4 million bribe to a Dominican official with influence over military procurement.”

Mead Johnson

Mead Johnson Nutrition Company recently disclosed as follows.

“The company has initiated an internal investigation of, and is voluntarily complying with a Securities and Exchange Commission request for documents relating to, certain business activities of the company’s local subsidiary in China. The company’s investigation is focused on certain expenditures that were made by the subsidiary in connection with the promotion of the company’s products or may have otherwise been made and that may not have complied with company policies and applicable U.S. and/or local laws. The company has retained outside legal counsel to conduct the investigation, which is being overseen by a committee of independent members of the company’s board of directors. At this time, the company is unable to predict the scope, timing or outcome of this ongoing matter or any regulatory or legal actions that may be commenced related to this matter.”

National Geographic

The on-line publication Vocativ recently published an article “Tut-Tut: Did National Geographic Bribe Egypt’s Famed Indiana Jones?”  The article begins as follows.

“This is not your typical story about international bribery. For one thing, it involves mummies. It also involves one of America’s most beloved institutions: National Geographic.  Vocativ has learned that the Justice Department has opened a criminal bribery investigation into the prestigious nonprofit. At issue: Nat Geo’s tangled relationship with Dr. Zahi Hawass, a world-famous Indiana Jones–type figure who for years served as the official gatekeeper to Egypt’s glittering antiquities.  Beginning in 2001 and continuing for a decade, National Geographic paid the archaeologist between $80,000 and $200,000 a year for his expertise. The payments came at a time when the popularity of mummies and pharaohs was helping transform the 125-year-old explorer society into a juggernaut with multiple glossies, a publishing house and a television channel. But they also came as Hawass was still employed by the Egyptian government to oversee the country’s priceless relics.”

According to the article, Hawass also worked with National Geographic competitor, the Discovery Channel.

Although National Geographic is a non-profit entity, the FCPA’s definition of “domestic concern” is “any corporation, partnership, association, joint-stock company, business trust, unincorporated organization, or sole proprietorship …”.

Teva Pharmaceuticals

As noted in this previous post, in August the company disclosed that it “received a subpoena … from the SEC to produce documents
with respect to compliance with the FCPA in Latin America.”  Earlier this week, Teva disclosed as follows.

“Beginning in 2012, Teva received subpoenas and informal document requests from the SEC and the Department of Justice (“DOJ”) to produce documents with respect to compliance with the Foreign Corrupt Practices Act (the “FCPA”) in certain countries. Teva has provided and will continue to provide documents and other information to the SEC and the DOJ, and is cooperating with the government in their investigations of these matters. Teva is also conducting a voluntary investigation into certain business practices that may have FCPA implications and has engaged independent counsel to assist in its investigation. In the course of its investigation, which is continuing, Teva has identified in Russia, certain Eastern European countries, and certain Latin American countries issues that could potentially rise to the level of FCPA violations and/or violations of local law. Teva has brought these issues to the attention of the SEC and the DOJ. No conclusion can be drawn at this time as to any likely outcomes in these matters.”

JPMorgan

As highlighted in this previous post, in August JPMorgan’s hiring practices in China came under scrutiny.

The company recently disclosed:

“The Firm has received subpoenas and requests for documents from the SEC’s Division of Enforcement regarding, among other things, hiring practices relating to candidates referred by clients, potential clients and government officials, the Firm’s employment of certain former employees in Hong Kong, its business relationships with certain related clients in the Asia Pacific region and its engagement of consultants in the Asia Pacific region. The Firm has also received a request for documents from the U.S. Department of Justice regarding the same referral hiring practices. The Firm is cooperating with these investigations. Separate inquiries on these or similar topics have been made by other authorities, including authorities in other jurisdictions, and the Firm is responding to those inquiries.”

Quotable

From Attorney General Eric Holder at the Arab Forum on Asset Recovery in Morocco.

“As we’ve all seen – and as President Obama has said – “[t]he struggle against corruption is one of the great struggles of our time.”  Fortunately [...] corruption is no longer widely seen as an accepted cost of doing business.  It is no longer tolerated as an unavoidable aspect of government.  On the contrary – it is now generally understood that the consequences of corruption are devastating – eroding trust in public and private institutions, undermining confidence in the fairness of free and open markets, siphoning precious resources at a time when they could hardly be more scarce, and all too often breeding contempt for the rule of law.

[...]

This is why, as Attorney General, I’ve consistently worked to ensure that anticorruption remains a top priority for my colleagues at every level of the United States Department of Justice – within as well as beyond our borders.”

A recent article in Corporate Counsel titled “The Perils of Keeping FCPA Infractions Under Wraps” states:

“Charles Duross, the deputy chief of the U.S. Justice Department’s Foreign Corrupt Practices Act Unit, delivered an ominous message Monday to in-house lawyers at the Association of Corporate Counsel’s Annual Meeting in Los Angeles: Failure to report potential bribery is more perilous than ever.  Duross, who is based in Washington, D.C., said DOJ is handling a “pretty steady stream of cases,” with every major U.S. attorney’s office investigating alleged violations of the FCPA, which prohibits bribery of foreign officials.  “The risk of getting caught . . . is greater today than any point previously,” Duross said. “I think that’s kind of a no-brainer.”  Duross said he isn’t naïve about the calculus companies have to perform when deciding whether to report a potential FCPA infraction to the U.S. government. But if a company makes the disclosure on its own, he noted, the Justice Department stands ready to help.  DOJ can make deferred-prosecution or non-prosecution agreements with businesses—or even decline to pursue any action against them, he said. “It’s a tough one” for companies, Duross said. “No doubt about it.” Self-reporting can be overrated, according to New York-based Morrison & Foerster partner Carl Loewenson Jr., a co-chairman of the firm’s securities litigation, enforcement, and white-collar defense group who also spoke at the ACC event. Making the disclosures is great for business at the DOJ, as well as law firms and accounting offices, he said. But companies that report almost always get some type of a public charge, he noted. “I think that these days there are too many cases in which too many companies are being too reflexive about self-reporting” to the government, Loewenson said. “In some cases, not in all, you can solve these problems yourself.”

Reading Stack

Several spot-on observations in the most recent issue of the always informative FCPA Update from Debevoise & Plimpton concerning the recent Diebold enforcement action (see here and here for prior posts).

“Although there are significant aggravating factors that might explain imposing $48 million in penalties and disgorgement on a company that voluntarily disclosed what are, unfortunately, common improprieties in China, combined with wholly unrelated commercial bribery in Russia, the size of the financial resolution – apart from the substantial burdens of the monitorship – raises questions about future enforcement of the FCPA, as well as the incentives for companies to self-report.

The first noteworthy aspect of this resolution is the enforcement agencies’ decision to use the books and records and internal controls provisions as a vehicle for obtaining monetary relief penalizing purely commercial bribery (40% of the improper payments at issue). While not entirely novel or outside the theoretical reach of those provisions, were the enforcement agencies routinely to investigate issuers in connection with commercial bribery abroad, the “risk-based” calculus of almost all corporate compliance programs would potentially need to be rebalanced.

Second, the total financial aspect of the resolution was 16 times the total value of alleged improper payments. In describing the improper payments, the enforcement agencies aggregated a number of often small payments over five years. When considered alongside the Ralph Lauren enforcement action from earlier this year, the Diebold enforcement action, and in particular its imposition of a monitor, long-considered one of the most burdensome aspects of FCPA settlements, could call into question one common view of the statements relating to gifts and corrupt intent in the November 2012 DOJ/SEC joint Resource Guide to the U.S. Foreign Corrupt Practices Act: namely, that FCPA covered companies should not “sweat the small stuff.”

[...]

“[T]he Diebold enforcement actions revive the pre-guidance confusion about the government’s enforcement priorities and raise significant questions about the value of voluntary disclosure. The confusion, arising from repeated charges related to relatively small expenditures, including, even, $500 for four pairs of shoes provided as gifts to Chinese officials, was part of  the background of frustration with the government’s enforcement of the FCPA that led to publication of the joint DOJ/ SEC Resource Guide.  It has been commonly thought that the Resource Guide’s distinctions between “expensive gifts” and “token[s] of esteem or gratitude” signified at least an implicit recognition by U.S. enforcement agencies that compliance resources would be better allocated to topics other than gifts valued at a few hundred dollars, let alone gifts that individually do not exceed $100 in value. But the Diebold case will raise new questions about the government’s enforcement priorities, questions that will only be amplified by the imposition of a monitor, potentially one of the most disruptive, burdensome, and costly components of FCPA settlement tools, and one that had been in declining use for several years.”

An observant article from The Lawyer titled “Round Table on Cross-Border Disputes – Bandwagons Roll.”  It states:

“Co-operation [between foreign law enforcement regulators] is good.’”  [...]  More co-operation between regulators when they are trying to address the same issues is welcome.”  However, co-operation – while praised for attempting to provide consistency – has its drawbacks.  “They all want to impose sanctions for the same conduct.” [...]   “It’s common now for a company to finish a US Foreign Corrupt Practices Act or UK Bribery Act investigation  that has taken three years and generated huge fees, to turn around and see a long line of regulators from, say, China or India with their own legal and  political concerns.”

It does not necessarily justify the behavior, but the following article at least puts the behavior in the proper context and highlights why Congress specifically included a facilitation payments exception in the FCPA’s anti-bribery provisions.

“Seventy-five percent of businesses in Vietnam pay bribes to  government agencies on their own volition in order to avoid being stuck in red tape, a World Bank specialist says.  At an anti-corruption conference held in Hanoi Thursday, Soren Davidsen said that sixty-three percent of firms questioned in a survey said they paid the “unofficial fees” to speed up procedures.”

A useful compliance resource here from the U.S. – China Business Council titled “Best Practices for Managing Compliance in China.”

*****

A good weekend to all,

What’s On Your Mind?

Tuesday, August 27th, 2013

The dog days of summer.  A time for reflection, a time to think.

I posed the question “what’s on your mind” to the following FCPA practitioners and below are their responses.

Philip Rohlik (Debevoise & Plimpton – Hong Kong)

“While I have been working on Asian related FCPA matters for more than seven years, I moved to the region two years ago.  Living here and interacting with local employees in situations other than investigations has given me a different perspective of the cost and difficulties associated with compliance.

Facilitating payments and transnational legal regimes that seek to bar them are on my mind.  While it is correct and easy to say that ethical multinational corporations should not give in to the petty extortion that characterizes facilitation payments, the issue is not so simple when looked at from the reality of an employee in a high-risk jurisdiction — the kind of employee who recently asked me for advice on “how do I make the police go away?” when they visit the second or third week of every month (about the time their last month’s paycheck runs out).  It is easy for a compliance officer or lawyer who encounters random government officials on his or her way to or from the airport to make full use of the ICC’s Resist handbook.  Local (and, let’s face it, not that well paid) employees who must deal with specific officials on a regular basis are in a different situation especially if they have no desire to test the limits of “imminent physical harm.”

When laws impose vicarious or respondeat superior liability, situations to which the law applies should not be determined from the abstract perspective of a corporation but from the realities faced by the company’s employees.  Is the fight against corruption really furthered by having zero tolerance policies for facilitation payments at the corporate level, but local employees very rationally believing that such grand pronouncements leave them in a situation that will either (i) make their life very difficult or (ii) force them to circumvent internal controls in order to make the payment (thereby creating a potential mechanism for more nefarious payments)?  In this respect, the U.S. law that exempts facilitating payments from the anti-bribery provisions of the FCPA may be less anachronistic than it is often made out to be.

Also often on my mind is third party due diligence.  Right now, one of our concerns is attending to our clients’ needs for right-sizing third party due diligence. Businesses are concerned that the continued lack of clarity from regulators as to the required steps results in excessive cost and a misallocation of compliance resources.  While some third parties deserve thorough diligence, how much diligence is due other third-parties?  Is a basic questionnaire and (the often-not-inexpensive) outsourcing of a public records check sufficient?  What if such checks are almost always inconclusive in countries with limited public records?  Do they just become inefficient box ticking?  We are actively working with both clients as well as due diligence firms providing cloud-based and world-wide investigative services to help get these costs under control.  Among the solutions we are working on are greater use of in-house information.  If there are adequate internal controls on the evaluation of in-house experience with a third party, we believe that the greater use of on-hand information to evaluate third parties can be a real cost-saver.  Doing so would free up resources for other compliance tasks as well as improve the client’s bottom line.”

John Rupp (Covington & Burling – London)

“As we continue to struggle on behalf of clients with demands for bribes, large and small, by government officials in a depressing number of countries, I have become ever more convinced that a new approach to the campaign against bribery – in particular, by western countries – is needed.  The approach that western countries have taken thus far to the bribery of foreign government officials is to punish the bribe giver.  The premise appears to be that international companies, including those subject to the US Foreign Corrupt Practices Act and the UK Bribery Act 2010, rather like bribing foreign government officials, seeing it as a convenient way to win business without having to compete fairly with other companies operating in the same space.

A completely different picture emerges, of course, when one spends a good part of each working day developing strategies to enable clients to operate in countries where official corruption is endemic.  The international company employee who wakes up in the morning, steadies himself or herself in the mirror and then looks forward to winning business through bribery is an exceedingly rare bird in my experience.  Overwhelming, the reflected image of the vast majority of employees of international companies grappling with bribery demands is of consternation – how does one continue to operate in Country X when everyone on the government payroll in the country is demanding a bribe for everything?

A fully developed, and maximally effective, anti-bribery program by a western country would involve, I believe, much more attention than has been paid in the past to assisting international companies when they are confronting demands for bribes by foreign government officials.  The US State and Commerce Departments, UK and German Foreign Ministries, World Bank – and many others – should put much more emphasis in the future than they have in the past on assisting companies fend off official demands for bribes.  In many, many cases, they have the resources – and the leverage – to do so.

I’m not suggesting that western countries consider repealing statutes punishing the bribery of foreign government officials.  What I am suggesting is that they balance that approach with an equally concerted effort to deal with the demand side of the bribery equation.

Thomas Fox (Solo Practitioner, Founder and Editor of the FCPA Compliance and Ethics Blog)

“The Securities and Exchange Commission (SEC) is investigating JPMorgan Chase regarding its hiring practices in China. It appears that JP Morgan Chase hired children of Chinese government officials or heads of state owned enterprises. While such hirings do not violate the FCPA per se, they do raise red flags. The FCPA Professor was quoted in the New York Times, “While the hire of a son or daughter itself is not illegal, red flags would be raised if the person hired was not qualified for the position, or, for example, if a firm never received business before and then lo and behold, the hire brought in business.” Such a hire may be a FCPA noteworthy event if the timing of the alleged hiring is closely connected to important business victories and awards of government business.

While the questions of corrupt intent will be paramount I think that this episode emphasizes the continuing key concept of the three most important things in any FCPA compliance program; that being: Document, Document, Document. If your compliance program does not document its successes there is simply no evidence that it has succeeded. In addition to providing to your company support to put forward to the DOJ, it is the only manner in which to gauge the overall effectiveness of your compliance program. To negate corrupt intent, JP Morgan Chase will have to dis-link any hiring with the obtaining of business. It will be the documentary efforts of the company in answering this query that may well decide the question of whether the SEC will consider the matter a FCPA violation or not.”