There is a need for a Foreign Corrupt Practices Act lingua franca. The absence of a lingua franca has all sorts of negative effects, including an impact on the quality of FCPA enforcement and related statistics. I previously wrote about this issue here (“What is an FCPA Enforcement Action”), here (“The Need For a Consensus ‘Declination’ Definition”) and here (“Further to the Definition of ‘Declination’”).
Several recent events have put into sharper focus the need for an FCPA lingua franca – both as to what is an FCPA enforcement action and what is a declination.
What is an FCPA Enforcement Action?
Last week, a guest post on the FCPA Blog by Marc Alain Bohn (Miller & Chevalier) contained the headline “Year’s First FCPA Enforcement Action Flies Under the Radar.” The post concerned this February 28th SEC enforcement action against Keyuan Petrochemicals, Inc. and Aichun Li (the company’s CFO). To be sure, it was a nice find by Bohn and I agree with his statement that the action, regardless of what it is called, is significant because it was an SEC enforcement action against a China-based company whose stock is registered with the SEC and traded in the U.S.
The enforcement action was principally based on Keyuan’s systematic failure “to disclose in its SEC filings numerous material related party transactions between the company and its CEO and controlling shareholders, entities controlled by or affiliated with these persons, and entities controlled by Kenyuan’s management or their family members.” As alleged by the SEC, “the related party transactions took the form of sales of products, purchases of raw materials, loan guarantees and short term cash transfers for financing purposes.”
The enforcement action also included allegations that Kenyuan “operated an off-balance sheet cash account that was kept off the company books.” According to the SEC, “the account was used to pay for various items, including cash bonuses for senior officers, fees to consultants who provided technical services to the company, and reimbursements to the CEO for business expenses, including travel, entertainment, and rent for an apartment.” Later in the complaint, the SEC alleges as follows regarding the “off-balance sheet cash account.”
“From at least July 2008 and continuing until March 2011, Keyuan maintained an off-balance sheet cash account. Total amounts funded to and disbursed from the account were approximately $1 million. As a consequence of the use of the off-balance sheet cash account, the company’s reported balances in its financial statements for cash, receivables, construction-in progress, interest income, other income, and general and administrative expenses were misstated. Cash disbursements from the off-balance sheet account were used to pay for various expenses. For instance, cash bonuses were paid to senior officers, including Individual A, in 2010 from the off-balance sheet cash account; Keyuan did not withhold any taxes on these bonus payments. Keyuan also paid various technical experts that provided consulting services from this account; no provision was made by Keyuan to pay local taxes in connection with these payments. The company’s CEO also received cash disbursements from the off-balance sheet cash account, including funds to cover business expenses (such as travel and entertainment) and to cover the costs of an apartment near the plant facilities.”
As detailed in this prior post, the FCPA of course is a law much broader than its name suggests. The FCPA’s books and records and internal control provisions are among the most generic substantive legal provisions one can find and the SEC often brings what I’ve called “non-FCPA FCPA enforcement actions.”
In the Keyuan enforcement action it is thus not surprising that the SEC charged violations of the FCPA’s books and records and internal control provisions based on the above conduct.
Yet, as Bohn correctly points out in his FCPA Blog post, the SEC complaint also did made passing reference, in detailing the off-balance sheet cash account, that it “was also used to fund gifts – both cash and non-cash – for Chinese government officials.” Specifically, in paragraph 42 of the complaint the SEC alleges as follows.
“The off-balance sheet cash account was also used, in part, to fund gifts to Chinese government officials, typically around the Chinese New Year. Among the recipients of the gifts were officials from the local environment, port, police, and fire departments. Gifts ranged from household goods (such as beddings and linens) to ‘red envelope’ gifts in which cash was directly gifted to the recipients”
Of note, in the SEC’s summary paragraphs (paras. 45 and 46) titled “False Books and Records and Inadequate Internal Controls,” the SEC makes explicit reference to certain conduct, but not the above paragraph related to Chinese government officials.
So the issue becomes what to make of this one paragraph of the 18 page SEC complaint and what to call the Keyuan Petrochemicals enforcement action?
Is it an FCPA enforcement action?
In this prior post, I set forth my criteria for an FCPA enforcement action, in pertinent part, as follows.
(1) An FCPA enforcement action is an instance in which an enforcement agency (whether DOJ or SEC) charges or finds that the FCPA (whether its anti-bribery, books and records, or internal controls provisions) has been violated.
(2) As to FCPA books and records or internal control charges or findings, such actions are only FCPA enforcement actions to the extent categorized as such by either the DOJ or SEC on its FCPA websites.
In the Keyuan Petrochemicals enforcement action, the SEC did indeed charge (as it charges in many non-FCPA FCPA enforcement actions) violations of the books and records and internal controls provisions. However, my criteria (2) is that such charges should only be considered FCPA enforcement actions to the extent categorized as such by either the DOJ or SEC or its FCPA website. The SEC’s FCPA website (here) does not include the Keyuan Petrochemicals action. On that basis, and consistent with my criteria, I am not going to call it an FCPA enforcement action either.
In many respects, the Keyuan Petrochemicals enforcement action is similar to the SEC’s 2012 enforcement action against former Digi International CFO Subramanian Krishnan (see here for the prior post). That action, like the Keyuan Petrochemical action, is also not listed on the SEC’s FCPA website.
In short, what one calls an action matters. Just using the Kenyuan example, FCPA enforcement thus far in 2013 is either 1 action with $1,025,000 collected (Keyuan agreed to pay a $1,000,000 civil penalty and Li agreed to pay a $25,000 civil penalty) or 0 actions, $0 collected.
“What is a Declination?
The good-faith debate as to the “d” word continues. In addition, to the declination posts highlighted above in the first paragraph, see this recent FCPA Blog guest post, also by Marc Alain Bohn.
In recent weeks, the FCPA Blog (and others – there is a certain herd mentality when it comes to such things) have called the end of FCPA scrutiny for Nabors Industries, Zimmer Holdings, and 3M - declinations. “Nabors Wins Declination” – “Double Declination for Zimmer” – “Declination for 3m.”
I again respectfully disagree and ask why are some calling these instances of FCPA scrutiny declinations? In doing so, I am guided by my definition of a declination as being an instance in which an enforcement agency has concluded that it could bring a case, consistent with its burden of proof as to all necessary elements, yet decides not to pursue the action. (Others have offered the same definition – see here for a Wilmer Hale Client Alert -”the concept of a declination is supposed to be reserved for instances in which the offense is chargeable but the government declines in its own discretion to bring a case”).
The FCPA scrutiny of both Nabors and Zimmer can be analyzed together because both companies were the subject of FCPA scrutiny because of an industry sweep.
In its February 20th SEC filing, Nabors stated, in pertinent part, as follows.
“We previously disclosed that on July 5, 2007, we received an inquiry from the U.S. Department of Justice relating to its investigation of one of our vendors [Panalpina] and compliance with the Foreign Corrupt Practices Act. The inquiry related to transactions with and involving Panalpina, which provided freight forwarding and customs clearance services to some of our affiliates. In 2012, the SEC advised us that it had concluded its review of the matter and did not intend to recommend any enforcement action against us. On February 15, 2013, the Department of Justice likewise advised us that it has concluded its inquiry, also without recommending any enforcement action against us.”
In its February 27th SEC filing, Zimmer stated, in pertinent part, as follows.
“In September 2007, the Staff of the U.S. Securities and Exchange Commission (SEC) informed us that it was conducting an investigation regarding potential violations of the Foreign Corrupt Practices Act (FCPA) in the sale of medical devices in a number of foreign countries by companies in the medical device industry. In November 2007, we received a letter from the U.S. Department of Justice (DOJ) requesting that any information provided to the SEC also be provided to the DOJ on a voluntary basis. In the first quarter of 2011, we received a subpoena from the SEC seeking documents and other records pertaining to our business activities in substantially all countries in the Asia Pacific region where we operate. We produced documents responsive to the subpoena and reported to the government concerning the results of our own reviews regarding FCPA compliance. During a meeting in December 2012, representatives from the agencies informed us that the SEC and the DOJ planned to close their investigation without pursuing any enforcement action against us. The DOJ and SEC formally notified us through letters of declination dated December 19, 2012 and February 1, 2013, respectively, that the agencies have closed their inquiries into this matter. While we are pleased with the government’s declination decision in this matter, we are committed to continuing to enhance our global anti-corruption compliance program.”
Using the above definition of declinations, I previously stated that anything less ought not be termed a ”declination” and noted that it is really no different that saying a police officer “declined” to issue a speeding ticket in an instance in which the driver was not speeding. This is not a declination, it is what the law commands, and such reasoning applies in the FCPA context as well.
Sticking with the law enforcement analogy, calling an instance of FCPA scrutiny resulting from an industry sweep that does not result in an enforcement action a declination, is like saying the police “declined” to charge one with drunk driving if a sober driver successfully passes through a law enforcement sobriety checkpoint. That is not a declination, it is what the law commands, and such reasoning applies in the FCPA context as well.
In its February 14th SEC filing, 3M stated, in pertinent part, as follows.
“In November 2009, the Company contacted the Department of Justice (DOJ) and Securities and Exchange Commission (SEC) to voluntarily disclose that the Company was conducting an internal investigation as a result of reports it received about its subsidiary in Turkey, alleging bid rigging and bribery and other inappropriate conduct in connection with the supply of certain reflective and other materials and related services to Turkish government entities. The Company also contacted certain affected government agencies in Turkey. In September 2012, the Turkish Competition Authority issued its decision finding that there was insufficient evidence obtained in the investigation to find that 3M Turkey or the other companies investigated violated the Turkish competition law. The Company retained outside counsel to conduct an assessment of its policies, practices, and controls and to evaluate its overall compliance with the Foreign Corrupt Practices Act (FCPA), including a review of its practices in certain other countries and acquired entities. As part of its review, the Company has also reported to the DOJ and SEC issues arising from transactions in other countries. In January 2013, the DOJ and SEC each notified the Company that they are terminating their investigations into possible violations of the FCPA without taking any action or imposing any fines against the Company. Among the reasons cited by the DOJ for closing its investigation included the Company’s voluntary disclosure and cooperation, the Company’s thorough investigation, and the steps the Company has taken to enhance its anti-corruption compliance program.”
There is nothing in this disclosure to suggest that the definition of declination has been met. Indeed, given that Turkish authorities concluded that there was “insufficient evidence” as to certain of the disclosed conduct, speaks to perhaps the quality of information 3M initially received as to its subsidiary.
Of course, if my declination proposal (see here from August 2010) were to be adopted, we would likely know the answer as to why the DOJ and SEC did not bring an enforcement action as a result of 3M’s voluntary disclosure.
Further to declination issues, I could not help but notice in the U.S.’s recent ((Jan. 28, 2013) “Final Follow-Up to Phase 3 Report and Recommendations” (a document that, to my knowledge has yet to be covered elsewhere) the U.S. acknowledged that it “has declined to bring criminal charges in some cases, in part due to lack of admissible evidence obtained prior to the statute of limitations.” This reason for “declining” is self-obvious, but there was no mention of it in the November 2012 FCPA Guidance section on declinations, likely because it did not advance the enforcement agencies’ policy positions.
Finally, if you have not yet read “Legal Limbo – Seeking Clarity In How and When The Department of Justice Declines to Prosecute” by George Terwilliger and Matthew Miner, put it on your reading stack. Like my 2010 declination proposal and the policy rationales behind it, Legal Limbo states, in pertinent part, as follows.
“While the cases DOJ elects to prosecute are well known, better understanding of the parameters of its decisions to forego prosecution can add significantly to the body of guidance available to the business community. In addition, fundamental fairness dictates that decisions not to prosecute be communicated to affected parties as soon as possible.”
“Legal Limbo” notes that a “little bit of daylight on the declination process could help light corporations’ way to improved compliance with legal requirements and enforcement expectations within their operations” and it proposes as follows.
”First [...], notice of declinations be issued presumptively, rather than permissively following a declination decision. This practice could be subject to clearly-stated and narrowly defined exceptions that are necessary to protect the Department’s interests in ongoing investigations.
Second [...], the Department publish an annual report summarizing the circumstances or key factors underlying major declination decisions. Such a report should be drafted with the goal of providing maximum guidance as to the factors underlying the Department’s declination determinations by case category, while also protecting the identities of those who had been investigated. Such a reform could be presented in a categorical fashion so that companies facing investigations are provided a better understanding of the types of conduct leading to a declination decision.”