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Survey Says

Monday, May 13th, 2013

Some recent FCPA-related surveys and notable survey results to share.

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Ernst & Young recently released its 12th Global Fraud Survey. The survey was based on “more than 1,700 interviews … conducted in 43 countries between November 2011 and February 2012. Survey results included the following:

39% of respondents reported that “bribery or corrupt practices occur frequently in their countries”

The following question was asked: “what, if any, of the following do you feel can be justified if they help a business survive an economic downturn.” 30% agreed with “entertainment to win/retain business”; 16% agreed with “personal gifts to win/retain business” and 15% agreed with “cash payments to win/retain business.”

“15% of CFOs surveyed would be willing to make cash payments to win or retain business”

“Only 46% of CFO respondents had attended [anti-bribery/anti-corruption] training”

“16% of CFO respondents do not know that their company can be held liable for the actions of third-party agents.”

McGladrey (a company that provides assurance, tax and consulting services focused on the middle market), in partnership with The Institute of Internal Auditors Research Foundation, recently released this ”Global Corruption Law Compliance Report.” The report was based on a survey of 120 executive leaders at middle-market companies across the globe. Participants were asked a variety of bribery and corruption related questions. Survey results included the following.

52% of survey respondents reported dealing with more than 100 foreign business partners on annual basis. 53% of companies with $1 billion or more in annual revenue reported having 50o or more foreign business relationships.

“Only 30% of all survey respondents say their companies always conduct a risk review of existing business relationships and ties to agents in foreign countries.”

“Just 43% of respondents say their companies conduct training at least once a year.” “Slightly more than one-third of all companies in our survey say they offer no compliance training, with the vast majority of those businesses in the under $500 million annual revenue bracket. Still, 24% of companies with over $1 billion in annual revenue also say they don’t provide corruption law compliance training.”

The question was asked, “in the past two years, has your organization experienced one of the following events due to a global corruption related incident. “Dismissal of an employee” – 24% said yes; “potential contract, deal or acquisition restructured” – 10% said yes; “potential contract, deal or acquisition cancelled” – 12% said yes.

“75% of all companies agree that their corruption law-related internal controls need some level of improvement”

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As noted in this previous post concerning the November 2012 FCPA Guidance, the DOJ and SEC recognized in the Guidance that “positive incentives” can drive compliant behavior. However, much of this recent data is consistent with prior data – and all point in the same direction: despite the general increase in FCPA enforcement and despite the incentives currently in place, a meaningful percentage of business organizations are not doing what the enforcement agencies want them to do. The enforcement agencies current incentive – that such compliance policies and procedures can only lessen the impact of legal exposure – is not the right positive incentive. An FCPA compliance defense (see here) is.

Of course, we don’t know what any of the above percentages would be if there was a compliance defense. However, I am confident that many categories would be “better” if there was an FCPA compliance defense. “Better” numbers would mean better compliance, which would likely mean less instances of improper conduct, which would likely mean less bribery, which would mean the objectives of the FCPA are being better achieved.

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This recent Grant Thorton survey of in-house counsel found that “‘regulatory compliance and enforcement’ was considered the second-highest threat to growth – even more threatening than traditional business concerns such as ‘global or domestic competition’ and the ‘lack of customer demand.’” Behind labor law violations, the FCPA was listed as the second most “specific regulatory area” respondents saw as a threat.

The survey was conducted online between January 15, 2013, and March 1, 2013. There were 243 respondents, all of whom were in-house counsel, 44% of whom were general counsel. The respondents were split evenly from among publicly traded and privately held companies,

A Positive Correlation

Wednesday, March 27th, 2013

Previous posts (see here, here and here) have posed the question several times.

Why do Foreign Corrupt Practices Act violations occur?

Do companies subject to the FCPA do business in foreign markets: (i) intent on engaging in bribery as a business strategy and without a committment to FCPA compliance; or (ii) with a committment to FCPA compliance, yet subject to difficult business conditions?

To be sure, there have been some instances, as reflected in FCPA enforcement actions, where bribery was used as a business strategy and approved of and condoned by high-level corporate executives. However, the latter is the more common reason for FCPA enforcement actions and related scrutiny.

Indeed, as Joseph Covington (a former DOJ FCPA Unit Chief) commented in this prior guest post, he has “rarely seen American companies affirmatively offering bribes in the first instance.” Rather, Covington observed that companies doing business in international markets are “reacting to a world not of their making” and that “as the world shrinks companies who seek to do the right thing can’t help but confront corrupt officials – as customers, regulator and adjudicators – and confront them often.”

This point is evident in reviewing the World Bank’s Ease of Doing Business Rankings and then comparing the results to Transparency International’s Corruption Perceptions Index.

The “ease of doing business index” ranks countries based on factors such as the ease of starting a business, obtaining permits and otherwise dealing with regulatory officials. The “corruption perceptions index” ranks countries based on the perceived levels of public sector corruption. You don’t have to be trained in sophisticated statistical methods (which I am not) to see a positive correlation between the two rankings. That is, the lower the regulatory burdens imposed on business, the less corrupt the country is perceived to be. The greater the regulatory burdens imposed on business, the more corrupt the country is perceived to be.

Regulatory burdens (ranging from customs procedures, licensing and certification requirements, foreign government procurement policies, etc.) create bureaucracy, bureaucracy creates interactions with foreign officials, and the more interactions with foreign officials the greater the FCPA risk will be.

In short, in addition to the forced business relationships that many companies are required to endure while doing business in a foreign country, companies are often funneled into an arbitrary world of low-paying civil servants who administer entrenched bureaucracies which create the conditions for harassment bribes to flourish.

In “Revisiting a Foreign Corrupt Practices Act Compliance Defense” I argued that the U.S. ought to recognize this simpl fact of doing business in many international markets.

Well, in fact, the U.S. Congress did recognize this fact when it passed the FCPA. Congress exempted so-called “grease” or “facilitation” payments from the reach of the FCPA (first through the definition of “foreign official” and then in 1988 through a stand-alone facilitation payment exception) and otherwise included an obtain or retain business element in the FCPA’s anti-bribery provisions. (See my article “The Story of the Foreign Corrupt Practices Act” for a detailed overview of the legislative history).

I argued in “Revisiting an FCPA Compliance Defense” that, so long as the enforcement agencies refuse to recognize congressional intent in enacting the FCPA, that such congressional intent 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. As detailed in the article, this is not the only reason I, and many others, support an FCPA compliance defense, but it is clearly an important reason.

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The below chart has two segments. The left segment lists the countries at the top of the “ease of doing business index” and a country’s associated “corruption perceptions index” score. The right segment lists the countries at the bottom of the “ease of doing business index” and a country’s associated “corruption perceptions index” score.

Country	World Bank Doing Business Index	Transparency International CPI Index	Country	World Bank Doing Business Index (out of 185)	Transparency International CPI Index (out of 174)
Singapore	1	5	Senegal	166	94
Hong Kong	2	14	Mauritania	167	123
New Zealand	3	1	Afghanistan	168	174
United States	4	19	Timor-Leste	169	113
Denmark	5	1	Gabon	170	102
Norway	6	7	Djibouti	171	94
United Kingdom	7	17	Angola	172	157
Korea, Rep.	8	45	Zimbabwe	173	163
Georgia	9	51	Haiti	174	165
Australia	10	7	Benin	175	94
Finland	11	1	Niger	176	113
Malaysia	12	54	Cote d Ivoive	177	130
Sweden	13	4	Guinea	178	154
Iceland	14	11	Guinea-Bissau	179	150
Ireland	15	25	Venezuela	180	165
Taiwan	16	37	Congo, Dem. Rep.	181	160
Canada	17	9	Eritrea	182	150
Thailand	18	88	Congo Rep.	183	144
Mauritius	19	43	Chad	184	165
Germany	20	13	Central Africa Rep.	185	144

Friday Roundup

Friday, March 22nd, 2013

An endorsement, it’s an FCPA world, spot-on, for the reading stack and events of interest. It’s all here in the Friday roundup.

An Endorsement

Several recent posts (see here for instance) have called for a common FCPA lingua franca including as to what is an FCPA enforcement action. In this prior post, in an effort to improve the quality and reliability of FCPA statistics and related information, I set forth various metrics for what is an FCPA enforcement action, including the core approach I use in my FCPA data.

Recently Chuck Duross (DOJ FCPA Unit Chief) endorsed the core approach when he stated as follows:

“So the bottom line is, we don’t count statistics the way I guess some of the people, whether it’s the commentators or the media, or law firms and the like. [...] And so, you know, we count slightly differently by the way, than a lot of people in the public. If you have a parent and two subs plead guilty, and the parent gets a DPA, we don’t count that as three actions. That’s one matter from our prospective, and I think internally it just makes sense for us.”

[The website Main Justice recently posted here the full comments of Duross at the ABA's National Institute on White Collar Crime]

As one informed observer recently shared with me, the lack of an FCPA lingua franca “muddies the conversational waters.”

Case in point, earlier this week the Wall Street Journal, citing statistics from a law firm, reported that “since 2009, the Justice Department has brought 108 [FCPA] cases while the SEC has brought 77.”

Using the core approach, the numbers since 2009 are as follows. DOJ – 46 “core” FCPA enforcement actions; SEC – 50 “core” FCPA enforcement actions. Obviously, there is a huge difference between these numbers, and even my “core” numbers paint an inadequate picture because many FCPA enforcement actions involve both a DOJ and SEC component based on the same alleged core set of facts. In short, since 2009, there have been approximately 55 ”core” FCPA enforcement actions (and a point could be made that even this number overstates things a bit since it separately counts the seven Panalpina related actions).

For additional reading on a proper perspective on FCPA enforcement statistics, see this prior post.

It’s An FCPA World

Scrutiny alerts / updates regarding Microsoft, News Corp, Optimer Pharmaceuticals and Sig Sauer.

Microsoft

Earlier this week, the Wall Street Journal reported here that the DOJ and SEC “are examining kickback allegations made by a former Microsoft representative in China, as well as the company’s relationship with certain resellers and consultants in Romania and Italy.” According to the article, “the China allegations come from an anonymous tipster who passed them on to U.S. investigators in 2012.” The article further states that “the allegations in China were also the subject of a 10-month internal investigation [conducted by an outside law firm] that Microsoft concluded in 2010 [and that the investigation] found no evidence of wrongdoing” and that tipster “whose contract [with Microsoft] ended in 2008, was also involved in a labor dispute with Microsoft in China.”

As to Romania, the articles states that “U.S. government investigators are also reviewing whether Microsoft had a role in allegations that resellers offered bribes to secure software deals with Romania’s Ministry of Communications” and that in Italy “the agencies are looking at Microsoft’s dealings with consultants in Italy that specialize in customer-loyalty programs.” According to the article, the allegations focus on Microsoft’s Italian unit’s use of “consultants as vehicles for lavishing gifts and trips on Italian procurement officials in exchange for government business.”

For additional coverage, see here from the New York Times.

John Frank (Microsoft Vice President & Deputy General Counsel) responded in a company blog post as follows.

“[T]he Wall Street Journal reported that the U.S. government is reviewing allegations that Microsoft business partners in three countries may have engaged in illegal activity, and if they did, whether Microsoft played any role in these alleged incidents. We take all allegations brought to our attention seriously, and we cooperate fully in any government inquiries. Like other large companies with operations around the world, we sometimes receive allegations about potential misconduct by employees or business partners, and we investigate them fully, regardless of the source. We also invest heavily in proactive training, compliance systems, monitoring and audits to ensure our business operations around the world meet the highest legal and ethical standards. The matters raised in the Wall Street Journal are important, and it is appropriate that both Microsoft and the government review them. It is also important to remember that it is not unusual for such reviews to find that an allegation was without merit. (The WSJ reported earlier this week that an allegation has been made against the WSJ itself, and that, after a thorough investigation, its lawyers have been unable to determine that there was any wrongdoing). We cannot comment about on-going inquiries, but we would like to share some perspective on our approach to compliance. We are a global company with operations in 112 countries, nearly 98,000 employees and 640,000 business partners. We’re proud of the role we play in bringing technology to businesses, governments, non-profits and consumers around the world and the economic impact we have in local communities. As our company has grown and expanded around the world, one of the things that has been constant has been our commitment to the highest legal and ethical standards wherever we do business. Compliance is the job of every employee at the company, but we also have a group of professionals focused directly on ensuring compliance. We have more than 50 people whose primary role is investigating potential breaches of company policy, and an additional 120 people whose primary role is compliance. In addition, we sometimes retain outside law firms to conduct or assist with investigations. This is a reflection of the size and complexity of our business and the seriousness with which we take meeting our obligations. We also invest in proactive measures including annual training programs for every employee, regular internal audits and multiple levels of approval for contracting and expenditure. In a company of our size, allegations of this nature will be made from time to time. It is also possible there will sometimes be individual employees or business partners who violate our policies and break the law. In a community of 98,000 people and 640,000 partners, it isn’t possible to say there will never be wrongdoing. Our responsibility is to take steps to train our employees, and to build systems to prevent and detect violations, and when we receive allegations, to investigate them fully and take appropriate action. We take that responsibility seriously.”

News Corp.

Earlier in the week, in what was a strange article in that the Wall Street Journal was reporting on itself, the WSJ reported here that “the Justice Department last year opened an investigation into allegations that employees at The Wall Street Journal’s China news bureau bribed Chinese officials for information for news articles. A search by the Journal’s parent company found no evidence to support the claim, according to government and corporate officials familiar with the case.” The article states as follows. “According to U.S. and corporate officials, News Corp. has told the Justice Department that some company officials suspect the informant was an agent of the Chinese government, seeking to disrupt and possibly retaliate against the Journal for its reporting on China’s leadership. The company officials came to that view after finding no evidence of the alleged bribery and because of the timing and nature of the accusations, company officials say.”

The article also states as follows concerning News Corp.’s overall FCPA scrutiny which splashed onto the scene in July 2011 (see here for the prior post).

“Since 2011, the Justice Department has been overseeing a criminal investigation of News Corp. relating to revelations that its British papers hacked phones and bribed public officials to get information for articles. Almost two years later, that probe is nearing completion, government and company officials said, setting the stage for settlement negotiations between the U.S. and News Corp. News Corp., which has hired law firm Williams & Connolly to oversee the FCPA case, is expected to make its final presentation detailing the company’s global bribery investigation to the Justice Department next month, according to people familiar with the matter. It will be then up to the Justice Department to spell out what punishment or sanctions, if any, the agency wants, and at that point negotiations will likely begin. The Justice Department doesn’t publicly discuss cases that close without charges filed. Both sides expect an agreement would include a monetary settlement of some kind, based on the alleged violations in the U.K. The government has also investigated potential misconduct in the company’s former Russian outdoor billboard subsidiary, according to people familiar with the case, specifically whether it paid bribes to local officials to approve sign placements in that country.”

Optimer Pharmaceuticals

Optimer (see here for the prior post) disclosed as follows in a recent SEC filing.

In March 2012, we became aware of an attempted grant in September 2011 to Dr. Michael Chang of 1.5 million technical shares of OBI. We engaged external counsel to assist us in an internal review and determined that the attempted grant may have violated certain applicable laws, including the FCPA. In April 2012, we self-reported the results of our preliminary findings to the SEC and the DOJ, which included information about the attempted grant and certain related matters, including a potentially improper $300,000 payment in July 2011 to a research laboratory involving an individual associated with the OBI [Optimer Biotechnology, Inc.] share grant. At that time, we terminated the employment of our then-Chief Financial Officer and our then-Vice President, Clinical Development. We also removed Dr. Michael Chang as the Chairman of our Board of Directors and requested that Dr. Michael Chang resign from the Board of Directors, which he has not. We continued our investigation and our cooperation with the SEC and the DOJ. As a result of our continuing internal investigation, in February 2013, the independent members of our Board of Directors determined that additional remedial action should be taken in light of prior compliance, record keeping and conflict-of-interest issues surrounding the potentially improper payment to the research laboratory and certain related matters. On February 26, 2013, our then-President and Chief Executive Officer and our then-General Counsel and Chief Compliance Officer resigned at the request of the independent members of our Board of Directors. In addition, over the past year, we have revised our compliance policies, strengthened our approval procedures and implemented training and internal audit procedures to make our compliance and monitoring more comprehensive. We continue to cooperate with the SEC and DOJ, including by responding to informal document and interview requests, conducting in-person meetings and updating these authorities on our findings with respect to the attempted OBI technical share grant, the potentially improper payment to the research laboratory and certain matters that may be related.”

Sig Sauer

The Indian Express reports here reports allegations that Sig Sauer (a U.S. arms manufacturer) conspired with an Indian agent and his associates ”to sell arms to India in violation of the FCPA and Indian laws. A JV called Sig Sauer Asia LLC was created with the sole purpose of paying 10 per cent commission on all arms deals made with the Defence and Home ministries in India.”

Spot-On

In a recent Q&A on Law360, William Goodman (Kasowitz) stated as follows.

“Q: What aspects of your practice area are in need of reform and why?

A: In the area of federal criminal practice, there must be reform in and reduction of the power of prosecutors to force individuals and corporations to cooperate in marginal cases by threatening draconian outcomes if cooperation is not forthcoming. This practice is particularly reprehensible because it does not achieve anything approaching a fair result in many cases. When lawyers and clients have to cave in to pressure based on a threatened punishment and not based on the merits of the case, the truth and genuine justice take a back seat to expediency.”

In this recent Op-Ed in the Wall Street Journal titled “Corporate Crime and Punishment” David Rivkin and John Carney stated as follows.

“Two weeks ago, a unanimous Supreme Court rebuffed the Securities and Exchange Commission Gabelli v. SEC. The SEC maintained that its enforcement actions for fines under the Investment Advisers Act weren’t subject to the five-year statute of limitations. This wasn’t the first time the courts have pushed back a federal agency for overreaching. It won’t be the last. But the SEC’s audacity prompts a broader policy question: What good is accomplished by imposing monetary penalties on corporations, as the agency attempted to do in Gabelli? The answer is that when such penalties are sought by the government, they probably do more harm than good. Monetary damages, including penalties, that are awarded in private lawsuits are an attempt to compensate victims of corporate fraud and other unlawful behavior, usually shareholders or customers, making them as “whole” as the law can approximate. The SEC doesn’t seek monetary fines in most cases—it has an array of other enforcement options including injunctive or remedial relief. When it does pursue a fine, however, the purpose is solely punitive. In Gabelli, for example, the SEC brought two sets of claims against principals of an investment firm who countenanced a client’s “market timing” scheme. The first claim sought disgorgement of profits to the government—a remedy that Gabelli didn’t appeal. But the SEC also sought large monetary fines designed solely to punish the defendants and brand them as wrongdoers. Who is the wrongdoer in such a situation? The company officials who made the bad decisions? The board of directors? The shareholders? Pinning a wrongdoer label on the corporation as a whole or fining a corporation in this way—years after any alleged wrongdoing—punishes current shareholders for conduct that benefited a largely different group of shareholders, if any benefit was conferred at all. From a current shareholder’s point of view, government-imposed corporate fines are virtually indistinguishable from a tax on investing, and are thus a disincentive for doing so.”

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“The principal rationale for levying fines is to deter corporate wrongdoing. The mismatch between the shareholders that benefit from misconduct and those that are ultimately punished undermines this rationale. Corporate fines are equally problematic when considered as punishment for a manager’s bad conduct. Fine an individual for his conduct, and you are likely to deter him from doing it again. Fine a corporation, and the managers responsible for the misconduct have almost always left or been fired long beforehand. New managers are in place, and for them the tab is just a price of doing business. Moreover, even the threat of government fines or penalties puts immediate, intense pressure on a corporation to settle, regardless of the merits. A protracted legal fight means a public-relations nightmare. It could also impinge on corporate earnings, the reputations of current executives, and relationships with regulators and other business concerns. Whether the corporation is actually culpable of wrongdoing is a consideration, but it may not be a major one. That question can be beside the point of getting back to business and avoiding a prolonged battle with the SEC. In the large number of settlement scenarios where actual guilt isn’t the most pressing or relevant consideration, the fines don’t by definition deter any future misconduct. In any event, when the government obtains fines from corporate wrongdoers, the monies rarely go to any ascertainable “victims”—they merely transfer funds from businesses to an already bloated public sector. With the aggregate penalties often running into the billions of dollars, the economic distortions involved are substantial.”

“More recently, the SEC fined Eli Lilly $29 million in December 2012 for alleged misconduct that purportedly began more than a decade ago.”

As I highlighted in this post, it is an open question whether the Lilly enforcement action really accomplished anything.

Reading Stack

This recent Debevoise & Plimpton FCPA Update focuses on Latin America and contains useful charts of corporate enforcement actions, individual enforcement actions, and instances of FCPA scrutiny (2005 to 2012) that have involved alleged business conduct in Latin America. Over at his FCPAmericas blog, Matt Ellis also recently posted here and here FCPA enforcement actions involving conduct in Latin America.

A useful update here from WilmerHale titled “Recent Court Decisions Reveal Litigation Challenges for SEC.” It begins as follows.

“Although the US Securities and Exchange Commission may have significant leverage to get what it wants during the course of an investigation and even in settlements, several recent court decisions strongly suggest that the playing field levels once the agency ends up in litigation. From the US Supreme Court to the federal district courts, litigants are pushing back effectively against the SEC on everything from when the clock starts for the SEC to bring an action for civil monetary penalties to key discovery questions.”

From Sidley & Austin attorneys Kimberly Dunne and Alexis Buese an article (here) titled “Holding the Government to its Burden of Proof in FCPA Cases: Litigating Jury Instructions.” The article notes as follows.

“Unlike corporate defendants that resolved FCPA investigations pre‐indictment, individual defendants were not as willing to accept the government’s aggressive pre‐indictment demands or its broad interpretation of the statute, which the defense bar considered vague and untested. What ensued from the indictments that followed were a number of defense upsets.”

In my 2010 article “The Facade of FCPA Enforcement,” I noted that government enforcement agencies, when challenged, are vulnerable in contested actions and encouraged more FCPA defendants to challenge the enforcement agencies and further expose the facade of FCPA enforcement.

Events of Interest

Dow Jones Global Compliance Symposium, April 2-3 in Washington, D.C.. I will be participating in a panel titled “The FCPA: Does It Need Further Clarifying” along with Paul McNulty (Baker & McKenzie and former Deputy Attorney General) and David Yawman (Senior Vice President & Chief Compliance and Ethics Officer, PepsiCo, Inc.). The panel is being moderated by Joe Palazzolo of the Wall Street Journal.

TRACE International, in partnership with Barrick Gold Corporation and Arnold & Porter LLP, presents a 1-day seminar on Anti-Corruption for the Extractive Industries being held on April 23, 2013 in Toronto, Canada. (See here).

Neither Admit Nor Deny: Corporate Crime in the Age of Deferred Prosecutions, Consent Decrees, Whistleblowers and Monitors sponsored by Corporate Crime Reporter at the National Press Club in Washington, D.C. on May 3. I will be participating in a panel titled “Deferred and Non-Prosecution Agreements” along with Anthony Barkow (Jenner & Block), Steven Fagell (Covington), Kathleen Harris (Arnold & Porter), Denis McInerney (Deputy Assistant Attorney General, DOJ Criminal Division), and David Uhlmann (Univ. of Michigan Law School).

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

Friday Roundup

Friday, March 1st, 2013

Hits and misses, does it really need to cost this much, the Wal-Mart effect, survey says, Senate hearing quotable, while they’re at it, checking in on Hollywood and Goldman too, spot on, and some refreshing words. It’s all here in the Friday roundup.

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.

A Summary Of The Statistics

Thursday, January 31st, 2013

My recent number crunching binge comes to an end. The calculator deserves a break.

This post summarizes, in one spot, the various Foreign Corrupt Practices Act facts and figures published over the past few weeks.

As highlighted in this post, just three unique historical events (Iraq Oil for Food, Bonny Island, Nigeria conduct, and Panalpina-related issues) served as the foundation for 35% of all corporate FCPA enforcement actions between 2007-2011 and resulted in 55% of settlement amounts in corporate enforcement actions between 2007-2011. Adding just the 2008 Siemens enforcement action to the settlement amount calculation, results in just four unique historical events accounting for 77% of settlement amounts in corporate enforcement actions between 2007-2011.

As highlighted in this post, 61% of the individuals charged by the DOJ with FCPA criminal offenses since 2008 have been in just four cases and 77% of the individuals charged by the DOJ since 2008 have been in just seven cases. There have been 53 corporate DOJ FCPA enforcement actions since 2008 and in 39 actions (or 74%) there have not (at least yet) been any DOJ charges against company employees. Of the individuals charged by the DOJ with FCPA criminal offenses since 2008, 70% were employees or otherwise affiliated with private business entities even though 79% of corporate DOJ FCPA enforcement actions during the same time period were against publicly traded corporations. In short, a private entity DOJ FCPA enforcement action is approximately three times more likely to have a related DOJ FCPA criminal prosecution of an individual than a public entity DOJ FCPA enforcement action.

As highlighted in this post, since NPAs and DPAs were first introduced to the FCPA context, 83% of corporate DOJ enforcement actions that were the result of a criminal indictment or resulted in a guilty plea by the corporate entity to FCPA violations resulted in related criminal charges of company employees. By comparison, only 6.5% of corporate DOJ FCPA enforcement actions resolved solely with an NPA or DPA resulted in related criminal charges of company employees. These data points are useful in assessing the quality and legitimacy of many corporate DOJ FCPA enforcement actions. Instead of asking the ”but nobody was charged” question, the more appropriate question ought to be – do NPA and DPAs always represent provable FCPA violations.

As highlighted in this post, 64% of the individuals charged by the SEC with FCPA civil offenses since 2008 have been in just five cases. There have been 57 corporate SEC FCPA enforcement actions since 2008 and in 45 actions (or 79%) there have not (at least yet) been any SEC charges against company employees. This data point is likewise useful in assessing the quality and legitimacy of many corporate SEC FCPA enforcement actions. Instead of asking the “but nobody was charged” question, the more appropriate question ought to be, given the SEC’s neither admit nor deny settlement policy, whether such settlements always represent provable FCPA violations.

All of the above facts and figures were assembled using the “core” approach as well as the definition of an FCPA enforcement action described in this prior post.