Archive for the ‘Internal Investigation Issues’ Category

Friday Roundup

Friday, October 16th, 2015

Roundup2Rama sentenced but what is the back story, scrutiny alert, and for the reading stack.  It’s all here in the Friday roundup.

Rama Sentenced, But What is the Back Story?

As noted here, last week James Rama, a former executive at defense contractor IAP Worldwide Services, was sentenced to four months in federal prison for his role in a bribery scheme involving a security systems project with the Kuwaiti Ministry of the Interior.

In its sentencing memo, the DOJ requested that Rama be sentenced to one year.  That the judge rejected the DOJ’s sentencing recommendation is not the story – judges frequently reject DOJ sentencing recommendations in individual FCPA cases.

Rather, according to a knowledgeable source who was unable to provide specifics, there is a more interesting back story in connection with the Rama prosecution.  Indeed, as noted in this article:

“Mr. Rama said he was disappointed that after a long investigation the case wasn’t pursued to its “proper conclusion.” Defense counsel William Brennan said the elaborate system required for the bribery reached higher at IAP than the Justice Department prosecuted. “There are people…that should have been prosecuted in this case and for whatever reason they were not,” Mr. Brennan said about the bribery scheme Mr. Rama helped engineer on the ground in Kuwait. The Justice Department lawyers present didn’t respond to the allegations at the hearing. The government said in its settlement with IAP that a “variety of factors, including but not limited to IAP’s cooperation,” led to the non-prosecution agreement.”

Consistent with the above, Rama’s lawyers stated in this sentencing memo as follows.

“Mr. Rama was a minor, albeit integral, part of a much larger scheme concocted by more senior executives at IAP – none of whom will be prosecuted in this case. In addition, IAP has entered into a non-prosecution agreement with the government and agreed to pay a $7.1 million penalty to resolve the matter. It would appear that Mr. Rama is the only individual who will face criminal prosecution in this matter.” (Emphasis in original).

Consistent with there being an interesting backstory in the IAP / Rama prosecution, on the same day the DOJ filed its sentencing memo, the court docket indicates that the DOJ also filed a motion under seal, a motion that will likely never see the light of day.

Just remember as Assistant Attorney General Leslie Caldwell recently stated, “greater transparency benefits everyone.”  (See here for the prior post).

Scrutiny Alert

Approximately four years ago (see here for the prior post), Kraft Foods disclosed FCPA scrutiny resulting from its acquisition of Cadbury in connection with a manufacturing facility in India.  Kraft, now known as Mondelēz International, Inc., was recently the focus of this Wall Street Journal article which states:

“[The SEC] preparing civil charges against snack-food maker Mondelez International Inc. in connection with a long-running investigation of payments its Cadbury unit made in India, said people familiar with the matter. [...]  The company concluded in an internal report by its lawyers in 2011 that Cadbury had used a consultant to funnel bribes to Indian officials in return for factory approvals and permits, which ultimately allowed Cadbury to claim a tax exemption valued at more than $90 million, according to the report, which was reviewed by The Wall Street Journal. The report says Cadbury also paid fees to eight other consultants from May 2008 to October 2010 “for which the only reasonable explanation is that they have been used to mask payments to government officials.” [...] Mondelez’s outside attorneys at Baker & McKenzie have told government investigators that they identified suspicious payments to consultants but couldn’t determine what ultimately became of the money, according to a person familiar with the matter. [...]  The most serious allegations centered on a tax break available to companies that began production in new plants in the Northern Indian state of Himachal Pradesh,where Cadbury’s Baddi plant is located, by March 31, 2010. Cadbury had planned to build a new standalone factory in Baddi, but instead it decided to add a second floor to its existing plant in 2008, with three new production lines for chocolate candies. The company gave the second floor its own entrance and claimed it as an independent unit on paper to qualify for the tax exemption, which would save the company more than $90 million over a decade, according to legal documents the company filed in India. But Cadbury’s lawyers determined in late 2009 that, in order to claim the exemption, the company needed to get separate licenses and approvals for the second-floor unit from Indian authorities, a process that typically takes more than six months, according to a timeline created as part of the internal investigation. With the sunset of the tax break just a few months off, Cadbury hired a consultant to “get all necessary approvals to start-up Unit 2 at Baddi…urgently,” the 2011 report said. Internal investigators concluded that the consultant’s fees—about $55,000—were passed on to Indian officials as bribes, according to their report. [...]  In March, an Indian tax commissioner fined Cadbury more than $90 million, rejecting the company’s argument that the addition of a second floor was the legal equivalent, for tax purposes, of a new plant. [A Mondelez spokesman] said the company is appealing the commissioner’s order. “We continue to believe that the decision to claim the excise-tax benefit is valid.”

Reading Stack

An informative read from Morgan Lewis regarding the European Court of Justice opinion in Maximillian Schrems v. Data Protection Commissioner, in which the court struck down a US-EU agreement that allowed companies to move personal electronic data between the European Union and the United States.

“This ruling, which is final and cannot be appealed, is likely to have far-reaching effects on how US corporations investigate allegations of wrongdoing by affiliates and subsidiaries based in Europe, including investigations of potential violations of the US Foreign Corrupt Practices Act (FCPA).”

Among those critical of the DOJ’s recently released Yates Memo is James Koukios (previously the Senior Deputy Chief of the Fraud Section in the DOJ Criminal Division and an Assistant Chief in the Fraud Section’s FCPA Unit).  In this Corporate Crime Reporter interview, Koukios offers his perspectives on the Yates Memo and other issues relevant to FCPA enforcement.


A good weekend to all.

Issues To Consider From The Mead Johnson Enforcement Action

Monday, August 3rd, 2015

IssuesThis recent post highlighted the SEC FCPA enforcement action against Mead Johnson Nutrition Company.

This post continues the analysis by highlighting various issues to consider from the enforcement action. In sum, the short enforcement action contains several troubling issues that should cause alarm.


Imagine a Foreign Corrupt Practices Act enforcement action without one single meaningful factual allegation against the corporate defendant resolving the action.

You don’t have to imagine. All you have to do is read the slim administrative cease and desist order against Mead Johnson.

The action was based on alleged conduct in China engaged in by Mead Johnson Nutrition (China) Co., Ltd. There was no finding, inference or suggestion in the SEC’s order that anyone associated with Mead Johnson, the issuer resolving the enforcement action, had knowledge of, participated in, or acquiesced in the improper conduct.

Rather, the order merely states the perfuctory finding that “Mead Johnson China’s books and records were consolidated into Mead Johnson’s books and records, thereby causing Mead Johnson’s consolidated books and records to be inaccurate” together with the conclusory legal finding that “Mead Johnson failed to devise and maintain an adequate system of internal accounting controls over Mead Johnson China’s operations sufficient to prevent and detect the improper payments that occurred over a period of years.”

Invoking a Standard That Does Not Even Exist In the FCPA

Relevant to the above conclusory legal finding, the SEC’s finding that issuers must devise and maintain internal controls “sufficient to prevent and detect” improper payments does not even exist in the FCPA.

As previously highlighted in this article ( “Why You Should Be Alarmed By the ADM FCPA Enforcement Action”)  and subsequently in connection with other recent SEC enforcement actions, 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.

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.”

Internal Controls – Which Is It?

Another trouble featuring of the Mead Johnson enforcement action is that the SEC makes contradictory findings regarding Mead Johnson’s internal controls.

On the one hand, the SEC finds:

“Mead Johnson has established internal policies to comport with the FCPA and local laws, and to prevent related illegal and unethical conduct. Mead Johnson’s internal policies include prohibitions against providing improper payments and gifts to HCPs that would influence their recommendation of Mead Johnson’s products.”
The use of the Distributor Allowance to improperly compensate HCPs was contrary to management’s authorization and Mead Johnson’s internal policies.”

Yet on the other hand, the SEC order contains the following conclusory legal finding:

“Mead Johnson failed to devise and maintain an adequate system of internal accounting controls over Mead Johnson China’s operations sufficient to prevent and detect the improper payments that occurred over a period of years.”

The Simplicity of But For

Numerous prior posts (see here along with embedded posts therein) have examined the simplicity of but for allegations or findings in FCPA enforcement actions (i.e. but for the alleged improper payments, the company would not have obtained or retained the alleged business at issue).

The Mead Johnson enforcement action contains such a simplistic finding as the SEC stated that Mead Johnson China “made improper payments to certain health care professionals (“HCPs”) at state-owned hospitals in China to recommend Mead Johnson’s nutrition products to, and provide information about, expectant and new mothers.” (emphasis added).

The but for inference is that without the alleged improper payments, the HCP’s would not have recommended Mead Johnson’s nutrition products.

Such a finding is fanciful.

Mead Johnson’s products (and those of other Western companies) are market leaders in China for the simple fact that “foreign infant formula became preferred by Chinese consumers after a milk scandal in 2008 in which domestic [Chinese] manufacturers mixed melamine with their infant formula products.  Six infants died of severe kidney damage and an estimated 300,000 babies suffered painful kidney stones, causing Chinese customers to lose confidence in domestic [Chinese] infant formula products.” (See here and here).

Alarming Language from the SEC

As troubling as the above issues are, the most alarming aspect of the short Mead Johnson enforcement action is the seeming suggestion by the SEC that issuers have an obligation to self-report internal investigation results that do not find evidence of FCPA violations.

By way of background, the SEC’s order states that in 2011 “Mead Johnson received an allegation of possible violations of the FCPA in connection with the Distributor Allowance in China. In response, Mead Johnson conducted an internal investigation, but failed to find evidence that Distributor Allowance funds were being used to make improper payments to HCPs. Thereafter, Mead Johnson China discontinued Distributor Allowance funding to reduce the likelihood of improper payments to HCPs, and discontinued all practices related to compensating HCPs by 2013.” (Emphasis Added).

Even though the SEC noted that Mead Johnson’s internal investigation failed to find evidence of FCPA violations, the SEC’s order next states: “Mead Johnson did not initially self-report the 2011 allegation of potential FCPA violations and did not thereafter promptly disclose the existence of this allegation in response to the Commission’s inquiry into this matter.” Subsequently, the SEC’s order similarly states: “Despite not self-reporting the 2011 allegation of potential FCPA violations or promptly disclosing the existence of this allegation in response to the Commission’s inquiry into this matter, Mead Johnson subsequently provided extensive and thorough cooperation.”

Perhaps it was merely inartful language, but if the SEC’s position is that issuers have an obligation to self-report internal investigation results that do not find evidence of FCPA violations, then such a position is truly alarming and without any legal support.


Contrary to this report, Mead Johnson did not first disclose its FCPA scrutiny “early last year” but rather in October 2013 (see this prior post).

Nevertheless, the time between public disclosure and the enforcement action was less than two years, an unusually speedy resolution given that the norm in FCPA inquiries is often 2-4 years with several examples in the 5-7 year range.


A Compliance Professional Speaks

Wednesday, November 12th, 2014

myster person2Today’s post is from a compliance professional who wishes to remain anonymous.


When you’re the Chief Compliance Officer (“CCO”) of a company that ends up in the middle of one of “those” all-encompassing FCPA investigations (as if there’s any other kind), people often want to know . . . what is it like?  How does it feel to be at ground zero of pure FCPA adrenaline?   This is my answer,  based on my repeated experiences.  I wish I could say it just happened once.  This is also based on my discussions with other CCOs.

It’s a rollercoaster with few ups and a lot of downs.

There’s that moment at the beginning when you know something is wrong.  Usually you know it’s not going to be trivial.  So you dig a bit more. Or have someone else dig a bit more.  Somewhere along the line, it strikes you.  This is going to be big.  Very big.  We can just call that the “oh crap” moment.  Every CCO I know has had at least one.

You feel a rush.  An excitement.  It’s what you’ve trained for, and read about.  And now it’s happening.  But there is invariably, immediately, a sense of dread.  Depending on the size of the issue and the seniority of the people involved, that sense of dread can range from a knot in the stomach to downright nausea.  Will the C-suite management understand it?  (Do you even have the ear of the C-suite management?) Will they do the “right thing”?

You know exactly what should happen next.  You should get on the phone with your favorite skilled, independent investigations counsel.  But before you can do that, you have to be a salesman.  You need to convince someone (sometimes the CEO, sometimes the General Counsel, sometimes a non-executive director) that this is something.  Or at the very least, it’s not nothing.  With any luck, you can make them see sense.  Most of the time, they’ve never been through this.  The education process can be slow and tedious.

You know who the right counsel are . .  . but not so fast.  You don’t have the budget.  Many times, you don’t even have the ability to hire outside counsel  without the approval of your General Counsel.  Do you have the GC’s backing?  Do they see compliance as a help or as a nuisance?  Do they believe you when you say this needs independent investigation?  Or do they think you’re just being alarmist?  What if the GC (or someone else) wants to investigate themselves?  Or hire the go-to corporate counsel?  Or hire their buddy, the jovial law school classmate of the GC who has never actually done an investigation but, really, how hard can it be?  You have to explain – calmly, rationally and often repeatedly – why that just isn’t the right thing to do.

In the meantime, a clock may be ticking. The company may be facing a quarterly SEC filing or the signing of a deal contract or the receipt of monies on the deal.  All of these have implications.  All of your powers of (gentle) persuasion are brought to bear.

And your reward for all of this?  If you’re lucky, they listen to you. The right outside counsel walks in the door and the matter rests in their capable hands. It’s a leap of faith to put something this sensitive in the hands of outside counsel.  Or, more specifically, outside counsel’s judgment of when enough is enough.   These issues always reach higher than you think.

More often than not, the legal group squeezes you out.  Compliance, after all, is not generally part of legal.  You may be kept in the loop, or you may be completely excluded.  If you’re very lucky, you are kept abreast of what is happening and people seek out your guidance and opinion.  But honestly?  Don’t hold your breath.  Particularly if this all results in a report to a regulator, you’ll definitely be pushed to the side.  Privilege is held in a tight circle that doesn’t generally include you.  So just go back to your office and keep the compliance program moving along.

What if you’re not lucky?  What if you can’t get anyone to understand? What if the issue is too subtle, or involves too senior a salesperson (they bring in the revenue, after all) or too important a client?  Not many can just stake out the moral (and legal) high ground and resign.  Sometimes the situation is that bad, or you have regulatory obligations, and you’re forced into that decision.  I know a brave few who have actually done that.  Put yourself in their shoes.  Think what it would mean for yourself and your family to walk away from a steady (and often healthy) paycheck.  What a price to pay for your convictions.

It’s far more common that you hold your tongue and bide your time. You find a way to rationalize the situation.  You compromise.  Being a CCO is, above all else, about compromise.  Does that surprise or appall lawyers in private practice or working for the government?  It shouldn’t.  Good CCOs are always “commercial” (whatever that is supposed to mean). As a CCO,  you’re being “business friendly.”  Or, to be less cynical, you’re doing your job.  You’re there to balance the company’s interests with the legal requirements.

But mostly you hope and pray that you’ve done the right thing.  And that a regulator never second guesses your actions.  That seems to be happening more and more.  I know too many CCOs  who are being subpoenaed to give testimony and defend their actions in front of regulators.  Sometimes as witnesses, but sometimes (rarely) as suspects.  So much for regulators seeing CCOs as the guys in the white hats.

Even if the  (right) lawyers do come in and they investigate, you hope that you didn’t raise a false alarm.  Then you hope none of your friends in the business were involved (CCOs always have friends in the business).   And when it turns out you were exactly right, and it really was worse than what you thought, it’s a hollow victory.  People lose their jobs.  People that you know and sometimes people that you like and who weren’t malicious or evil.  They were just doing their jobs and got caught up in the tide.  Sometimes they are sued or brought up on criminal charges.  The rest of the company is left in a state of shock.  You may have been trained to spot a FCPA issue when it arises, but there’s very little training on how to deal with the human element.  It is far and away the worst part of the job.

Friday Roundup

Friday, August 29th, 2014

Some reading material to keep you occupied and engaged over the three-day holiday weekend.


This recent Wall Street Journal article is about China’s recent antitrust crackdown, but the same could perhaps be said about China’s recent corruption crackdown against foreign multinationals doing business in China.

“The fact that regulators are going after allegedly dubious practices by multinationals isn’t what bothers trade officials at Western embassies in Beijing, even if they suspect that the probes sometimes have the effect of strengthening Chinese state-owned competitors.

What concerns them the most is the heavy-handed way that investigations are being pursued—and highly charged media coverage that makes for a troubling atmosphere for Western companies.

Foreign executives have learned two early lessons from the antitrust probes. First, the law provides little refuge. The message that the National Development and Reform Commission, the government agency that sets pricing rules, delivers in private to multinationals at the outset of a price-fixing investigation is not to bring in their foreign lawyers, according to numerous accounts by foreign executives, diplomats and lawyers themselves.

The second lesson is connected to the first: Resistance is futile. There’s scant need for lawyers when companies face a choice of either bowing to demands for quick remedies or becoming involved in a protracted wrangle with regulators in what is still a state-dominated economy. In almost every antitrust case launched so far, foreign companies have capitulated without a fight.

Voluntary price cuts of up to 20% are the norm, accompanied by board-level expressions of remorse and promises to do better.

And these cuts are offered at the very outset of investigations—and, sometimes, to get ahead of them. Chrysler described its abrupt decision to slash car-part prices as a “proactive response” to the price-fixing probe as it got under way. These price-fixing investigations have been accompanied by heated nationalistic rhetoric in the state media with antiforeign overtones. Taking down multinationals a peg plays well among the large sections of the public that view them as arrogant.”


The always informative Debevoise & Plimption FCPA Update is particularly stellar this month.  It contains articles about the recent Wal-Mart – investor dispute in the Delaware Supreme Court as well as the recent settlement in SEC v. Jackson & Ruehlen.

Wal-Mart Delaware Action

The Wal-Mart Delaware action remains in my mind much to do about little at least as to the monumental corporate governance issues some had hoped for.

Nevertheless, the FCPA Update makes several valid points about the decision.

“In the wake of Wal-Mart, stockholders in future cases are likely to raise questions about the ways in which investigations have been conducted to see whether those questions also provide a “colorable basis” for seeking a broad range of investigative records. Companies that conduct investigations, therefore, will want to structure the investigation from the outset in a way that limits the ability of shareholders to assert that it was done improperly or otherwise may give rise to any legitimate shareholder concern. This, in turn, will place a premium on early decisions about who should conduct the review, who should supervise the review and the scope of the inquiry. Those decisions, which are generally made before any review has been conducted and based upon limited information, are sure to get close scrutiny from stockholders and should be undertaken with the utmost deliberation and care.”

SEC v. Jackson & Ruehlen

This previous post highlighted the recent settlement in SEC v. Jackson & Ruehlen and noted that the SEC, a law enforcement agency with merely a civil burden of proof, was never able to carry its burden and this was among other reasons why the SEC’s case against Jackson and Ruehlen failed – and yes – this is the only reasonable conclusion to be drawn from the settlement.

The FCPA Update states:

“In the realm of FCPA enforcement, where the vast majority of cases are settled before the filing and litigation of formal  charges, it is often hard to compare the outcomes of early and eve-of-trial or post-trial settlements in any meaningful way. The Noble case, however, provides  a rare opportunity to engage in such a comparison, not only because it was litigated by the SEC farther than almost any other FCPA case has been, but also because it involved both pre-and post-litigation settlements for individual defendants based on charges arising out of the same series of events.

In February 2012, the U.S. Securities and Exchange Commission (“SEC”) charged three executives of Noble Corporation with violating various provisions of the FCPA and related laws in the course of their interactions with public officials in Nigeria’s energy sector. One of these defendants, Thomas O’Rourke, promptly settled with the SEC, accepting permanent injunctions against future violations as to every count on which he was charged, and agreeing to pay a $35,000 civil penalty.

The remaining individual defendants, Mark Jackson and James Ruehlen, decided to litigate. On July 2, 2014 – less than a week before trial was to start and after more than two years of litigation – the SEC settled with these two defendants. Although Jackson and Ruehlen agreed to be enjoined from future violations of the books and records provision of the FCPA, the settlements in their matters were notable in that the vast majority of the charges in the initial complaint, including the bribery charges, were conspicuously absent from the settlements, and no monetary penalties were imposed.

Although the Noble case offers just one data point, the outcomes for the three defendants raise important questions about both the difficulties of litigating these types of cases for the SEC and the potential advantages of declining pre-trial settlement for would-be defendants. In addition, the SEC’s litigation strategy in these cases highlights some possible problems with the expansive interpretation of the FCPA that the SEC and the Department of Justice (“DOJ”) have advanced in recent FCPA cases. These problems, highlighted in the District Court’s refusal to accept the SEC’s interpretation on certain key issues, such as the scope of the facilitation payments exception, as well as the concrete impact of the U.S. Supreme Court’s Gabelli decision (133 S. Ct. 1216 (2013)) in gutting large portions of the SEC’s claims for penalty relief, will doubtless affect future litigation, as well as the “market” for SEC (and in certain respects, DOJ) settlements for years to come. But at the same time, the SEC’s losses on these key issues, which drove the favorable settlements with Jackson and Ruehlen, could well incentivize the SEC to dig deeper, and earlier, for the evidence needed to sustain its burdens in FCPA matters.”


The Economist states – in a general article not specific to the FCPA – that “the [U.S.] legal system has become an extortion racket.” According to the article,

“[J]ustice should not be based on extortion behind closed doors. The increasing criminalisation of corporate behaviour in America is bad for the rule of law and for capitalism.  [...] Perhaps the most destructive part of it all is the secrecy and opacity. The public never finds out the full facts of the case, nor discovers which specific people—with souls and bodies—were to blame. Since the cases never go to court, precedent is not established, so it is unclear what exactly is illegal. That enables future shakedowns, but hurts the rule of law and imposes enormous costs.”

In the FCPA context, see here for my 2010 article “The Facade of FCPA Enforcement.


A series of informative posts here, here, here and here from Thomas Fox (FCPA Compliance and Ethics Blog) regarding risk assessment.


A good weekend to all.

Friday Roundup

Friday, April 4th, 2014

Contorted, interesting, deserving?, scrutiny alerts and updates, and for the reading stack.  It’s all here in the Friday Roundup.


One of the most contorted words in the FCPA vocabulary is “declination” (see here among other posts).

This K&L Gates report contains a useful summary of DOJ and SEC comments at a recent conference.  It states:

“Mr. Knox [DOJ Criminal Division Fraud Section Chief] stated that companies continue to request specific information regarding the Department’s declinations, but that it is the Department’s long-standing practice not to publish details of declinations without a company’s permission, which is rarely given.  According to Mr. Knox, however, over the last two years, the Department has declined to prosecute dozens of cases.  Notably, Mr. Knox stated that, aside from finding no evidence of criminal conduct, the Department may issue a declination when a case involves an isolated incident, the company had a strong compliance program, and the problem was remediated.”


If the DOJ does not find evidence of criminal conduct and therefore does not bring a case, this is not a “declination,” it is what the law commands.

On the topic of voluntary disclosure, the K&L Gates report states:

“Mr. Cain [SEC FCPA Unit Deputy Chief] started by stating “there is no perfect compliance program;” therefore, companies will always have some “background issues” which need to be addressed, especially as business and risk profiles change.  Mr. Cain does not expect companies to disclose these “normative” problems; however, companies should disclose “significant problems.”  These “significant problems” are the types of issues which may end up being enforcement actions if the SEC learns of them through means other than self-disclosure.”

“Mr. Knox took the position that it would be “very reckless and foolish” for him “to try and draw a line between matters which should be self-disclosed and matters which shouldn’t.”  In making the decision of whether to self-disclose, he advised companies and counsel to apply “common sense” and ask whether this is “something that [the Department] would be interested in hearing about?”  According to Mr. Knox, if the answer to that question is “yes,” then the Department would “probably want [a company] to self-disclose it.”  Nonetheless, there are instances which are not worthy of self-disclosure because the conduct is “minor” and “isolated” or the allegation of wrongdoing is “much too vague.”  Mr. Knox advised companies to “be thoughtful” when making disclosure decisions and carefully document any decision not to disclose.”

If the above leaves you scratching your head, join the club.


My article “Why You Should Be Alarmed by the ADM FCPA Enforcement Action” highlights how ADM and its shareholders were victims of a corrupt Ukrainian government in that the government refused to give ADM something even the DOJ and SEC acknowledged ADM was owed – VAT refunds.  Among other things, the article discusses how VAT refund refusals were well-known and frequently criticized prior to the ADM enforcement action in late 2013.

Fast forward to the present day and VAT refund refusals remain a problem in Ukraine.  Recently the International Monetary Fund issued this release concerning a potential aid package for Ukraine.  Among the conditions is that Ukraine  adopt “reforms to strengthen governance, enhance transparency, and improve the business climate” such as taking “measures to facilitate VAT refunds to businesses.”


Earlier this week, the African Development Bank Group (AfDB) released this statement

“Kellogg Brown & Root LLC, Technip S.A. and JGC Corp. agree to pay the equivalent of US $17 million in financial penalties as part of Negotiated Resolution Agreements with the African Development Bank following admission of corrupt practices by affiliated companies in relation to the award of services contracts for liquefied natural gas production plants on Bonny Island, Nigeria, from 1995 until 2004.”

The Director of the AfDB’s Integrity and Anti-Corruption Department stated:

“This settlement demonstrates a strong commitment from the African Development Bank to ensure that development funds are used for their intended purpose.  At the same time, it is a clear signal to multinational companies that corrupt practices in Bank-financed projects will be aggressively investigated and severely sanctioned. These ground-breaking Negotiated Resolution Agreements substantially advance the Bank’s anti-corruption and governance agenda, a strategic priority of our institution.”

Pardon me for interrupting this feel good moment (i.e. a corporation paying money to a development bank), but why is AfDB deserving of any money from the companies?  As noted here, AfDB’s role in the Bonny Island project was relatively minor as numerous banks provided financing in connection with the project.  Moreover, as noted here, the AfDB “invested in the oil and gas sector through a USD 100 million loan to NLNG [Nigeria LNG Limited] to finance the expansion of a gas liquefaction plant located on Bonny Island.”

As alleged in the U.S. Bonny Island FCPA enforcement actions, the above-mentioned companies allegedly made corrupt payments to, among others, NLNG officials.  And for this, the specific companies paid $579 million (KBR, et al), $338 million Technip, and $219 million (JGC).

Why is the bank that loaned money to NLNG deserving of anything?  Is there any evidence to suggest that the $100 million given to NLNG was not used for its “intended purpose” of building the Bonny Island project?

Scrutiny Alerts and Updates

SBM Offshore, Sweett Group, Citigroup, Cisco, and Societe Generale.

SBM Offshore

The Netherlands-based company (with ADRs traded in the U.S. that provides floating production solutions to the offshore energy industry) has been under FCPA scrutiny for approximately two years.  It recently issued this statement which states, in summary, as follows.

“SBM Offshore presents the findings of its internal investigation, which it started in the first quarter of 2012, as the investigators have completed their investigative activities. The investigation, which was carried out by independent external counsel and forensic accountants, focused on the use of agents over the period 2007 through 2011. In summary, the main findings are:

  • The Company paid approximately US$200 million in commissions to agents during that period of which the majority relate to three countries: US$18.8 million to Equatorial Guinea, US$22.7 million to Angola and US$139.1 million to Brazil;
  • In respect of Angola and Equatorial Guinea there is some evidence that payments may have been made directly or indirectly to government officials;
  • In respect of Brazil there were certain red flags but the investigation did not find any credible evidence that the Company or the Company’s agent made improper payments to government officials (including state company employees). Rather, the agent provided substantial and legitimate services in a market which is by far the largest for the Company;
  • The Company voluntarily reported its internal investigation to the Dutch Openbaar Ministerie and the US Department of Justice in April 2012. It is presently discussing the disclosure of its definitive findings with the Openbaar Ministerie, whilst simultaneously continuing its engagement with the US Department of Justice. New information could surface in the context of the review by these authorities or otherwise which has not come up in the internal investigation to date;
  • At this time, the Company is still not in a position to estimate the ultimate consequences, financial or otherwise, if any, of that review;
  • Since its appointment in the course of 2012 the Company’s new Management Board has taken extensive remedial measures in respect of people, procedures, compliance programs and organization in order to prevent any potential violations of applicable anti-corruption laws and regulations. Both it and the Company’s Supervisory Board remain committed to the Company conducting its business activities in an honest, ethical, respectful and professional manner.”

The SBM Offshore release contains a detailed description of the scope and methodology of its review, as well as remedial measures the company has undertaken.  For this reason, the full release is an instructive read.

Sweett Group

As noted in this prior post, in June 2013 Sweett Group Ltd. (a U.K. based construction company) was the subject of a Wall Street Journal article titled “Inside U.S. Firm’s Bribery Probe.” The focus of the article concerned the construction of a hospital in Morocco and allegations that the company would get the contract if money was paid to “an official inside the United Arab Emirates President’s personal foundation, which was funding the project.”

Earlier this week, the company issued this release which stated:

“[T]here have been further discussions with the Serious Fraud Office (SFO) in the UK and initial discussions with the Department of Justice (DOJ) in the USA.  The Group is cooperating with both bodies and no proceedings have so far been issued by either of them.  The Group has commissioned a further independent investigation which is being undertaken on its behalf by Mayer Brown LLP.  Whilst this investigation is at an early stage and is ongoing, to date still no conclusive evidence to support the original allegation has been found.  However, evidence has come to light that suggests that material instances of deception may have been perpetrated by a former employee or employees of the Group during the period 2009 – 2011.  These findings are being investigated further.”


When first discussing Citigroup’s “FCPA scrutiny” I noted the importance of understanding that the FCPA contains generic books and records and internal controls provisions that can be implicated in the absence of any FCPA anti-bribery issues. (See here for a prior post on this subject).  As highlighted in this recent New York Times Dealbook article, this appears to be what Citigroup’s scrutiny involves.  According to the article:

“Federal authorities have opened a criminal investigation into a recent $400 million fraud involving Citigroup’s Mexican unit, according to people briefed on the matter …  The investigation, overseen by the FBI and prosecutors from the United States attorney’s office in Manhattan, is focusing in part on whether holes in the bank’s internal controls contributed to the fraud in Mexico. The question for investigators is whether Citigroup — as other banks have been accused of doing in the context of money laundering — ignored warning signs.”


BuzzFeed goes in-depth as to Cisco’s alleged conduct in Russia that has resulted in FCPA scrutiny for the company. The article states, in pertinent part:

“[T]he iconic American firm is facing a federal investigation for possible bribery violations on a massive scale in Russia. At the heart of the probe by the Department of Justice and the Securities and Exchange Commission, sources tell BuzzFeed, are allegations that for years Cisco, after selling billions of dollars worth of routers, communications equipment, and networks to Russian companies and government entities, routed what may have amounted to tens of millions of dollars to offshore havens including Cyprus, Tortola, and Bermuda.”

“Two former Cisco insiders have described to BuzzFeed what they say was an elaborate kickback scheme that used intermediary companies and went on until 2011. And, they said, Cisco employees deliberately looked the other way.”

“No one is suggesting that Cisco bribed Russia’s top leaders. Instead, the investigation is centered on day-to-day kickbacks to officials who ran or helped run major state agencies or companies. Such kickbacks, according to the allegations, enabled the firm to dominate Russia’s market for IT infrastructure.”

“Last year, according to sources close to the investigation, a whistleblower came forward to the SEC, sketching out a vast otkat [kickback] scheme and providing documents as evidence.”

“The two former Cisco executives laid out for BuzzFeed how the alleged scheme worked:  In Cisco’s Russia operations, funds for kickbacks were built into the large discounts Cisco gave certain middleman distributors that were well-connected in Russia. The size of the discounts are head-turning, usually 35% to 40%, but sometimes as high as 68% percent off the list price.  And there was a catch: Instead of discounting equipment in the normal way, by lowering the price, parts of the discounts were often structured as rebates: Cisco sent money back to the middlemen after a sale. Some intermediaries were so close to the Russian companies and government agencies — Cisco’s end customers — that these intermediaries functioned as their agents. These middleman companies would direct the rebate money to be sent to bank accounts in offshore havens such as Cyprus, the British Virgin Islands, or Bermuda.”

According to the article, WilmerHale is conducting the internal investigation.

Societe Generale

Like other financial services company, Societe Generale has come under FCPA scrutiny for business dealings in Libya.  (See here for the prior post).  As noted in this recent article in the Wall Street Journal, in a U.K. lawsuit the Libyan Investment Authority has alleged that the company “paid a middleman $58 million in alleged bribes to secure almost $2 billion in business … during the final years of dictator Moammar Gadhafi’s rule.”

Reading Stack

The most recent issue of the always informative FCPA Update from Debevoise & Plimpton contains a useful analysis of the DOJ’s recent opinion procedure release (see here for the prior post).  Among other things, the Update states:

“[W]hy did it take eight months for the DOJ to issue an Opinion which could have simply cited [a prior Opinion Release]? The delay does not appear to be related to the DOJ’s heavy workload or bureaucratic inertia, as “significant backup documentation” was provided and “several follow up discussions” took place during the eight months.”


A good weekend to all.  On Wisconsin!