Archive for the ‘Guest Posts’ Category

Lessons Learned As A Foreign Corrupt Practices Act Monitor

Thursday, July 23rd, 2015

LeasonsToday’s post is from Scott Fredericksen (Partner, Foley & Lardner) and originally appeared in International Trade Law & Regulation, Vol. 21, Issue 3, 2015 (Thomson Reuters).

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Not long ago, Foley & Lardner was selected as a monitor for a medical devices company that had been found to have engaged in activities alleged to have violated the FCPA. As the leader of the investigatory team, I did not have the normal advantage of working with a known client with a known business.

Rather, I needed to quickly develop a multi-faceted team that had to quickly get up to speed on the company’s business model, how it conduct business abroad, its distributor arrangements, its compliance program, its internal controls, and its training. In short, I had to set up a compliance review with the kind of probing that one would find in an in-depth financial audit.

The importance compliance lessons learned from Foley’s experience of a corporate monitor are provided below.

General Lessons

As most people who are involved in the compliance area know, establishing the right corporate culture is paramount. The key requirements include ensuring that the company has a culture of respect for compliance, that senior management is firmly behind all compliance efforts, and that there is a strong and well-funded compliance infrastructure that can catch compliance missteps from a variety of angles.

Establishing the appropriate corporate compliance culture requires constant reiteration of the compliance message. Compliance standards must be public and promulgated throughout the company, including through regular placement in company newsletters and on corporate intranets. Compliance A Corporate Monitor’s Guide to International Regulatory Compliance 6 policies should be readily accessible to employees and integrated into all aspects of employment, starting with discussions of compliance during the hiring process and references to the policy in employment contracts. Even employee performance reviews can help serve this purpose, by ensuring that employee adherence to compliance standards are part of the evaluation process.

The involvement of senior management is also essential for the development of a corporate culture focused on compliance. Placing a member of senior management in charge of compliance acts as a vital link between the executives and board members responsible for running a company and the employees on the ground who must deal with potential regulatory violations issues on a regular basis. A high-level member of management who is intimately involved in the compliance process also lends legitimacy to the company’s compliance policy and helps firmly establish the tone from the top.

This is not to say that every company needs to have a dedicated chief compliance officer. The establishment of the compliance infrastructure, like all compliance efforts, needs to be a risk-based endeavor, which means that the compliance needs of a smaller company that only operates in a handful of foreign countries may not be the same as those of a large multinational corporation that operates in a number of high-risk environments. It is common in smaller companies for compliance duties to be handled by an employee who has multiple responsibilities, such as the head of the human resources or audit departments. But at all companies, there should be a single person who is responsible for monitoring potential violations, managing due diligence, developing and providing compliance training, answering questions and resolving red flags, and testing the compliance program. This type of compliance ownership, by a person who is free from business pressures to achieve particular outcomes, is essential to ensure that compliance responsibilities are taken seriously. A Corporate Monitor’s Guide to International Regulatory Compliance.

A final issue is the adequacy of funding. Effective compliance requires hiring appropriate compliance personnel, taking time from busy employees for training, the establishment of internal controls and processes to monitor the effectiveness of the program and procedures in place, and periodic revisions to the policies and training materials. Companies should put in place programs that will be supported by commensurate resources. If, for example, a company states that it will perform due diligence on every agent it hires, then it should ensure that it has set aside sufficient resources to carry through on this commitment. Although compliance can be expensive, it pales in comparison to the multimillion dollar fines and high investigatory costs that now accompany even routine violations of U.S. regulations.

Compliance Program Improvements

A thorough and proper risk assessment forms the core of any good compliance program. No compliance program has the luxury of drawing on unlimited resources. Therefore, it is necessary to begin with a sober assessment of the regulatory risks facing the business, including those posed by its corporate profile, business model, types of products sold, areas of operation, use of third parties, degree of government interaction, and other business-profile issues that impact the degree of regulatory risk.

The ways in which to conduct a proper risk assessment vary, but certain principles are universal. Involvement from senior management and employees that understand the company, its business model, and its specific regulatory risk points is essential. The risk assessment must be conducted free of business pressures, without clouded judgment regarding where the highest risks arise. The risk assessment also should take into account all the ways in which outside actors can implicate the company or create regulatory liability, such as agents, distributors, joint venture partners, and other third parties. A Corporate Monitor’s Guide to International Regulatory Compliance

Companies also need to update their risk assessments on a regular basis. Corporate expansions, mergers and acquisitions, establishment of new joint ventures, expansions into new countries or product lines, and new distributor arrangements are all activities that can alter the risk profile of a company. Even regulatory developments, such as enactment of broad anticorruption laws such as the UK Bribery Act or the recent ramping up of OFAC sanctions and related enforcement activity, can impact compliance requirements. Not all of these changes, or their impact on compliance efforts, are obvious, which makes a regular reassessment of risk an important compliance function.

After conducting a risk assessment, a company must decide how to allocate its compliance resources. Allocating most resources to identified high-risk areas is important. So, however, is recognizing that the risk even in low-risk areas seldom is zero, and thus deserve some compliance attention as well. A well-structured risk assessment can help balance the distribution of compliance resources.

It also is important to regularly update compliance measures. Compliance standards regularly change, driven not only by changes in the regulatory framework but also the expectation of the regulators. As a result, it is important for a company to remain educated about compliance issues, including through regularly sending compliance personnel to specialized conferences, and following developments that bear on the ever-evolving standards for an acceptable compliance program.

When changes are made, the changes to the compliance program must be appropriately promulgated throughout the company. Depending on the change, this could require anything from company-wide training to a simple email from the company’s chief compliance officer. Regular communications regarding the company’s compliance message serves the dual purposes of keeping the A Corporate Monitor’s Guide to International Regulatory Compliance 9 compliance message top-of-mind while also communicating the company’s evolving compliance efforts and its commitment to compliance.

Training Enhancements

Training is an integral part of every compliance program, and serves a function that is much greater than merely communicating information. Done properly, it is an important part of the compliance-related dialogue that helps minimize the risk of violations and while helping to discover violations that already have occurred. It also is a key cog in the central goal of communicating the importance of compliance to the organization.

Although many companies conduct training electronically, including through the use of innovative compliance presentations and on-line quizzes, in-person training remains the gold standard. Company personnel tend to pay more attention to a live presentation, and the presentation can be tailored to the requirements of the audience. Allowing time for discussion not only allows employees the opportunity to ask questions about areas that are unclear, but often reveals areas where further inquiry may be appropriate. Properly presented, in-person training can result in compliance feedback that can be incorporated to improve the overall compliance program.

No matter how training is provided, it cannot be a one-time event. Although all employees should receive initial training upon their hiring, reinforcement of the training on a periodic basis is essential. Annually is a good benchmark that works for most companies.

Finally, companies should make training relevant to the evidence. The training should use as many real-world examples as possible, such as case studies drawn from actual problems confronted by the A Corporate Monitor’s Guide to International Regulatory Compliance 10 company in the past, as well as those that are more likely to occur based on the industry and where and how the company does business.

Audits and Compliance Checkups

Compliance as envisioned by the compliance program, and compliance as it actually occurs in the field, often are two very different things. A company that implements rigorous procedures, but then fails to live up to them, often enjoys the worst of two worlds, since its failure to meet its compliance goals would be held against it in any enforcement proceeding. To avoid this possibility, compliance implementation should be monitored by direct observation, by supervision of the program, and by testing the controls.

Some of this testing can be done in the company’s normal internal audit process, and it is important that internal audit employees receive specific compliance training so they understand what to do and why they are doing it. One increasingly common way of ensuring the testing of the controls is to conduct compliance audits. These audits are intended to stress-test compliance procedures by picking high-risk transactions at random to see whether the compliance program is functioning as envisioned. Beyond this, regime-specific audit items can be created, which generally will focus on whether the company is adhering to its internal controls in a given area. They can be conducted by properly trained internal or external auditors.

The tendency at many companies is to conduct audits based upon the ease of conducting them, rather than their utility. This shows up, for example, when companies target their own foreign operations for compliance-related audits, but do not exercise their rights to audit agents or joint venture partners. It also arises when companies do not return to the lessons of their risk assessments to determine the high- A Corporate Monitor’s Guide to International Regulatory Compliance 11 risk areas that merit follow-up checks. Unlike financial audits, which tend to concentrate on areas with the highest revenue impact, compliance-based audits often need to focus on areas that may have a small revenue impact but a large compliance risk footprint. Operations in a developing country, for example, may be new and have still-small revenue, yet present an outsized compliance risk.

Agent and Distributor Controls

No compliance program, no matter how well conceived, can perform its job unless the risks posed by third parties are adequately addressed. This is because many enforcement settlements are premised on agency principles, i.e., a determination that parties outside the company were acting on behalf of the principal, thus creating legal liability for the principal.

Dealing with agents, distributors, and other third parties presents unique and interesting challenges. Often companies work with these third parties in foreign countries because they do not understand the business culture or ins-and-outs of doing business in a particular country. Agents help fill this knowledge gap by bringing knowledge of the business environment that the company cannot fill by itself.

But the greater the separation from corporate headquarters, the greater the risk. The dangers of third parties can arise in a host of areas, including for matters handled by customs brokers, distributors, sales agents, political consultants, lobbyists, and other third parties. The consistent use of third parties, even when justified from a business perspective, by itself can be considered a compliance red flag. The oversight of third parties accordingly should be considered in every aspect of the company’s risk assessment, including with regard to the establishment of the relationship (with appropriate contractual protections), training, accounting, ongoing certifications, and even audits. A Corporate Monitor’s Guide to International Regulatory Compliance

Due diligence is also a key step when managing third-party risks. Due diligence is a potpourri of tasks that may include interviews, background checks, reviews of databases and publications, consulting third parties to provide reliable local information, using forensic accountants to review books and records to evaluate risk, visiting the office of agents, and other methods of confirming suitability, as the case may be. Once again, the application of risk-based principles will help determine how much due diligence is appropriate for various types of third parties.

At too many companies, third-party compliance oversight begins and ends with due diligence. In other words, the company conducts its third-party due diligence, places the resulting report in its file, and then moves on to conducting the business relationship without much more in the way of oversight. Ongoing review of the relationship, however, is the best way to proceed, including through periodic certifications, ensuring up-to-date training, monitoring any deviations of the relationship from the anticipated course, and the conduct of third-party audits. Due diligence is important, but it is only a limited snapshot of the past. As the relationship evolves, the company’s best source of information about the relationship becomes the data concerning its own relationship with the third party.

 

“The Most Corrupt Health System Globally Is That in the US. Unfortunately It is Also the Most Influential Medical System”

Tuesday, July 21st, 2015

PillsIn response to this recent post, I received the following from an individual who prefers to be called “a fraud investigator from the United Kingdom.”

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I was interested to read your points and observations about health care and the foreign official issue. Notwithstanding whether or not employees and physicians connected to state owned or controlled hospitals etc are foreign officials, there is a very real concern, certainly in the UK, that financial interests undermine medical decision making. Indeed there are various studies which appear to prove the effect.

I know from experience there is a resultant detriment to state funds here, so in this context and in the absence of other meaningful regulation of health care corruption, the broad use of “foreign officials” is welcome.

Many people working in my industry recognise that health care presents unique issues with corruption. This may be explained by market forces. For example, if you ‘marketize’ an essential service where the purchasers are entirely reliant on people with financial interests (Physicians) to decide what is best for them, and at the same time patients cannot challenge those people without potentially jeopardizing their own care, it is arguable that such a market cannot ever function effectively, particularly when huge amounts of money are involved.

Health care is also unique in how and why it is utilized. You can walk away from your lawyer, accountant etc if you feel uncomfortable, but you can’t so easily walk away from a Physician who may hold the key to curing you. It follows that you are very unlikely to question or care about their financial interests, particularly when your insurer or the government is paying most of the costs.

Ultimately though, patients not only trust Physicians based on them being people of high public standing, but they also have to trust Physicians if they are to be confident of getting well. It is this inherent trust which is exploited and undermined by financial interests. I think everyone knows fundamentally how wrong it is for payments to be made to Physicians and other health care professionals, the question is how to stop the practices and to cure the underlying cultural cause.

Within the US health care sector there are agencies who use well intentioned laws to prosecute wrongdoing such as under Stark or the Federal Anti-Kickback statute; HHS-OIG and the FBI publicize high profile prosecutions very frequently. However, those efforts appear never ending – presumably because the profits are so great that for many people it is considered worth taking the risk. However, I also know in some parts of the US that businesses are unable to compete for patients on a legitimate basis because all other providers are paying kickbacks to secure business.

My interest and point in contacting you, is one of culture. Health care is an essential need for everyone and the corruption of those services affects all levels of society globally. Unfortunately, the US has suffered so much misconduct in medical practices that it has become almost the norm. For example, the very idea of so called “Patient Recruiters” goes against everything I understand to be reasonable yet they form part of the structure of health care provision in the US.

If you consider – Pharma payments, medical devices such as cardiac implants, CPD coding, patient recruiting, hospital kickbacks, pathology overuse, durable medical equipment and ambulatory care as headline issues (there are many others), you will find the US system is rife with problems. Although nowhere near to the same extent here in the UK, it is clear that in India, Serbia, Greece, China, Russia and many other countries there are massive issues with corruption in health care. However, my view and I suspect that of many others, is the most corrupt health system globally is that in the US, primarily due to conflicts of interest. Unfortunately it is also the most influential medical system.

The corruption is partly explained by the lack of transparency around pricing and proven clinical benefits. For example, I travelled to the US not so long ago and required a common over the counter remedy available in the UK for about 15 dollars. In the US, the same medicine is prescription only and costs $150 dollars plus $150 dollars to see a Physician for the prescription. Fortunately, a colleague had brought some with him as on his last trip he had ended up paying the $300 dollars.

Another example is just looking at all the people wearing physiotherapy aids. I couldn’t quite believe it when I was just walking around a US city, but came to understand that there is big money in prescribing pointless wrist, knee, elbow supports and the like. The reason for these two simple examples is to show that pricing in the US is out of control and that treatments of questionable clinical benefit are routinely offered and accepted.

What I wonder is:

  • How much global health care corruption can be accounted for by large corporates which are either directly based or primarily selling in the US (Pharma and device manufacturers in particular)?
  • Is the issue in fact that financial practices designed to influence Physicians’ independent decision making have become so commonplace in the US that they are replicated overseas as a matter of course? In other words if usual business practice in the US is on a corrupt basis, and indeed is necessary just to compete with rivals, then when those corporate move into overseas markets the natural tendency must be to use the same methods. This is certainly evident in FCPA cases in China. It would be easy to make a lot more discussion around what happens when US corporate practices are applied in countries with endemic corruption issues.
  • Would it be better to have an anti-corruption focus and international agreement specifically targeting designated sectors – health in this case but also perhaps mining, energy and other areas where problems are similar on a global level, are well known about and the market is one which all people are to an extent dependent on?

One final thought/question. Should the US be policing health care overseas under the guise of the “foreign official” enforcement theory or should the US be policing it by redefining how businesses operate in the US as a starting point and then applying those standards overseas?

I will certainly continue to watch developments on your website with interest and thank you for your excellent insights – do keep up the good work.

Canadian Government Overhauls the Integrity Regime for Suppliers – Still Tough to Get Over Debar

Monday, July 13th, 2015

CanadaToday’s post is from Milos Barutciski and Matthew Kronby (partners with Bennett Jones in Toronto).

It was originally published as a Bennett Jones Client Alert and is reposted below with permission.

 

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On July 3, the Government of Canada announced a new Integrity Regime to replace the previous rules for debarment (disqualification) from public procurement. The new Regime, which is effective immediately, responds to more than a year of steady criticism of the previous Integrity Framework first established in 2010 by Public Works and Government Services Canada (PWGSC), the principal procuring arm of the Canadian federal government. That criticism, from business, legal and anti-corruption organizations, argued that the Integrity Framework had become so inflexible, punitive and far-reaching that it would be counterproductive to its objectives, namely to deter criminal misconduct and protect the integrity of the public procurement process. Commentators argued that the actual effect of the old Integrity Framework was to make it difficult for the government to find “clean” suppliers and to discourage companies from acknowledging and remediating wrongdoing.

The Government signaled its intention to address these concerns in its April 2015 budget. The new Integrity Regime goes a considerable distance to correct many of the problems with the Integrity Framework, but falls short in some critical respects.

The Concerns Giving Rise to the New Integrity Regime

Under the former Integrity Framework, suppliers faced disqualification from PWGSC procurements for fraud or corruption offences they or their affiliates have committed. The definition of “affiliates”, which appears to have been drawn from the U.S. debarment rules, is very broad; it covers all relationships where one entity has the power to control the other or a third party has the power to control both. In 2012, the list of offences that could give rise to debarment was expanded to include the bribery of foreign public officials under the Corruption of Foreign Public Officials Act and other federal offences.

None of this provoked particular concern until March 2014, when PWGSC adopted the latest in a series of “get tough” amendments to the Integrity Framework. One of these amendments imposed a mandatory 10-year ineligibility period for suppliers, with no scope for reduction due either to the gravity of the offending conduct or the remediation efforts of the business involved. In contrast with the U.S. and similar regimes elsewhere, which give credit for mitigating circumstances and remediation efforts in determining or subsequently reducing debarment penalties, companies doing significant business with the Canadian government have had little incentive to admit to and redress corrupt conduct and potentially a strong disincentive to do so.

The 2014 amendments also expanded the ineligibility conditions to include foreign offences “similar” to the listed domestic offences. Since the Integrity Framework already extended to the conduct of far-flung affiliates, this meant that Canadian businesses could face automatic 10-year debarments from most federal procurement not only for their own corrupt conduct but for the foreign conduct of remotely related entities over which they exercised no oversight or control. Increasing international enforcement of regulatory laws, such as anti-corruption, economic sanctions, antitrust and competition offences, meant that Canadian companies could face automatic debarment in ever expanding circumstances with no connection to Canada.

Key Elements of the New Integrity Regime

The new Integrity Regime remains under the primary authority of PWGSC and its Minister. The elements of the Regime are set out in a new PWGSC Ineligibility and Suspension Policy. The new Regime introduces key changes in relation to (i) the potential to reduce the length of debarment through remediation in certain circumstances; (ii) interim debarment prior to conviction; (iii) the consequences of “affiliate” conduct, (iv) the impact of conviction for foreign offences, and (v) new administrative and review process within PWGSC.

Potential Reduction of 10-year Debarment

The Regime maintains the 10-year ineligibility period for participation in procurements, which will apply for any convictions for covered offences within the previous three years. However, suppliers, other than those convicted of fraudulent conduct in a government procurement, will have the opportunity to reduce their ineligibility by up to five years by co-operating with law enforcement authorities or implementing appropriate remediation to address the causes of the misconduct. To restore their eligibility, suppliers also will need to obtain independent third-party certification that they have successfully addressed the causes of the misconduct. Suppliers convicted of fraud in connection with Canadian government procurement will remain ineligible indefinitely until they have received a pardon.

Ineligibility extends to sub-contractors as well. Suppliers who without prior Ministerial approval perform government contracts using sub-contractors deemed ineligible under the Integrity Regime will themselves face five-year debarments.

Interim Debarment

In addition to the 10-year ineligibility period, suppliers that have been charged with or admitted to any of the covered offences may be suspended from participating in procurement processes pending completion of the criminal proceedings.

PWGSC will maintain a list of ineligible and suspended companies and individuals.

Affiliates

The actions of an affiliate no longer render the supplier automatically ineligible. Instead, a supplier will be ineligible for the conduct of an affiliate only where the supplier can be shown to have “directed, influenced, authorized, assented to, acquiesced in or participated in” the conduct that would give rise to ineligibility. The Integrity Regime also establishes a review process under which suppliers will have 30 days to contest determinations of ineligibility based on the conduct of affiliates.

Foreign Offences

“Similar” foreign offences remain a basis for ineligibility or suspension under the Integrity Regime. The regime now explicitly contemplates an assessment of that similarity as well as the fairness and legitimacy of the proceedings that produced the foreign conviction. However, it is unclear who will be charged with making those assessments; the Ineligibility and Suspension Policy contemplates suppliers hiring independent third parties to provide information about foreign conviction but states rather vaguely that the “opinion of Canada” will be determinative.

Administrative Process

As under the Integrity Framework, the Government will be able to enter into a contract with an otherwise ineligible supplier where doing so is deemed necessary to the public interest, such as where no other suppliers can perform the contract or where failure to enter into the contract would pose risks to national security or public health.

The Regime contemplates the use of administrative agreements imposing conditions and compliance measures that an ineligible supplier must take to have its 10-year ineligibility period reduced or suspension following charges lifted, or when the Government invokes the public interest exemption or maintains an existing contract with a supplier who has become non-compliant. Supplier compliance with these agreements will be subject to independent third-party monitoring.

Impact Assessment

The new Integrity Regime addresses the overreach and potential unfairness that were inherent in the Integrity Framework’s application to foreign convictions of supplier affiliates. More generally, it adds transparency to the process by which ineligibility decisions will be made.

The elimination of automatic 10-year ineligibility is also a welcome development as it, to some degree, recognizes and encourages cooperation and remediation efforts by suppliers who have committed listed offences.

However, the revised policy fails to make a clear distinction between punishment and deterrence of misconduct (the domain of criminal law) and protecting the integrity of federal procurement and taxpayer dollars (the domain of procurement rules). The growing severity of corporate fines and the risk of individual imprisonment in corporate criminal cases, together with the reputational harm suffered by companies found guilty of white collar crimes, are a very strong deterrent for repeat offences and a general deterrent for other companies. It is unlikely that an automatic five-year debarment from Canadian public procurement will contribute significantly further to deterrence. It will, however, have a detrimental impact on Canadian companies (and their employees) even when they have substantially overhauled their management and practices. The automatic debarment will also harm Canadian taxpayers by eliminating potential suppliers and reducing the number of competitors bidding on public contracts (with the consequential pricing impact of reduced competition).

PWGSC’s claim that the new Regime will encourage suppliers to proactively disclose misconduct seems similarly misguided. Unlike the U.S., which can offer deferred or non-prosecution agreements to enable companies that voluntarily confess their sins to avoid debarment, the only benefit the Regime will offer such companies is that their ineligibility period can begin sooner. Those companies will still face a minimum ineligibility period of five years, more than long enough to have serious or even existential consequences if they are heavily dependent on federal procurement contracts. Companies facing legal exposure in Canada or abroad that include potential ineligibility under the Integrity Regime therefore will want to consider their options carefully, with the assistance of expert legal counsel.

Silly DOJ Press Release Belies Government’s Failure in Joseph Sigelman FCPA Prosecution

Wednesday, July 1st, 2015

Laurel and HardyToday’s post is from Paul Calli and Chas Short of Calli Law LLC.

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As readers of FCPA Professor well know ( see herehere and here for prior posts), in mid-June, the FCPA prosecution of Joseph Sigelman came to an abrupt halt after DOJ’s star witness admitted to giving false testimony on the stand. The case ended in a plea to one conspiracy count and a sentence of probation.  DOJ nonetheless issued a press release crowing as though this were a prosecution victory.

Make no mistake: this is a loss for the government and a win for Mr. Sigelman.

Trial had gone badly for the government. The government’s star witness lied on the stand and admitted to it, prompting the trial judge to ask, “Did you have a hallucination?” The FBI agent (the only other witness who had testified) admitted that the alleged Colombian “foreign official” at the center of the government’s case was allowed to travel from the United States to Colombia without facing arrest. It was a debacle, as many of the government’s prior FCPA prosecutions have been.

DOJ nonetheless issued a press release trumpeting Mr. Sigelman’s plea and the pending related cases.  The press release, and the government’s decision to spin an embarrassing loss, is silly.

By contrast, Mr. Sigelman’s defense team issued their own press release, which actually discussed the events at trial, and is well worth reading.

The government’s approach is even sillier when its collapse at trial is compared to the pomposity in its initial press release (still on the DOJ’s website). When the complaint was unsealed back in early 2014, DOJ’s press release ‘warned,’ “[W]e are not going away.”

This type of overheated press release rhetoric is not new for DOJ, unfortunately. When the Government made arrests in its FCPA Gabon “sting” case, then-Assistant Attorney General Lanny Breuer stated, “[T]hese actions are a turning point.” And he quipped at a press conference, “This is one case where what happens in Vegas didn’t stay in Vegas.” It turns out that the turning point was trial: that case ended in a complete victory for the accused individuals.

Government exaggeration is not limited to FCPA cases of course. Back in 2013, U.S. District Judge Richard Sullivan mockingly read a press release from the United States Attorney’s Office for the Southern District of New York at a conference on white collar crime. Judge Sullivan commented that the press release “sounds like the theme from Mighty Mouse,” and said that the release “seems to be designed for tabloid consumption.” The press release in the government’s failed prosecution of Mr. Sigelman is part of a trend.

But it’s not just that the DOJ release is silly.

It is also offensive to the spirit of justice. The release is written as though all the things that went badly at trial for DOJ never happened. It fails to mention the lies of the cooperator whom the government had decided to embrace. In doing so, it is a clear demonstration that the DOJ press office does not exist to inform the public, but to serve as the propaganda arm of DOJ.

Moreover, consider this: if a publicly traded company issued a press release that contained a material omission, the company may be the subject of criminal prosecution. The release in the Sigelman prosecution unapologetically embraces selective disclosure and deliberate omissions. If we accept the premise that the DOJ ought to do justice (as opposed to simply trying to win), then the DOJ ought to have a duty to keep the public informed about all aspects of its enforcement program.

Just because DOJ alleges it, doesn’t mean it’s true. Reciting it again in a press release doesn’t mean it’s true. Finally, just because the DOJ secures a plea agreement does not necessarily represent a success.  Stated differently, if it smells like a loss, looks like a loss and everyone who followed the case knows it is a loss, it is still a loss.

So why has the DOJ struggled when put to its burden in individual enforcement actions while racking up numerous corporate enforcement actions?

It is one thing for the DOJ to process a corporate voluntary disclosure of an investigation conducted by mid-level associates at FCPA, Inc. As Judge Irenas commented to the DOJ at Mr. Sigelman’s sentencing, “You had PetroTiger through the investigation done by Sidley & Austin, basically dumped – dumped the case in your lap.”

It’s another thing entirely for the DOJ to actually prove up its case against an adversary.

The DOJ’s track record in FCPA cases when held to its burden of proof is poor.  Conversely, the defense’s track record is excellent.

The lesson to be drawn from Sigelman, despite the DOJ’s silly press release, is the reminder that trial is the great equalizer.

Let’s Pause Before We Dole Out Dollars

Thursday, May 14th, 2015

Out of thin airPrevious posts here and here addressed the calls of some that settlement amounts in an FCPA enforcement action be, at least in part, returned to the so-called victims of the underlying bribery.

Today’s post is from Joe Murphy.

Murphy is the author of 501 Ideas for Your Compliance and Ethics Program (SCCE; 2008) and a frequent commentator on compliance issues.

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There was recently an online posting championing the idea of the Department of Justice using some of the $9 billion criminal penalty imposed on one company for violations of sanctions against Sudan, Iran and Cuba to compensate victims of the regimes in those countries.  The Department would explore who those victims were and determine how to compensate them.

As a student of political science, I find this worrisome.  Any figure with that many zeros behind it is real money.  And, it can fairly be said, that money is a form of power.  Here we would have unelected enforcement officials making policy decisions about how to spend large pools of funds. Determining exactly who were the victims of such systemic violations is not simply an administrative task; there will be important policy decisions to be made, including matters of foreign policy.

When the fines were small this could be considered an incidental function. But when the amounts are in the billions, this is cause for much more consideration. Sure, we are often frustrated by the slow process of legislative deliberation, but that is the governmental system we have chosen. The raising and allocation of funds is subject to a system of checks and balances.  We live in a democracy, not a government of selected elites who choose to spend money as they think best. Enforcement officials should be enforcing the law and taking steps to prevent violations. Courts should be hearing disputes and resolving conflicts. But they are not legislatures and should not be selecting where to dole out billions of dollars in funds.

As the size of criminal fines has ballooned we have passed the point where this issue can be ignored.  There are serious policy issues.  If, on the one hand, the funds were simply added to the general funds of the government we would also have the troublesome issue of law enforcement being converted into a revenue-raising operation.  This specter is seen in Europe, where the EU’s competition law enforcers sometimes seem more like revenue agents than public servants dedicated to preventing violations. Consider the institutional bias this would introduce if an enforcement agency is a funding source for government operations.  Instead of having an incentive to stamp out violations, there would at least appear to be an opposite interest:  let the violations ripen into large cases so there is more revenue to harvest.

On the other hand, if the proceeds go elsewhere, then what is done with the money and who decides?  In the US at the federal level the proceeds go to victim reimbursement.  But as the cases deal with systematic violations or ones where victims are not clearly defined, this is not so easy.  When the violations are not simply theft, how do we determine who the victims are?  Who makes those decisions?  Is there a process in place capable of handling this?  And in a system where the victims are capable of pursuing their own compensation through litigation, what happens to the penalty funds generated by government?

If enforcers are allocating billions of dollars, can lobbying for that money be far behind?  What alert non-profit would pass up the opportunity to have access to those funds? And, as the enforcers should know well, dealing in those sums eventually invites fraud.  Will the enforcers require reports on how the funds were spent?  Will they audit or investigate this?  Will they then be allocating resources to monitor their grants to the victims and those who purport to benefit the victims?  Is this a business we want enforcers conducting?

Giving this level of power to enforcement officials should at least cause us to stop and think more about the process. They were not trained in how to do this, they were not selected for this, and they are not accountable to the public for what they do. Up until now, this question has not only not been answered, but for the most part it is not even being asked.  I find this at least a cause for concern.