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Understanding Wal-Mart

Tuesday, May 1st, 2012

Prior posts here and here discussed and analyzed the New York Times April 21st article regarding Wal-Mart and its potential FCPA exposure. As noted in the prior posts, the New York Times article was both unremarkable and remarkable at the same time. Wal-Mart has dominated the news cycle not because it is under FCPA scrutiny (this was known since December 2011 when Wal-Mart disclosed its FCPA scrutiny joining a list of approximately 100 companies known to be under FCPA investigation). Rather, Wal-Mart has dominated the news cycle because of how the company acted, or failed to act, since learning of potential FCPA issues in approximately 2005. Thus, Wal-Mart is mostly a corporate governance story.

Even so, there are some core and fundamental FCPA issues worthy of exploration. This post discusses many of the same issues I’ve discussed with journalists and others over the past week. Given the space constraints of media outlets, the below was understandably reduced to one or two sentences. It is in instances like this when I particularly enjoy having my own website and having the ability to go long and deep.

So long and deep we shall go and the issues discussed below are informed by, among other things, my review of the FCPA’s entire legislative history and my years as an FCPA practitioner. Although focused on the FCPA’s “foreign official” element, a thorough and comprehensive review of the FCPA’s legislative history can be found here (my “foreign official” declaration used in connection with several recent judicial challenges). My article “The Story of the Foreign Corrupt Practices Act” is forthcoming in the Ohio State Law Journal.

Do the Wal-Mart Mexico payments at issue violate the FCPA’s anti-bribery provisions? From a practical standpoint, does it even matter?

The FCPA’s Anti-Bribery Provisions

Two distinct and important questions can be asked about many instances of FCPA scrutiny, including Wal-Mart’s, in this new era of FCPA enforcement.

The first question is whether, given the DOJ and SEC’s current enforcement theories, the Mexican payments at issue - allegedly in connection with permitting, licensing and inspection issues - can expose Wal-Mart to an FCPA enforcement action? The answer is likely yes and in the past several years the enforcement agencies have brought several FCPA enforcement actions premised on payments to obtain foreign licenses, permits and the like. For instance see here (and embedded posts therein) for the numerous Panalpina related enforcement actions in 2010. See here at pages 972-975 for a listing of such cases 2007-2009.

The second (and from my perspective more important) question is whether Congress, in passing the FCPA, intended the law to capture payments occurring outside the context of foreign government procurement and involving ministerial and clerical acts by foreign officials. The answer from the FCPA’s legislative history is no.

In the mid-1970′s Congress learned of a variety of foreign corporate payments to a variety of recipients and for a variety of reasons. Congress accepted and acknowledged in passing the FCPA that it was capturing only a narrow range of foreign payments. For instance the relevant Senate Report in May 1977 specifically notes that “the committee has recognized that the bill would not reach all corrupt overseas payments.” Likewise, the relevant House Report in September 1977 also states that “the proposed law will not reach all corrupt payments overseas.”

Of note, in November 1977 (a month prior to passage of the FCPA in December 1977), Representative Robert Eckhardt (D-TX, a Congressional leader on the foreign payments issue) stated on the House floor as follows. “Payments to a [foreign official with ministerial or clerical duties] for instance, to complete a form that ought, in equity, to be completed, to give everybody equal treatment, to move the goods off a dock which he will not move without a tip, a mordida, I think, as they call it in the Spanish language, a facilitating payment, or a grease payment would not constitute a bribe.”

Thus, when the FCPA was passed in December 1977 it specifically excluded from the definition of “foreign official” “any employee of a foreign government or any department, agency, or instrumentality thereof whose duties are essentially ministerial or clerical.” This was the FCPA’s original (albeit indirect) facilitating payment or grease exception. The relevant House Report states in pertinent part as follows: “… a gratuity paid to a customs official to speed the processing of a customs document would not be reached by this bill. Nor would it reach payments made to secure permits, licenses, or the expeditious performance of similar duties of an essentially ministerial or clerical nature which must be performed in any event.”

When Congress amended the FCPA in 1988 it, among other things, amended the definition of foreign official by removing this indirect facilitating payment exception from the “foreign official” definition by creating a stand-alone facilitating payment exception currently found in the statute. The relevant House Report indicates that Congress did not seek to disturb Congress’s original intent. “The policy adopted by Congress in 1977 remains valid, in terms of both U.S. law enforcement and foreign relations considerations. Any prohibition under U.S. law against this type of petty corruption would be exceedingly difficult to enforce, not only by U.S. prosecutors but by company officials themselves. Thus while such payments should not be condoned, they may appropriately be excluded from the reach of the FCPA. U.S. enforcement resources should be devoted to activities have much greater impact on foreign policy.”

Even if a payment does not meet the FCPA’s facilitation payments exception, in order for there to be a violation of the FCPA’s anti-bribery provisions, all statutory elements must be met including the “obtain or retain business” element.

To my knowledge, the enforcement theory that payments outside the context of foreign government procurement fall under the FCPA’s anti-bribery provisions has been subjected to judicial scrutiny three times. These three judicial decisions are summarized below.

Kay Trial Court

In 2001, David Kay and Douglas Murphy (“Defendants”), the president and vice president of Houston-based American Rice, Inc. (“ARI”), were criminally indicted. The indictment charged FCPA anti-bribery violations and alleged that the defendants made improper payments to Haitian “foreign officials” for the purpose of reducing customs duties and sales taxes owed by ARI to the Haitian government. The indictment, while specific as to other items, merely tracked the FCPA’s “obtain or retain business” language and did not specifically allege how the alleged payments assisted ARI in obtaining or retaining business in Haiti or what business was obtained or retained. As stated by the court: “In other words, the indictment recite[d] no facts that could demonstrate an actual or intended cause-and-effect nexus between reduced taxes and obtaining identified business or retaining identified business opportunities.”

In a case of first impression in the federal courts, the court granted Defendants’ motion to dismiss the indictment and held, as a matter of law based on the FCPA’s legislative history, that the alleged payments were not payments made to “obtain or retain business” and thus did not fall within the scope of the FCPA’s anti-bribery provisions. See 200 F.Supp.2d 681 (S.D. Tex. 2002).

Mattson / Harris

A few months after the trial court decision in Kay, the Southern District of Texas again considered whether payments made outside the context of foreign government procurement fall under the FCPA’s anti-bribery provisions. As noted in this previous post, the Mattson and Harris enforcement action (a civil enforcement action brought by the SEC) involved alleged goodwill payments to an Indonesian tax official for a reduction in a tax assessment. The SEC claimed that the FCPA’s unambiguous language plainly encompassed the goodwill payment and the issue before the court was whether the plain language of the FCPA prohibited goodwill payments for the purpose of reducing a tax assessment. The court noted that U.S. v. Kay had already dismissed that case finding that the plain language of the FCPA does not prohibit goodwill payments to foreign government officials to reduce a tax obligation. However, the SEC attempted to distinguish the trial court’s Kay ruling by arguing that in the civil enforcement context, the Court should interpret the FCPA’s language more liberally than in criminal cases. The court rejected the SEC’s arguments and followed the trial court’s analysis in Kay that the payments at issue to the Indonesian tax official did not violate the FCPA because it did not help Mattson’s and Harris’s employer (Baker Hughes) “obtain or retain business.” See this Memorandum and Order (Sept. 9, 2002). As noted in this release, the SEC dropped its appeal in July 2004.

Of interest is that Mattson’s lawyers, Martin Weinstein and Robert Meyer of Willkie Farr & Gallagher, were the lawyers identified in the New York Times articles who advised Wal-Mart in 2005 on an investigative work plan that was apparently rejected by Wal-Mart.

Kay Fifth Circuit Ruling

The DOJ appealed the 2002 decision of the Southern District of Texas dismissing the indictment and one issue on appeal was whether payments to “foreign officials” to obtain favorable tax and customs treatment can come within the scope of the FCPA’s anti-bribery provisions.

The Fifth Circuit, like the trial court, concluded that the FCPA’s “obtain or retain business” element was ambiguous and it thus analyzed the FCPA’s legislative history. See 359 F.3d 738 (5th Cir. 2004). The Fifth Circuit focused specifically on the U.S. Senate’s 1977 sponsored bill and the SEC report on which the Senate’s proposal was based. According to the court, the SEC report “exhibited concern about a wide range of questionable payments [including those at issue in Kay] that were resulting in millions of dollars being recorded falsely in corporate books and records.” Although the Fifth Circuit recognized that the Senate’s proposal did not expressly cover payments that seek to influence the administration of tax laws or seek a favorable tax treatment, the Senate, in the words of the court, “was mindful of bribes that influence legislative or regulatory actions, and those that maintain established business opportunities.”

In short, the Fifth Circuit was convinced that Congress intended to prohibit a range of payments wider than those that only directly influence the acquisition or retention of government contracts or similar arrangements. The Fifth Circuit held that making payments to a “foreign official” to lower taxes and custom duties in a foreign country can provide an unfair advantage to the payer over competitors and thereby assist the payer in obtaining and retaining business. The court concluded that there was “little difference” between these type of payments and traditional FCPA violations in which a company makes payments to a “foreign official” to influence or induce the official to award a government contract.

However, the Kay court empathically stated that not all such payments to a “foreign official” outside the context of directly securing a foreign government contract violate the FCPA; it merely held that such payments “could” violate the FCPA. According to the court, the key question of whether Defendants’ alleged payments constituted an FCPA violation depended on whether the payments were intended to lower ARI’s costs of doing business in Haiti enough to assist ARI in obtaining or retaining business in Haiti. The court then listed several hypothetical examples of how a reduction in custom and tax liabilities could assist a company in obtaining or retaining business in a foreign country. On the other hand, the court also recognized that “there are bound to be circumstances” in which a custom or tax reduction merely increases the profitability of an existing profitable company and thus, presumably, does not assist the payer in obtaining or retaining business.

The court specifically stated: “[I]f the government is correct that anytime operating costs are reduced the beneficiary of such advantage is assisted in getting or keeping business, the FCPA’s language that expresses the necessary element of assisting in obtaining or retaining business would be unnecessary, and thus surplusage – a conclusion that we are forbidden to reach.”

In short, the enforcement theory that payments outside the context of foreign government procurement satisfy the FCPA’s “obtain or retain business” has been subjected to judicial scrutiny three times.

The scorecard: US – 1; Defendants – 2; or if you prefer US – .5; Defendants – 2.5 (recognizing that the 5th Circuit decision is equivocal).

Contrary to popular misperception, Kay thus does not hold that all payments to a “foreign official” outside the context of foreign government procurement fall within the FCPA’s scope. Rather, the decision merely holds that Congress intended for the FCPA to apply broadly to payments intended to assist the payer, directly or indirectly, in obtaining or retaining business and that payments to a “foreign official” outside the context of foreign government procurement can, under appropriate circumstances, fall within the statute. Given the facts and circumstances the Kay court found relevant, it is highly fact-dependant analysis whether a payment to a “foreign official” satisfies the “obtain or retain business” element outside of the context of foreign government procurement.

A key portion from the Kay ruling likely relevant in Wal-Mart is the following: “there are bound to be circumstances” in which payments outside the context of foreign government procurement merely increase the profitability of an existing profitable company and thus, presumably, does not assist the payer in obtaining or retaining business.

Despite the equivocal nature of the Kay holding, (and the enforcement agencies overall losing record on the issue) the decision clearly energized the enforcement agencies and post-Kay there has been a significant increase in FCPA enforcement actions where the alleged improper payments involve customs duties and tax payments or are otherwise alleged to have assisted the payer in securing foreign government licenses, permits, and certifications which assisted the payer in generally doing business in a foreign country. For a listing of many such cases, see my scholarship, “The Facade of FCPA Enforcement” – here. None of the enforcement actions profiled therein were challenged or subjected to judicial scrutiny.

It thus remains an open question whether payments outside the context of foreign government procurement, in any particular case if subjected to judicial scrutiny, (i) would satisfy the FCPA’s “obtain or retain business” element; or (ii) are too attenuated to obtaining or retaining business (such as merely increasing the profitability of an existing profitable business) and thus, per the Kay holding, not a violation of this key FCPA anti-bribery element.

Does It Even Matter?

A logical and practical question then becomes, does it even matter? As in most FCPA enforcement actions, the answer in any future Wal-Mart FCPA enforcement action is likely no. At the end of the day it will not matter if Wal-Mart’s payments, if subjected to judicial scrutiny, would result in FCPA violations.

The short reason is that while Wal-Mart’s counsel can make valid and legitimate legal and factual arguments around conference room tables behind closed doors in Washington D.C., to truly challenge the DOJ in an instance of FCPA scrutiny, and to put the DOJ to its high burden of proof at trial, first requires that the company be criminally indicted, something few corporate leaders are willing to let happen. It is simply easier, more cost-efficient, and more certain to resolve FCPA scrutiny notwithstanding aggressive (and dubious) enforcement theories or the existence of valid and legitimate defenses. Also relevant to this issue is the existence of the “carrots” and “sticks” relevant to resolving FCPA enforcement actions. To learn more about these “carrots” and “sticks” please read my article ”The Facade of FCPA Enforcement” – here.

To my knowledge, in the FCPA’s 35 year history, only two corporate defendants have put the DOJ to its high burden of proof in trial. Wal-Mart will not become the third. Even so, it is instructive to learn about the two instances in which corporate defendants have put the DOJ to its high burden of proof at trial.

The DOJ’s ultimate record? 0-2.

As noted in this prior post, in 1990, Harris Corporation (“Harris” – a publicly traded telecom provider), along with certain of its executives, were charged in a criminal indictment concerning conduct in Colombia. In 1991, the court, after hearing the prosecution’s case, granted a defense motion for a verdict of acquittal. The San Francisco Chronicle stated as follows. “Shortly after the government rested its case, U.S. District Judge Charles Legge of San Francisco ruled from the bench that ‘no reasonable jury’ could convict the company nor its executives on any of the five bribery-related counts for which they were indicted. Citing insufficient evidence, Legge said the government had failed to show any intent by the defendants to enter into a criminal conspiracy. Legge also said it was the first time in his six years on the federal bench that he had dismissed a criminal case at mid-trial for lack of evidence.”

As noted in this prior post, in December 2011 (after the DOJ had secured trial court jury verdicts convicting privately held Lindsey Manufacturing Company and its CEO and CFO of FCPA offenses), Judge Howard Matz (C.D. Cal). vacated the convictions and dismissed the indictment based on numerous prosecutorial misconduct issues that together added “up to an unusual and extreme picture of a prosecution gone badly awry.” In addition to prosecutorial misconduct, Judge Matz noted the “weakness of the Government’s case” and that the “case against the Lindsey Defendants was far from compelling.”

Analyzing Wal-Mart

Monday, April 23rd, 2012

This prior post discussed the New York Times lengthy Wal-Mart investigative piece published over the weekend.

This post analyzes the likely issues and the road ahead.

The Times article is both unremarkable and remarkable at the same time.

The unremarkable portion of the Times article is that a foreign subsidiary of a multi-national company operating in a FCPA high-risk jurisdiction allegedly made payments to “foreign officials” to facilitate or grease the issuance of certain licenses or permits. According to the Times, Wal-Mart’s subsidiary in Mexico “had taken steps to conceal [the payments] from Wal-Mart’s headquarters in Bentonville, Ark.” and Wal-Mart Mexico’s chief auditor altered reports sent to Bentonville discussing various problematic payments. In short, there is nothing in the Times report to suggest that Wal-Mart’s board or top executives (with the exception of Eduardo Castro-Wright – discussed below in more detail) knew of or authorized the problematic payments.

By unremarkable I do not mean to suggest that such payments will not attract DOJ and SEC scrutiny under the FCPA’s anti-bribery provisions. They surely will, even if Congress likely intended to exclude such payments from the FCPA’s reach and even if the only case law of precedent on the issue is muddled. (Both issues were discussed in the prior post).

Even if the Mexican payments do not meet the elements of an FCPA anti-bribery violation, the enforcement agencies are likely to assert that such payments violate of the FCPA books and records and internal control provisions. For instance, the Times article suggests that the Mexican payments were routed through Mexican gestores who were told to submit invoices full of secret code words. The enforcement agencies frequently take the position that payments recorded on a subsidiary’s books and records become the parent company issuer’s problem on the theory that such subsidiary books and records are consolidated with the issuers for purposes of financial reporting.

The enforcement agencies also expect that a parent company implement effective internal controls throughout its organization, including foreign subsidiaries. On this issue, one of the most significant issues is likely to be, as the Times article details, that in 2003 Wal-Mart engaged Kroll Inc. on an apparent unrelated issue in which Kroll concluded that Wal-Mart Mexico “executives had failed to enforce their own anticorruption policies, [and] ignored certain internal audits that raised red flags.” According to the Times article, “Wal-Mart then asked Kroll to evaluate Wal-Mart de Mexico’s internal audit and antifraud units” and that “Kroll wrote another report that branded the units ‘ineffective.’”

An issue the enforcement agencies are likely to explore is how Wal-Mart reacted to the 2003 Kroll audit and if it didn’t react why not? The same general issue is present in Avon’s current FCPA scrutiny. As noted in this February Wall Street Journal article, a grand jury is probing how certain U.S. executives reacted to a 2005 internal audit by the company that concluded Avon employees in China may have been bribing officials in violation of the FCPA. As in Avon, an issue in the Wal-Mart matter, including as to individual executives who may not have participated in or authorized any Mexican payments, will likely be willful blindness as to the Mexican audit.

The remarkable aspects of the Times investigation include the conduct (or lack thereof) of Wal-Mart and its top executives upon learning of problematic conduct in its Mexican subsidiary. Even in 2005 and continuing today, most business leaders, audit committees, and boards tend to overreact to FCPA issues and often reflexibly launch broad internal investigations.

However, the payment issues at Wal-Mart Mexico apparently resulted in exactly the opposite at Wal-Mart’s corporate headquarters. Wal-Mart’s conduct will not be viewed favorably by the enforcement agencies.

For instance, under the DOJ’s Principles of Federal Prosecution of Business Organizations (here) a factor the DOJ will consider in arriving at its enforcement decision include ”the corporation’s timely and voluntary disclosure of wrongdoing and its willingness to cooperate in the investigation of its agents.” While the FCPA does not contain any affirmative disclosure obligation, most companies the size and stature of Wal-Mart tend to disclose conduct that could implicate the FCPA, particularly given the SEC’s position that all payments in violation of the FCPA are qualitatively material, even if not quantitatively material.

Lacking such a voluntarly disclosure, a company should, at the very least, thoroughly investigate the alleged wrongdoing and implement effective remedial measures, including by disciplining and terminating culpable employees. Once again, the Principles of Prosecution state that ”the corporation’s remedial actions, including any efforts to implement an effective corporate compliance program or to improve an existing one, to replace responsible management, to discipline or terminate wrongdoers, to pay restitution, and to cooperate with the relevant government agencies” is a factor the DOJ will consider in arriving at its enforcement decision. As to this factor, the relevant comment in the Principles of Prosecution states as follows. “In determining whether or not to prosecute a corporation, the government may consider whether the corporation has taken meaningful remedial measures. A corporation’s response to misconduct says much about its willingness to ensure that such misconduct does not recur. Thus, corporations that fully recognize the seriousness of their misconduct and accept responsibility for it should be taking steps to implement the personnel, operational, and organizational changes necessary to establish an awareness among employees that criminal conduct will not be tolerated. Among the factors prosecutors should consider and weigh are whether the corporation appropriately disciplined wrongdoers, once those employees are identified by the corporation as culpable for the misconduct.”

On this issue, another remarkable aspect of the Times investigation is how Eduardo Castro-Wright (at the critical time period the CEO of Wal-Mart Mexico) was known by others at Wal-Mart to be involved in the Mexican payments, but was nevertheless continuously thereafter promoted by Wal-Mart. For instance, as noted in this January 7, 2005 release, Wal-Mart announced that “Eduardo Castro-Wright, currently president and chief executive officer of Wal-Mart Mexico, will become executive vice president and chief operating officer of the Wal-Mart Stores Division in the United States.” In the release, Wal-Mart President and CEO Mike Duke stated as follows. “Eduardo is a proven leader who has helped Wal-Mart Mexico achieve outstanding results. His experience, perspective and management skills will be a valuable addition to our division here in the United States.” In this June 2010 release, the company announced that “Vice Chairman Eduardo Castro-Wright has been appointed President and CEO of Global.com and Global Sourcing.” Wal-Mart President and CEO Mike Duke stated as follows. “Eduardo has made extraordinary contributions to Walmart U.S. over the past five years, and many contributions are still to come. He is a visionary thinker who has strengthened our overall business and built a foundation that positions us well for the future.”

As to other Wal-Mart executives, while there is no suggestion at this point that they knew of or authorized the Mexican conduct while it was occurring, their conduct since learning of the misconduct is likely to attract regulatory scrutiny. Such scrutiny is likely to include certification issues under Sarbanes-Oxley (SOX) as well as other executive statements to the market since 2005 when they became aware of the payments at issue. You can bet that the SEC in particular will be analyzing every SEC filing, specifically the Management Discussion & Analysis section, and all other statements to the market since 2005 by executives regarding Wal-Mart Mexico.

As to SOX certification issues, as noted in this prior post, in 2011 the SEC charged Paul Jennings, the former CEO and CFO of Innospec. Jennings was charged in connection with the payments, but also charged with violating Exchange Act Rule 13b2-2 by making false statements to accountants and violating Exchange Act Rule 13a-14 by signing false personal certifications required by SOX that were attached to annual and quarterly Innospec public filings. As to these charges, the SEC alleged as follows. “From 2004 to February 2009, Jennings signed annual certifications that were provided to auditors where he falsely stated that he complied with Innospec’s Code of Ethics incorporating the company’s Foreign Corrupt Practices Act policy, and that he was unaware of any violations of the Code of Ethics by anyone else. [...] Jennings also signed annual and quarterly personal certifications pursuant to SOX in which Jennings made false certifications concerning the company’s books and records and internal controls. Jennings also signed false management certifications to Innospec’s auditors indicating that the books and records were accurate and that Innospec had appropriate internal controls.” Then SEC FCPA Unit Chief, Cheryl Scarboro stated as follows: “we will vigorously hold accountable those who approve such bribery and who sign false SOX certifications and other documents to cover up the wrongdoing.”

Also perhaps relevant is the 2009 SEC FCPA enforcement action against Nature’s Sunshine Products (“NSP”) including its executives Douglas Faggioli (President and Chief Executive Officer of NSP and a member of its board of directors during the relevant time period) and Craig Huff (the company’s CFO). The SEC complaint did not allege that these executives knew of or participated in the improper payments at issue, but the SEC nevertheless charged the executives on a control person theory of liability. The complaint charged that Faggioli and Huff, as “control persons” of NSP, violated the FCPA’s books and records and internal control provisions and generally alleged that both Faggioli and Huff had “supervisory responsibilities” over NSP’s senior management and policies, yet as “control persons,” “failed to make and keep books, records, and accounts, which in reasonable detail, accurately and fairly reflected the transactions of NSP” and failed to devise and maintain an adequate system of internal accounting controls.

Not only will the DOJ and SEC likely be examining the conduct of Wal-Mart executives, but so too will plaintiff law firms representing shareholders who will likely scour Wal-Mart’s SEC filings and other statements to the market in bringing derivative claims alleging breach of fiduciary duty and potential Section 10(b) claims based on material omissions concerning Wal-Mart Mexico. On this score, shareholders are likely to allege, among other things, that Wal-Mart’s officers and directors demonstrated conscious disregard for fiduciary duties by failing to act diligently in the face of known facts suggesting a duty to act.

Whether remarkable or unremarkable, the information revealed in the Times article is likely to be a long and costly exercise for Wal-Mart and certain of its executives. Wal-Mart’s statement over the weekend indicated that it already is conducting a world-wide review of its operations and such “where else” investigations frequently uncover additional problematic conduct. Among other things, the enforcement agencies are likely to take a keen interest in how Wal-Mart obtained foreign licenses or permits in other FCPA high-risk jurisdictions around the world. This world-wide review will take time and for this reason FCPA scrutiny of the type that Wal-Mart is currently under is likely to last 2-4 years.

Wal-Mart’s FCPA Scrutiny Grows

Saturday, April 21st, 2012

In December 2011, Wal-Mart made the following generic disclosure in a 10-K filing.

“During fiscal 2012, the Company began conducting a voluntary internal review of its policies, procedures and internal controls pertaining to its global anti-corruption compliance program. As a result of information obtained during that review and from other sources, the Company has begun an internal investigation into whether certain matters, including permitting, licensing and inspections, were in compliance with the U.S. Foreign Corrupt Practices Act. The Company has engaged outside counsel and other advisors to assist in the review of these matters and has implemented, and is continuing to implement, appropriate remedial measures. The Company has voluntarily disclosed its internal investigation to the U.S. Department of Justice and the Securities and Exchange Commission. We cannot reasonably estimate the potential liability, if any, related to these matters. However, based on the facts currently known, we do not believe that these matters will have a material adverse effect on our business, financial condition, results of operations or cash flows.”

Today, the New York Times ran a major story (here) titled “Vast Mexico Bribery Case Hushed Up by Wal-Mart After Top-Level Struggle” that relates to Wal-Mart’s prior disclosure. Was Wal-Mart’s disclosure to the DOJ, as stated in its December 10-K filing “voluntary”? According to the Times article, “in December, after learning of The Times’s reporting in Mexico, Wal-Mart informed the Justice Department that it had begun an internal investigation into possible violations of the Foreign Corrupt Practices Act.” (emphasis added).

The conduct at issue in the Times article relates to Wal-Mart’s largest foreign subsidiary, Wal-Mart de Mexico (“Wal-Mart Mexico), and suggests that Wal-Mart Mexico “orchestrated a campaign of bribery to win market dominance” and that the entity “paid bribes to obtain permits in virtually every corner” of Mexico.

According to the article, in 2005, “Wal-Mart dispatched investigators to Mexico City, and within days they unearthed evidence of widespread bribery. They found a paper trail of hundreds of suspect payments totaling more than $24 million. They also found documents showing that Wal-Mart de Mexico’s top executives not only knew about the payments, but had taken steps to conceal them from Wal-Mart’s headquarters in Bentonville, Ark.” According to the Times, Wal-Mart’s lead investigator, a former FBI agent, “recommended that Wal-Mart expand the investigation” but its own examination found that ”Wal-Mart’s leaders shut it down.” The article states that “in one meeting where the bribery case was discussed, H. Lee Scott Jr., then Wal-Mart’s chief executive, rebuked internal investigators for being overly aggressive.”

The Times examination included more than 15 hours of interviews with Sergio Cicero Zapata a former executive who resigned from Wal-Mart Mexico in 2004 after nearly a decade in the company’s real estate department. The article states as follows. “In the interviews, Mr. Cicero recounted how he had helped organize years of payoffs. He described personally dispatching two trusted outside lawyers to deliver envelopes of cash to government officials. They targeted mayors and city council members, obscure urban planners, low-level bureaucrats who issued permits — anyone with the power to thwart Wal-Mart’s growth. The bribes, he said, bought zoning approvals, reductions in environmental impact fees and the allegiance of neighborhood leaders.”

Elsewhere, the Times article states as follows. “The idea, [Cicero] said, was to build hundreds of new stores so fast that competitors would not have time to react. Bribes, he explained, accelerated growth. They got zoning maps changed. They made environmental objections vanish. Permits that typically took months to process magically materialized in days. ‘What we were buying was time,’ he said. ” The article states that Cicero’s “allegations were all the more startling because he implicated himself” and ”helped funnel bribes through trusted fixers, known as ‘gestores.’”

The times article contains several internal documents including Willkie Farr & Gallagher’s 2005 ”investigative work plan” that called for tracing all payments to anyone who helped Wal-Mart Mexico obtain permits for the previous five years. The Times article states as follows. “In short, Willkie Farr recommended the kind of independent, spare-no-expense investigation major corporations routinely undertake when confronted with allegations of serious wrongdoing by top executives. Wal-Mart’s leaders rejected this approach. Instead, records show, they decided Wal-Mart’s lawyers would supervise a far more limited ‘preliminary inquiry’ by in-house investigators.”

According to the Times article, in 2006, Wal-Mart again considered a full investigation of the conduct in Mexico, but that in the end, the company largely delegated responsibility for the investigation to Wal-Mart Mexico. The Times article quotes a person with knowledge of the thinking of Wal-Mart executives as follows. “It’s a Mexican issue; it’s better to let it be a Mexican response.”

The Times article contains a detailed statement by Wal-Mart. Among other things, the Wal-Mart statement notes that “many of the alleged activities in the New York Times article are more than six years old” and that “in a large global enterprise such as Walmart, sometimes issues arise despite our best efforts and intentions.” The statement continues as follows. ”When they do, we take them seriously and act quickly to understand what happened. We take action and work to implement changes so the issue doesn’t happen again. That’s what we’re doing today.”

See here for Wal-Mart’s video response to the New York Times article.

*****

The New York Times article paints a troubling picture for Wal-Mart that will likely occupy the company for years to come. In addition to the Mexico conduct, the DOJ and SEC will surely be interested in the response (or lack thereof) by company executives in Arkansas as well as the results of Wal-Mart’s worldwide review of its operations.

The DOJ and SEC frequently bring FCPA enforcement actions premised on payments to obtain foreign licenses, permits and the like. For instance see here (and embedded posts therein) for the numerous Panalpina related enforcement actions in 2010. See here at pages 972-975 for a listing of such cases 2007-2009.

This despite the following relevant history.

The FCPA’s original definition of “foreign official” was as follows. “… any officer or employee of a foreign government or any department, agency, or instrumentality thereof, or any person acting in an official capacity for or on behalf of such government or department, agency or instrumentality. Such terms do not include any employee of a foreign government or any department, agency, or instrumentality thereof whose duties are essentially ministerial or clerical.”

This last sentence was the FCPA’s original (albeit indirect) facilitating payment or grease exception. The relevant House Report states in pertinent part as follows: “… a gratuity paid to a customs official to speed the processing of a customs document would not be reached by this bill. Nor would it reach payments made to secure permits, licenses, or the expeditious performance of similar duties of an essentially ministerial or clerical nature which must be performed in any event.”

The relevant House Report indicates that Congress did not seek to disturb Congress’s original intent. “The policy adopted by Congress in 1977 remains valid, in terms of both U.S. law enforcement and foreign relations considerations. Any prohibition under U.S. law against this type of petty corruption would be exceedingly difficult to enforce, not only by U.S. prosecutors but by company officials themselves. Thus while such payments should not be condoned, they may appropriately be excluded from the reach of the FCPA. U.S. enforcement resources should be devoted to activities have much greater impact on foreign policy.”

Also relevant is the holding of U.S. v. Kay, the only appellate court decision to directly address payments outside the context of directly securing a foreign government contract. In Kay, the 5th Circuit said that such payments “could” violate the FCPA, but that “there are bound to be circumstances” in which such payments merely increase the profitability of an existing profitable company and thus, presumably does not assist the payer in obtaining or retaining business. The court specifically stated as follows. “If the government is correct that anytime operating costs are reduced the beneficiary of such advantage is assisted in getting or keeping business, the FCPA’s language that expresses the necessary element of assisting in obtaining or retaining business would be unnecessary, and thus surplusage – a conclusion that we are forbidden to reach.”

A Focus On Facilitation Payments

Tuesday, March 6th, 2012

This post is all about facilitation payments.

Congress was clear when it passed the FCPA that the statute was not intended to address such payments. For instance, the relevant House Report (H.R. Rep. No. 95-640 (1977)) stated as follows. “The language of the bill is deliberately cast in terms which differentiate between [corrupt] payments and facilitating payments, sometimes called ‘grease payments,’ … For example, a gratuity paid to a customs official to speed the processing of a customs document would not be reached by the bill. Nor would it reach payments made to secure permits, licenses, or the expeditious performance of similar duties of an essentially ministerial or clerical nature which must of necessity be performed in any event. While such payments made to assure or to speed the proper performance of a foreign official’s duties may be reprehensible in the United States, the committee recognizes that they are no necessarily so viewed elsewhere in the world and that it is not feasible for the United States to attempt unilaterally to eradicate all such payments. As a result, the committee has not attempted to reach such payments.”

Originally, the FCPA contained an indirect facilitation payments exception through the definition of “foreign official” which excluded from that definition any employee of a foreign government “whose duties are essentially ministerial or clerical.” Among the FCPA’s 1988 amendments was taking this indirect facilitation payments exception from the definition of “foreign official” and establishing a direct, stand-alone facilitation payment exception currently found in the statute.

With that backdrop, two items to highlight. First, recent scholarship from an SEC enforcement attorney on facilitation payments. Second, a Q&A with a member of the Global Steering Team for the recently formed facilitation payment focused anti-corruption industry initiative, Committee to Address Facilitation Payments (C.A.F.P.)

Facilitation Payments Scholarship

Jon Jordan (Senior Investigations Counsel with the FCPA Unit of the SEC) recently published “The OECD’s Call For An End To “Corrosive’ Facilitation Payments And The International Focus On The Facilitation Payments Exception Under The Foreign Corrupt Practices Act” in the University of Pennsylvania Journal of Business Law (see here).

The article gives a basic outline of the FCPA and the facilitation payments exception and explores the history behind the exception. The article then discusses the U.S. pursuit of an international agreement prohibiting foreign bribery and the resulting OECD Anti-Bribery Convention. Next, the article focuses on international and domestic disdain over the issue of facilitation payments during the first decade of the Convention. Then, the article considers the recent OECD Recommendation calling on the prohibition of facilitation payments and the OECD’s recent criticisms of the U.S. with respect to its policies on facilitation payments. Jordan then gives his prediction that the facilitation payments exception will be eliminated and provides his recommendation that domestic companies prohibit the use of facilitation payments in the current global anti-bribery environment.

Jordan’s article is an informative read and this sentence from the article stood out to me. “[W]hile the FCPA contains several core provisions that will always withstand the test of time, the facilitation payments exception is out of date in this modern-day era of commerce and sensibility.”

Q&A With Mike Munro

The Committee to Address Facilitation Payments (C.A.F.P.) is a collection of global companies working together to address the potential future demand/risk of facilitation type payments in a thoughtful, proactive and appropriate manner. It recently released this document and below Mike Munro (Vice President, Associate General Counsel and Chief Compliance Officer, Transocean, and a member of the Global Steering Team for C.A.F.P.) responds to some questions.

Q: Congress chose to exempt facilitating payments from the reach of the FCPA’s anti-bribery provisions. Why then is there a need for CAFP to address facilitating payments?

A: Regardless of whether facilitation payments are allowed by anyone, I am not aware of any company that believes facilitation type payments are positive to business or economic development. All companies want to reduce the risk of potential facilitation payments and clearly the best way to do that is through collective action.

Q: Does CAFP support amending the FCPA to remove the facilitating payments exception?

A: C.A.F.P. is not an organization that would take that type of position. The types of legal changes we are interested in relate to how government processes can be clarified or improved (such as computer automation) to reduce risk or situations that potentially could involve facilitation payments.

Q: To best eliminate facilitating payments in many countries, cultural changes are necessary. Can a committee of multinational companies effectuate cultural change?

A: Cultural change could be helpful in some countries and situations to reduce the potential risk of facilitation type payments and therefore a significant focus of C.A.F.P. is to engage local people and companies in this effort.

Q: It would seem that the best forward-looking solution to reducing the demand for facilitating payments is to increase civil servant salaries in many foreign countries. Do you agree?

A: Increasing civil servants pay could potentially have a positive impact but how positive of an impact would be difficult to determine. Clearly if an individual’s pay is not sufficient to meet daily living requirements, most would agree that there is likely a higher probability of requests or demands, but as indicated above, other factors such as culture, individual integrity norms, etc. do have an impact.

Q: If increasing foreign civil service salaries is a good idea, how can it be accomplished?

A: If a decision was made that increasing civil servant salaries would be helpful, one of the ways to approach that would be to have key companies and industry groups in a particular country approach high level government officials to determine how best to effectuate such a change. The companies and industry groups could then help coordinate that effort with others in that country who have similar interests and views.

Will The SEC Be Put To Its Burden Of Proof In The Jackson And Ruehlen Enforcement Action?

Tuesday, February 28th, 2012

As discussed in this previous post, in November 2010, Noble Corporation was one of several companies to resolve FCPA enforcement actions in what I called CustomsGate – enforcement actions largely focused on alleged payments to Nigerian customs officials to receive various permits. The Noble enforcement action involved both a DOJ and SEC component. Total settlement amount was approximately $8.2 million ($2.6 million criminal fine via a non-prosecution agreement; $5.6 million in disgorgement and interest via a SEC complaint).

As noted in the previous post, in the Noble Corporation enforcement action it was stated, not once but twice, that the payments at issue “would not constitute facilitation payments for routine governmental actions within the meaning of the FCPA.” I noted then that one can reasonably conclude that if the DOJ felt the need to express such a statement twice, that the FCPA’s facilitating payment exception should probably be on the minds of many in connection with the CustomsGate enforcement actions.

Against the backdrop of recent and well-deserved scrutiny of the DOJ’s FCPA enforcement program, the SEC reminds us all that it too can enforce the FCPA. [As an aside, Professor Barbara Black (University of Cincinnati College of Law) recently released her forthcoming scholarship - see here - "The SEC and the Foreign Corrupt Practices Act: Fighting Global Corruption is Not Part of the SEC's Mission].

Last Friday, the SEC announced here charges against “three oil services executives with violating the FCPA by participating in a bribery scheme to obtain illicit permits for oil rigs in Nigeria in order to retain business under lucrative drilling contracts.”

In this complaint filed in the S.D. of Texas, the SEC charged Mark Jackson (former Noble Corporation CEO) and James Ruehlen (current Director and Division Manager of Noble’s subsidiary in Nigeria) based on the same core set of facts relevant to the prior corporate enforcement action – namely that Noble and its wholly-owned subsidiary (Noble-Nigeria) “authorized its customs agent to pay bribes” on the companies behalf “to Nigerian government officials to influence or induce them to (1) favorably process false paperwork, (2) grant temporary import permits (TIPs) based on the false paperwork, and (3) favorably exercise or abuse their discretion in granting extensions to these illicit TIPs.”

The complaint (a meaty 46 pages) next states, in summary fashion, as follows.

“Defendants approved payment of the bribes. Defendant Ruehlen also assisted the customs agent in preparing false documents, processed the customs agent’s invoices for the bribes, and signed the checks reimbursing the customs agent for the bribes he paid to Nigerian government officials. Defendants acted in this way to obtain TIPs and TIP extensions and retain business under drilling contracts in Nigeria. As a consequence, Defendants violated the anti-bribery provisions [of the FCPA.] Defendants also took steps to circumvent Noble’s internal controls and to falsely record these bribes as legitimate operating expenses on Noble’s books. Defendant Jackson failed to implement internal accounting controls to prevent the bribery and false recording of the bribes. As a consequence, Defendants violated the records falsification and internal control provisions of the Exchange Act and aided and abetted Noble’s violations of the books and records and internal control provisions [of the FCPA]. Defendant Jackson misled Noble’s auditors about the bribes and signed certifications required by the Sarbanes-Oxley Act of 2002 falsely stating that he had created and maintained effective internal controls, and that there were no internal control weaknesses, fraud or FCPA violations. As a consequence, Jackson violated Rules 13b2-2 and 13a-14 of the Exchange Act. During the violations, Jackson was Noble’s Chief Financial Officer, Chief Operating Officer, and ultimately President and Chief Executive Officer, and Chairman of the Board of Directors. Jackson directly or indirectly controlled Noble, Defendant Ruehlen, and others, and therefore is liable as a control person under Section 20(a) of the Exchange Act for all of their violations.”

[For previous Section 20(a) control person (or similar) FCPA enforcement actions - see here and here.]

Unlike the vast majority of FCPA defendants (corporate and individual) charged in an SEC enforcement action, Jackson and Ruehlen appear poised to launch a defense.

Jackson’s lawyer, David Krakoff (here - BuckleySandler) stated as follows. “We unequivocally deny the SEC’s baseless allegations. Mr. Jackson will vigorously defend himself in court where the evidence will show what the SEC already knows, that at all times Mr. Jackson acted in good faith at Noble. He looks forward to clearing his good name in this proceeding.”

Ruehlen’s lawyer F. Joseph Warin (here - Gibson Dunn & Crutcher) told the Wall Street Journal that his client was the one who initially raised concerns about the payments and that Ruehlen ”fully cooperated throughout the investigation and always acted in an ethical and transparent manner.” Warin stated that “the claims against Mr. Ruehlen are wrong and they will be proven so at trial.”

This will be most interesting to follow as the SEC is rarely put to its burden of proof in FCPA enforcement actions (or any of its actions for that matter). This is due to the SEC’s long-standing policy of allowing defendants to settle SEC complaints without admitting or denying the SEC’s allegations. For recent judicial scrutiny of this settlement device, see this prior post.

The last time the SEC is believed to have been put to its burden of proof in an FCPA enforcement action was in the Eric Mattson and James Harris enforcement action also filed in the S.D. of Texas. Like the Jackson and Ruehlen enforcement action, the Mattson and Harris enforcement action involved conduct outside the context of foreign government procurement. As detailed in this Memorandum and Order, the SEC had its FCPA anti-bribery charges dismissed in that case. The case involved alleged goodwill payments to an Indonesian tax official for a reduction in a tax assessment. The SEC claimed that the FCPA’s unambiguous language plainly encompassed the goodwill payment and the issue before the Court was whether the plain language of the FCPA prohibited goodwill payments for the purpose of reducing a tax assessment. When Mattson and Harris was decided, the S.D. of Texas in U.S. v. Kay case had already dismissed that case finding that the plain language of the FCPA does not prohibit goodwill payments to foreign government officials to reduce a tax obligation. The SEC attempted to distinguish the trial court’s Kay ruling by arguing that in the civil enforcement context, the Court should interpret the FCPA’s language more liberally than in criminal cases. The Court rejected the SEC’s arguments and followed the trial court’s analysis in Kay that the payments at issue to the Indonesian tax official did not violate the FCPA because it did not help Mattson’s and Harris’s employer (Baker Hughes) “obtain or retain business.”

Of course, the 5th Circuit overturned the Kay trial court ruling and held that making payments to a “foreign official” to lower
taxes and custom duties in a foreign country can provide an unfair advantage to the payer over competitors and thereby assist the payer in obtaining and retaining business. However, the Kay court emphatically stated that not all such payments to a “foreign official” outside the context of directly securing a foreign government contract violate the FCPA; it merely held that such payments “could” violate the FCPA. The 5th Circuit then listed several hypothetical examples of how a reduction in custom and tax liabilities could assist a company in obtaining or retaining business in a foreign country. On the other hand, the court also recognized that “there are bound to be circumstances” in which a custom or tax reduction merely increases the profitability of an existing profitable company and thus, presumably, does not assist the payer in obtaining or retaining business. The court specifically stated: “[i]f the government is correct that anytime operating costs are reduced the beneficiary of such advantage is assisted in getting or keeping business, the FCPA’s language that expresses the necessary element of assisting in obtaining or retaining business would be unnecessary, and thus surplusage – a conclusion that we are forbidden to reach.”

The point of this extended discussion in the context of Jackson and Ruehlen is two-fold: (1) that the SEC has already lost a non-government procurement FCPA case in the S.D. of Texas; and (2) even with the 5th Circuit precedent in Kay, and even taking the SEC’s allegations as true, payments in connection with TIPs would seem to be only to increase the profitability of an existing profitable company and thus - following the logic of the Fifth Circuit – fall outside of the FCPA’s anti-bribery provisions.

It will be interesting to see how this plays out should the SEC’s FCPA anti-bribery charges be fully litigated in the Jackson and Ruehlen enforcement action.

As noted in the SEC’s release last week, the Noble executive enforcement action also involved a separate complaint (here) against Thomas O’Rourke (the former controller and head of internal audit at Noble). The complaint alleged that O’Rourke: (1) aided and abetted Noble’s violations of the FCPA anti-bribery provisions, books and records and internal controls provisions; and (2) directly violated the FCPA’s internal controls provisions and false records provisions of the Exchange Act.

Under the heading “defendants’ violations” the SEC alleged, among other things, that O’Rourke: (1) ”understood that Noble-Nigeria had used false paperwork to obtain TIPs, and that Noble-Nigeria paid its customs agent for ‘special handling charges’ that were passed through to Nigerian officials; (2) “knew that the ‘special handling charges’ were entered into Noble-Nigeria’s books as legitimate operating expenses, and he knew or was reckless in not knowing that those entries were improper”; (3) “knowingly allowed TIP-related payments to government officials to be improperly accounted for as legitimate operating expenses.

Like the vast majority of FCPA defendants in SEC enforcement actions, O’Rourke chose to settle the SEC’s complaint without admitting or denying the SEC allegations. According to the SEC release, O’Rourke consented to entry of a court order requiring him to pay a $35,000 civil penalty and permanently enjoining him from future violations.

*****

Last week I participated in a discussion with Howard Sklar regarding a potential FCPA compliance defense (see here for the webcast.) In the aftermath of the SEC’s charges against the Noble executives, Sklar penned a Forbes blog (here) and stated as follows. “One example Mike brings to prove his point [that the FCPA should be amended to include a compliance defense] is the Panalpina line of cases, including Noble. I don’t think he’ll be able to use the Noble case as an example after today. These complaints are against the CEO (who formerly held the CFO spot) and the country leader for Nigeria. Plus, there’s Thomas O’Rourke. Thomas O’Rourke was Noble’s Director of Internal Audit, Controller, and VP of Internal Audit.”

Nice try Howard, but you are off-target.

Sklar is correct that I discuss the Noble Corp. enforcement action (and other related CustomsGate enforcement actions) in my “Revisiting a Foreign Corrupt Practices Act Compliance Defense” article (see here at pgs. 9-12 ). However, that discussion is focused on specific reasons warranting an FCPA compliance defense, including that in many markets, companies subject to the FCPA must navigate challenging environments replete with barriers and other conditions that serve as breeding grounds for payments implicating (at least in the eyes of the enforcement agencies) the FCPA.

In discussing harassment bribes, I then talk about the notoriously corrupt Nigerian Customs Service (“NSC”) and how business interactions with NSC officials have been the basis for several FCPA enforcement actions including the coordinated enforcement actions from November 2010 involving Noble Corp. and others. Anticipating the counter-argument that the FCPA does not need a compliance defense due to the harassment bribery conditions many companies face in foreign markets because the FCPA already contains a facilitating payments exception, I then stated that so long as the DOJ refuses to recognize a facilitating payments exception to the FCPA, that Congressional intent on the facilitating payments issue is best advanced through an FCPA compliance defense in which a company can assert, as a matter of law, that its pre-existing FCPA policies and procedures sought to prevent such payments in foreign markets.

In short, I was using the Noble Corporation enforcement action in connection with a discussion of facilitating payments, not using that particular enforcement action to support an FCPA compliance defense because it somehow was based on low-level employee conduct. Indeed, in the DOJ’s non-prosecution agreement (here) which I discussed in this previous post, “Senior Executive,” “Executive A” and “Executive B” are all specifically mentioned as participating in the alleged improper conduct and an FCPA compliance defense would not apply to corporate conduct engaged in by executive officers.

The point of the Noble Corp. reference in my article was that the company should not have been the subject of an FCPA enforcement action based on the alleged conduct because Congress intended to exempt such payments from the FCPA’s anti-bribery provisions (regardless of who made, directed, or authorized the payments).