Archive for the ‘Internal Controls’ Category

Issues To Consider From The FLIR Systems Enforcement Action

Monday, April 13th, 2015

IssuesThis recent post highlighted the SEC FCPA enforcement action against FLIR Systems.

This post continues the analysis by highlighting various issues to consider associated with the enforcement action.

 

Was the Enforcement Action “Just”

In the minds of some, “rogue employees” are mere figments in the imagination of corporate apologists.

Yet, the FLIR Systems enforcement action was based on the conduct of two individuals:  Stephen Timms (Head of FLIR’s Middle East Office) and Yasser Ramahi who reported to Timms.

What did these two individuals do?

In the words of the SEC, the individuals “concealed” the extent and nature of the travel and gifts to “foreign officials” which gave rise to the enforcement action.

In the words of the SEC, after Timms’ manager asked certain questions about the travel, “Ramahi and Timms later claimed that the … ‘world tour’ had been a mistake” and that the foreign officials “used FLIR’s travel agent in Dubai to book their own travel and that it had been mistakenly charged to FLIR.  They then used FLIR’s third-party agent to give the appearance that the MOI paid for their travel.  Timms also oversaw the preparation of false and misleading documentation of the MOI travel expenses that was submitted to FLIR finance as the ‘correct’ travel document.”

Was the conduct of the two individuals, who concealed and lied, inconsistent with FLIR’s existing FCPA-related policies and internal controls?

Yes.

In the words of the SEC:

“During the relevant time, FLIR had a code of conduct, as well as a specific anti-bribery policy, which prohibited FLIR employees from violating the FCPA. FLIR’s policies required employees to record information “accurately and honestly” in FLIR’s books and records, with “no materiality requirement or threshold for a violation.” FLIR employees, including Timms and Ramahi, received training on their obligations under the FCPA and FLIR’s policy, although the company did not ensure that all employees, including Ramahi, completed the required training.”

Against this backdrop of SEC allegations, was it truly “just” for the SEC to find that FLIR Systems violated the FCPA’s anti-bribery provisions?

The same question can even apply to the SEC’s finding that FLIR Systems also violated the FCPA’s books and records and internal controls provisions.

In the words of the SEC:

“FLIR had few internal controls over travel in its foreign sales offices at the time. Although FLIR had policies and procedures over travel for its domestic operations, there were no controls or policies in place governing the use of foreign travel agencies. Instead, FLIR foreign sales employees worked directly with FLIR’s foreign travel agencies to arrange travel for themselves and others. Sales managers, such as Timms, were solely responsible for expense approvals for their sales staff. Timms’ manager was responsible for approving travel-related expenses for all non-U.S.-based senior sales employees (such as Timms) and approving the payment of large invoices to the foreign travel agencies.

FLIR also had few controls over the giving of gifts to customers, including foreign government officials. Sales staff and managers were responsible for all expense approvals for gifts and accounts payable was not trained to flag expenses that were potentially problematic.”

As a matter of law, the FCPA’s internal control provisions do not specify which type of internal controls provisions an issuer must have.  Rather, the law states than issuer must have internal controls sufficient to provide reasonable assurances as to four general categories.  The FCPA specifically defines ”reasonable assurances” and “reasonable detail” as follows: a “level of detail and degree of assurance as would satisfy prudent officials in the conduct of their own affairs.”

The only substantive judicial decision on the internal controls provisions states:

“The concept of ‘‘reasonable assurances’’ contained in [the internal control provisions] recognizes that the costs of internal controls should not exceed the benefits expected to be derived. It does not appear that either the SEC or Congress, which adopted the SEC’s recommendations, intended that the statute should require that each affected issuer install a fail-safe accounting control system at all costs.”

The SEC’s most extensive guidance on the internal controls provisions states, in pertinent part, as follows:

“The Act does not mandate any particular kind of internal controls system. The test is whether a system, taken as a whole, reasonably meets the statute’s specified objectives. ‘‘Reasonableness,’’ a familiar legal concept, depends on an evaluation of all the facts and circumstances.

Private sector decisions implementing these statutory objectives are business decisions. And, reasonable business decisions should be afforded deference. This means that the issuer need not always select the best or the most effective control measure.”

Against this backdrop, it would seem relevant to the SEC’s internal controls finding regarding foreign travel that during the time period relevant to the enforcement action FLIR had approximately 2,100 employees, with approximately 1,400 located in the U.S.

Are the Post-Enforcement Action Reporting Obligations “Just”?

Against the backdrop of the SEC’s allegations, as well as the fact that FLIR Systems voluntarily disclosed and cooperated in the SEC’s investigation and undertook “significant remedial efforts,” was it “just” that the SEC required FLIR Systems, for a two year period, to report “periodically, at no less than nine months intervals” concerning the “status of its compliance review of its overseas operations and the status of its remediation and implementation of compliance measures?”

Or was the SEC’s condition of settlement yet another example of a government required transfer of shareholder wealth to FCPA Inc. (See here for the prior post).

Is the Disgorgement “Just”?

The bulk of the $9.5 million settlement ($8.5 million to exact) consisted of disgorgement and prejudgment interest.

The simplistic position that the SEC took (and often takes in FCPA enforcement actions) is that FLIR Systems would not have secured the business at issue with the Saudi Arabia Ministry of Interior (“MOI”) but for the alleged travel (which the SEC did acknowledge contained a core, legitimate business but morphed) and wrist-watches provided to the “foreign officials”.

Because FLIR System did obtain or retain such business, the theory goes, FLIR Systems was unjustly enriched and thus should disgorge its profits from the sales to the MOI.

This is so simplistic as to fail the basic smell test (see here, here, here and here for prior posts discussing the same general topic).

For instance, FLIR’s major customer base is governments around the world – including the U.S. government.  Indeed, as noted in its most recent annual report:

“We derive significant revenue from contracts or subcontracts funded by United States government agencies. A significant reduction in the purchase of our products by these agencies or contractors for these agencies would have an adverse effect on our business. For the fiscal years ended December 31, 2014, 2013 and 2012 approximately 20 percent, 24 percent and 27 percent, respectively, of our revenues were derived directly or indirectly from sales to the United States government and its agencies.”

Yet, in the SEC’s mind, FLIR was unjustly enriched when the Saudi MOI purchased its products because a few of its officials happened to go to, among other places, New York City in connection with a legitimate factory inspection tour or were provided with wrist-watches.

The Foolish of Obey the Law Injunctions

As noted in the SEC’s administrative order resolving the FCPA enforcement:

“On September 30, 2002, in connection with a settled accounting fraud case, the Commission ordered FLIR to cease and desist from violations of the anti-fraud and related provisions of the federal securities laws.”

As highlighted in the SEC’s order, the 2002 action focused on general revenue recognition and financial reporting issues.  Yet, given the generic nature of the FCPA’s books and records and internal controls provisions, the SEC did find violations of those provisions in the 2002.

This is another reminder of the foolishness of the SEC’s so-called “obey the law injunctions” – which as explored in this guest post – have been found invalid because the injunction is so broad as to mean next to nothing.

No Disclosure

The vast majority of issuers under FCPA scrutiny disclose the scrutiny in SEC filings, notwithstanding the fact that in most instances there is no legal obligation to do so.

FLIR Systems was a unique example of a company not disclosing its FCPA scrutiny.  The first the public learned about FLIR’s scrutiny was logically when the SEC brought the related enforcement against the former employees in November 2014.

Duke’s Season Of Failures

Wednesday, April 8th, 2015

DukeEarlier this week, Duke won the national championship basketball game to cap off a successful season.  By one measure, Duke was thus the most successful team in college basketball this year.

However, it is undisputed that Duke failed many times this year.

For starters, Duke ended the season 35-4 which means that Duke lost 10% of its games.  Duke failed to win the regular season ACC conference championship and also failed to win the ACC tournament conference championship.  The second week of January was a complete failure for Duke as they lost to both unranked North Carolina State and unranked Miami.

Duke’s season statistics also evidence less than perfection in several fundamental categories.  For the year, Duke’s defense ranked 110th in points per game allowed; 53rd in rebounds per game; 134th in blocks per game; and 68th in steals per game.  In short, there were countless teams that performed better than Duke in the above categories.

More generally Duke’s season witnessed several missed easy shots, numerous dumb fouls, and countless unforced turnovers.

So pronounced were Duke’s failures this past season that in January the team dismissed a key player because he ”repeatedly struggled to meet the necessary obligations” expected of players in the program.

Despite Duke’s many failures this past season, the beauty of sports is that success is viewed holistically and not through a narrow segment of time, a discrete statistical category, the specifics of a certain possession, or the actions of just one player.

Yet the point of this post is to contemplate what would have happened to Duke this season if it was a business organization subject to various criminal or civil laws such as the Foreign Corrupt Practices Act.

The short answer is that Duke would have been prosecuted and criticized (by the DOJ and numerous FCPA commentators) for its complete lack of internal controls.  The enforcement theories / comments would have been along the following lines.  That Duke lost 10% of its games is evidence of ineffective internal controls; team that losses twice in one week to unranked teams does not have effective internal controls;  given the key player’s dismissal, Duke surely failed to detect and prevent improper conduct.

After all, FCPA enforcement actions are often based on the enforcement agencies wearing  rose-colored glasses and viewing a multinational business organization with thousands of employees through the prism of just a 1% fail rate, through the prism of just one business transaction, or through the prism of just an incredibly small group of employees.

An interesting clause in most corporate FCPA enforcement actions is that the company conducted a thorough review of its business operations in a number of jurisdictions other than the locus of the alleged FCPA violation.  Yet, in most cases no other improper conduct is alleged in the enforcement action.  This alone is suggestive of effective internal controls regardless of the discrete conduct alleged in the enforcement action.

The holistic view of internal controls is consistent with legal authority, legislative history and enforcement agency guidance.

The FCPA’s internal control provisions are specifically qualified through concepts of reasonableness.

Legislative history instructs that the internal controls provisions standard does not equate to an “unrealistic degree of exactitude or precision.”

The only judicial decision to substantively address the internal controls provisions states:

“It does not appear that either the SEC or Congress, which adopted the SEC’s recommendations, intended that the statute should require that each affected issuer install a fail-safe accounting control system at all costs.”

And even the SEC has stated in internal controls guidance as follows.

“Inherent in this concept [of reasonableness] is a toleration of deviations from the absolute.”

“The test of a company’s internal control system is not whether occasional failings can occur. Those will happen in the most ideally managed company.”

Sports analogies are often useful in other contexts.

The sports analogy in this post demonstrates just how wayward FCPA enforcement has become in many instances.

Issues To Consider From The Goodyear Enforcement Action

Thursday, February 26th, 2015

IssuesThis recent post highlighted the SEC FCPA enforcement action against Goodyear.

This post continues the analysis by highlighting various issues to consider associated with the enforcement action.

 

Invoking a Standard That Does Not Even Exist Under the FCPA

To anyone who values the rule of law, it is troubling when an FCPA enforcement agency invokes a standard of liability that does not even exist under the FCPA.

As previously highlighted in this article, “Why You Should Be Alarmed By the ADM FCPA Enforcement Action,” the enforcement agencies’ invocation of a ‘‘failure to prevent or detect’’ internal controls standard is alarming because such a standard does not even exist in the FCPA and is inconsistent with actual legal authority. Just as important, such a standard is inconsistent with enforcement agency guidance relevant to the internal-controls provisions.

Nevertheless, and notwithstanding such legal authority and enforcement agency guidance, the SEC again referenced the “prevent and detect” standard twice in the Goodyear enforcement action.

The internal-controls provisions are specifically qualified through concepts of reasonableness and good faith. This statutory standard is consistent with congressional intent in enacting the provisions. Relevant legislative history states: ”

“While management should observe every reasonable prudence in satisfying the objectives called for [in the books-and-records and internal-controls provisions], . . . management must necessarily estimate and evaluate the cost/benefit relationships to the steps to be taken in fulfillment of its responsibilities . . . . The size of the business, diversity of operations, degree of centralization of financial and operating management, amount of contact by top management with day-to-day operations, and numerous other circumstances are factors which management must consider in establishing and maintaining an internal accounting controls system.”

As highlighted here, the only judicial decision to directly address the substance of the internal-controls provisions states, in pertinent part, as follows:

“The definition of accounting controls does comprehend reasonable, but not absolute, assurances that the objectives expressed in it will be accomplished by the system. The concept of ‘‘reasonable assurances’’ contained in [the internal control provisions] recognizes that the costs of internal controls should not exceed the benefits expected to be derived. It does not appear that either the SEC or Congress, which adopted the SEC’s recommendations, intended that the statute should require that each affected issuer install a fail-safe accounting control system at all costs. It appears that Congress was fully cognizant of the cost-effective considerations which confront companies as they consider the institution of accounting controls and of the subjective elements which may lead reasonable individuals to arrive at different conclusions. Congress has demanded only that judgment be exercised in applying the standard of reasonableness.”

In addition, various courts have held—in the context of civil derivative actions in which shareholders seek to hold company directors liable for breach of fiduciary duties due to the company’s alleged FCPA violations— that just because improper conduct allegedly occurred somewhere within a corporate hierarchy does not mean that internal controls must have been deficient.

The ‘‘failure to prevent and detect’ standard is also alarming when measured against the enforcement agencies’ own guidance concerning the internal controls provisions.  As highlighted here, the SEC’s most extensive guidance on the internal controls provisions states, in pertinent part, as follows:

“The accounting provisions’ principal objective is to reaching knowing or reckless conduct.”

“Inherent in this concept [of reasonableness] is a toleration of deviations from the absolute. One measure of the reasonableness of a system relates to whether the expected benefits from improving it would be significantly greater than the anticipated costs of doing so. Thousands of dollars ordinarily should not be spent conserving hundreds. Further, not every procedure which may be individually cost-justifiable need be implemented; the Act allows a range of reasonable judgments.”

“The test of a company’s internal control system is not whether occasional failings can occur. Those will happen in the most ideally managed company. But, an adequate system of internal controls means that, when such breaches do arise, they will be isolated rather than systemic, and they will be subject to a reasonable likelihood of being uncovered in a timely manner and then remedied promptly. Barring, of course, the participation or complicity of senior company officials in the deed, when discovery and correction expeditiously follow, no failing in the company’s internal accounting system would have existed. To the contrary, routine discovery and correction would evidence its effectiveness.”

A Government Required Transfer of Shareholder Wealth to FCPA Inc.?

According to Goodyear’s initial disclosure of the matter, the voluntary disclosure resulted from an anonymous source reporting through a confidential ethics hotline. In short, an effective internal control.

According to the SEC, Goodyear “promptly halted the improper payments” and voluntarily reported the matter to the SEC (and DOJ).  Goodyear also provided significant cooperation with the SEC’s investigation and undertook significant remedial efforts and disciplinary actions.  Goodyear also implemented “improvements to its compliance program, both specific to its operations in sub-Saharan Africa, and globally.”  In short, an effective internal control and remediation.

Nevertheless, as a condition of settlement, Goodyear is required to report to the SEC, “at no less than 12 month intervals during a three year term” on the status of its remediation and implementation of compliance measures.”  The SEC’s Order contains further specifics about initial reviews, written reports, and follow-up reviews and reports.

Let’s call a spade a spade folks.  This amounts to little more than a government required transfer of shareholder wealth to FCPA Inc.  (See here for the prior post of the same title).

Top 5

While the Goodyear enforcement action was clearly not a top ten enforcement action in terms of overall settlement amount, it was the 4th largest SEC only FCPA enforcement action of all-time behind (Eli Lilly, General Electric and Diageo).

No-Charged Bribery Disgorgement

As in prior years, in the Goodyear enforcement action the SEC continued its practice of ordering disgorgement even though the offending company was not charged with violating the FCPA’s anti-bribery provisions.

As highlighted in this previous post, so-called no-charged bribery disgorgement is troubling.

Among others, Paul Berger (here) a former Associate Director of the SEC Division of Enforcement) has stated that “settlements invoking disgorgement but charging no primary anti-bribery violations push the law’s boundaries, as disgorgement is predicated on the common-sense notion that an actual, jurisdictionally-cognizable bribe was paid to procure the revenue identified by the SEC in its complaint.” Berger noted that such “no-charged bribery disgorgement settlements appear designed to inflict punishment rather than achieve the goals of equity.”

Not The First FCPA Enforcement Action Against a Goodyear Entity

As highlighted in this prior post, in 1989 the DOJ charged Goodyear International Corp., a subsidiary of Goodyear Tire & Rubber Co., with FCPA anti-bribery violations for alleged improper payments to Iraqi officials.  Goodyear International pleaded guilty and agreed to pay a $250,000 fine.

A Future Enforcement Action Against a Tire Industry Company?

It will be interesting to see if anything comes from the following sentence in the SEC’s Order. The SEC is “not imposing a civil penalty based upon [Goodyear's] cooperation in a Commission investigation and related enforcement action.”

Friday Roundup

Friday, January 16th, 2015

Roundup2Hollywood film studios, more FBI agents, asset recovery, quotable, and for the reading stack.  It’s all here in the Friday roundup.

Hollywood Film Studios

A recent Wall Street Journal article went in-depth regarding the FCPA scrutiny of Hollywood film studios doing business in China. According to the article, Sony received a subpoena from the SEC in June 2013 regarding possible violations of the U.S. Foreign Corrupt Practices Act.  The article states:

“The SEC’s questions to Sony dealt primarily with potential bribery related to the release of “Resident Evil: Afterlife” in China in 2010, according to email communication between Sony’s in-house and outside legal counsel. A Sony-led investigation that followed the SEC subpoena examined the company’s distribution efforts more broadly, the emails show. The subpoena indicates an escalation of an inquiry that began in 2012 when the SEC requested that every major studio voluntarily provide information about their movie-distribution practices in China, a request that was publicly reported at the time. However the SEC’s specific concerns weren’t disclosed nor was it previously known that the agency had stepped up its probe with a subpoena. Sony documents show that the SEC refers to its probe as “In the Matter of Lions Gate Entertainment Corp,” indicating that the rival Hollywood studio behind “The Hunger Games” has been asked questions as well.”

Many FCPA enforcement actions have, as a root cause, a foreign trade barrier or distortion.  This appears to be true in the case of the Hollywood film studios.  As stated in the article, the companies ran into “China’s quota and censorship systems to secure distribution for their films in that country.”  According to the article:

“Hollywood studios are barred from distributing films on their own in China, but instead work with the state-owned China Film Group to secure one of the 34 highly coveted spots offered each year for imported movies. [Third party distribution firms] help studios navigate the bureaucracy.”

More FBI Agents

The Wall Street Journal reports:

“The Federal Bureau of Investigation’s foreign corruption program will more than triple the number of agents focused on overseas bribery this year to more than 30 from around 10, according to bureau officials. The agents will focus on both sides of corruption, hunting down executives that pay off foreign officials, while also helping other nations recoup funds stolen by corrupt leaders. The FBI usually can’t directly arrest corrupt foreign leaders, but at the request of foreign law enforcement the bureau can help locate funds stolen by kleptocrats. [...]  “With the growing global economy and the growing nature of international commerce with globalization of more companies and economies, it’s creating more opportunities for the potential of FCPA and corruption,” said Joseph Campbell, assistant director of the bureau’s criminal division, in an interview. The newly assigned agents will work out of field offices in New York, Washington, D.C., San Francisco, Los Angeles, Miami and Boston, with backup from forensic analysts and other specialists in headquarters, which is also located in the capital. Currently, the bureau’s foreign anti-corruption field agents are managed out of a field office in Washington, D.C. and split their time while pursuing other white collar crimes, bureau officials said.”

Asset Recovery

As part of its Kleptocracy Asset Recovery Initiative, the DOJ recently announced the filing of a “civil forfeiture complaint seeking the forfeiture of nine properties worth approximately $1,528,000 that were allegedly purchased with funds traceable to a $2 million bribe paid by a Honduran information-technology company to the former Executive Director of the Honduran Institute of Social Security.”

According to the DOJ:

“From 2010 to 2014, Dr. Mario Roberto Zelaya Rojas, 46, of Tegucigalpa, Honduras, served as the Executive Director of the Honduran Institute of Social Security (HISS), a Honduran Government agency that provides social security services, including workers’ compensation, retirement, maternity, and death benefits.  According to allegations in the forfeiture complaint, Zelaya solicited and accepted $2.08 million in bribes from Compania De Servicios Multiples, S. de R. L. (COSEM) in exchange for prioritizing and expediting payments owed to COSEM under a $19 million contract with HISS.  Zelaya also allegedly instructed COSEM to make bribe payments to two members of the Board of Directors of HISS charged with overseeing the COSEM contract.  To conceal the illicit payments, COSEM allegedly sent the bribes through its affiliate company, CA Technologies.  As further alleged in the complaint, the bribe proceeds were then laundered into the United States and used by Zelaya and his brother, Carlos Alberto Zelaya Rojas, to acquire real estate in the New Orleans area.  Certain properties were titled in the name of companies nominally controlled by Zelaya’s brother in an effort to conceal the illicit source of the funds as well as the beneficial owner.  The current action seeks forfeiture of nine properties acquired with the proceeds of Zelaya’s alleged bribery scheme.”

In the DOJ’s release, Assistant Attorney General Leslie Caldwell stated:

“Our action today highlights how the Criminal Division’s Kleptocracy Initiative, with our network of law enforcement partners around the globe, will trace and recover the ill-gotten gains of corrupt officials.  Criminals should make no mistake:  the United States is not a safe haven for the proceeds of your crimes.  If you hide or invest your stolen money here, we will use all the legal tools we have to find it and seize it.”

Quotable

In this Global Investigations Review article, Timothy Dickinson (Paul Hastings and a veteran of the FCPA bar) states:

“Ten years ago, I would have been happy to bet anyone a doughnut that I could accurately define what a foreign official is. Now, with various court definitions and a lack of clarity from the DoJ, I fear I might actually lose my doughnut.”

In this piece about the SEC’s internal controls enforcement theories, Michael Shepard (Hogan Lovells) states:

“Beneath the surface of these developments [the increased use of the internal controls provisions] is a disconnect about what the internal controls provisions actually require. The government — and especially the SEC — has settled on an interpretation of the internal controls provision that is at odds with the understanding of many in-house finance professionals about what internal controls are intended to address. Ask corporate finance professionals about internal controls at their companies and you will likely get an answer about processes designed to protect the company’s assets at a level that would materially impact the company’s financial statements. Ask your friendly neighborhood SEC investigator about internal controls and you will instead get inquiries about the exponentially smaller level of amounts of money that would be enough to influence a low-paid public official in a poor third-world country. Not only is the SEC looking at controls on a more microscopic level, but its predilection to pursue internal controls charges sometimes seems based on an interpretation of the FCPA that borders on strict liability. Circumstantial evidence of a bribery violation — such as evidence that some money may have left the company without proper authorization or accounting records — translates for the SEC into proof that the company’s controls were inadequate. Statutory elements of reasonableness and scienter get short shrift in a world in which the SEC aggressively pushes internal controls charges, and the vast majority of companies remain predisposed to settle.”

Reading Stack

Paul Barrett at Bloomberg BusinessWeek goes in-depth about the FCPA charges pending against Joseph Sigelman in an article titled “Does This Man Look Like a Felon to You?”

From the New Yorker, “Can Corruption Be Erradicated?”

“[C]orruption has always permeated so many fields of human endeavor that it may be not a corruption of anything—but, rather, a regrettable feature of our natural condition. Accountable government is an ideal, to be sure. It may also be an aberration.”

[O]ur conceptual vocabulary for understanding [corruption], let alone combatting it, remains conspicuously meagre. The very term “corruption” is so inclusive as to be almost meaningless, encompassing bribery, nepotism, bid-rigging, embezzlement, extortion, vote-buying, price-fixing, protection rackets, and a hundred other varieties of fraud.”

From Bloomberg BNA “As FCPA Complexity Increase, Corporate Interest in Self-Disclosure Wanes.”

*****

A good weekend to all.

Issues To Consider From The Alstom Action

Friday, January 2nd, 2015

IssuesThis recent post dived deep into the Alstom FCPA enforcement action.

This post continues the analysis by highlighting various issues to consider associated with the enforcement action.

 

A Real Head-Scratcher

Alstom entities engaged in conduct in violation of the FCPA.  This is clear from the DOJ’s allegations and consistent with DOJ enforcement theories.  Yet, if the DOJ’s FCPA enforcement program is to be viewed as legitimate and credible, the charged conduct must fit (for lack of a better term) the crime.

The charges against Alstom S.A. are a real head-scratcher.

The conventional wisdom for why the Alstom action involved only a DOJ (and not SEC) component is that Alstom ceased being an issuer in 2004 (in other words 10 years prior to the enforcement action).

Yet, the actual criminal charges Alstom pleaded guilty to – violations of the FCPA’s books and records and internal controls provisions –  were based on Alstom’s status as an issuer (as only issuers are subject to these substantive provisions).

In other words, Alstom pleaded guilty to substantive legal provisions in 2014 that last applied to the company in 2004.

This free-for-all, anything goes, as long as the enforcement agencies collect the money nature of FCPA enforcement undermines the legitimacy and credibility of FCPA enforcement.

Enforcement Action Origins

What were the origins of the Alstom enforcement action?

It appears to be a 2011 Swiss enforcement action that began in October 2007.  (See here, here and here).

Indeed, in briefing in an individual enforcement action (Lawrence Hoskins) connected to the Alstom Indonesia conduct, the DOJ stated:

“When the Government began investigating this case, it sought evidence from various countries including Switzerland [...].  The Government obtained orders pursuant to 18 USC 3292, tolling the statute of limitations in this case for the shorter of three years or the time it took to receive the evidence sought.  The first request, to Switzerland, was transmitted on September 22, 2010, and the tolling order reflects tolling beginning on that date.  Switzerland provided responses to the request on December 23, 2013.”

In the Swiss action, “Alstom Network Schweiz AG … was fined CHF2.5 million for negligence in implementing proper controls to prevent bribery by company officials in Latvia, Tunisia and Malaysia, and it was ordered to pay an additional CHF36 million for profits connected to the negligence.”

The foreign law enforcement origins of the Alstom action are typical of other enforcement actions in the Top Ten List of FCPA settlements (Siemens and the Bonny Island, Nigeria enforcement actions – KBR/Halliburton, Snamprogetti/ENI, Technip, and JGC Corp).

No Monitor

On one level, it seems odd that the Alstom enforcement action did not involve a corporate monitor as a condition of settlement. After all, the $772 million enforcement action was the largest DOJ FCPA enforcement action of all-time and per the DOJ “Alstom’s corruption scheme was sustained over more than a decade and across several continents. It was astounding in its breadth, its brazenness and its worldwide consequences.”

However, the resolution documents note “that Alstom is already subject to monitoring requirements pursuant to a February 2012 World Bank Resolution.” (See here).  As stated in the DOJ resolution documents: “in the event that the Integrity Compliance Office [of the World Bank] does not certify that the Company has satisfied the monitoring requirements contained in the World Bank Resolution, the Company shall be required to retain an Independent Compliance Monitor.”

Moreover, the vast majority of the alleged improper conduct in the DOJ enforcement action resided in business units that will soon be part of General Electric in 2015.  Thus, to impose a monitor on Alstom would, in effect, have been to impose a monitor on General Electric.

Third Party Red Flags

Most FCPA enforcement actions result from the conduct of third parties and ineffective corporate controls over third parties.

In this regard, the following paragraph from the Alstom enforcement is a dandy regarding third party red flags.

“A number of consultants that Alstom hired raised a number of “red flags” under Alstom’s own internal policies.  Certain consultants proposed for retention had no expertise or experience in the industry sector in which Alstom was attempting to secure or execute the project.  Other consultants were located in a country different than the project country.  At other times, the consultants asked to be paid in a currency or in a bank account located in a country different than where the consultant and the project were located.  In multiple instances, more than one consultant was retained on the same project, ostensibly to perform the very same services.  Despite, these “red flags,” the consultants were nevertheless retained without meaningful scrutiny.”

FCPA enforcement actions of course are no laughing matter, but the following specific allegations sort of make one chuckle.

“Alstom did not perform any due diligence on the consultant even though the consultant had no knowledge about, or experience in, the power industry.  Rather, the information alleges, the consultant “sold furniture and leather products, and exported chemical products and spare parts.”

“An Alstom entity formally retained a consultant on a [rapid transit] project even thought the consultant did not have the requisite expertise in the transport sector.  According to the information, the consultant’s expertise was as a “wholesaler of cigarettes, wines and pianos.”

More Information Needed As to Lack of Cooperation

Repeatedly in the resolution documents, the DOJ states that Alstom did not “cooperate.”

“The Defendant initially failed to cooperate with the Department’s investigation, responding only to the Department’s subpoenas to the Defendant’s subsidiaries.  Approximately one year into the investigation, the Defendant provided limited cooperation, but still did not fully cooperate with the Department’s investigation.”

“The Company and its parent initially failed to cooperate with the Department’s investigation, responding only to the Department’s subpoena.  Approximately one year into the investigation, the Company and its parent provided limited cooperation, but still did not fully cooperate with the Department’s investigation.”

Likewise, at the DOJ press conference, Assistant Attorney General Caldwell stated:

“The guilty pleas and resolutions announced today also highlight what can happen when corporations refuse to disclose wrongdoing and refuse to cooperate with the department’s efforts to identify and prosecute culpable individuals.”

[...]

“Alstom did not voluntarily disclose the misconduct to law enforcement authorities, and Alstom refused to cooperate in a meaningful way during the first several years of the investigation.”

If the DOJ wants its cooperation message to be fully absorbed by the corporate community, the DOJ should have been more specific about Alstom’s lack of “cooperation.”

Moreover, if “responding only to the DOJ’s subpoena” is considered lack of cooperation by the DOJ, this is troubling.  (See here for the prior post “Does DOJ Expect FCPA Counsel to Role Over and Play Dead?”).

A “Foreign Official” Stretch?

It was a relatively minor allegation in the context of the overall Alstom enforcement action, but one which caught my eye because of its extraordinarily broad implication.

As highlighted in this previous post, Asem Elgawhart was employed by Bechtel Corporation (a U.S. company) and was assigned by Bechtel to be the General Manager of Power Generation Engineering and Services Company (PGESCo), a joint venture between Bechtel and Egyptian Electricity Holding Company (the alleged “state-owned and state-controlled electricity company in Egypt”). According to the DOJ, Elgawhart “used his position and authority as the General Manager of a power generation company to solicit and obtain millions of dollars of kickbacks for his personal benefit from U.S. and foreign power companies that were attempting to secure lucrative contracts to perform power-related services.” “In total,” the DOJ alleged, “Elgawhart received more than $5 million in kickbacks to help secure more than $2 billion in contracts for the kickback-paying companies, all of which he concealed from his employer, from bidding companies that did not pay kickbacks and from the U.S. Internal Revenue Service.” Based on these allegations, and as indicated in this DOJ release, Elgawhart was charged in a 8-count indictment with mail and wire fraud, money laundering and various tax offenses.

In the Alstom enforcement action, PGESCo and Elgawhart are described as follows:

As to Egypt, the information concerns bidding on various projects with the Egyptian Electricity Holding Company (“EEHC”), the state-owned and state-controlled electricity company in Egypt.  According to the information, “EEHC was not itself responsible for conducting the bidding [on projects], and instead relied on Power Generation Engineering & Services Co. (“PGESCo”), which was controlled by an acted on behalf of EEHC.”

PGESCo was controlled by and acted on behalf of EEHC. PGESCo worked “for or on behalf of’ EEHC, within the meaning of the FCPA, Title 15, United States Code, Section 78dd-l (f)( 1) [the FCPA's "foreign official" definition].

According to the DOJ, Alstom used a consultant whose primary purpose “was not to provide legitimate consulting services to Alstom and its subsidiaries but was instead to make payments to Egyptian officials, including Asem Elgawhary who oversaw the bidding process.”

In short, in the Alstom action the DOJ alleged that Elgawhary, a Bechtel Corporation employee, was an Egyptian “foreign official.” This is an extraordinarily broad “foreign official” interpretation with implications for any person (privately employed) working on foreign projects with participation by a foreign government department, agency or instrumentality.

Rhetoric Undermined

As highlighted in this post, Assistant Attorney General Leslie Caldwell recently defended the DOJ’s frequent use of NPAs and DPAs by stating that the DOJ is able to achieve through such negotiated settlements reforms, compliance controls, and all sorts of behavioral change compared to what it could achieve without use of NPAs and DPAs.

As highlighted in the prior post, the notion that the DOJ is powerless to effect corporate change through old-fashion law enforcement (that is enforcing the FCPA without use of NPAs and DPAs) is plainly false.

Indeed, the Alstom and Alstom Network Schweiz AG plea agreements contain substantively the same corporate compliance program and reporting obligations as the Alstom Power and Alstom Grid DPAs.

False Certification

A likely overlooked allegation in the Alstom enforcement action concerns bidding on various grid projects with alleged state-owned and state-controlled entities in Egypt. According to the charging documents, certain of these projects were “funded, at least in part, by the United States Agency for International Development (“USAID”)” and “an Alstom entity “repeatedly submitted false certifications to USAID in connection with these projects, and did not disclose that consultants were being used, that commissions were being paid, or that unlawful payments were being made.”

These allegations are similar to DOJ allegations in the BAE enforcement action (an enforcement action that alleged conduct that could have served as the basis for FCPA violations, but resulted in no actual FCPA charges).  As noted in this previous post, in the BAE action, the DOJ “filed a criminal charge against BAE Systems charging that the multinational defense contractor conspired to impede the lawful functions of the Departments of Defense and State, made false statements to the Departments of Defense and Justice about establishing an effective anti-corruption compliance program to ensure conformance with the Foreign Corrupt Practices Act and paid hundreds of millions of dollars in undisclosed commission payments in violation of U.S. export control laws.”

How to Count FCPA Enforcement Actions

It is a basic issue:  how to count FCPA enforcement actions.

I use the “core” approach to counting FCPA enforcement actions (see here), an approach endorsed by the DOJ, but many in FCPA Inc. use various different creative counting methods that significantly distort FCPA enforcement statistics (see here).

Pursuant to the “core” approach, the Alstom action was one core enforcement action even though it involved the following components all based, in whole or in part, on the same core conduct.

  • Alstom S.A.
  • Alstom Network Schweiz AG
  • Alstom Power Inc.
  • Alstom Grid Inc.
  • Individual enforcement actions against Frederic Pierucci, David Rothschild, William Pomponi, and Lawrence Hoskins.

Counting the above as 8 FCPA enforcement actions instead of 1 core action highly distorts FCPA enforcement statistics and impacts the denominator of just about any FCPA enforcement statistic imaginable.

With several 2014 FCPA Year in Reviews to be published in January, one needs to be cognizant of these creative counting methods.