Archive for the ‘Guest Posts’ Category

Canada 2013 Year In Review

Tuesday, January 14th, 2014

Several recent posts have highlighted various 2013 Foreign Corrupt Practices Act enforcement statistics.  Future posts will continue the number crunching on individual FCPA enforcement statistics.

Today however, we pause and look north to Canada for a year in review by the Canada Expert for FCPA Professor, Mark Morrison (Blake, Cassels & Graydon), and Blake attorneys Matthew Huys and Michael Dixon.

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2013 was a bellwether year for Canadian anti-corruption law and enforcement. On June 19, 2013 the Canadian government passed into law amendments to the Corruption of Foreign Public Officials Act (CFPOA) that significantly strengthen Canada’s primary foreign anti-corruption legislation. Additionally, 2013 has seen a number of prominent enforcement proceedings, including Canada’s largest fine for a CFPOA conviction to date, as well as the first trial and conviction of an individual under the CFPOA.

This post discusses recent enforcement proceedings and amendments to the CFPOA in turn.

Recent Enforcement Proceedings

Canadian authorities continue to focus on enforcing the CFPOA. As noted above, 2013 has seen the largest fine to date for a conviction under the CFPOA, the first trial and conviction of an individual under the CFPOA, the ongoing investigations into SNC-Lavalin Group Inc. (SNC-Lavalin) and its affiliates, and the corruption allegations against a large number of municipal officials and members of the construction industry in Quebec. Notable enforcement proceedings are discussed below.

Griffiths Energy - The Griffiths Energy case is the second major conviction under the CFPOA.   In January 2013, Griffiths pled guilty to the bribery offence under section 3(1)(b) of the CFPOA and agreed to pay a fine of $9M, plus a 15% victim surcharge, for a total of $10.35M. This fine was in relation to consulting agreements that provided for payments in the amount of $2M to two entities owned and controlled by Chad’s ambassador to Canada and his spouse. In assessing the fine, the Court noted as mitigating factors that Griffiths had self-reported, taken the extraordinary step of sharing privileged materials, spent $5M conducting an internal investigation into the bribery, and had to postpone its planned IPO at a cost of $1.8M.

Karigar Conviction- On August 15, 2013 the Ontario Supreme Court released its decision in the trial of Nazir Karigar, the first individual charged under the CFPOA. Mr. Karigar was a former employee of Cryptometrics, a company developing facial recognition software for airports and governments. The RCMP laid charges against Mr. Karigar individually, alleging that he violated the CFPOA by paying bribes totalling $450,000 to an Indian minister and Air India officials in relation to a security system contract. Notably, the trial judge convicted Mr. Karigar notwithstanding that there was no evidence that bribes were actually offered or paid, holding that section 3 of the CFPOA also prohibits any conspiracy or agreement to bribe foreign public officials. A sentencing hearing in Mr. Karigar’s case is expected to be scheduled in the near future. A more detailed summary of the Karigar decision can be found here.

Investigation into SNC-Lavalin -The investigation into SNC-Lavalin and its subsidiaries remains ongoing. On September 1, 2011 the RCMP raided its offices in connection with a corruption probe into the bidding process for the World Bank funded Padma Bridge Project in Bangladesh.  On April 11, 2012, Ramesh Shah and Mohammad Ismail, two former executives of SNC-Lavalin, were charged with one count each of corruption under the CFPOA.  Another former executive of SNC-Lavalin, Kevin Wallace, was charged on September 18, 2013. In addition, two former executives, including a former CEO, are facing fraud charges relating to a contract for a multi-billion dollar health facility in Montreal.

Corruption Inquiry in Quebec - The Charbonneau Commission inquiry into corruption in the management of public construction contracts in Quebec is ongoing. While the final report of the Charbonneau Commission Inquiry is not expected until Spring 2015, the inquiry has heard testimony of rampant corruption in municipal contracting in Quebec. There have been wide-ranging allegations against a large number of municipal officials, suggesting that they accepted bribes to award municipal construction contracts. Notably, allegations of corruption have resulted in the resignation of the former mayors of Montreal, Michael Applebaum and Gerald Tremblay, in addition to the resignation of the Mayor of Laval, Gilles Vaillancourt. Additionally, there have been allegations of collusion on the part of engineering and construction firms in bidding on municipal contracts.

Ongoing RCMP Investigations -In addition to the foregoing matters, the RCMP has also made it known that it has 34 active and ongoing CFPOA investigations.

Amendments to the CFPOA

The amendments to the CFPOA close significant loopholes, create new offences, and increase penalties for violating its provisions.  They include:

Nationality Jurisdiction – Prior to the amendments, the CFPOA contained a significant loophole with the application of territorial jurisdiction. Territorial jurisdiction created enforcement difficulties as there had to be a territorial nexus between Canada and the offence for the CFPOA to apply, meaning that some part of the formulation, initiation, or commission of the offence must have taken place within Canada. Considering that the CFPOA is directed at transactions that predominantly occur abroad, territorial jurisdiction hampered the ability of Canadian authorities to enforce the CFPOA in cases where the entire transaction occurs abroad.

The amendments closed the territorial jurisdiction loophole by employing nationality jurisdiction in a similar manner as other global anti-corruption legislation, such as the United States Foreign Corrupt Practices Act (FCPA). The relevant provision deems acts of Canadian citizens, permanent residents, corporations, societies, firms or partnerships on a worldwide basis to be acts within Canada for the purposes of the CFPOA. This provision essentially subjects all Canadian citizens and companies to global regulation by Canadian authorities under the CFPOA.

Increased Penalties – The amendments significantly increased the penalties for violations of the CFPOA. Maximum imprisonment for violation of the CFPOA is now 14 years, as opposed to five years prior to the amendments.

Books and Records Offence – New offences now exist for concealing bribery in accounting records. Pursuant to the new books and records provisions, it is an offence to keep secret accounts, falsely record, not record or inadequately identify transactions, enter liabilities with incorrect identification of their object, use false documents, or destroy accounting books and records earlier than permitted by law for the purpose of concealing bribery of a public official. Similar to the bribery offence under the CFPOA, the new books and records provisions carry a maximum sentence of 14 years’ imprisonment.

While this new offence has some similarity to the books and records provisions of the FCPA, it is not likely to have the same impact in Canada as it has had in the United States, as in Canada the new books and records provisions are criminal, meaning both that the authorities must prove an offence to the higher standard of proof, and also that there is no civil resolution option provided under the CFPOA.

No Facilitation Payments –Under the amendments, the current exception in the CFPOA for facilitation payments will be removed. The timing for removal of such exception is subject to a further order of the Governor in Council.

No For-Profit Requirement – Prior to the amendments, application of the CFPOA was restricted to for-profit transactions. This allowed for potential arguments that any particular payment did not violate the CFPOA because it was not directly tied to a for-profit purpose. Under the amendments, this potential argument is no longer available as the for-profit restriction has been removed.

Double Jeopardy – Previously, the CFPOA did not specifically address the potential availability of double jeopardy protection in circumstances involving prosecutions for the same conduct in different jurisdictions (for instance, in the United States under the FCPA). While common law arguments for such protection did exist, the availability of a double jeopardy defence based on the principles of autrefois acquit or autrefois convict was by no means certain. The amendments now clarify this uncertainty and ensure that Canadian companies and individuals tried in another jurisdiction cannot be convicted for the same conduct in Canada.

For a further summary of the amendments to the CFPOA, please see here.

Conclusion

The trend of increased focus on anti-corruption compliance and enforcement in Canada has continued in 2013. This trend will likely continue with the recent amendments to the CFPOA, active investigations by the RCMP, and the continued emphasis on anti-corruption compliance in the media and in Canadian board rooms.

A Focus On Indian Pre-Contract Integrity Pacts

Wednesday, January 8th, 2014

This post is from Sherbir Panag (MZM Legal Advocates & Legal Consultants in Mumbai, India).

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The Government of India  unilaterally terminated a Euro 556 Million contract with the Anglo-Italian helicopter manufacturing company AgustaWestland on the 1st of January 2014 for breach of the pre-contract integrity pact on the basis of allegations of bribery. Similarly in March 2012 the Ministry of Defence (which is incidentally the Ministry concerned in the AgustaWestland case as well) cashed a bank guarantee put forth by the Israeli Military Industries and blacklisted six companies amidst allegations of bribery and breach of the pre contract integrity pact.  A similar blacklisting was also imposed by the Ministry of Agriculture for a period of 5 years on M/s Dow Agro Sciences India Pvt. Ltd in the year 2011. The operative term in the above cases is the ‘allegation of bribery’ or rather the assumption of bribery after which consequences have ensued.

What is a Pre-Contract Integrity Pact?

‘Pre-Contract Integrity Pact’ or ‘Integrity Pact’ is a tool that was developed by Transparency International to help governments, businesses and civil society fight corruption in the field of public contracting where the scope of abuse is immense owing to the large value of contracts. The ‘Pre-Contract Integrity Pact’ establishes binding obligations on both parties, those being the State or its instrumentalities and the commercial organisation.

As the name suggests these obligations become effective from the stage of bidding itself that is prior to the contract and remain in force thereafter as well. The Central Vigilance Commission of India in a document explaining the nature of ‘Pre-Contract Integrity Pacts’ states that failure to implement the Pre-Contract Integrity Pacts’ , would result in public officials being subjected to penal action and bidders would face cancellation of contracts, forfeiture of bonds, liquidated damages and blacklisting. Such action does not require a criminal conviction but can be based on “no-contest” after the evidence is made available or there can be no material doubts. Pre-Contract Integrity Pacts are gradually being widely used by the State and its instrumentalities in all areas of public contracting.

The Ministry of Finance, Government of India in  a circular titled ‘Use of Integrity Pacts by Ministries / Departments – Implementation of Administrative Reforms Commission’ provided a draft of a Pre Integrity Contract.  A perusal of this draft puts forth the following salient points:

  • Commitments to not engage in any form of bribery either directly or through any agents or third parties on the part of the bidder
  • Commitments to not accept any form of bribes or demand any bribes and to treat all bidders fairly by the Buyer (Government)
  • A declaration by the bidder that no previous transgression occurred in the last three years before the signing of the Pact with any other company in any country with respect to corrupt practices.
  • Clause 6 of the Pact lays down sanctions for violation which include cancellation of the contract if awarded, confiscation of the security deposit, debarment, recovery of sums so illegally paid, applicable damages with interest, so on and so forth.
  • The Buyer (Government) will appoint Independent Monitors in consultation with the Central Vigilance Commission to have an objective review of the implementation of the Pact.
  • The Pact extends to a period of 5 years after complete execution of the contract.

Why should companies take Pre-Contract Integrity Pacts seriously?

The cases discussed above and a perusal of the text of the pact, puts forth a situation that companies must take stock of whereby companies have faced the consequences whether it be blacklisting or contract termination, without the investigation being completed or a trial commencing or an ensuing conviction from such trial. Why should companies engaging in public procurement with the Indian State be worried:

  • Allegation of bribery: Firstly, as stated above the provisions of the pre-contract integrity pact become operative on the allegation of bribery. In AgustaWestland’s case, India began investigating the matter after proceedings commenced in Italy which the Indian media reported. Thus, news travels and there is no caution that a media house has to exercise in reporting an allegation of bribery as it technically still remains an allegation.
  • Simple procedure:  No strict procedure per se is in place to invoke the provisions of the pre-contract integrity pact and nor is there any guidance in this regard as to what the State must follow. The procedure to be followed would merely be to ensure conformance with the principles of natural justice namely audi alteram partem i.e, to hear the other party, which in this case would take the form of a show cause notice. When the State considers the evidence is conclusive enough to invoke the provisions of the pre-contract integrity pact still remain unclear.
  • Time frame of action: The time frame in which the action is taken against the company is considerably faster than the regular legal process in India. In AgustaWestland’s case, the allegations came forward in early 2012 and in less than 2 years action was taken. In the case of the blacklisting by the Ministry of Defence, the allegations emerged in May 2009 and by March 2012 the blacklisting was effectuated. This as compared to the time frame of investigations and trials in India which can go into over 10-15 years is something to take note of. Companies’ earlier taking advantage of the tortoise pace of the Indian legal system would come onto the receiving end of the same when they would challenge it in adverse action initiate against them in the courts.
  • Checks foreign bribery: Through the Integrity Pact the State is also plugging the loophole of a prevention of a foreign bribery clause (Indian law does not prevent foreign bribery, though a bill is pending in Parliament) by stating  that no transgression viz a viz corruption has taken place in any country for a stipulated period before the signing of the pact.
  • Plethora of remedies: If the State terminates a contract in furtherance of the pre-contract integrity pact, it would in no way be precluded from concurrently blacklisting the company or forfeiting deposits or cashing bank guarantees or claiming damages. The use of one remedy would not prevent another from being put into motion.
  • Still open to criminal prosecution: While remedies the State has for an act of bribery by a company under the Pre-Contract Integrity Pact remain essentially contractual and administrative in nature, an action or invocation of  a clause from the pact (termination, penalty, blacklisting) would in no way preclude criminal prosecution for these offences. Such action would not constitute a plea bargain or settlement of any kind, but would be independent of the criminal law machinery of the Indian state.

This notwithstanding, a company would have grounds to challenge the State’s action when it invokes a breach of the pre-contract integrity pact before a higher court, but it’s definitely not going to be an easy battle nor will the result be immediate.

Conclusion:

In light of recent actions in India, companies engaged in public procurement / public contracting need to take Pre-Contract Integrity Pacts more seriously and not view them as a mere procedural requirement before signing the contract. Further, companies should also consider the impact that proceedings / investigations / disclosure in one jurisdiction may have in another and should address the risks of the same. With public pressure against corruption mounting and proactive media houses in India reporting instances of corruption, companies need to do a major re-think on the economic viability of bribing in India and the consequences that may follow.

An Update From Australia – 2013 Year In Review

Thursday, December 19th, 2013

Today’s post is from Robert Wyld (Partner, Johnson Winter & Slattery).  Wyld is the Australia Expert for FCPA Professor.

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The year in Australia for foreign bribery and corruption matters has been mixed.  While the singular Securency prosecution has become delayed in legal argument with the committal hearing yet to be completed, the Australian media has been at the forefront of promoting a greater awareness of foreign bribery issues and taking to task corporations and management (ranging from allegations concerning the Reserve Bank banknote printing scandal, BHP Billiton and tainted Olympic medal minting contracts, Oz Minerals and Cambodian mining sagas and Leighton Holdings construction projects in the Middle East) who appear, at least in the eyes of the media, to be less than diligent in their compliance and ethical activities.

In September 2013, Australia changed government from a Labor to a conservative (Liberal/National) government.  Whether or not foreign bribery and its regulation and enforcement are of interest to the current government is unclear as they have said almost nothing on the topic. It is hoped international momentum in combating foreign bribery and commercial corruption continues to germinate in Australia, albeit very slowly and becomes more of a focus during 2014.

Australia’s Corruption Reputation

The Transparency International Corruption Perception Index 2013 was released earlier this month and, surprise surprise, Australia’s ranking amongst the stars in cleanliness dropped from 85 in 2012 to 81 in 2013.

While Australia was still ranked as the 9th “cleanest” country in the world and the 3rd cleanest country in the Asia Pacific region, the constant flow of media attention on the topic, particularly the criminal prosecution of the Securency and Note Printing Australia executives through to the offshore activities of BHP Billiton, Oz Minerals and Leighton Holdings to the NSW State-based corruption investigations of various former politicians and crown ministers, it does not take much publicity to generate a negative perception that Australia is perhaps not as clean as it would like to be seen.  Clearly, further work needs to be done to address these perceptions.

Australia’s Enforcement Activity

Over the last 12 months’ since the OECD Phase 3 Review was published in October 2012, the response from the Australian Federal Police (AFP) has been noteworthy.

The AFP’s Expert Panel on Foreign Bribery cases has been running for nearly 12 months. In addition, a range of earlier investigations have been reviewed and resources pooled into a coordinated team approach. Senior AFP officers have candidly admitted past shortcomings while proactively seeking to improve investigation procedures. In May 2013, the AFP signed up to the International Foreign Bribery Taskforce together with regulators from the US, Canada and the UK. While further criminal prosecutions are yet to occur, there is significant activity in the investigation space which bodes well for encouraging business to understand and comply with the law and the ethical standards underlying the law.

The AFP has also been active in the proceeds of crime jurisdiction. The AFP Asset Confiscation Taskforce has turned its attention to economic crime. Given the size of profit opportunities that exist in many large-scale contractual deals won through corrupt practices, the threat of disgorging the value of the profit or contract value secured from corrupt conduct should add a significant deterrent element to the array of regulatory sanctions that can and should be used to encourage ethical commercial behaviour.

However, the position of Australia’s corporate regulator, the Australia Securities and Investments Commission (ASIC) has been less favourably reviewed. ASIC has been heavily criticised in the media for it apparent inaction on any significant investigation into highly public scandals including the bribery allegations concerning the Reserve Bank of Australia subsidiaries (Securency and Note Printing Australia) and Leighton Holdings. The Chairman of ASIC has responded by saying that foreign bribery is a criminal matter, therefore it falls to be investigated by the AFP and besides, it will rarely interfere in a criminal investigation or undertake a civil investigation while a criminal investigation is running, save for exceptional circumstances. More surprising, the Chairman’s strategic goals of ASIC made no mention of enforcement – which is surprising and appears to add weight to a popularly held view (in many sections of the media) that ASIC is, in comparison to other corporate regulators, relatively weak and risk adverse in taking on well-funded corporations and their executives.

Some careful thought should be given to the creation of one national agency or a national coordinating agency that takes full responsibility for the criminal and civil investigations of foreign bribery and corruption complaints. This ought to have the following features:

  • a clear mandate to cover all civil and criminal investigations and to prosecute and/or negotiate settlements;
  • all potential settlements should be ultimately supervised by the Courts and the terms made public (similar to the current UK model for Deferred Prosecution Agreements in the Crime and Courts Act 2013 Schedule 17);
  • the new agency should be properly and adequately resourced (drawing upon the existing skills within numerous Commonwealth agencies);
  • prosecutions could take place in conjunction with the existing Commonwealth Director of Public Prosecutions, or a dedicated independent Prosecutor; and
  • the organisations under investigation do all the heavy work in their internal assessment of the offending conduct and report that to the agency (similar to the US and UK position) and the agency can then determine its own action or further work that it needs to perform.

This would be a great step forward in addressing the criticism directed to all Australian Governments over the years (that they pay lip service to really targeting foreign bribery by creating numerous laws and adopting international treaties but rarely follow through in practice because it is just all too hard or too expensive). However, in the current political cycle dominated by budget deficits and slash and burn financial savings, this may still be but a dream!

Australia’s Moribund National Anti-Corruption Plan

In 2011, the Commonwealth Attorney General’s Department actively promoted a National Anti-Corruption Plan.  Since that time, silence has descended and little, if anything, has been heard about it.  Indeed, some sources have suggested that the Commonwealth Government does not believe there is corruption in its ranks, and if a national Anti-Corruption Commission is necessary, then it requires examples of corruption in order to justify the creation of the commission!  We had thought such obtuse attitudes had finally been abandoned when all Australian States agreed to or are in the process of implementing their own State-based anti-corruption commissions.  The Commonwealth is clearly lagging behind in this field and it is hardly to its credit in a year when it takes on the chairmanship of the G20 Group, that it had failed to address corruption at a national level.

To Blow or Not to Blow the Whistle?

Australian Governments of all political persuasion appear alarmed by the thought that whistleblowers who report incidents of potentially serious crime should be free to do so. Over the years, Australian Governments and business have each preferred to shoot the messenger rather than address unpalatable messages.

In July 2013, the Public Interest Disclosure Act 2013 (Cth) came into effect. The Australian States have various forms of public interest disclosure statutes while other laws, for example, the Corporations Act 2001 (Cth), create a statutory protection in favour of an employee in reporting the company’s conduct which may amount to a potential offence under that Act. While the 2013 Act is a significant improvement on the previous very patchy protections given to whistleblowers and the almost inevitable targeting of whistleblowers as rogue complainants, the system still does not cover all those involved in exercising public power (that is, politicians) and ASIC’s public perception of responding to whistleblowers appears patchy at best. What is needed is clear leadership to encourage the transparent (and protected) reporting of serious allegations of commercial and public wrongdoing which can then be investigated.

Australia has not gone down the US path of offering bounties to whistleblowers if the evidence they disclose (often direct to the US Securities & Exchange Commission) results in securing a conviction against the perpetrators. Australia is probably unlikely to adopt such a course. But, the value of such a system, in positively rewarding whistleblowers, ought to be seriously considered in light of how the US program has developed over nearly 2 years of operation. The sky did not fall in and yes, the SEC has approved two modest and one more significant bounty to a whistleblower. What the system has generated is a well recognised process for whistleblowers to rely upon, completely independent from reliance upon any internal reporting of the alleged wrongdoing (often to the alleged wrongdoer) which can often result in persecution and retribution against the complainant.

Facilitation Payments

In November 2011, the Commonwealth Government issued a Discussion Paper calling for comment on certain proposed changes to the Criminal Code 1995 (Cth), the most important of which was whether to abolish facilitation payments as a defence to foreign bribery. The Government only allowed one month for submissions with the deadline closing in December 2011. Again, since then, a deafening silence.

The UK Bribery Act 2010 had no facilitation payment defence. The world of commerce in London did not fall over and collapse. The Canadians followed suit earlier this year. In January 2014, the Brazilian Clean Companies Act will impose strict liability on conduct constituting the bribery and corruption of domestic and foreign public officials with no facilitation payments permitted.

There is no good principled reason to retain any facilitation payments as a defence to conduct constituting the offence of foreign bribery. All facilitation payments do is encourage both developing and developed nations and their public officials and corporations to trade in minor bribes for pure commercial gain and personal exploitation (particularly the bribe recipient). The arguments peddled in favour of facilitation payments (maintaining Australian jobs and business and simply having to comply with “local demands”) are spurious and illustrate a misguided view about any concept of ethical commercial behaviour.

When most corporations espouse the highest standards of integrity (in the Codes of Conduct) and then resort to facilitating bribes to pursue their commercial projects, there is a serious disconnect between ethical perception and reality. For Australia to fail to address this glaring issue in a year in which it assumes a leading role within the G20 community reflects very poorly on its own ethical standards

Anti-Corruption Guidance for the Public and Business

The website of the Commonwealth Attorney General’s Department contains a series of short Fact Sheets which set out in plain terms what is foreign bribery, the offence, the penalties, Australia’s international obligations and how to report suspect conduct.

Given the vast amount of literature that exists and the level of guidance published by various regulatory agencies (such as the US FCPA Resource Guide) and NGOs (such as the World Bank, the OECD and Transparency International), it would be of great benefit for the Australian authorities to draw this body of knowledge together and to publish a guide for Australian business on anti-corruption ethics and compliance to clearly demonstrate the type of commercial conduct and ethical behaviour that is expected by Australian corporations and individuals consistent with their legal obligations, particularly operating outside Australia. The traditional view (adopting a conservative economic free market theory framework) is largely to leave it to business to work out the issues as Australian Governments and regulators do not like telling business what to do – they only act when business gets it wrong. Such a guide is likely to be of great assistance to many businesses who genuinely try and do the right thing, but who would be assisted by a clear message on what the Australian Government considers (in a non-binding sort of way) to be the way to behave.

Wish List for 2014

If I was asked to advance some key developments that I would like to see occur in 2014, then these would be on top of the ethical Santa’s list:

  • abolish facilitation payments;
  • implement a robust National Anti-Corruption Plan underpinned with a truly independent national anti-corruption commission;
  • issue a discussion process for the creation of one properly funded and resourced national agency to take responsibility for all civil and criminal investigations and prosecutions of foreign bribery offences with clear powers to negotiate settlements in a manner contemplated by the UK acceptance of Deferred Prosecution Agreements into its criminal law;
  • publish a thorough and informative guide for Australian business to encourage them to proactively manage their offshore trade risks and reduce the likelihood of foreign bribery occurring; and
  • give serious thought to implementing a whistleblower bounty scheme (modelled on the US SEC scheme) which promotes a transparent and regulated system for encouraging those inside in the know to report corrupt conduct to the authorities.

Will any of this occur? I live in hope but remain slightly pessimistic given Australia’s apparent traditional minimalist approach to tackling foreign bribery and corruption.

Costs of FCPA Investigations – A Board Issue?

Monday, December 9th, 2013

Numerous prior posts (see here for instance) have highlighted the excessive pre-enforcement action professional fees and expenses companies often incur when under Foreign Corrupt Practices Act scrutiny.

This month’s FCPA Professor Apple Award (which recognizes informed, candid, and fresh thought-leadership on the Foreign Corrupt Practices Act or related topics) goes to Homer Moyer (Miller & Chevalier).

Moyer provides guidance – in a new article titled “Costs of Investigations – a Board Issue?” – on factors that can contribute to the “soaring costs” of FCPA investigations.

Moyer’s article may not be well-received in some circles, but that is all the more reason to read it.  Plus, when a dean of the FCPA bar writes on a pressing topic, you should read.

Moyer’s article was originally published at www.boardmember.com and is republished below with permission.

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Costs of FCPA Investigations–A Board Issue?

Homer Moyer

Even major corporations consider a $10 million FCPA investigation to be a large expenditure. But investigations costing that much or more are no longer aberrational, as public reports and SEC filings in 2013 have made clear.

Companies that are not transnational behemoths – Nordion, Diebold, and Dun & Bradstreet – reported spending $19.5, $22.3, and $18.8 million, respectively, on FCPA investigations. Costs of other investigations, some still ongoing, have been reported to be $75 million (Stryker), $106 million (News Corp), and $130 million (Weatherford). From 2010 through 2012, Avon spent $90-100 million a year; its total costs thus far exceed $345 million.

Walmart, in an investigation begun relatively recently, reportedly has already rung up more than $300 million in costs, with quarterly costs ranging from $44-82 million. So even without reference to the $1 billion total for Siemens’s massive investigation and global remediation, reported costs of FCPA investigations are at levels widely regarded as breathtaking.

Since other large investigations have been expertly and successfully handled at a fraction of those costs, such reports raise the question whether the cost of FCPA investigations should become an issue for companies’ boards of directors. If so, what can board members do to help manage costs while assuring a thorough and rigorous investigation?

One step is to recognize factors, such as the following, that can contribute to soaring costs.

Retaining an Efficient Law Firm.  Although management, not the board, typically hires law firms, board oversight can help avoid common mistakes that lead to excessive costs. With the sharp rise in interest in the FCPA area, it is prudent for companies to press law firms on the extent of their prior FCPA work, the depth of their expertise, the costs of past engagements, and familiarity with the unwritten views of enforcement officials. A firm with limited experience may innocently over-staff, over-investigate, and charge for steep learning curves.

A cost-conscious board member may also appreciate that utilizing multiple regional offices because they are convenient to investigation sites will likely inflate, not reduce, costs. Using lawyers in several locations multiplies the number of lawyers involved. Since a primary driver of costs is the number of timekeepers, a single traveling team will almost always be less costly that multiple teams, most of which have uneven expertise and require additional time for coordination and synthesizing disparate investigation results.

Whether To Retain Forensic Accountants.  Skilled forensic accountants are often indispensable, and failing to retain them can be a grievous error. Where investigating entails “following the money,” experienced, inquisitive forensic accountants can be invaluable.

At the same time, forensic accountants, who often come in teams, are sometimes unnecessary. For example, some payment schemes, once exposed, can readily be understood and remediated without a separate forensics team, or with a small one.

Defining the Scope of the Investigation.  At the outset, the ultimate scope of an investigation may not be known, and successive government requests may expand the scope. Nonetheless, a clear meeting of the minds on staffing and scope, even if for just the first segment of an investigation, can help prevent runaway costs.

Knowing When to Stop.  Closely related is knowing when to stop.  To be credible with government agencies, investigations must be thorough and objective and must test whether abuses are isolated or systemic. Credibility may not require turning over every proverbial rock, however. If an investigation finds consistent patterns of misconduct, it may make more sense to remediate aggressively than to investigate further.

Government enforcement agencies will rarely tell a company to stop or to narrow its investigation. Independent investigations are cost-free benefits for government agencies. Similarly, counsel may sometimes recommend expanding an investigation in the name of satisfying government expectations. A company, however, should want knowledgeable counsel who sees when additional investigation will add little, will so advise their client, and is prepared to make that case to enforcement agencies.

FCPA and due diligence investigations are generally managed by management, not the board of directors. With the reported cost of many FCPA investigations, however, investigation costs may become a board-level issue. When they do, savvy board members who understand potential cost escalators can provide great value to their companies by helping them avoid runaway costs.

Safeguarding Against Corruption In The Context Of Sporting And Other Major Public Events

Wednesday, November 27th, 2013

Note:  Professor Juliet Sorensen (Northwestern University School of Law) and Northwestern Law students Akane Tsuruta and Jessica Dwinell are attending the Fifth Conference of the State Parties (CoSP) to the United Nations Convention against Corruption in Panama City, Panama.  See here for a live feed of the States Parties’ discussions.

This post regarding the proceedings is by Jessica Dwinell.

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News broke yesterday that oilfield services company Weatherford International agreed to pay $253 million to settle federal charges in the United States, including FCPA charges in which an allegation by the SEC was that Weatherford funded a trip to the 2006 World Cup for two officials from a state-owned Algerian company. At the same time, members of the United Nations Office on Drugs and Crime (UNODC), the Global Alliance for Integrity in Sports and the OECD were gathering at the fifth CoSP to the UNCAC to present on the importance of safeguarding against corruption in the context of sporting events.

As Nicola Bonucci (Director for Legal Affairs of the OECD) explained, “sport events are sport, but sport is also a . . . business,” and a highly lucrative one at that. Unfortunately, though hosting public and sporting events can serve as a great honor for a country, many major events also breed corruption.

Alexey Kronov (the Head of the Expert Group on Anti-Corruption for the Department of Public Administration and Russian G20 expert) outlined three factors that create the corruption-prone environment surrounding major sporting events. First, countries or regions who want to host events often feel pressure to “overcome other bidders,” a pressure which can lead to bribe offers or solicitation. Second, after winning a bid, the host country controls significant funds to build infrastructure, creating numerous opportunities for public abuse for personal gain during the procurement process. Third, sporting events are unique in that all projects must be completed by a specified time; where the opening of a transnational tunnel can be delayed, the start of the World Cup games cannot. The Executive Summary to the UNODC report, “A Strategy for Safeguarding against Corruption in Major Public Events,” similarly suggests that the high risk of corruption “is largely because such events involve significant resources and large amounts of funds as well as complex logistical arrangements within very tight timeframes.”

Representatives from Russia (set to host the Winter Olympics in 2014) and Brazil (the host of the World Cup in 2014 and the Summer Olympic games in 2016) provided information on measures their respective governments have taken to prevent corruption surrounding their upcoming major events, including efforts to undertake extensive risk assessments, audit event budgets and project proposals to ensure accurate price projections and quality designs, creation a public website detailing project expenditures to increase transparency, and conduct periodic on-site visits.

Such measures are a step in the right direction; however, Mr. Bonucci suggested several additional steps that could further decrease corruption in sports. For instance, Mr. Bonucci stressed the need for a multi-stakeholder approach, an approach of utmost importance given the constant interaction between government officials and private companies during the procurement process. Further, he recommended that the global community establish clear international standards, which include provisions detailing conflict of interest disclosure requirements, and complete transparency.

Olajobi Makinwa (Head of the Transparency & Anti-Corruption Initiatives for the UN Global Compact) stated that “it is necessary to keep sports clean because people look up to sports heroes.” Sports offer hope, break down barriers and provide role models. Sporting events can also prove crucial for morale building. A mishandling of funds, however, can quickly derail any positive advances. Though further research must be done, transparency, multi-national and multi-stakeholder approaches appear key to combating corruption in the context of sporting events.