*****

Professor Koehler (my former colleague at Foley & Lardner) has been critical of “FCPA Inc.” and, in particular, the astronomical costs associated with certain FCPA investigations and compliance measures.  My friends in the C-Suite of FCPA Inc. have responded defensively – reacting at least in part to a perception that these criticisms suggest a corner-cutting approach to important work that must be done properly.

As an FCPA lawyer with a foot in both camps, let me try to find some common ground.

I share Mike’s concerns.  While I understand that each case is different and that it is often necessary for investigating counsel to respond to outside forces that drive up costs, some of the eye-popping numbers can’t help but make one question the FCPA investigation/compliance value proposition.

This dynamic is especially troubling because, I fear, it drives the perception among many smaller and mid-sized companies that anti-bribery compliance is simply out of reach financially.  A recent survey of global corruption compliance in the middle market conducted by McGladrey confirms that this segment of the market is underserved.  That is dangerous and bad for all the interested parties – including the DOJ and SEC.  It simply isn’t good public policy for sound FCPA compliance advice and investigative resources to be available only to the Exxon Mobils of the world.

That said, the quality of the work should not be compromised by maintaining some focus on the value proposition.  Corner-cutting is not appropriate (and is almost never in the company’s long-term interests).  But aren’t there ways to manage costs and still produce quality work?  The answer is clearly yes.  And while the options for delivering more for less are myriad, let me propose three fairly modest concepts, which, if implemented, would help bring quality FCPA representation to many more companies that really need it:

1.         Give Strong but Practical Compliance Advice

We can start by heeding the counsel of the SEC and DOJ in last year’s Resource Guide:

•  “DOJ and SEC have no formulaic requirements regarding compliance programs.  Rather, they employ a common-sense and pragmatic approach to evaluating compliance programs.”
• “[T]here is no one-size-fits all program. . . . Indeed, small-and medium-sized enterprises likely will have different compliance programs from large multi-national corporations, a fact DOJ and SEC take into account when evaluating companies’ compliance programs.”

In other words, take it seriously, but be practical.  And take a risk-based approach to FCPA compliance.

In a world where FCPA compliance was the company’s number one focus (above and beyond making and selling stuff), a company would conduct “Full Monty” due diligence on all of its distributors (maybe even its customers).  It would employ a rigorous system for reviewing all gifts, meals and entertainment expenses in excess of $25.  (After all, $25 is a lot of money to a customs official in Borneo . . .)  It would conduct annual compliance audits of the books and records of all of its third-party intermediaries.

But really, does that approach make sense for most of our clients?  While there may be companies that have a risk profile that justifies these procedures, for many – indeed, the vast majority –  such an approach is simply impractical.  Let’s not make the perfect the enemy of the good.

To lawyers and compliance professionals:  Be practical. Be willing to sign-off on compliance procedures that are effective but tailored to the actual risk posed.  Don’t be afraid to divert from “best practices” when best practices are not risk justified.  Take a stand.  But be prepared to defend your decisions.

And to the enforcement agencies.  Be true to your word.  “[D]o not hold companies to a standard of perfection.” Accept common sense compliance judgments, even when things ultimately go wrong.

2.         Appropriately Scope FCPA and Bribery Investigations

When a company discovers conduct that may violate the FCPA or company policies, an investigation is necessary.  It never makes sense for a company to ignore such a discovery.  You are simply not serious about compliance if you do not take steps to understand what happened, why, how, and to respond appropriately.  The enforcement agencies are entirely justified in requiring this and in taking companies to account for failing to investigate and respond to indications of wrongdoing.

The problem for many companies is that they hear the words “FCPA investigation” and think millions of dollars – or tens of millions, or hundreds of millions – in costs and fees.  Too often, this leads companies to make the bad decision to forgo an investigation altogether.

But just as there is no “one-size-fits-all” FCPA compliance program, there is no “one-size-fits-all” FCPA investigation.  Proportionality and reasonableness are key.

The main driver of investigation cost is scope.  FCPA investigations that spin out of control usually do so because the scope is never clearly defined at the outset or because of significant scope-creep during the investigation.  Think about our country’s history with Independent Counsel investigations.  Without a clear, narrowly defined mandate, investigations can go on interminably.  Investigators investigate.  There is always some new lead to pursue, another witness to interview, another document to request and review.

The investigation scope needs to be reasonable and appropriately calibrated to the issues under investigation.  Scope must be clearly defined, and the investigator must keep the scope front of mind.  Discipline is key.

This is not to say that the scope should never change once defined.  Often, new significant facts are discovered and new issues identified.  Many times, these developments warrant a modification to the scope.  But those decisions should be approached thoughtfully and intentionally.  Scope modification is not the same thing as scope-creep.

Appropriately scoped investigations cost less.  Companies with limited legal and compliance resources can access quality investigative services and can fulfill the agencies’ directive that “companies should have in place an efficient, reliable, and properly funded process for investigating the allegation and documenting the company’s response.”

To the SEC and DOJ:  To make this work, you need to apply these same common-sense principles to your assessment of company investigations.  Be reasonable.  To outside auditors assessing the company’s response:  Ditto.

3.         Disaggregation of Services in FCPA and Bribery Investigations

One final modest idea to manage the cost of FCPA investigations:  Consider disaggregating services.

It is not necessary to have high-priced lawyers conduct every aspect of every investigation.  In the health care industry, they refer to “working at the top of your license.”  In other words, to enhance the efficiency of the provision of care, each professional should be put to his or her highest and best use.  Move the work down the chain of training and expertise where appropriate.  Application of the same concept in FCPA investigations can have the same pro-efficiency effect.

As a preliminary matter, it isn’t necessary for a company to hire outside counsel to conduct every FCPA investigation.  There are certainly some situations where the exclusive deployment of inside investigative resources is appropriate.

Even when outside counsel properly leads the investigation, the lead investigator should consider non-traditional deployment of resources so that everyone on the team is being put to his or her highest and best use.  A couple of examples:

Consider enlisting internal company resources to accomplish some investigative tasks.  Under the right circumstances, company IT personnel can help gather and process data for the investigation; internal audit or finance resources can help with the analysis of the books and records; and in-house counsel can perform certain investigative tasks.  Independence and perceptions of independence must be taken into consideration in every case, of course.  In some investigations, it won’t be appropriate to involve company personnel.  But in some, it will be entirely reasonable and appropriate.  And where it is, there will be substantial cost savings.

In addition, investigative counsel should consider outsourcing or alternative-sourcing aspects of the investigation.  Document review is an obvious example.  Consider using data review software to cull the relevant documents that warrant review.  (It is noteworthy that DOJ recently approved the use of this approach in the AB InBev/Grupo Modelo merger review.  If it works in antitrust, why not FCPA investigations?)  This can save hundreds of hours of lawyer and staff time.  It also often makes sense to outsource document review.  There are a number of firms that conduct quality document review at a much lower cost than using attorneys (even contract attorneys.)  I personally have used Novus Law, a document-related discovery firm, to handle all of the document review, management and analysis on a couple of document-heavy FCPA investigations.  They do an outstanding job (no quality compromises) at a fraction of the cost.

These are just a few ideas for changing the way we provide compliance and investigative services to give better access to these critical services to more companies.  How we do this is less important than that we do it.

Wal-Mart’s FCPA Expenses

In this previous Friday roundup, I calculated Wal-Mart’s 2012 FCPA-related professional fees and expenses as being approximately $604,000 per working day.

Yesterday in a first-quarter earnings conference call (see here), Wal-Mart disclosed as follows.

“Our core corporate expenses [included] $73 million in expenses related to FCPA matters, which was above our forecasted range of $40 to $45 million. Approximately $44 million of the expenses represent costs incurred for the ongoing inquiries and investigations, while $29 million covers costs regarding the global compliance review, program enhancements and organizational changes.”

Doing the math, Wal-Mart’s first quarter FCPA-related professional fees and expenses equal approximately $1.16 million per working day.

I observed in this March 2011 article as follows.

“This new era of enforcement has resulted in wasteful overcompliance, companies viewing every foreign business partner with irrational suspicion, and companies deploying teams of lawyers and specialists around the world spending millions to uncover every potential questionable or unethical $100 corporate payment.  This new era of enforcement has proven lucrative to many segments of the legal, accounting, and compliance industries and the status quo would, from their perspective, seem desirable.”

The question again ought to be asked – does it really need to cost this much or has FCPA scrutiny turned into a boondoggle for many involved?  For more on this issue, see my article “Big, Bold, and Bizarre: The Foreign Corrupt Practices Act Enters a New Era.”

Sticking with Wal-Mart, this Bloomberg article provides an update on certain of the civil cases pending against Wal-Mart based on the company’s FCPA scrutiny.

Show Me The Numbers

This previous Friday roundup highlighted comments by Senator Elizabeth Warren concerning the SEC’s neither admit nor deny settlement policy and how it creates conditions in which there is “not much incentive to follow the law.”  Senator Warren now wants to see research and analysis of the pro and cons of this policy and other related regulatory settlement devices.

In this letter to, among others, Attorney General Eric Holder and SEC Chairman Mary Jo White, Senator Warren writes, in pertinent part, as follows.

“There is no question that settlements, fines, consent orders, and cease and desist orders are important enforcement tools, and that trials are expensive, demand numerous resources, and are often less preferable than settlements.  But I believe strongly that if a regulator reveals itself to be unwilling to take large financial institutions all the way to trial — either because it is too timid or because its lacks resources — the regulator has a lot less leverage in settlement negotiations and will be forced to settle on terms that are much more favorable to the wrongdoer.  [...]  Have you conducted any internal research or analysis on trade-offs to the public between settling an enforcement action without admission of guilty and going forward with litigation as necessary to obtain such admission, and if so, can you provide that analysis to my office.  I am interested in learning more about how your institution has evaluated the cost to the public of settling cases without requiring an admission of guilt rather than pursuing more aggressive actions.”

Senator Warren is obviously concerned that settlement policies and procedures facilitate the under-prosecution of alleged corporate wrongdoer.  This is a valid concern.  Yet so is the concern that such settlement policies and procedures also facilitate the over-prosecution of corporate conduct.  For more, see my article “The Facade of FCPA Enforcement“, including reference to the SEC’s acknowledgment that settlement of an SEC enforcement action does “not necessarily reflect the triumph of one party’s position over the other.”

Quotable

Michael Crites (Dinsmore & Shohl and the former U.S. Attorney for the S.D. of Ohio) stated as follows in a recent Law360 interview.

“The federal government passed the Foreign Corrupt Practices Act in 1977 after discovering that American companies were making millions of dollars in bribes to various foreign government officials. The law was heralded as solving the problem by prohibiting companies and individuals from offering or making payments to any foreign official with the purpose of inducing the recipient to use their official position by directing business to or continuing business with the briber. Over 35 years later, the basics of this law are still necessary to prevent and punish unethical bribes but businesses have discovered that the Department of Justice’s interpretation of the law is broader than anyone intended.”

“DOJ has increased dramatically the number of investigations and enforcement actions under the FCPA, creating what DOJ calls a new era of FCPA enforcement.  Unlike the activity in 1977, this heightened enforcement does not come from illegal bribes but the DOJ’s broad interpretation of the law which is now being applied to otherwise legitimate and ethical actions. The law is undeniably vague and few judicial decisions exist to provide additional guidance. Without these restraints, DOJ has embraced their power to apply the FCPA to unintended situations, resulting in a climate of fear for American businesses that conduct any business abroad.”

Reading Stack

More from the recent Corporate Crime Reporter sponsored conference.  This article concerns a panel on corporate monitors.  Participating in the panel were Dan Newcomb of Shearman & Sterling, George Stamboulidis of Baker Hostetler, Gil Soffer of Katten Muchin, Joseph Warin of Gibson Dunn, and John Buretta, chief of staff of the Criminal Division at the Department.

Hits and Misses

I read pretty much everything churned out by FCPA Inc., including the flood of recent client alerts concerning the Straub and Steffen decisions.  (See here and here for previous posts summarizing the decisions).  Many of these alerts are good and informative (for instance, see here from Debevoise & Plimpton).  However, some of these alerts are just plain wrong.

The headline of one alert was “District Court Decision Limits the Extraterritorial Reach of the FCPA.”  The headline of another alert was “Court Sets Limits on Extraterritorial FCPA Reach; Dismisses Case Against Foreign Siemens Executive.”

Neither the Straub nor Steffen decisions concerned extraterritorial application of the FCPA.  In fact, there is no extraterritorial reach of the FCPA as to foreign actors.  Yes, the FCPA was amended in 1998 to provide for alternative “nationality” jurisdiction (i.e. extraterritorial jurisdiction) over U.S. persons (both legal and natural), however, 78dd-1(g) and 78dd-2(i) are strictly limited to U.S. persons.

Rather, the Straub decision concerned the scope of territorial jurisdiction under 78dd-1(a), specifically the meaning of “use of the mails or any means or instrumentality of interstate commerce …”.

The Steffen decision did not even reach this issue as the judge found the initial threshold issue of personal jurisdiction lacking.

Wal-Mart’s FCPA Scrutiny Expenses Mount

During the media feeding frenzy after the New York Times April 2012 Wal-Mart article (see here for the prior post), I had the pleasure to appear on Eliot Spitzer’s Viewpoint program on Current TV.  At the end of the segment, after the substantive issues were discussed, Spitzer offered that he has several contacts in the FCPA bar and that, regardless of the substantive issues involved in Wal-Mart’s FCPA scrutiny or the ultimate outcome, lots of lawyers were poised to make lots of money.

Spitzer of course was right.

Wal-Mart recently stated (here) that it has incurred “$157 million of professional fees and expenses related to the ongoing” FCPA matter during its last fiscal year and that it expect to incur an additional ”$40 to $45 million for the first quarter of fiscal 2014.”  During Wal-Mart’s recent earnings conference call, a company executive stated as follows.  “On FCPA, we continue  to work closely with anticorruption compliance experts to review and to assess  our programs and help us implement concrete steps for each particular market. In  the various markets, these experts have spent tens of thousands of hours on  anti-corruption support and training. We remain committed to follow all laws and  regulations in the markets where we operate.”

The $157 million Wal-Mart spent in the last FY equates to approximately $604,000 in professional fees and expenses per working day.

I observed in this March 2011 articles as follows.

“This new era of enforcement has resulted in wasteful overcompliance, companies viewing every foreign business partner with irrational suspicion, and companies deploying teams of lawyers and specialists around the world spending millions to uncover every potential questionable or unethical $100 corporate payment.  This new era of enforcement has proven lucrative to many segments of the legal, accounting, and compliance industries and the status quo would, from their perspective, seem desirable.”

The question again ought to be asked – does it really need to cost this much or has FCPA scrutiny turned into a boondoggle for many involved?  For more on this issue, see my article “Big, Bold, and Bizarre: The Foreign Corrupt Practices Act Enters a New Era.”

While minor compared to Wal-Mart’s FCPA professional fees and expenses, Beam Inc. recently disclosed here that in 2012 the company spent approximately $4.2 million for “legal, forensic accounting, and other fees related to our internal investigation into Foreign Corrupt Practices Act compliance in our India operations.”

Wal-Mart Effect

Switching gears, but sticking with Wal-Mart related issues, this May 2012 post highlighted a potential “Wal-Mart effect.”  In short, the point was that Wal-Mart is clearly not the only company subject to the FCPA that needs licenses, permits and the like when doing business in Mexico.  I predicted that Wal-Mart’s potential FCPA exposure would cause sleepless nights for many company executives doing business in Mexico and the general region.  The post then discussed statements made during a Kimco Realty Corporation earnings call in May 2012 concerning its properties in Mexico.

Earlier this week, Kimco Realty stated in an SEC filing as follows.

“On January 28, 2013, the Company received a subpoena from the Enforcement Division of the SEC in connection with an investigation, In the Matter of Wal-Mart Stores, Inc. (FW-3678), that the SEC Staff is currently conducting with respect to possible violations of the Foreign Corrupt Practices Act. The Company is responding to the subpoena and intends to cooperate fully with the SEC in this matter. The Company has also been notified that the U.S. Department of Justice (“DOJ”) is conducting a parallel investigation, and the Company expects that it will cooperate with the DOJ investigation. At this point, we are unable to predict the duration, scope or result of the SEC or DOJ investigation.”

Survey Says

The annual Litigation Trends and Survey report by Fulbright & Jaworski is always a good read.  This year’s report (see here to download) surveyed 392 “senior corporate counsel” (275 in the U.S., 100 in the U.K. and 17 in other jurisdictions) on a wide-range of litigation and related matters.  The following were FCPA or related survey results.

“Companies that have retained outside counsel to assist with a corruption or bribery investigation in the past 12 months (including, but not limited to, FCPA in U.S. and equivalent in U.K.”

• 9% of U.S. respondents answered “yes”; 18% of U.K. respondents answered “yes.”  As noted, “U.S. figures [2010-2012] have remained relatively stable.”

“Companies that have engaged in due diligence for bribery or corruption (including FCPA matters) relating to a merger, acquisition or other business transactions with a foreign country in the past 12 months.”

• 18% of U.S. respondents answered “yes”; 26% of U.K. respondents answered “yes.”  As noted, “more companies this year have engaged outside counsel in due diligence for corruption or bribery investigations due to business transactions with entities based in a foreign country.”

As to the due diligence figures, in the abstract these figures do not mean much, unless one knows how many responding companies actually engaged in foreign acquisitions or other business combinations.

The last survey result in the report perhaps speaks best to the over-hyped nature of the U.K. Bribery Act.

“Has your company changed the way it operates due to the emergence of anti-bribery legislation outside the U.S., such as U.K. Bribery Act 2010?”

• 78% of U.S. respondents answered “no” and 63% of U.K. respondents answered “no.”

Senate Hearing Quotable

Senator Elizabeth Warren (D-MA) had some quotable moments (here) during a recent Senate Banking hearing.  The hearing concerned financial regulation, not the FCPA.  Nevertheless, some of the issues have some overlap to FCPA enforcement - including how settlement policies in regulatory enforcement actions create conditions in which there is “not much incentive to follow the law” and how “too big to fail” perhaps means “too big for trial.”

Disclosure Issues

This recent Wall Street Journal CFO Journal post notes as follows.

“Securities and Exchange Commissioner Troy Paredes called for a complete review of the information companies disclose to investors, amid concerns that investors suffer from “disclosure overload” that could hamper their ability to gauge the importance of the data.  “What we need is a top-to-bottom review of our disclosure regime,” Mr. Paredes said at the Practising Law Institute’s annual “SEC Speaks” conference in Washington, D.C. on Friday.”

While they’re at it, the SEC should take a look at its absurd position that all payments in violation of the FCPA, no matter how small the payment and no matter how large the company, are “qualitatively material.”  For instance, as noted in this previous post concerning comments made by enforcement officials at a conference I chaired, an SEC official suggested that the concept of materiality itself has two “sub-concepts”: (i) quantitative materiality (something that impacts a company’s financial statements) and (ii) qualitative materiality.  While conceding that very few improper payments are “quantitatively material” and while recognizing that “qualitative materiality” is a “complicated gray area,” the SEC officials nevertheless said that all bribes can be considered qualitatively material because they may “automatically trigger a books and records violation.”  For formal SEC guidance on this issue, see here.

Checking In

Hollywood Industry Sweep

From the New York Times regarding the on-going scrutiny of Hollywood movie studios in China.

“Last March, word reached several studios of a confidential inquiry by the Securities and Exchange Commissionand the Justice Department into possible violations of the Foreign Corrupt Practices Act by people or companies involved in the China film trade. Since then, executives and their advisers have been waiting for some public sign of the scope or focus of the government’s interest.  So far, there has been none. But official silence has not kept the investigation from casting a chill over dealings between Hollywood and China.”

Goldman

From the Wall Street Journal regarding the on-going scrutiny of Goldman’s dealings with Libya’s sovereign wealth fund.

“Libya’s sovereign-wealth fund said it is cooperating with the U.S. Securities and Exchange Commission in its ongoing investigation into Goldman Sachs Group Inc. over the securities firm’s dealings with the fund when Col. Moammar Gadhafi was in power.  [...]  People close to the Libyan investment fund said officials have authorized some former fund executives to give testimony to the SEC. The officials also agreed to provide documents and other data to U.S. regulators about the fund’s ties to Goldman, these people said.”

Spot On

Two recent Q&A’s on Law360 caught my eye.  The question was “what is an important issue or case relevant to your practice area and why.”

Neil Eggleston (Kirkland & Ellis) stated as follows.

“We are beginning to see the development of case law in the FCPA area, which I believe is good for the process. Most of these cases have been settled. When that occurs, defendants have little incentive to refuse to agree to novel Department of Justice theories of prosecution or jurisdiction, so long as the penalty is acceptable. The department then cites its prior settlement as precedent when settling later ones. But no court approved the earlier settlement, and the prior settlement should have no precedential value in favor of the DOJ in later settlements. As the DOJ increases its prosecution of individuals, we will see many more trials, which will give rise to courts, not the DOJ, interpreting the statute.”

For more on these issues, see my article “The Facade of FCPA Enforcement” and this previous guest post on ”prosecutorial common law.”

Richard Marmaro (Skadden) answered the same question as follows.

“An issue of importance in the white collar area is the issue of prosecutorial misconduct, and appropriate remedies for prosecutors who intentionally conceal evidence, intimidate witnesses, or otherwise compromise or impact a defendant’s right to a fair trial. I have seen firsthand in several of my cases shocking misconduct, which has gone undisciplined by the U.S. Department of Justice. I have been fortunate enough to expose this misconduct, and have had cases dismissed as a result. Indeed, over the last decade, there have been several dismissals nationwide at trial or reversals on appeal based on willful misconduct by government lawyers. Despite these judicial findings, however, the Justice Department’s record of disciplining misbehaving prosecutors is shockingly inadequate. I don’t know of any prosecutor that has been terminated based on a judicial finding of intentional misconduct. In addition, I believe that only two prosecutors have received any discipline at all (both in the Stevens case). In my view, the failure to sanction prosecutors who have been found by judges to have committed misconduct sends the wrong signal to defendants, the public and the vast majority of prosecutors who do their jobs honestly every day.”

For more, see this previous post titled ”Should There Be A Difference?”

Refreshing Words

Every now and then it is refreshing to read some common sense words about FCPA compliance and risk assessment.  Such as this recent post from the Trace blog.

“Remember, perfection is neither possible nor necessary.  When devising a compliance plan, it’s important to remind oneself of the big picture.  A company need not break the bank to have a compliance program that follows accepted best practices.  As discussed below, there are various ways that good compliance can be affordable.  And companies are not responsible for developing full-proof compliance programs; they only need to develop programs proportionate to the risk they face, with the understanding that no program will completely eliminate all risk from the equation.  Unlike in other areas of business, when it comes to compliance, being in the middle of the pack is okay.”

*****

A good weekend to all.

And no, I am not talking about the unsurprising fact that Wal-Mart’s scrutiny has expanded beyond Mexico to also include China, India and Brazil.  (See here for the prior post discussing how this was likely to happen).

Rather, the new details suggest that Wal-Mart’s internal review is less of a knee-jerk reaction upon learning of the New York Times April story, but more an instance of the company pro-actively seeking to understand its FCPA risk, notwithstanding whatever may have occurred within the company in 2005 and 2006 upon learning of potentially problematic payments in Mexico.

According to the recent Times article, Wal-Mart’s internal review began in Spring 2011 when Jeffrey Gearhart (Wal-Mart’s general counsel) learned of an FCPA enforcement action against Tyson Foods (like Wal-Mart, a company headquartered in Arkansas – see here for the prior post discussing the Tyson enforcement action).  According to the Times article, “the audit began in Mexico, China and Brazil, the countries Wal-Mart executives considered the most likely source of problems” and Wal-Mart hired KPMG and Greenberg Traurig to conduct the audit.  The Times article notes that “in July 2011″ the firms “had identified significant weaknesses in all three subsidiaries.”

The Times article next rightly states as follows.  “The audit was uncovering the kinds of problems and oversights that plague many global corporations.”

The Times article notes that Wal-Mart has spent $99 million on its FCPA review in the past nine months.

To learn more about Wal-Mart’s potential FCPA scrutiny and what it says about this current era of FCPA enforcement, see my article “Foreign Corrupt Practices Act Enforcement As Seen Through Wal-Mart’s Potential Exposure.”

I was pleased to do a telephone interview with the FCPA Report in mid-August.  Today’s post sends you to the wide-ranging Q&A previously published, in two parts, in the FCPA Report and linked to here with permission.

Topics covered in the Q&A include the following:  statute of limitations, judicial scrutiny, the duration of FCPA scrutiny, voluntary disclosure, Wal-Mart’s FCPA scrutiny, facilitation payments, obtain or retain business, foreign official, corporate fines, victims issues, a private right of action, FCPA Inc. and the revolving door, the three buckets of FCPA financial exposure and Foreign Corrupt Practices Act reform.

The manufactured Africa Sting case may be over, but it effects are still being felt.

Allied Defense Group (“ADG”) employed Mark Frederick Morales, one of the individuals charged in the case.  The company stated in its recent quarterly filing (here) as follows.

“In February and March, 2012, the DOJ dismissed charges against all individuals indicted in the FCPA sting operation, including the former employee of MECAR USA. Since this time, the Company’s FCPA counsel has had several discussions with the DOJ and SEC regarding the agencies’ respective inquiries. Based upon these discussions, it appears likely that resolution of these inquiries will involve a payment by the Company to at least one of these government agencies in connection with at least one transaction involving the former employee of Mecar USA. At this point, the amount of this payment is undeterminable.”

As noted in this previous post, in January 2010, ADG agreed to be acquired by Chemring Group PLC.

Another publicly traded company that employed an Africa Sting defendant, Amaro Goncalves, is Smith & Wesson.  The company disclosed in its most recent quarterly filing (here) as follows.

“On February 21, 2012, the DOJ filed a motion to dismiss with prejudice the indictments of the remaining defendants who are pending trial, including our former Vice President-Sales, International & U.S. Law Enforcement. On February 24, 2012, the district court granted the motion to dismiss. We cannot predict, however, when the investigation will be completed or its final outcome. There could be additional indictments of our company, our officers, or our employees. If the DOJ determines that we violated FCPA laws, we may face sanctions, including significant civil and criminal penalties. In addition, we could be prevented from bidding on domestic military and government contracts and could risk debarment by the U.S. Department of State. We also face increased legal expenses and could see an increase in the cost of doing international business. We could also see private civil litigation arising as a result of the outcome of the investigation. In addition, responding to the investigation may divert the time and attention of our management from normal business operations. Regardless of the outcome of the investigation, the publicity surrounding the investigation and the potential risks associated with the investigation could negatively impact the perception of our company by investors, customers, and others.”

Even though the individual Africa Sting cases are over, the case provided a point of entry into several companies and an entire industry and its effects are still being felt as demonstrated by the above disclosures.

Orthofix

This previous post discussed the July enforcement action against Orthofix International.  As noted in the post, the specifics of the DOJ’s allegations were not known as the information against Orthofix was filed under seal.  The information (here) was recently unsealed.  In summary fashion, the DOJ alleged as follows under the heading “corrupt conduct.”  “From [2003 through March 2010], with the knowledge of Orthofix Executive A [a citizen of Peru and legal permanent resident in the U.S. who was a senior manager of Orthofix Inc. (an indirectly wholly owned subsidiary) and responsible for sales operations in Latin America], Promeca [an entity incorporated and headquartered in Mexico and an indirectly wholly owned subsidiary of Orthofix International] and its employees paid approximately $300,000 to Mexican officials, in return for agreements with IMSS and its hospitals to purchase millions of dollars in Orthofix International products.”

IMSS is a social service agency of the Mexican government that provided public services to Mexican workers and their families and the Mexican Officials identified in the information are as follows.

Mexican Official 1 – a deputy administrator of Magdelena de las Salinas (a hospital in Mexico City that IMSS owned and controlled)

Mexican Official 2 – the purchasing director of Magdelena de las Salinas

Mexican Official 3  – the purchasing director of Lomas Verdes (a hospital in the State of Mexico that IMSS owned and controlled)

Mexican Official 4 – a sub-director of IMSS

According to the information, “Executive A knew of the payments and things of value [provided to the Mexican Officials] but failed to stop the scheme or report the scheme to Orthofix Interntional or Orthofix’s Inc.’s compliance department.”

Under the heading “Internal Controls” the information alleges, among other things, as follows.  “Orthofix International,which grew its direct distribution footprint in part by purchasing existing companies, often in high-risk markets, failed to engage in any serious form of corruption-related diligence before it purchased Promeca.  Although Orthofix International promulgated its own anti-corruption policy, that policy was neither translated into Spanish nor implemented at Promeca.  Orthofix International failed to provide any FCPA-related traning to many of its personnel, including Executive A.  Orthofix also failed to train Promeca personnel for years on the FCPA, to test regularly or audit particular transactions, or to ensure that subsidiary maintained controls sufficient to detect, deter or prevent illicit payments to government officials.”

The information charges one count of violating the FCPA’s internal control provisions.

Checking In On Wal-Mart

During the media feeding frenzy after the New York Times Wal-Mart article (see here for the prior post), I had the pleasure to appear on Eliot Spitzer’s Viewpoint program on Current TV.  At the end of the segment, after the substantive issues were discussed, Spitzer offered that he has several contacts in the FCPA bar and that, regardless of the substantive issues involved in Wal-Mart’s FCPA scrutiny or the ultimate outcome, lots of lawyers were poised to make lots of money.

Spitzer of course was right.

During its second quarter earnings call (see here for the transcript) Wal-Mart executives stated as follows.   ”Within core corporate, we incurred approximately $34 million in expenses related to third-party advisors reviewing matters involving the Foreign Corrupt Practices Act and we expect these expenses to continue through the rest of the year.”  Later in the call, the following was said.  “We also expect to incur approximately $35 to $40 million in expenses for the review of matters relating to the Foreign Corrupt Practices Act during each of the remaining quarters for this fiscal year.”

In other news, on the civil litigation front, as noted in this Reuters article “an Indiana union pension fund that owns shares in Wal-Mart Stores Inc has sued the company to gain access to thousands of internal documents related to allegations that a Wal-Mart subsidiary bribed Mexican government officials.”  According to the report, the lawsuit, filed in Delaware’s Chancery Court, alleges the “company had made a ‘woefully deficient’ production of documents following an earlier out-of-court demand and that hat documents were produced were ‘so heavily redacted,’ or blacked out, they were nearly worthless.”

Turning to Capital Hill, several prior posts have chronicled efforts by Representative Elijah Cummings and Henry Waxman to conduct a shadow investigation of Wal-Mart in the aftermath of the New York Times article (see here for the previous post).  As indicated in this recent press release and this recent letter the lawmakers are growing impatient.  In pertinent part, the letter to Wal-Mart CEO Michael Duke stated as follows.

“We are writing to give you a final opportunity to respond to our requests for information about allegations that your company violated the Foreign Corrupt Practices Act. Although you have stated on multiple occasions that you intend to cooperate with our investigation, you have failed to provide the documents we requested, and you continue to deny us access to key witnesses. Your actions are preventing us from assessing the thoroughness of your internal investigation and from identifying potential remedial actions.

During the course of our investigation, we have learned that Wal-Mart’s concerns about potential violations of the Foreign Corrupt Practices Act are not limited to operations in Mexico, but are global in nature. Your outside counsel informed us that, before allegations of bribery in Mexico became public, Wal-Mart retained attorneys to conduct a broad review of the company’s anti-corruption policies. This review identified five “first tier” countries “where risk was the greatest.” Wal-Mart then conducted a worldwide assessment of the company’s anti-corruption policies, culminating in a series of recommendations and policy changes based on those findings.

In addition, we have obtained internal company documents, including internal audit reports, from other sources suggesting that Wal-Mart may have had compliance issues relating not only to bribery, but also to “questionable financial behavior” including tax evasion and money laundering in Mexico.”

Pipeline Report

Add NCR Corporation and Expro International to the list of companies under FCPA scrutiny.

NCR

Global technology company NCR Corp. recently disclosed here as follows.

This previous post regarding the recent Pfizer enforcement action raised the following question(s).

Does anyone truly believe that the only reason Chinese doctors prescribed Pfizer products was because under the “point programs” the physician would receive a tea set?  Does anyone truly believe that the only reason Czech doctors prescribed Pfizer products was because the company sponsored educational weekend took place at an Austrian ski resort?  Does anyone truly believe that the only reason Pakistani doctors offered Wyeth nutritional products to new mothers was because the company provided office equipment to the physicians?

The questions were asked in the context of disgorgement remedies, but can also be asked in the context of product safety.  One can safely assume that if the enforcement agencies had any evidence to suggest that the products at issue jeopardized public safety, the enforcement agencies would have alleged such facts, as they occasionally do in FCPA enforcement actions (see Innospec for instance).

The absence of such allegations make this recent article by Online Pharmacy Safety foolishly speculative.  The article states as follows.

“[The conduct at issue in the enforcement action] puts the safety of consumers at risk.   If large companies are able to bribe their way to getting more business, and anticipate government officials to turn a blind eye, the wrong products could be getting into the hands of consumers worldwide.  The Pfizer products approved by foreign governments and prescribed by doctors may not have been the best product available, which could endanger consumers. Doctors put selfishness at the expense of patients, and the company was putting profits ahead of its public safety.”

Harvey Silverglate (author of Three Felonies a Day: How the Feds Target the Innocent) hit the ball out of the park with this recent Wall Street Jouranl op-ed.  Referring to the recent Gibson Guitar Lacey Act enforcement action and how the resolution documents muzzle the company (as is typical in FCPA NPAs and DPAs), Silverglate wrote as follows.

“Through these and myriad other techniques, federal investigator and prosecutors create an alternative reality that favors their own institutional interests, regardless of the truth or of justce.  All citizens and companies become subject to the Justice Department’s essentially unfettered power.  Remedying this problem cannot be left to the victims of this governmental extortion, because their risks are too high if they fight; nor will their lawyers likely blow the whistle, since the bar makes a tidy living by playing the game.  It is up to the rest of civil society to let the Justice Department emperor know that we see he is not wearing clothes.”

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A good weekend to all.

In this Q&A, Machua Millett (Senior Vice President and General Partner Liability Product Leader at Marsh) answers questions about FCPA Corporate Response as well as other issues presented by FCPA insurance.  Prior to joining Marsh, Millett practiced law at Skadden Arps, Bingham McCutchen and Edwards Angell Palmer & Dodge.

Why is FCPA insurance needed?  What was your “ah-ha” moment in developing this product?

FCPA investigation costs insurance is needed because existing insurance products were leaving companies and their employees largely unprotected against one of their major potential liabilities in conducting international business. Our “ah-ha” moment came after one too many clients had come to us seeking an insurance solution, and we had to tell them that no comprehensive FCPA investigation costs insurance product existed.  So we collaborated with an A-rated insurance company to create and launch a solution.

Describe in detail the product Marsh is offering.

The product, exclusively available through Marsh, is called FCPA Corporate Response. It is an insurance policy that funds investigation costs resulting from any regulatory investigation by any regulator in the world concerning alleged bribery of a government official.

The four main pillars of the policy are the definitions of Investigation Costs, Claim, Insured, and Wrongful Act.

Investigation Costs includes all fees and expenses of attorneys, experts, consultants, accountants, auditors, and any other professionals a company typically hires in the course of conducting or defending itself against an anti-corruption investigation.  This definition is significantly broader than most directors and officers liability (D&O) policies, which generally cover only attorneys’ fees. This is not by accident. In our experience, companies caught up in an FCPA investigation incur significant accounting and consulting fees in addition to legal fees, and we wanted all such investigation costs covered by this policy.  It is important to note, however, that this policy only covers investigation costs.  It does not cover settlements, judgments, damages, wages/salaries, fees of directors/officers/employees, costs of compliance/remedial measures or fines and penalties, (most of which would de deemed uninsurable by insurers, regardless).

Claim includes any civil, criminal, administrative and/or regulatory investigation or inquiry brought by any U.S. or foreign regulator, with the trigger broadly defined to include any written notice of such investigation or inquiry.  In addition to this broad claim trigger, the policy also provides pre-claim inquiry coverage for internal investigations.  This means that any investigation costs incurred as part of a company’s internal investigation prior to regulatory involvement is covered on a retroactive basis when a company self-reports or a regulatory investigation or inquiry is otherwise initiated.

Insured includes all entities and individuals that might be implicated as part of an FCPA investigation of a company, including all subsidiaries, affiliates, directors, officers, employees, foreign equivalents, consultants, agents and independent contractors.  These last three categories are of particular importance, as nearly 80 percent of FCPA investigations arise from the activities of such third-party agents and independent contractors, who are often not treated as insureds under standard D&O policies.

Wrongful Act means: any actual or alleged violation of the FCPA, including criminal bribery allegations and civil recordkeeping allegations; and any actual or alleged violation of any other law, treaty, regulation or act that, but for geography, would also constitute a violation of the FCPA.  The definition of Wrongful Act is quite broad in terms of geography, potentially-implicated conduct, and potentially relevant laws. However, it is important to note that the policy’s coverage does not extend to aspects of foreign corruption laws like the U.K. Bribery Act that are broader than the U.S. FCPA. In the case of the UKBA, the two most relevant examples would be the UKBA’s prohibition of commercial bribery and lack of an exception for facilitation payments. Where an investigation under a foreign statute involves both FCPA-type allegations (bribery of a government official) and non-FCPA-type allegations (say commercial bribery), investigation costs would have to be allocated between covered and uncovered aspects of the investigation.

The policy contains only two exclusions, both of which are directed toward the simple idea that a company cannot buy insurance for a burning building. The first exclusion bars coverage for a prior or pending investigation and the second exclusion bars coverage for any matter that was known at a truly corporate level — by the general counsel of the Named Insured — at the time of application for the policy and later develops into a regulatory investigation or inquiry.  It is also relevant in this regard to note that just as a company may not buy insurance for a burning building, it may not purchase a burning building and expect coverage under the policy. Although the policy provides automatic coverage for new subsidiaries, coverage only applies to wrongful acts that occurred after the acquisition. Transactional risk insurance products do exist that can be used to mitigate acquisition risks around FCPA issues.

The FCPA contains both anti-bribery provisions and books and records / internal controls provisions.  The latter provisions are generic in scope and don’t require foreign conduct to be implicated.  Does the product cover the range of circumstances in which the FCPA books and records and internal controls can be implicated?

As mentioned before, FCPA Corporate Response does provide investigation costs coverage for both anti-bribery and books and records and internal controls.  Anything that is a violation of the FCPA, or would be but for geography, will trigger the policy’s definition of wrongful act.

One of the reasons for the increase in FCPA enforcement is the increase in corporate voluntary disclosures, an event which often prolongs FCPA scrutiny for many years and results in lucrative professional fees for those involved in the investigation and disclosure.  Will FCPA insurance increase the number of corporate voluntary disclosures on the theory that the downside of corporate voluntary disclosures (longer period of scrutiny which leads to higher professional fees) will be covered?

We have had some people comment that the policy seems to create an incentive to self-report, both generally because the company has the investigation costs insurance, but more specifically to trigger coverage for internal investigation costs.  While this may be, I find it somewhat hard to believe that the existence of the policy will prevail over other considerations; after all, the policy does not cover FCPA fines, penalties, or remedial measures.  However, the policy certainly doesn’t create any disincentive against self-reporting.

Will FCPA insurance lead to more aggressive business conduct in foreign markets?

I don’t think so.  Again, the policy does not cover fines and penalties and other costs that we have seen reach the hundreds of million of dollars. The policy covers investigation costs.  FCPA Corporate Response is most certainly not meant to be a replacement for a robust FCPA compliance program at a company, but instead is meant to be a compliment or backstop to such a program based on the realization that no compliance program, no matter how robust, can prevent the rogue activities of one employee or independent agent

The “where else” questions often works as follows.  A company voluntarily discloses conduct to the DOJ/SEC that occurred in country x that could implicate the FCPA.  Before the DOJ/SEC agree to resolve any enforcement action, the agencies will often ask something to the effect – if the conduct occurred in country x, convince us that similar conduct did not also occur in countries a, b, c, etc.  The lawyers on the receiving end of the “where else” question don’t mind being asked because the “where else” question often leads to a world-wide review of their client’s operations around the world.

I first started writing about “where else” in 2009, see here, and most recently wrote about “where else” here.  As a former FCPA practitioner I was on the receiving end of the “where else” question and conducted resulting world-wide reviews on behalf of corporate clients.

The “where else” question is asked in nearly every FCPA enforcement action.  How does one know?  Read the resolution documents.  For instance, the Magyar Telekom resolution documents states that the company conducted a “thorough global internal investigation concerning bribery and related misconduct.”  The Tenaris resolution documents cites that company’s “voluntary investigation of the Company’s business operations throughout the world.”  The Tyson resolution documents state that all of the company’s wholly-owned overseas production facilities were “subjected to rigorous FCPA reviews.”  Numerous other examples could also be cited.

Claudius Sokenu is a leading FCPA practitioner at Arnold & Porter (see here).  As a former SEC FCPA enforcement attorney, Sokenu has both asked the “where else” question in the context of an FCPA inquiry and has been on the receiving end of the “where else” question as an FCPA practitioner.  His views on “where else” first caught my attention in this 2011 interview with The Metropolitan Corporate Counsel and he expands on “where else” in the below Q&A.

What percentage of FCPA enforcement actions that you have been involved in have resulted in the “where else” question being  asked?

In my time as a regulator at the Securities and Exchange Commission’s Division of Enforcement and in private practice, the “where else” question has been asked in  virtually every single FCPA matter in which I have been involved.  I have asked  it and it has been asked of me.

Do you believe the “where else” question was appropriate in these instances?

In some instances it was entirely appropriate for the SEC, the Justice Department, and other regulators to ask the “where else” question.  In others, however, the allegations did not support a “where else” question and it appeared to be more of a fishing expedition and boiler plate question than a well-reasoned question under the facts.  “Where else” is a reasonable and appropriate question when the alleged misconduct appears to be systemic and/or the company under investigation appears to lack the controls necessary to prevent the payment of bribes to foreign government officials.  It is not, however, an appropriate question where it is intended to force companies to conduct multi country internal investigations with little more than the uninformed hunch of a government official who has little or no experience in how businesses work around the world.

The “where else” question could logically be asked in any DOJ or SEC investigation regardless of substantive area of law.  Do you believe the “where else” question is asked more frequently in FCPA enforcement actions
compared to say antitrust, tax, or environmental enforcement actions?  If so, why?

Because the “where else” question is often raised behind closed doors in private conversations between government and counsel, it is difficult to be certain, but yes, I do believe the question is asked more frequently in FCPA enforcement investigations.

This is not entirely unreasonable given the nature of the FCPA.  First, the scope of the FCPA’s jurisdiction, by definition and necessarily, covers the entire world.  And unlike antitrust laws, for example, which have some extraterritorial application but are primarily concerned with the impact on U.S. markets, the FCPA’s primary focus is on actions occurring abroad.  Second, it is not always unreasonable to think that the insufficient (or nonexistent) internal controls that facilitated bribe payments in one country will have the same effect elsewhere. Taking these two factors together, one could reasonably conclude that the FCPA is uniquely amenable to the “where else” question.

That is not to say, of course, that the “where else” question will always be appropriate in the FCPA context or that it will never be relevant elsewhere.  For example, a discharge of pollutants in one of a company’s many U.S. plants may very well justify a widespread environmental audit.  Expanding the scope of investigation in such a case would depend on whether the discharge was the result of, say, incompetent employees hired under criteria used nationwide, as opposed to a once-in-a-generation weather event.  In the former case, a widespread audit would likely be called for, whereas in the latter it likely would not.  The fact is, in the FCPA context, the vast majority of cases have resembled the first scenario – i.e., systematic defects whose effects could arise anywhere – and thus broad investigations have often made more sense than localized ones.

Of course, a somewhat more pessimistic reason for the “where else” question’s predominance in the FCPA context would involve the issues that you’ve written about extensively in your papers and on your blog. Namely, a case law scarcity that causes risk-averse corporate defendants to cooperate regardless of the cost, and government agencies who have the mostly unchecked power (and possibly incentive) to exploit a corporation’s position to cobble together the largest possible fine. Overall, I expect both of these possible frameworks are at play.

DOJ or SEC asks the “where else” question in the absence of any meaningful check or judicial oversight.  What is the remedy?

If I had been asked a year ago whether there was any meaningful check or judicial oversight with respect to the “where else” question, I would almost certainly have replied that there was not.  Given the government’s assorted setbacks in the past year, however — the overturned Lindsay Manufacturing convictions, the O’Shea acquittal, the Africa sting case acquittals and mistrial — it is possible that a potential check is emerging.  Until recently, the government’s near-perfect track record has given them the power to unilaterally dictate the terms of a defendant’s “voluntary” cooperation.  It stands to reason that once defendants have some hope of a positive outcome at trial, the parties’ negotiating positions will not be so lopsided and a company will be able to resist, without fear of reprisal, an unreasonable demand to expand the investigation.

Another possible remedy, although perhaps a more improbable one, would be a revision not to the FCPA itself, but instead to the agencies’ internal guidelines.  This revision would make clear that cooperation credit should not be withheld in situations where the company declines to expand its investigation in the absence of some specific and articulable facts pointing to wrongdoing there.  This “reasonable suspicion” language is, of course, less demanding than the probable cause required for a warrant, but it is at least enough to prevent the blind fishing expeditions that happen now.

Both of the above scenarios will likely require another high-profile setback or two, but as we’ve seen over the past year, those are certainly not out of the question anymore.

In short, failure to comply with the FCPA has real business effects in addition to any ultimate fine and penalty amount announced on resolution day.    This post summarizes several recent business effects associated with FCPA scrutiny.

*****

As previously indicated in this Wall Street Journal Corruption Currents post by Samuel Rubenfeld, S&P  recently cut its debt rating on Avon Products Inc.  Among the reasons cited for the downgrade was “expenses related to the ongoing investigation under the Foreign Corrupt Practices Act.”  (See here).  As noted in this recent New York Times White Collar Watch piece by Professor Peter Henning, professional fees and expenses incured by Avon in connection with its internal FCPA review have approached $250 million – and there hasn’t even yet been an enforcement action.  Over the past three years and doing the math, Avon has spent approximately $225,000 per day on its FCPA inquiry.  One can debate whether such expenses (as well as the other business effects noted in this post) should happen or are truly necessary, but the point remains such effects are happening.

Sticking with the investigative fees issue, Weaterford International recently stated in its March 15th annual report (here) that since disclosure of its FCPA scrutiny (as well as Iraq Oil for Food and OFAC scrutiny) it has “incurred $123 million for legal and professional fees in connection with complying with and conducting” the on-going investigations.  According to the company, “this amount excludes the costs [the company has] incurred to augment and improve our compliance function.”

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Diebold, which disclosed FCPA issues in July 2010 (see here), stated in March 14th proxy solicitation materials (here) that the cash bonus of Thomas Swidarski (President and CEO) was reduced by the Compensation Committee.  According to the materials, the Committee concluded that ”given the CEO’s ultimate responsibility for the oversight of the company, as a result of the impact to the company of the global FCPA investigation it was appropriate that Mr. Swidarski’s cash bonus be reduced.”  Nevertheless the materials indicate that Swidarski did receive a $1 million cash bonus (on top of his other compensation) … but it could have been more.  Another component of the proxy materials that caught my eye was discussion of the Board Special Committee set up to oversee the “global FCPA review.”  The materials note as follows.  “This committee met in person or telephonically seven times in 2011.

*****

In other disclosure news, Dun & Bradstreet (the world’s leading source of commercial information and insight on businesses) announced earlier this week (see here) that it “has been reviewing certain allegations that local employees may have violated the Foreign Corrupt Practices Act and certain other laws in our China operations. D&B is cooperating with the  local Chinese investigation, and has voluntarily reported these matters to the U.S. Department of Justice and the U.S. Securities and Exchange  Commission.”

D&B’s FCPA disclosure was contained in the same release in which the company stated it “has temporarily suspended its Shanghai Roadway D&B Marketing Services Co Ltd. operations in China, pending an investigation into allegations that its data  collection practices may violate local Chinese consumer data privacy laws.”

D&B’s FCPA disclosure marks the third time in the last four weeks that a company has newly disclosed FCPA scrutiny.

Reader Mail

At times, even I ask myself why I spend countless hours maintaining a free website.  Then I receive an e-mail from a reader such as the one below (the reader encouraged me to share it) and I keep writing.

“I just wanted to thank you for your blog.  My son-in-law, [former Africa Sting defendant], was involved in the sting case.
After his arrest we found your website and learned alot from it.  We had never heard of the fcpa before all of this happened.  Your site was the most informative and easy for nonlawyers to understand. I would check it everyday for updates!  It was my lifeline!  Thank you again for writing so much about the case.  I’m just glad it is over and life can go back to normal.

Sincerely,

[Relative of former Africa Sting defendant]”

Olympic Loophole

A recent article in the Wall Street Journal (A Battle for Mongolia’s Copper Lode – Feb. 22nd) reminded me of a post lost in the unpublished archives.

Last August, Rio Tinto PLC, which manages the Oyu Tolgoi mine in Mongolia, announced (here) that the company “signed an agreement with the Mongolian National Olympic Committee (MNOC) to be a Gold Partner sponsor for the Mongolian National Team competing at the London 2012 Olympic and Paralympic Games.”  In the release, Rio Tinto Country Director Mongolia, David Paterson,  stated “we are sponsoring the National Olympic Team as part of our long-term commitment to Mongolia and Oyu Tolgoi.”  The release further stated as follows.  “Rio Tinto’s Olympic sponsorship is just one of many ways the company is contributing to Mongolia’s development. For example, Rio Tinto invests in numerous programmes that assist regional and local communities and young Mongolians in the areas of education and training, local procurement practices and sustainable development.”

An August 2011, Wall Street Journal article discussing Rio Tinto’s sponsorship states that Mongolia “is a key battleground for mining companies, which are vying to extract its rich mineral deposits” and that the Oyu Tolgoi project “is expected to yield 1.2 billion metric tons of copper and 650,000 ounces of gold a year in its first 10 years, as well as silver and other metals.”

For more on Rio Tinto’s involvement at Oyu Tolgoi, see here from the company’s website.

On one level, engaged corporate citizens with a committment to community welfare and development is a good thing and ought to be encouraged.

But, on another level, and FCPA jurisdictional issues aside (although Rio Tinto’s ADR’s are traded on a U.S. exchange), is a company’s sponsorship of a country’s Olympic team any less problematic than a company providing a laptop computer or an expensive bottle of wine to an employee of a state-owned or state-controlled enterprise?  What about pre-paid gifts cards (oops, getting ahead of myself, that is coming up next)?  Such instances have never been the sole basis for an FCPA enforcement action, but such allegations (or those similar) are frequently included in FCPA enforcement actions suggesting that the enforcement agencies do indeed view such conduct as problematic.

Strange as it may sound, the FCPA’s anti-bribery provisions are only implicated when something of value is provided, directly or indirectly, to a foreign official to influence the official in obtaining or retaining business.  The FCPA’s anti-bribery provisions are not implicated when the thing of value is provided to a foreign government itself.  Even the DOJ recognizes this. See here for DOJ Opinion Procedure Release 09-01 in which the DOJ states that the  proposed course of conduct “fall[s] outside the scope of the FCPA in that the  [thing of value] will be provided to the foreign government, as opposed to  individual government officials …”.

Is this an FCPA loophole?  If so, ought it be closed?

This Week’s Disclosure(s)

Back to those pre-paid gift cards.

On Feb. 16th in this prior post, I commented (somewhat tongue-in-cheek) that every week another  company seems to be disclosing FCPA scrutiny.  So far two weeks have passed and there have been two new disclosures.  This week’s disclosure is from W.W. Grainger Inc. (consistently ranked as one of the “world’s most admired companies” by Forbes).  In a recent SEC filing, the company (a broad-line distributor of maintenance, repair and operating supplies and other related products and services) stated as follows.

“The Company is conducting an inquiry into alleged falsification of expense accounts submitted by employees in certain sales offices of Grainger China LLC, a subsidiary of the Company. In the course of the investigation the Company learned that sales employees may have provided prepaid gift cards to certain customers. The extent and value of the gift cards are subject to further inquiry. The Company’s investigation includes determining whether there were any violations of laws, including the U.S. Foreign Corrupt Practices Act. Consequently, on January 24, 2012, the Company contacted the U.S. Department of Justice (DOJ) and the Securities and Exchange Commission (SEC) to voluntarily disclose that the Company was conducting an internal investigation, and agreed to fully cooperate and update the DOJ and SEC periodically on further developments. The Company has retained outside counsel to assist in its investigation of this matter. Because the investigation is on-going, the Company cannot predict at this time whether any regulatory action may be taken or any other potential consequences may result from this matter.”

Finally on the disclosure front, in August 2011, Brucker Corp. made an FCPA disclosure concerning its Brucker Optics subsidiary in China.  Recently, the company further disclosed as follows.

“As previously reported, in 2011 the Audit Committee of our Board of Directors commenced an internal investigation, with the assistance of independent outside counsel and an independent forensic consulting firm, in response to certain anonymous communications received by us alleging improper conduct in connection with the China operations of our Bruker Optics subsidiary. The Audit Committee’s investigation, which included a review of compliance by Bruker Optics and its employees in China and Hong Kong with the requirements of the Foreign Corrupt Practices Act (FCPA) and other applicable laws and
regulations, has been completed. The investigation found evidence indicating that payments were made that improperly benefited employees or agents of government-owned enterprises in China. The investigation also has found evidence that certain employees of Bruker Optics in China and Hong Kong failed to comply with our corporate policies and standards of conduct. As a result, we have taken personnel actions, including the termination of certain individuals. We have also terminated our business relationships with certain third party agents, implemented an enhanced FCPA compliance program, and strengthened the financial controls and oversight at our subsidiaries operating in China and Hong Kong. We have also initiated a review of the China operations of our other subsidiaries, which is being conducted with the assistance of an independent audit firm.

“In the fiscal year ended December 31, 2011, $4.3 million was recorded for legal and other professional services incurred related to the internal investigation of these matters.”

As noted in Brucker’s initial filing, in 2010, the China operations of Bruker Optics accounted for less than 2.5  percent of the Company’s consolidated net sales and less than 1.0 percent of its  consolidated total assets.

SEC Speaks

The Subject to Inquiry Blog published by McGuireWoods has this post regarding the recent SEC Speaks event.  Regarding anti-corruption enforcement, the post states as follows.

The Commission now has a “cross-border group” charged with ferreting out corruption in corporations that trade on US exchanges, but are headquartered abroad.  The group is particularly interested in the accounting policies and financial disclosures of cross-border companies, many of which rely on “small US audit firms.”  As a result, the SEC is leaning on audit firms, which the SEC regards as “gatekeepers.”  To that end, the SEC issued guidance in 2010 and again in 2012, advising that they conduct risk-based analyses of their overseas clients.  According to Kara Brockmeyer, head of the SEC’s FCPA Unit, the SEC has seen a spike in Form 8-K reports of accounting irregularities, as well as a jump in Rule 10A reports.  She expects additional 10A reports to flow in through the Office of the Whistleblower.

Brockmeyer noted that the SEC is also devoting significant resources to Foreign Corrupt Practices Act (FCPA) enforcement.  The SEC’s FCPA Unit is focusing heavily on international cooperation, teaming with regulators around the world.  She highlights the FCPA Unit’s cooperation with Switzerland, Russia, and China, each of which recently enacted anticorruption laws.  The FCPA Unit brought 20 FCPA enforcement cases 2011, including 19 against companies and one against an individual.  Brockmeyer cautioned, however, that the 2011 numbers should not be seen as a model.  Indeed, in 2012 the SEC has already charged 14 individuals with FCPA violations, compared with only five companies charged.

From the Executive’s Mouth

Some excerpts from earnings conference calls that caught my eye.

From Bill Utt (President, CEO and Chairman of KBR Inc.) during a recent call.  “I would also like to report that in February KBR successfully concluded our three-year independent corporate monitorship related to KBR’s 2009 plea under the US Foreign Corrupt Practices Act case. Overall, the engagement with our corporate monitor was a positive experience for KBR. We remain committed to consistently doing the right thing every time, and our commitment to compliance is a fundamental part of KBR’s culture. In fact, our compliance programs are paying off in terms of new work as we were recently awarded an international project where our compliance program was a differentiating factor in KBR securing the work.”

From Kevin Royal (Senior VP, CFO of Maxwell Technologies) during a recent call.  “Now I would like to provide an update regarding the shareholder derivatives. As we have disclosed in past public filings in 2010, two shareholders had alleged that certain of our past and current officers and directors failed to prevent us from violating the US Foreign Corrupt Practices Act, or FCPA. It is important to note that the Company is only a nominal defendant in this suit. In December 2011 mediation was held and a proposed settlement was reached wherein $3 million would be paid to plaintiff’s counsels, with $2.7 million to be paid by our insurance carrier, and $290,000 would be paid by the Company. In addition, we would be required to insure that certain corporate governance measures are in place and in force. The agreement is subject to among other things, court approval and notice to our shareholders. Without admitting any wrongdoing, the defendants to this suit are willing to enter into this settlement in order to expedite resolution of the matter, and to relieve the defendants and the Company from further financial burden. We are pleased that this suit is near final settlement, and look forward to putting this matter behind us.”  [For a recent post on FCPA-related civil litigation titled "A Purpose or Parasitic" - see here].

From Bernard Duroc-Danner (President and CEO of Weatherford International in response to a question about the company’s FCPA inquiry) “Well, there’s not a lot to say about, that I can say, about the DOJ process. To a degree, I think it fell off the screen as it were.  For us it moves slowly, that’s all I can tell you. So, I don’t have much of an update that I can tell you. And actually even if I could, I wouldn’t have much of an update period.”

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On that note, a good weekend to all.