Last year at this time, Morgan Stanley’s so-called “declination” dominated the conversation.  Why was it a “declination”?  It seemed simply because the DOJ said it was, even though a bit of independent analysis would quickly reveal that there was likely no criminal case to be made against Morgan Stanley based on the DOJ’s own allegations and comments from the judge who sentenced Garth Peterson.  (See here for the prior post “Stop Drinking the Kool-Aid”).

Last week, the DOJ and SEC announced double non-prosecution agreements against Ralph Lauren Corporation (“RLC”).  (See here for the prior post).  Because it was the SEC’s first use of an NPA in the FCPA context, the SEC portion of the enforcement action received the most attention.

Why did the SEC use an NPA to resolve RLC’s alleged scrutiny?  The SEC said that it was because RLC voluntarily disclosed, provided extensive and thorough cooperation, and implemented various remedial measures.

Sensing an avalanche of FCPA Inc. information carrying forward the SEC’s comments, I noted in this post last Tuesday as follows.

“Of course, these are not distinguishing factors.  Many SEC FCPA enforcement actions are the result of corporate voluntary disclosures where companies are likewise commended on the information and cooperation provided.  In the Tenaris DPA action, the SEC (see here) said substantively the same thing.  In the recent Philips SEC enforcement action, the SEC (see here) said substantively the same thing.”

The RLC enforcement action was released during the early days of a new era of SEC leadership and one law firm alert on the action stated that ”the SEC’s enforcement division is clearly using the NPA with RLC as an opportunity to do some cheerleading for the Enforcement Cooperation Initiative” (see here for more of that initiative launched in January 2010).

Many FCPA Inc. industry participants picked up the pom-poms are started cheering alongside the SEC.

One headline read –  ”Self-Reporting FCPA Violations Pays Off: Just Ask Ralph Lauren.”

Another headline read – “Another Example Of The Benefits Of FCPA Self-Reporting.”

A law firm alert stated as follows.  “The NPA in this case resulted from Lauren’s prompt self-reporting and extensive cooperation. Prior to the Lauren NPA, the SEC seemed to provide limited credit to public companies for cooperation in FCPA investigations.”

Another law firm alert stated as follows.   ”With the announcement of the Ralph Lauren resolution … the SEC and DOJ have taken pains to highlight that beyond self-disclosure, the expedient and thorough reporting of a potential violation, real-time cooperation, and implementation of effective remedial measures may yield more positive results for companies subject to the FCPA.”

As is often the case, the FCPA Inc. material then closed with marketing pitches concerning FCPA compliance services.

Many others highlighted that the SEC mentioned that “Ralph Lauren Corporation has ceased operations in Argentina” and “is in the process of formally winding down all operations there” to make the causal inference that RLC did this because of the FCPA enforcement action and/or risk associated with the FCPA.  However, as noted in my post last Tuesday, a few minutes of internet research will quickly reveal that RLC made the decision in August 2012 to suspend and wind-down its Argentine operations based on import controls put on foreign companies and associated foreign currency controls intended to control one of highest rates of inflation in the world.  In doing so, RLC joined several other luxury brands Ermenegildo Zegna, Escada, Calvin Klein Underwear, Cartier, Yves Saint Laurent, Hermes, and Louis Vuitton – to have abandoned or are considering leaving Argentina.

Against the backdrop of misses, it was refreshing to read a hit - Covington & Burling’s release titled “The Ralph Lauren Case:  Inadequate Rewards for Exemplary Corporate Cooperation.”  The alert states, in pertinent part, as follows.

“Although the government will no doubt cite these NPAs as an exemplar of the benefits of self-reporting and cooperation, we think they reaffirm the importance of careful consideration before a company decides to self-report potential unlawful conduct.

Based on the facts recited in the SEC NPA, Ralph Lauren appears to have held itself to an extremely high standard of compliance. On its own initiative, the company adopted a new Foreign Corrupt Practices Act policy and distributed it to employees, which led some Argentine employees to raise concerns about the company’s customs broker. The company immediately conducted an internal investigation, which ultimately uncovered improper payments and gifts to government officials. Within two weeks of this discovery, Ralph Lauren self-reported its findings to both the SEC and the DOJ. The NPA also highlights that Ralph Lauren adopted numerous remedial measures, including firing its customs broker and implementing further enhancements to its compliance program, cooperated extensively with the SEC, and undertook a world-wide review of its operations that uncovered no other violations.

It is difficult to imagine a set of facts more deserving of a non-public declination based on the criteria outlined by the SEC and the DOJ late last year in their FCPA Resource Guide: detection of the wrongdoing by the corporation itself; a thorough internal investigation of the misconduct; implementation of remedial measures, including termination of employees engaged in wrongdoing and improvements in internal controls and compliance programs; and voluntary disclosure to the DOJ and/or the SEC.

[…]

The Ralph Lauren NPAs are far less advantageous to the company than a declination, which would have involved no public allegations of wrongdoing and no fines. By contrast, in addition to paying approximately $1.6 million in penalties and disgorgement, under the DOJ NPA, the company had to publicly admit and accept responsibility for the illegal conduct, which potentially exposes it to shareholder lawsuits and reputational damage. The company also was required to agree to toll the statute of limitations, implement further extensive changes to its compliance program, and submit annual reports to the DOJ detailing its remediation efforts. If Ralph Lauren is found to have breached any of the terms of the agreements — determined solely by the SEC or the DOJ — it may still face the original charges by both agencies, plus potentially new charges based on any information collected during the course of the NPAs.

The benefits to the government from entering into these NPAs are clear. NPAs — unlike deferred prosecution agreements and SEC injunctive actions — are not filed with any court, thus escaping the kind of judicial scrutiny that has recently been given to some SEC settlements. Moreover, the SEC and DOJ are able to emphasize, once again, the importance of voluntary disclosure and cooperation, while still requiring significant ongoing obligations on the part of the company.

The benefits to Ralph Lauren, on the other hand, are less clear. It is likely that the government applied a discount when deciding what sanctions to impose based on the company’s self-reporting and cooperation. However, it is not at all clear that any such discount was sufficient to cover the incremental investigative and other costs incurred by the company as a result of the self-report, and the additional burdens the company has agreed to shoulder by entering into the NPAs. For other companies contemplating whether to self-report potential FCPA violations, the case reinforces the importance of closely evaluating the risks and rewards of potential outcomes, especially given the government’s apparent reluctance to grant a declination even when presented with a textbook case of extraordinary cooperation.”

Covington & Burling of course is the law firm former Assistant Attorney General Lanny Breuer recently joined as Vice-Chair (see here for the prior post).  Breuer was not listed as an author of the alert, but several former DOJ and SEC enforcement attorneys, including Steve Fagell (a former member of Breuer’s DOJ senior leadership team) are listed as authors.

The RLC enforcement action involved, per the DOJ / SEC allegations, payments by one person in one of RLC’s approximate 95 subsidiaries.  The payments at issue, involving customs issues, likey did not even violate the FCPA as Congress intended.  [For more on what Congress intended - including, as to alleged payments to ministerial officials, see my article "The Story of the Foreign Corrupt Practices Act.').  Indeed, when the government has been put to its ultimate burden of proof in cases occurring outside the context of procurement, the government has an overall losing record.  (See this prior post).  In the only case that the government has won in this context, - the Fifth Circuit decision in U.S. v. Kay- the decision was equivocal and the Court recognized that “there are bound to be circumstances” in which a custom or tax reduction merely increases the profitability of an existing profitable company and thus, presumably, does not assist the payer in obtaining or retaining business."  Indeed, the Court specifically rejected the DOJ's contrary argument and stated as follows.  “[I]f the government is correct that anytime operating costs are reduced the beneficiary of such advantage is assisted in getting or keeping business, the FCPA’s language that expresses the necessary element of assisting in obtaining or retaining business would be unnecessary, and thus surplusage – a conclusion that we are forbidden to reach.”]

Against this backdrop and as a further sign of just how backwards the FCPA conversation of late has become, the Society of Corporate Compliance & Ethics (SCCE) released this statement praising the DOJ and SEC for its handling of the RLC action.

SCCE representatives stated as follows.

“As with the recent Morgan Stanley case, the government has made it clear that companies who take compliance seriously and are committed to finding, fixing, and solving legal and regulatory problems are in a far better position than those who do not invest in real, robust, and effective compliance programs. I can think of no better proof of the value of strong compliance and ethics programs than the DOJ’s and SEC’s recent actions.”

“When the government visibly acknowledges and credits internal compliance efforts, Boards and management take note of their tangible value and are reminded of the need to support empowered, independent compliance officers and functions.”

When the DOJ (and now the SEC) use resolution vehicles that are not subject to one ounce of judicial scrutiny, this is not something to praise, it is something to lament.

When the DOJ and SEC take action against an entity (one of the world’s most admired companies according to this recent Fortune list) that had an isolated instance of conduct that likely did not even violate the FCPA as Congress intended, this is not something to praise, it is something to lament.

When the DOJ and SEC extract approximately $1.6 million from an entity that acted like a responsible corporate citizen upon learning of an issue, and then imposes annual government reporting obligations on that company, and otherwise “muzzles” the company, this is not something to praise, it is something to lament.

Simply Inexcusable

The government holds those subject to the FCPA to high standards.  If the proverbial “right hand” in a company doesn’t know what the “left hand” is doing, the government is likely to call that an internal control failure.

In this post earlier this week regarding Ralph Lauren Corp.’s (RLC) FCPA enforcement action, it was noted that the RLC enforcement action was a rare instance of an issuer not previously disclosing its FCPA scrutiny.  Thus, the first instance of public scrutiny appears to have been announcement of the enforcement action on Monday morning.  RLC’s stock dipped approximately 2% on the news and closed at $165.93.  The “FCPA dip” lasted only a day, as Tuesday the stock rebounded and then some and closed yesterday at $175.38.

Reading Stack

A good weekend to all.

Although the DOJ frequently uses NPAs and DPAs in the FCPA context, this is only the second instance the SEC has used an alternative resolution vehicle to resolve an FCPA enforcement action.  As noted in this previous post, in May 2011 the SEC used a DPA to resolve an FCPA enforcement action against Tenaris.  For more on the SEC’s use of alternative resolution vehicles, see prior posts here and here.

RLC agreed to pay $1.6 million to resolve its FCPA scrutiny – $882,000 pursuant to the DOJ NPA and $700,000 pursuant to the SEC NPA ($593,000 in disgorgement and $141,845 in prejudgment interest).

The gist of the enforcement action is as follows.

RLC has approximately 95 foreign subsidiaries.  One subsidiary, PRL S.R.L, an indirectly wholly-owned subsidiary of RLC headquartered and incorporated in Argentina, had a General Manager who conspired with a customs clearance agency to make improper payments “to assist in improperly obtaining paperwork necessary for goods to clear customs, to permit clearance of items without the necessary paperwork, to permit the clearance of prohibited items, and to avoid inspection.”

There is no allegation or suggestion that RLC was aware of, or participated in, the alleged conduct.  The resolution documents merely say that “in the five years that General Manager A, Agent 1, and others at PRL S.R.L carried out this scheme, RLC did not have an anti-corruption program and did not provide any anti-corruption training or oversight with respect to PRL S.R.L.”

The simplistic inference would seem to be that General Manager A would not have engaged in the improper conduct had RLC had an anti-corruption program and provided anti-corruption training.  However, this notion would seem to be undermined by reference to RLC’s worldwide FCPA compliance review which ”identified no further violations.”

DOJ NPA

The NPA states that the DOJ “will not criminally prosecute RLC … related to violations of the anti-bribery provisions of the FCPA … arising from and related to improper payments in Argentina …”.

The NPA next states as follows.  “The DOJ enters into this Non-Prosecution Agreement based, in part, on the following factors:

(a) the Company’s timely, voluntary, and complete disclosure of the conduct;

(b) the Company’s extensive, thorough, and real-time cooperation with the Department, including conducting an internal investigation, voluntarily making employees available for interviews, making voluntary document disclosures, conducting a world-wide risk assessment, and making multiple presentations to the Department on the status and findings of the internal investigation and the risk assessment;

(c) the Company’s early and extensive remedial efforts already undertaken – including conducting extensive FCPA training for employees world-wide, enhancing the Company’s existing FCPA policy, implementing an enhanced gift policy as well as other enhanced compliance, control and anti-corruption policies and procedures, enhancing its due diligence protocol for third-party agents, terminating culpable employees and a third-party agent, instituting a whistleblower hotline, and hiring a designated corporate compliance attorney – and to be undertaken, including enhancements to its compliance program as described in [the compliance features of the NPA); and

(d) the Company’s agreement to provide annual, written reports to the Department on its progress and experience in monitoring and enhancing its compliance policies and procedures, as described in [the compliance features of the NPA).

In the NPA, which has a term of two years, RLC admitted, accepted and acknowledged responsibility for the conduct set forth in the statement of facts contained in the NPA, and further agreed to a "muzzle" clause in connection with the conduct at issue (see here for the prior post describing such a clause).

The conduct at issue focused on PRL S.R.L "an indirect wholly-owned subsidiary of RLC headquartered and incorporated in Argentina."  According to the NPA, "PRL S.R.L. marketed and sold RLC merchandise, including merchandise that was shipped from outside Argentina."  According to RLC's most recent annual report PRL S.R.L. is one RLC's approximate 95 subsidiaries.

More specifically, the conduct at issue focused on "General Manager A" described as a "dual U.S. and Argentine citizen ... hired by RLC to manage the business of PRL S.R.L. from 2003 until 2009" and "Agent 1" described as a "customs clearance agency that was retained by PRL S.R.L. to assist with customs clearance issues in Argentina."

According to the NPA, from 2004 to 2009 "PRL S.R.L. and its employees, including General Manager A, together with Agent 1 and others, conspired to make unlawful payments to foreign officials to use the officials' influence with foreign government agencies and instrumentalities in order to assist PRL S.R.L. in obtaining and retaining business for and with, and directing business to PRL S.R.L."

According to the NPA, the improper payments were "to assist in improperly obtaining paperwork necessary for goods to clear customs, to permit clearance of items without the necessary paperwork, to permit the clearance of prohibited items, and to avoid inspection." The NPA states that "these payments were not for routine government action."

According to the NPA, the improper payments were "disguised" by "having Agent 1 include the payments in Agent 1's invoice as 'Loading and Delivery Expenses' and 'stamp tax/label tax."  The NPA states that "General Manager A and others at PRL S.R.L. knew of the true purpose of these expenses and nonetheless approved reimbursement to Agent 1."

The NPA next states as follows.

"In the five years that General Manager A, Agent 1, and others at PRL S.R.L carried out this scheme, RLC did not have an anti-corruption program and did not provide any anti-corruption training or oversight with respect to PRL S.R.L."

The approximate three-page NPA concludes as follows.  "In total, General Manager A and PRL S.R.L. paid roughly $580,000 to Agent 1 for the purpose of paying bribes to customs officials in order to obtain improper customs clearance of merchandise."

Pursuant to the NPA and based on the above statement of facts, RLC agreed to pay a penalty of $882,000.  There is no indication in the NPA as to how this figure was calculated or what it is based on.

SEC NPA

The SEC's NPA is based on the core set of conduct set forth in the DOJ's NPA.

The short 2.5 page document does however contain the following additional paragraph.

"In addition to paying bribes to Argentina customs officials, RLC Argentina's general manager directly provided or authorized several gifts to be made to Argentine government officials to improperly secure the importation of RLC's products into Argentina.  The gifts provided to three different government officials between approximately 2005 through approximately 2009 included perfume, dresses and handbags value at between $400 and$14,000 each."

[As to this "statement of fact," I noted in"Grading the FCPA Guidance" that one of the utilities of the FCPA Guidance issued in November 2012 would be to serve as a useful measuring stick for future FCPA enforcement activity.  As noted in this prior post, this is yet again another FCPA enforcement action based, in part, on such items as perfume, dresses and handbags - in the RLC action - allegedly paid by one employee at one of RLC's approximate 95 subsidiaries.]

Under the heading “RLC’s Inadequate Internal Controls and Inaccurate Books and Records,” the NPA states as follows.

“As evidenced by the improper payments to Argentine customs officials and gifts to other government officials, the failure to ensure that proper and effective due diligence was conducted on the customs broker and Customs Broker A, and the failure of the review process for authorization or approval of reimbursement payments to Customs Broker A to detect a single improper payment, between 2005 and 2009, RLC failed to devise and maintain a system of internal controls at RLC Argentina sufficient to provide reasonable assurances that (i) transactions were executed in accordance with management’s general or specific authorization; (ii) transactions were recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles or any other criteria applicable to such statements; (iii) transactions were recorded as necessary to maintain accountability for assets; and (iv) that access to assets was permitted only in accordance with management’s general or specific authorization. RLC’s policies, procedures and training related to anticorruption and the Foreign Corrupt Practices Act (“FCPA”) compliance in place at that time of the misconduct warranted further strengthening to ensure effective compliance with the related laws.

Between 2005 and 2009, certain RLC Argentina employees and agents paid bribes which were inaccurately recorded in RLC Argentina’s books, records and accounts, which were consolidated into the books and records of RLC.”

Under the heading “RLC’s Self Report,” the NPA states as follows.

“In or about February 201 0, RLC’ s Board of Directors adopted a new FCPA policy and shortly thereafter the policy was disseminated through RLC’s intranet site. In approximately Spring or Summer 2010 RLC Argentina employees reviewed the FCPA policy and raised concerns about the company’s customs broker in Argentina. As a result, RLC conducted an internal investigation of the allegations and discovered the improper payments to the customs officials and gifts to Argentine government officials. Within two weeks of uncovering the payments and gifts, RLC self-reported its preliminary findings to the both the SEC and the Department of Justice.”

Under the heading “Remedial Measures and Cooperation,” the NPA states as follows.

“Upon discovering the bribes, RLC took steps to end the misconduct, including terminating its customs broker. RLC also thoroughly reviewed its pre-existing compliance program and undertook steps to further update and enhance its compliance program, and successfully implemented those new enhancements. These steps included, in part, adoption of: (1) an amended anticorruption policy and translation of the policy into eight languages, (2) enhanced due diligence procedures for third parties, (3) an enhanced commissions policy, (4) an amended gift policy, and (5) in-person anticorruption training for certain employees. RLC also ceased retail operations in Argentina and is in the process of formally winding down all operations there.

RLC provided extensive, thorough, real-time cooperation with the staff of the Division and the Department of Justice, including: voluntary and complete production of documents and disclosure of information to the staff, including the facts described above; voluntarily providing accurate translations of documents; voluntarily making witnesses available for interviews; and conducting a risk assessment of certain other world-wide operations of the company. The worldwide review included its operations in Italy, Hong Kong and Japan, and identified no further violations. In fact, the revised compliance policies appear to be working, as the world-wide review identified one instance of a bribe solicitation being rejected by the company’s employees after adoption of the company’s revised FCPA policy in 2010.”

Without admitting or denying liability, RLC agreed to enter into the NPA.  At the same time, the NPA states as follows.  “This agreement should not … be deemed exoneration of RLC or to be construed as a finding by the Commission that no violations of the federal securities laws have occurred.”  At the same time, the NPA states that the “facts set forth are made pursuant to settlement negotiations and are not binding against RLC or its directors, officers or employees, or any other person or entity in any other legal proceeding.”

Like the DOJ NPA, the SEC NPA also contains a “muzzle” clause.

The SEC’s release (here) states as follows.

“The SEC has determined not to charge Ralph Lauren Corporation with violations of the Foreign Corrupt Practices Act (FCPA) due to the company’s prompt reporting of the violations on its own initiative, the completeness of the information it provided, and its extensive, thorough, and real-time cooperation with the SEC’s investigation. Ralph Lauren Corporation’s cooperation saved the agency substantial time and resources ordinarily consumed in investigations of comparable conduct.”

Of course, these are not distinguishing factors.

Many SEC FCPA enforcement actions are the result of corporate voluntary disclosures where companies are likewise commended on the information and cooperation provided.  In the Tenaris DPA action, the SEC (see here) said substantively the same thing.  In the recent Philips SEC enforcement action, the SEC (see here) said substantively the same thing.

The SEC release further states as follows.

“According to the NPA, Ralph Lauren Corporation’s cooperation included:

• Reporting preliminary findings of its internal investigation to the staff within two weeks of discovering the illegal payments and gifts.
• Voluntarily and expeditiously producing documents.
• Providing English language translations of documents to the staff.
• Summarizing witness interviews that the company’s investigators conducted overseas.
• Making overseas witnesses available for staff interviews and bringing witnesses to the U.S

“The SEC took into account the significant remedial measures undertaken by Ralph Lauren Corporation, including a comprehensive new compliance program throughout its operations. Among Ralph Lauren Corporation’s remedial measures have been new compliance training, termination of employment and business arrangements with all individuals involved in the wrongdoing, and strengthening its internal controls and its procedures for third party due diligence. Ralph Lauren Corporation also conducted a risk assessment of its major operations worldwide to identify any other compliance problems. Ralph Lauren Corporation has ceased operations in Argentina.”

Thomas Hanusik (Crowell & Moring - and a former DOJ and SEC enforcement official) represented RLC.

*****

Should conduct at one of RLC’s approximate 95 foreign subsidiaries (which per the government’s own allegations appears to have been isolated in scope) have led to a world-wide risk assessment by RLC?  (See here for the prior post on the “Where Else” question).

Should conduct at one of RLC’s approximate 95 foreign subsidiaries (which per the government’s own allegations appears to have been isolated in scope) have lead to RLC having a reporting obligation to the DOJ and SEC during the two-year term of the NPA?  (See here for the prior post “A Government Mandated Transfer of Shareholder Wealth to FCPA Inc.?)

*****

It is tempting, based on the SEC’s statements that “Ralph Lauren Corporation has ceased operations in Argentina” and “is in the process of formally winding down all operations there” to make the causal inference that RLC did this because of the FCPA enforcement action and/or risk associated with the FCPA.

However, that would appear to be wrong conclusion.  As noted here and here, when RLC made the decision in August 2012 to suspend and wind-down its Argentine operations, the decision appeared to be based on import controls put on foreign companies and associated foreign currency controls intended to control one of highest rates of inflation in the world.  As noted in the above-linked CNN article, the economic measures caused tourism in Argentina to drop.  Indeed, RLC was one of several luxury brands – such as Ermenegildo Zegna, Escada, Calvin Klein Underwear, Cartier, Yves Saint Laurent, Hermes, and Louis Vuitton – to have abandoned or are considering leaving Argentina.

*****

The RLC enforcement action is just the latest to involve customs and related issues in Argentina.

See here for the Ball Corp. enforcement action, here for the Helmerich & Payne enforcement action, here for the BJ Services enforcement action.

*****

The RLC enforcement action was a rare instance of an issuer not previously disclosing its FCPA scrutiny.  Subject to materiality thresholds (which are rarely triggered in cases of FCPA scrutiny), there is no disclosure obligation, yet most issuers choose to disclose FCPA scrutiny.  Thus, yesterday appeared to be the first instance of public disclosure of RLC’s scrutiny.  The company’s stock closed at $165.93, down 1.9%.

The conduct at issue in the Times article related to Wal-Mart’s largest foreign subsidiary, Wal-Mart de Mexico (“Wal-Mart Mexico), and suggested that Wal-Mart Mexico “orchestrated a campaign of bribery to win market dominance” and that the entity “paid bribes to obtain permits in virtually every corner” of Mexico.

The April 2012 NY Times article resulted in intense world-wide media scrutiny of Wal-Mart.  However, it was known months before the NY Times article that Wal-Mart was under FCPA scrutiny.  (See here for the December 2011 post highlighting Wal-Mart’s FCPA disclosure).  Thus, this week is a false one year anniversary of Wal-Mart’s FCPA scrutiny, but a meaningful anniversary nevertheless.

A year ago this week, in response to the NY Times article, Wal-Mart’s stock dropped approximately 8%.  However, savvy investors should have recognized the NY Times induced dip as a buying opportunity because the market often overreacts (perhaps because of the plethora of suspect FCPA enforcement information in the public domain).  For instance, the last trading day before the NY Times April article, Wal-Mart stock closed at $62.45.  Last Friday, Wal-Mart stock closed at $78.29.

A December 2012 front-page NY Times article (see here for the prior post) added additional details to the previous April 2012, but did not change much from an FCPA perspective.

In the year since the original NY Times article, Wal-Mart’s FCPA scrutiny has followed a fairly typical pattern.  Wal-Mart’s internal review has expanded beyond Mexico, civil shareholder suits and derivative claims have been filed, Wal-Mart has engaged in various remedial measures, and the company’s pre-enforcement action professional fees and expenses has skyrocketed (see this prior post for my calculation of $604,000 per work day).

The conduct described in the NY Times articles was unremarkable from a Foreign Corrupt Practices Act perspective – a view I have consistently held since last April (see here for a prior post and here for my article “Foreign Corrupt Practices Act Enforcement As Seen Through Wal-Mart’s Potential Exposure.”

The unremarkable portion of the NY Times articles is that foreign subsidiary of a major multi-national company operating in an FCPA high-risk jurisdiction allegedly made payments to “foreign officials” to facilitate or grease the issuance of certain licenses or permits.  Even according to the NY Times, Wal-Mart’s subsidiary in Mexico “had taken steps to conceal [the payments] from Wal-Mart’s headquarters in Bentonville, Ark.” and Wal-Mart Mexico’s chief auditor altered reports sent to Bentonville discussing various problematic payments.

Payments in connection with foreign licenses, permits and the like have been the basis for many FCPA enforcement actions prior to Wal-Mart’s FCPA scrutiny and will likely be the basis for many FCPA enforcement actions in the future.

Indeed, a November 2012 NY Times article (here) by David Barstow (the same author as the April 2012 and December 2012 articles) rightly noted that Wal-Mart’s investigation “was uncovering the kinds of problems and oversights that plague many global corporations.”  It was perhaps the most insightful thing the NY Times has said about Wal-Mart’s FCPA scrutiny, yet the November 2012 article received scant attention compared to the other two articles.

It is also interesting to ponder the salient question of whether the payments at issue in Wal-Mart, which are outside the context of procurement, actually violate the FCPA (and here, as in many cases, there is an important distinction between the law Congress passed and DOJ/SEC enforcement theories).  For instance, as noted in this prior post and in my above Wal-Mart Scrutiny article, the government has an overall losing record in non-procurement type cases when actually put to its burden of proof.  However, as we all know, this will matter very little when it comes to any resolution of Wal-Mart’s scrutiny.

For all of the above reasons, I do not believe that Wal-Mart’s scrutiny “will test FCPA enforcement in new ways” as suggested by this post on the FCPA Blog.  Nor should it.

FCPA enforcement ought not be influenced merely by the fact that a talented journalist at a leading newspaper has devoted time and effort to cover an instance of FCPA scrutiny.  If Barstow and the NY Times would have focused on BizJet, the reaction likely would have been, and with good reason, more negative.  But then again, there probably would not have been any reaction at all because BizJet is obviously no Wal-Mart.  Insert many other recent FCPA enforcement actions [here], if Barstow and the NY Times would have focused on [that] instance of FCPA scrutiny, the story would have largely read the same.

Nor do I believe that Wal-Mart’s FCPA scrutiny will likely end up in the Top 5 FCPA enforcement actions of all time in terms of settlement amount.  The reason?  All of the cases in the Top 5 are procurement cases, not cases focused on licenses, permits and the like.

If Wal-Mart does indeed crack the Top 5 (and with the seeming escalation of FCPA fine and penalty amounts, it is likely only a matter of time when a license, permit case does crack the Top 5), it will likely be for reasons unrelated to substantive FCPA issues, but rather an increase in the company’s culpability score under the advisory Sentencing Guidelines based on its alleged handling of the potential FCPA issues in 2005.

Indeed, the remarkable aspects of the NY Times investigation is the alleged conduct (or lack thereof) of Wal-Mart and its top executives upon learning of problematic conduct in its Mexican subsidiary in 2005.  Even in 2005 and continuing today, most business leaders, audit committees, and boards tend to overreact to FCPA issues and often reflexibly launch broad internal investigations.  But, according to the NY Times, that is not what Wal-Mart did.  Another remarkable aspect of the NY Times investigation is how Eduardo Castro-Wright (at the critical time period the CEO of Wal-Mart Mexico) was allegedy known by others at Wal-Mart to be involved in the Mexican payments, but was nevertheless continuously thereafter promoted by Wal-Mart.

Corporate governance, or lack thereof, is what made the NY Times April 2012 remarkable.  This is the reason why Wal-Mart generated all the buzz it did a year ago this week and I’ve consistently held the view that the Wal-Mart story is a corporate governance sandwich with the FCPA as a mere condiment.

But even here, the seldom-discussed November 2012 NY Times article, adds additional relevant details.  It suggests that Wal-Mart’s December 2011 FCPA disclosure was motivated by Wal-Mart’s desire to pro-actively understand its FCPA risk (notwithstanding whatever may have occurred within the company in 2005 upon learning of potentially problematic payments in Mexico).  According to the article, Wal-Mart’s internal review began in Spring 2011 when Jeffrey Gearhart (Wal-Mart’s general counsel) learned of an FCPA enforcement action against Tyson Foods (like Wal-Mart, a company headquartered in Arkansas – see here for the prior post discussing the Tyson enforcement action).  According to the NY Times article, “the audit began in Mexico, China and Brazil, the countries Wal-Mart executives considered the most likely source of problems” and Wal-Mart hired KPMG and Greenberg Traurig to conduct the audit.

On Monday, the DOJ announced (here) criminal obstruction of justice charges against “Frederic Cilins a French citizen [for] attempting to obstruct an ongoing investigation into whether a mining company paid bribes to win lucrative mining rights in the Republic of Guinea.”

Yesterday, it was reported (here) that former Siemens executive Uriel Sharef had, as expected, settled the SEC enforcement action against him by agreeing, without admitting or denying the SEC’s allegations, to pay a $275,000 penalty.  (See here for the prior post discussing the DOJ’s and SEC’s December 2011 charges against Sharef and others).

Yesterday, the DOJ announced (here) that criminal charges “have been unsealed against one current and one former executive of the U.S. subsidiary of a French power and transportation company for their alleged participation in a scheme to pay bribes to foreign government officials.”  The individuals are:

Frederic Pierucci (“a current company executive who previously held the position of vice president of global sales for the Connecticut-based U.S. subsidiary) “who was charged in an indictment unsealed in the District of Connecticut with conspiring to violate the Foreign Corrupt Practices Act (FCPA) and to launder money, as well as substantive charges of violating the FCPA and money laundering.”  According to the DOJ, Pierucci, a French national, was arrested Sunday night at John F. Kennedy International Airport.

David Rothschild (“a former vice president of sales for the Connecticut-based U.S. subsidiary”) who pleaded guilty on Nov. 2, 2012, to a criminal information charging one count of conspiracy to violate the FCPA.  The charges against Rothschild and his guilty plea were recently unsealed.

Future posts will explore in more detail each of the above developments.

Today’s post is about yesterday’s other FCPA development - the announcement of the long-expected enforcement action against Parker Drilling (a Houston-based oil drilling services company) for conduct in Nigeria.

As indicated in this DOJ release, the Parker Drilling action “stemmed from the DOJ’s Panalpina-related investigations.”

As detailed in this prior post, in November 2010, the DOJ and SEC announced coordinated FCPA enforcement actions against Swiss-based freight forwarder Panalpina and six oil and gas companies that utilized its services in connection with business in Nigeria.  The November 2010 enforcement action resulted in approximately $237 million in combined DOJ/SEC settlement amounts.  (For additional reading on these actions, please visit the CustomsGate tab under the search feature of this site or see here where all the prior actions are linked).  As noted in this prior statistical post, Panalpina-related enforcement actions are one, of just a few unique events, that have given rise to the majority of FCPA enforcements since 2007, and Panalpina-related enforcement actions significantly contributed to the “spike” in FCPA enforcement actions in 2010.

Total fines and penalties in the Parker Drilling enforcement action were approximately $15.9 million (approximately $11.8 million in the DOJ enforcement action and approximately $4.1 million in the SEC enforcement action).

This post summarizes the DOJ’s and SEC’s allegations and resolution documents.

DOJ

The DOJ enforcement action involved a criminal information (here) against Parker Drilling resolved through a deferred prosecution agreement (here)

Criminal Information

Parker Drilling operated oil-drilling rigs in Nigeria owned by Parker Drilling (Nigeria Limited), a Nigerian entity and wholly-owned subsidiary of Parker Drilling Offshore International, Inc., (a Cayman Islands corporation wholly-owned by Parker Drilling).  According to the information, “Parker Drilling ceased drilling operations in Nigeria in 2006″ and the conduct at issues focused on two issues or events that occurred between 8 to 12 years ago.

First, the information, like the prior Panalpina-related enforcement actions, alleged conduct in connection with obtaining temporary importation permits (TIPs) in Nigeria for oil-drilling rigs.  The information alleges that in 2001, Parker Drilling retained Panalpina to “obtain TIPs and TIP extensions on Parker Drilling’s behalf.  According to the information, between 2001 and 2002:

“Panalpina obtained new TIPs for Parker Drilling’s rigs by submitting false paperwork on Parker Drilling’s behalf to avoid the time, cost, and risk associated with exporting the rigs and re-importing them into Nigerian waters (a process that Panalpina referred to as the ‘paper process’ or ‘recycling.’).  Panalpina created and caused to be presented to Nigerian officials documents that reflected that the rigs had been physically exported and re-imported.  In reality, the drilling rigs never left Nigerian waters.”

Second, and more significant in terms of the conduct alleged in the information, the DOJ alleges conduct in relation to the Nigerian ”Panel of Inquiry for the Investigation of All Cases of Temporary Import Permits Issued Between 1984 to Year 2000″ (the “TI Panel”).  According to the information, the TI Panel was “presidentially appointed, operated under the auspices of the Nigerian President’s Office, and possessed the power to issue subpoenas and levy fines” in connection with certain duties and tariffs that the Nigerian Customs Service (“NCS”) collected or failed to collect between 1984 and 2000.

As to the TI Panel, the information alleges that beginning in 2002 the TI Panel began reviewing Parker Drilling.  According to the information, thereafter Parker Drilling engaged Nigeria Outside Counsel (a Nigerian citizen based in Nigeria who advised Parker Drilling on customs and other matters in Nigeria) and a Nigeria Agent (a Nigerian and British citizen based in the U.K. to assist Parker Drilling in connection with customs matters in Nigeria) who represented Parker Drilling before the TI Panel.

The information alleges that in 2004 “the TI Panel concluded that Parker Drilling had violated [Nigerian law] with respect to several of its TIPS” and that the “TI Panel assessed a fine of $3.8 million against Parker Drilling.”  The information then outlines a “bribery scheme,” that resulted in the TI Panel reducing Parking Drilling’s fine ”to just $750,000.”

In connection with this ”bribery scheme,” the information alleges conduct as to Employee A (a U.S. citizen based in Nigeria who, during the relevant time period, was the General Manager of Parker Drilling’s operations in Nigeria); Employee B (a U.S. citizen based in Nigeria who also was a General Manager of Parker Drilling’s Operations in Nigeria); Executive A (a U.S. citizen based in Houston who performed financial and compliance functions for Parker Drilling between 2002 through 2005); Executive B (a U.S. citizen based in Houston who performed a legal function for Parker Drilling); U.S. Outside Counsel (a U.S. citizen and partner in a U.S. law firm who served as Parker Drilling’s outside counsel who provided legal and business advice to Parker Drilling on customs and other issues in Nigeria).

Specifically, the information alleges that U.S Outside Counsel suggested that Parker Drilling retain the Nigeria Agent to resolve its Nigerian customs issues even though Nigeria Agent’s “resume, which U.S. Outside Counsel provided to Parker Drilling, did not reflect any past experience in Nigeria or handling customs issues.”  According to the information, Parker Drilling “conducted no additional due diligence into Nigeria Agent’s qualifications.”

The information alleges that “with one exception, Parking Drilling paid Nigeria agent indirectly through the U.S.-based law firm” and that “Executives A and B paid and caused to be paid all of Nigeria Agent’s expenses without receiving any invoices particularly describing the expenditures’ purposes.”   According to the information, many of expenses related to food, entertainment, social events and the like and the information alleges various meetings the Nigeria Agent had with various Nigerian foreign officials.

The information further alleges that Parker Drilling’s treasurer informed Executive B “that the lack of invoices could raise an issue in Parker Drilling’s ongoing Sarbanes Oxley audit.”  Thereafter, the information alleges, the Nigeria Agent sent an invoice and that Executive B “accepted the invoice and retained it in Parker Drilling’s files, knowing that the invoice did not accurately reflect the true purpose of Parker’s Drillings” prior payments to the Nigeria Agent.

The information then states as follows.  “All told, Parker Drilling transferred and caused to be transferred to Nigeria Agent approximately $1.25 million to address Parker Drilling’s TI Panel issues” and that “Nigeria Agent succeeded in reducing Parker Drilling’s TI Panel Fines.”

Based on the above conduct, the information charges one count of violating the FCPA’s anti-bribery provisions.  Although the above Panalpina-related allegations are incorporated by reference into the paragraphs charging the FCPA violation, the information specifically identifies only the TI Panel conduct and states as follows.  “Parker Drilling made and cause to be made from the United States … a series of payments totaling approximately $1.25 million to Nigeria Agent, knowing that all or a portion of those payments would be given or used to procure goods and services that were to be given to a foreign government official in return for the diminution of a lawfully assessed fine.”

Deferred Prosecution Agreement

The above charge against Parker Drilling was resolved via a DPA in which Parker Drilling admitted, accepted, and acknowledged that it was responsible for the acts of its officers, directors, employees and agents as charged in the information.

The DPA has a term of three years and under the heading “relevant considerations” it states as follows.

“The Department enters into this Agreement based on the individual facts and circumstances presented by this case and the Company.  Among the facts considered were the following:  (a) the Company’s cooperation, including conducting an extensive internal investigation and collecting, analyzing, and organizing voluminous evidence and information for the Department; (b) the Company has engaged in extensive remediation, including ending its business relationships with officers, employees or agents primarily responsible for the corrupt payments, enhancing its due diligence protocol for third-party agents and consultants, increasing training and testing requirements, and instituting heightened review of proposals and other transactional documents for all the Company’s contracts; (c) the Company has retained a full-time Chief Compliance Officer and Counsel who reports to the Chief Executive Officer and Audit Committee, as well as staff to assist the Chief Compliance Officer and Counsel; (d) the Company has already significantly enhanced and is committed to continue to enhance its compliance program and internal controls, including ensuring that its compliance program satisfies the minimum elements set forth [elsewhere in the DPA]; (e) the Company has implemented a compliance-awareness improvement initiative and program that includes issuance of periodic anti-bribery compliance alerts; (f) the Company has already implemented many of the elements described [elsewhere in the DPA]; and (g) the Company has agreed to continue to cooperate with the Department in any ongoing investigation …”.

Pursuant to the DPA, the advisory Sentencing Guidelines range for the conduct at issue was $14.7 million to $29.4 million.  The DPA then states as follows.

“The Company agrees to pay a monetary penalty in the amount of $11,760,000, an approximately 20% reduction off the bottom of the fine range [...].  The Company and the Department agree that this fine is appropriate given the facts and circumstances of this case, including the Company’s cooperation, extensive remediation, committment to continue to enhance its compliance program, and culpability relative to other companies examined in this investigation.”

During the period of the DPA, Parker Drilling will have annual reporting obligations to the DOJ concerning its remediation and implementation of various compliance measures.  As is typical in FCPA DPAs, Parker Drilling also agreed to a ”muzzle clause” (see this prior post for more information).

SEC

In a related enforcement action based on the same core conduct, the SEC brought a civil complaint (here) against Parking Drilling.

The introductory paragraph of the complaint states as follows.

“This matter involves violations of the Foreign Corrupt Practices Act (“FCPA”) by Defendant Parker Drilling Company.  In 2004, through its outside counsel, Parker Drilling retained a Nigerian agent to assist the company with customs disputes related to the importation of its drilling rigs into Nigeria. During the course of the agent’s work, two Parker Drilling executives knowingly paid the agent large sums of money through its outside counsel for, among other things, the “entertainment” of Nigerian foreign officials in an effort to obtain their influence in resolving the customs disputes.”

The SEC complaint also contains a paragraph with the same general Panalpina-related allegations as alleged in the DOJ’s criminal information.

Under the heading “Remedial Efforts” the complaint states as follows.

“Parker Drilling demonstrated significant cooperation and conducted an extensive internal investigation. Since the time of the conduct noted in this Complaint, Parker Drilling has made significant enhancements to its global anti-corruption compliance program, including: retaining a full-time Chief Compliance Officer and Counsel who reports to the Chief Executive Officer and Audit Committee and full-time staff to assist him; enhancing anti-corruption due diligence requirements for relationships with third parties; increasing compliance monitoring and corporate auditing specifically tailored to anti-corruption; implementing a compliance awareness initiative that includes issuance of periodic anti-bribery compliance alerts; enhancing financial controls and governance; and expanding anti-corruption training throughout the organization.”

Based on the above conduct, the SEC charged an FCPA anti-bribery violation and an FCPA books and records and internal controls violation.  Other than restating the language of the books and records and internal controls provisions, the SEC complaint does not contain any specific allegations concerning these charges.

As noted in this SEC release, Parker Drilling agreed to pay disgorgement of 3,050,00 plus pre-judgment interest of $1,040,818, and consented to the entry of a final judgment permanently enjoining it from future FCPA violations.

Mitchell Ettinger, Saul Pilchen and Stephanie Cherny (Skadden, Arps) represented Parker Drilling.

Parker Drilling in this release stated as follows.

“After an extensive investigation, with which we fully cooperated, we are pleased to have reached agreement with the DOJ and the SEC, and we will continue to maintain a vigorous FCPA compliance program, to emphasize the importance of compliance and ethical business conduct, and to enhance our compliance efforts.”

Parker Drilling had previously disclosed that the DOJ and SEC’s investigations concerned “certain of our operations relating to countries in which we currently operate or formerly operated, including Kazakhstan and Nigeria.”

Why do Foreign Corrupt Practices Act violations occur?

Do companies subject to the FCPA do business in foreign markets: (i) intent on engaging in bribery as a business strategy and without a committment to FCPA compliance; or (ii) with a committment to FCPA compliance, yet subject to difficult business conditions?

To be sure, there have been some instances, as reflected in FCPA enforcement actions, where bribery was used as a business strategy and approved of and condoned by high-level corporate executives.  However, the latter is the more common reason for FCPA enforcement actions and related scrutiny.

Indeed, as Joseph Covington (a former DOJ FCPA Unit Chief) commented in this prior guest post, he has “rarely seen American companies affirmatively offering bribes in the first instance.”  Rather, Covington observed that companies doing business in international markets are “reacting to a world not of their making” and that “as the world shrinks companies who seek to do the right thing can’t help but confront corrupt officials – as customers, regulator and adjudicators – and confront them often.”

This point is evident in reviewing the World Bank’s Ease of Doing Business Rankings and then comparing the results to Transparency International’s Corruption Perceptions Index.

The “ease of doing business index” ranks countries based on factors such as the ease of starting a business, obtaining permits and otherwise dealing with regulatory officials.  The “corruption perceptions index” ranks countries based on the perceived levels of public sector corruption. You don’t have to be trained in sophisticated statistical methods (which I am not) to see a positive correlation between the two rankings.  That is, the lower the regulatory burdens imposed on business, the less corrupt the country is perceived to be.  The greater the regulatory burdens imposed on business, the more corrupt the country is perceived to be.

Regulatory burdens (ranging from customs procedures, licensing and certification requirements, foreign government procurement policies, etc.) create bureaucracy, bureaucracy creates interactions with foreign officials, and the more interactions with foreign officials the greater the FCPA risk will be.

In short, in addition to the forced business relationships that many companies are required to endure while doing business in a foreign country, companies are often funneled into an arbitrary world of low-paying civil servants who administer entrenched bureaucracies which create the conditions for harassment bribes to flourish.

In “Revisiting a Foreign Corrupt Practices Act Compliance Defense” I argued that the U.S. ought to recognize this simpl fact of doing business in many international markets.

Well, in fact, the U.S. Congress did recognize this fact when it passed the FCPA.  Congress exempted so-called “grease” or “facilitation” payments from the reach of the FCPA (first through the definition of “foreign official” and then in 1988 through a stand-alone facilitation payment exception) and otherwise included an obtain or retain business element in the FCPA’s anti-bribery provisions. (See my article “The Story of the Foreign Corrupt Practices Act” for a detailed overview of the legislative history).

I argued in “Revisiting an FCPA Compliance Defense” that, so long as the enforcement agencies refuse to recognize congressional intent in enacting the FCPA, that such congressional intent is best advanced through an FCPA compliance defense in which a company can assert, as a matter of law, that its pre-existing FCPA policies and procedures sought to prevent such payments in foreign markets.  As detailed in the article, this is not the only reason I, and many others, support an FCPA compliance defense, but it is clearly an important reason.

*****

The below chart has two segments.  The left segment lists the countries at the top of the “ease of doing business index” and a country’s associated “corruption perceptions index” score.  The right segment lists the countries at the bottom of the “ease of doing business index” and a country’s associated “corruption perceptions index” score.

The Foreign Corrupt Practices Act Under The Microscope

Academic publishing is seldom quick. Yet before the calendar flips into another year, I am pleased to share my article concerning 2011 FCPA enforcement.  The abstract of ”The Foreign Corrupt Practices Act Under The Microscope” (see here to download) recently published in the University of Pennsylvania Journal of Business Law is as follows.  Information in the article is current as of January 16, 2012.

For most of the Foreign Corrupt Practices Act’s history, key decisions concerning its scope and enforcement were made behind closed doors around conference room tables in Washington, D.C. The FCPA took on a life of its own and, in many instances, the statute came to mean whatever the DOJ or SEC could get putative corporate FCPA defendants (mindful of the consequences of actual prosecuted charges) to agree to behind those closed doors. However, as the enforcement agencies continued to push the envelope on enforcement theories and practices, and as the DOJ brought more individual FCPA enforcement actions, including through manufactured sting operations, business entities and individuals alike began to openly fight back. While many FCPA enforcement decisions and procedures remain opaque, 2011 witnessed the most intense year of public scrutiny in the FCPA’s history. This Article (i) provides an overview of 2011 FCPA enforcement and discusses certain problematic enforcement trends, and (ii) highlights how in 2011 the FCPA was subjected to the most meaningful public scrutiny in its history. FCPA enforcement trends and scrutiny demonstrate that as the FCPA nears its thirty-fifth year, basic legal and policy questions remain as to the purpose, scope, and effectiveness of the FCPA.

Start your collection of FCPA Year in Reviews.  For my 2011 (short version), see here.  For 2010, see here (short version), here (long version).  For 2009, see here (long version).

Judge Leon Pulls a Judge Rakoff

My post concerning the SEC’s March 2011 enforcement action against IBM was titled “Questions Abound in IBM Enforcement Action.”  (See here).  Among the issues I discussed were the following.  That in December 2000, IBM resolved an FCPA enforcement action and consented, as part of the settlement, to the entry of an Order that requires IBM to cease and desist from committing or causing any future violation of [the FCPA's books and records provisions].  I noted that because the March 2011 enforcement action alleged FCPA books and records charges, that IBM was thus in clear violation of the 2000 court order.

The case was assigned to Judge Richard Leon (of Africa Sting fame) and lingered for a long time.  This Wall Street Journal Corruption Currents post and this Bloomberg article report that Judge Leon has refused to approve the settlement.

As stated by Bloomberg – “The heart of the dispute is that Leon, who has had the case under review for 22 months, wants reporting on a broader range of possible wrongdoing than the company is willing to turn over.  Leon, who spoke loudly and angrily, asked why the regulator would agree to limit such requirements for a company with a history of books-and-records violations. [...]   “I guess you want that $10 million judgment on your list of achievements this year,” Leon told [the SEC lawyer]. “Well, it’s not going to happen.”  He scheduled a hearing for Feb. 4.”

As stated by Wall Street Journal Corruption Current – “Leon also questioned broader SEC settlement policies and warned that he was among “a growing number of district judges who are increasingly concerned” by those policies.”

In not ”rubber stamping” the SEC – IBM settlement, Judge Leon pulled a Judge Rakoff.  Judge Rakoff of the S.D. of N.Y. has been a frequent focus on this site – see here, here, here and here.  See also, the discussion of Judge Rakoff in my 2010 article “The Facade of FCPA Enforcement.”

Edmonds Sentence

This past June, David Edmonds, a defendant in the long-running “Carson” enforcement action involving former employees of Control Components Inc., agreed to plead guilty on the eve of trial to substantially reduced charges. (See here for the prior post).  Earlier this week, Judge James Selna sentenced Edmonds to four months in prison and four months of home confinement.  (See here for Judge Selna’s sentencing memo).  As noted in the DOJ’s sentencing memo (here), the DOJ sought a 14 month prison sentence.

Other defendants previously sentenced in the case are Stuart Carson (4 months in prison followed by 8 months of home detention), Hong Carson (3 years probation to include 6 months of home detention) and Paul Cosgrove (13 months home detention).

It’s Official

Imagine a foreign country in which the president is actively seeking and accepting corporate money to fund inaugural festivities.  All sorts of red flags right?

But wait, this describes the United States and President Obama’s upcoming inauguration.  As detailed in this prior post, President Obama’s fundraising advisers “have urged the White House to accept corporate donations for his January 2013 inaugural celebration rather than rely exclusively on weary donors who underwrote his $1 billion re-election effort.”

It’s now official.  As noted by this recent New York Times article “President Obama’s finance team is offering corporations and other institutions that contribute $1 million exclusive access to an array of inaugural festivities.”  As noted in the article, Obama’s finance team is offering four different packages “with differing levels of access depending on the level of contribution.”

Our FCPA enforcement agencies are bringing enforcement actions against companies for conduct that includes providing $600 bottles of wine, Cartier watches, cameras, kitchen appliances, business suits, and executive education classes to individuals employed by foreign companies that are allegedly state-owned or state-controlled.  (These are all allegations found in recent FCPA enforcement actions).

But remember, as Assistant Attorney General Lanny Breuer recently declared (see here), “we in the United States are in a unique position to spread the gospel of anti-corruption.”

Whistleblower Statistics

The Dodd-Frank Act enacted in July 2010 contained whistleblower provisions applicable to all securities law violations including the Foreign Corrupt Practices Act.  In this prior post from July 2010, I predicted that the new whistleblower provisions would have a negligible impact on FCPA enforcement.  As noted in this prior post, my prediction was an outlier (so it seemed) compared to the flurry of law firm client alerts that predicted that the whistleblower provisions would have a significant impact on FCPA enforcement.

So far, there have not been any whistleblower awards in connection with FCPA enforcement actions.  Given that enforcement actions (from point of first disclosure to resolution) typically take between 2-4 years, it still may be too early to effectively analyze the impact of the whistleblower provisions on FCPA enforcement.

Whatever your view, I previously noted that the best part of the new whistleblower provisions were that its impact on FCPA enforcement can be monitored and analyzed because the SEC is required to submit annual reports to Congress.  Last month, the SEC released (here) its annual report for FY2012.

Of the 3,001 whisteblower tips received by the SEC in FY2012, 3.8% (115) related to the FCPA.  As noted in this similar post from last year, in FY2011 (a partial reporting year)  3.9% of the 334 tips received by the SEC related to the FCPA.

It Ought to Stop Marketing

In this previous post titled “It Ought to Stop” I focused on the FCPA conference industry and how conference firms drive attendance to their events by touting the public servants who will speak at the event.

Here is how conference firm C5 touts its upcoming conference in a press release (here).

Ask the U.S. DOJ and U.S. SEC directly how your company can remain compliant

Hear the latest on the newly released FCPA guidance. Along with the U.S. Securities & Exchange Commission’s, Charles E. Cain, the Deputy Chief of the FCPA Unit, Enforcement Division, we will have Matthew S. Queler, from the Criminal Division at the U.S. Department of Justice, presenting comprehensive, insightful and practical details of the U.S. government’s interpretation of the guidance, and highlight recent examples designed to help prevent future violations.  Their session at 14:00 on Day 1, will help you navigate the ever evolving markets and recognize the current enforcement trends; giving you the tools to reanalyse risk profiles and minimize areas of exposure. Finally, to top off the hour you will be given an exclusive opportunity to have your FCPA questions answered. The only way to obtain answers directly from the U.S. DOJ and U.S. SEC is to register for this forum!

The event, depending when you register and which package you select, costs between €4341 – €1795.

It ought to stop.

China Related Issues

An occassional topic of discussion on this site is Chinese state-owned enterprises (SOEs) and how such companies are frequently doing business outside its borders, including here in the U.S. (See here, here, and here for prior posts).

Wall Street Journal Columnist Dennis Berman “hit the nail on the head” in his recent column when he noted that one of “the most intriguing business stories of the past month has been taking place in San Francisco, where a group of U.S. developers is planning the biggest real-estate expansion there since the 1906 earthquake. The group—which includes Lennar Corp., Ross Perot Jr. and others —isn’t getting financing from an American bank or pension fund. No, the money, some $1.7 billion of it, is coming from the China Development Bank, a policy arm of the Chinese state.  As Berman further notes, a financing contingency is that China Railway Construction Corp. – a state-owned infrastructure builder with roots in the People’s Liberation Army—take part in the projects, which will develop up to 20,000 new homes.

Another occasional topic of discussion on this site is how Chinese companies are listing shares on U.S. exchanges and thus becoming “issuers” for purposes of the FCPA.  (See here for a prior post).  A core FCPA enforcement action of a Chinese issues has never occurred, but I predict it will some day – diplomatic and foreign policy issues aside.  Only now, the universe of potential targets is shrinking.  As noted in this recent Wall Street Journal article, several Chinese companies have delisted from U.S. exchanges.  The article provides the following information.  “At the peak, at year-end 2010, 167 Chinese companies were listed on Nasdaq and 99 on the NYSE. That compares with 84 China-based companies on NYSE and 129 on Nasdaq as of Nov. 30, 2012, according to the exchanges.”  For more, see this recent article from the New York Times.

ICE Melted Quickly

This recent post highlighted the cert petition of Instituto Constarricense de Electricidad of Costa Rica (“ICE”) to the Supreme Court related to victim issues in connection with the December 2010 Alcatel-Lucent FCPA enforcement action.  After several unsuccessful 11th Circuit appeals, ICE petitioned the Supreme Court to hears it case (see here).  The question presented for review is as follows.  “Whether a crime victim who is denied rights conferred by the federal Crime Victims’ Rights Act has a right to directly appeal the denial of those rights.”

The ice melted quickly as recently the Supreme Court denied ICE’s petition.

U.K. Enforcement Action

Earlier this week, the U.K. Serious Fraud Office announced (here) charges against former employees of Swift Group (an oil and gas services provider) following “a two-year investigation into allegations of corruption in relation to the tax affairs of Swift Technical Energy Solutions Ltd, a Nigerian subsidiary of the Swift Group of companies.”  According to the SFO release,  ”the value of the bribes alleged to have been paid is approximately£180,000.”

The SFO release notes that Paul Jacobs (the former Chief Financial Officer of Swift), Bharat Sodha (the former Tax Manager of Swift), Nidhi Vyas (the former Financial Controller of Swift), and Trevor Bruce (the former Area Director for Nigeria of Swift) were charged in relation to “bribes to tax officials to avoid, reduce or delay paying tax on behalf of workers placed by Swift.  The charges relate to payments said to have been made to agents of the Rivers State Board of Internal Revenue and the Lagos State Board of Internal Revenue, both in Nigeria. The payments were made in 2008 and 2009.”

*****

A happy holiday season to all.

Motion to Dismiss Filed in SEC Enforcement Action

This previous post highlighted how former Magyar Telekom executives Elek Straub, Andras Balogh and Tamas Morvai planned to challenge the SEC’s charges against them.  Earlier this week, the defendants filed this memorandum in support of their motion to dismiss.

In summary fashion, the memorandum states as follows.

“There are several bases for dismissing the complaint.

 First, this Court lacks personal jurisdiction over the defendants. The complaint alleges conduct by foreign national defendants that occurred wholly outside, and with no nexus to, the United States. Nowhere does the complaint allege that defendants purposefully directed their conduct at the United States. Following constitutional due process principles, the defendants lack the requisite minimum contacts with the forum, and it would be inconsistent with traditional notions of fair play and substantial justice to require them to defend this action in the United States. Indeed, the SEC has acknowledged that its jurisdictional position lacks precedent “on all fours factually” and “may be breaking new ground[.]“

“Second, the SEC’s claims are time-barred [...]  There is no doubt that the complaint was filed outside the five-year period. Specifically, the complaint was filed on December 29, 2011, more than five years after all three defendants had left Magyar Telekom, and more than five years after the alleged conduct occurred. Consequently, the five-year period has expired.”

“Third, with regard to the remaining claims, the complaint fails to adequately state the claims alleged. More specifically, the complaint: (i) fails to adequately plead that the defendants corruptly made use of interstate commerce, as is required to state a claim for bribery and the claims stemming from the alleged bribery under the FCPA (books and records and internal controls violations, falsifying books and records, and lying to auditors); (ii) fails to adequately plead that the intended payment recipients were “foreign official[s]” under the FCPA; (iii) fails to allege sufficient facts supporting the aiding and abetting claims; and (iv) fails to meet the heightened pleading requirements under Rule 9, including allegations of individualized culpable conduct by each defendant. The complaint also merely parrots the statutory language and fails to allege that the defendants profited personally from any of the alleged conduct. For all these reasons, the complaint should be dismissed with prejudice.”

As to “foreign official” the motion states that the complaint’s reference to “officials” “government officials” and other vague allegations represent “mere legal conclusions that the recipients were “foreign officials” under the FCPA.  The motion states as follows.  “A legal conclusion couched as a ‘factual allegation’ is insufficient to establish the essential element that the intended recipient be a foreign official.  Repeated references to “government officials” without underlying facts presents nothing ‘more than labels and conclusions’ that constitute ‘a formulaic recitation of the elements of a cause of action.”"

Indeed, in my 2010 article “The Facade of FCPA Enforcement” (here) I noted the frequency in which enforcement agency FCPA pleadings “contain little more than uninformative, bare-bones statement of facts replete with legal conclusions.”  I said that the “most common and troubling use of bare-bones, uninformative, legal conclusory statements of facts or allegations is when the enforcement agencies describe the ‘foreign officials’ involved in the alleged conduct giving rising to the FCPA violation.”  In the article, I noted that because there is generally no threat that these bare-boned, uninformative facts or legal conclusions will ever be subject to meaningful judicial scrutiny, that the enforcement agencies get away with such practices.

At least until recently.

Noticeable Lack of FCPA Charges

Numerous FCPA enforcement actions have been based on allegations of payments to foreign customs personnel in connection with customs, license, permit type issues.

Thus, the lack of FCPA charges were noticeable in the DOJ’s recent criminal indictment of APEGO Inc., and various of is employees and agents.  As noted in this recent DOJ Release (N.D. of Georgia), charges were filed alleging conspiracy and twelve counts of importing notebooks and filler paper from China using false  documents.

The indictment (here) includes the following allegations.

“It was further part of the conspiracy that [certain individuals] paid bribes to Taiwanese customs officials on behalf of defendants APEGO and Gung to allow U.S.-bound lined paper products made by the Watanabe Group in China but lacking required country of origin labels, or mislabeled ‘Made in Taiwan,’ to enter Taiwan from China and clear Taiwanese customs.”

Elsewhere, the indictment alleges: (i) that in December 2006 various bribes were paid to Taiwanese customs officials which “allowed defendant APEGO to transship these products from Taiwan to the United States more quickly and less expensively by limiting the need to ‘rework’ the products and cartons (i.e. relable ‘Made in Taiwan’) in Taiwan”; (ii) that in March 2007 when customs officials at a certain Taiwan port no longer accepted bribes, the company arranged for its shipments to be processed through another port in a different part of the country where bribes were paid for the same purpose

Recent Disclosures

Owens-Illinois

Owens-Illinois, Inc. (an Ohio based company that describes itself as the world’s largest glass container manufacturer and preferred partner for many of the world’s leading food and beverage brands) recently disclosed as follows.

“The Company is conducting an internal investigation into conduct in certain of its overseas operations that may have violated the antibribery provisions of the United States Foreign Corrupt Practices Act (FCPA), the FCPA’s books and records and internal controls provisions, the Company’s own internal policies, and various local laws. In October 2012, the Company voluntarily disclosed these matters to the U.S. Department of Justice (DOJ) and the Securities and Exchange Commission (SEC). The Company intends to cooperate with any investigation by the DOJ and the SEC. The Company is presently unable to predict the duration, scope or result of its internal investigation, of any investigations by the DOJ or the SEC or whether either agency will commence any legal action. The DOJ and the SEC have a broad range of civil and criminal sanctions under the FCPA and other laws and regulations including, but not limited to, injunctive relief, disgorgement, fines, penalties, and modifications to business practices. The Company also could be subject to investigation and sanctions outside the United States. While the Company is currently unable to quantify the impact of any potential sanctions or remedial measures, it does not expect such actions will have a material adverse effect on the Company’s liquidity, results of operations or financial condition.”

Given the recent FCPA scrutiny of the beverage industry (Diageo, Beam Inc., and Central European Distribution Company) one might wonder whether Owens-Illinois’s recent disclosure is connected to those developments.

Barclays

This previous post detailed how Barclays PLC’s relationship with Qatar’s sovereign-wealth fund was under scrutiny by U.K. authorities.

The company recently disclosed (here) as follows.  “Subsequent to reporting the investigations of the Financial Services Authority and Serious Fraud Office in July and August 2012 respectively, Barclays has been informed by the US Department of Justice (DOJ) and US Securities and Exchange Commission (SEC) that they are undertaking an investigation into whether the Group’s relationships with third parties who assist Barclays to win or retain business are compliant with the United States Foreign Corrupt Practices Act. Barclays is investigating and fully co-operating with the DOJ and SEC.”

According to this article in the Wall Street Journal, the focus is “on Barclay’s use of external brokers who facilitated meetings between bank officials and powerful Middle Eastern families.”  The article further notes that “Barclays recently started conducting an internal investigation, with the help of an outside law firm, to figure out whether it or its Middle Eastern introducers might have run afoul” of the FCPA.

Schlumberger

The company recently disclosed as follows.

“In 2007, Schlumberger received an inquiry from the United States Department of Justice (“DOJ”) related to the DOJ’s investigation of whether certain freight forwarding and customs clearance services of Panalpina, Inc., and other companies provided to oil and oilfield service companies, including Schlumberger, violated the Foreign Corrupt Practices Act. In October 2012, Schlumberger was advised by the DOJ that it has closed its inquiry as it relates to Schlumberger.”

For more on the numerous Panalpina-related enforcement actions – what I’ve termed CustomsGate – see here.

The company’s recent disclosure would seem not to address the issues previously the focus of a front-page Wall Street Journal article in October 2010 concerning alleged conduct in Yemen.  (See here for the prior post).

Quotable

In this recent Reuters article, current SEC FCPA Unit Chief Kara Brockmeyer stated as follows.

“I would hate to think the companies view [FCPA] enforcement actions as the cost of doing business.  If we find that out, it will certainly increase the size of the penalty.”

One thing that is becoming increasingly clear in this new era of FCPA enforcement is that investors do appear to view FCPA scrutiny and enforcement actions as a cost of doing business and akin to a regulatory violation.

The Reuters article also stated that there has yet to be a repeat FCPA prosecution.  This is a false statement.  Companies that have resolved more than one FCPA enforcement action over time include: Tyco, ABB, Baker Hughes and General Electric.

Quotable

On his Corruption, Crime & Compliance site (here) Michael Volkov recently observed as follows.

“The FCPA Paparazzi has done a great disservice to the business community.  Call it a complete lack of credibility.  Legal marketing has become confused in this day and age – marketing has now been turned into the “Fear Factor,” meaning that lawyers need to scare potential clients into hiring them.  That is flat out wrong.   Each week, new client alerts, client warnings and other cries of impending disaster are transmitted through the Internet to businesses.  If I were a general counsel, I would have them on “auto delete.”  Talk about a waste of time and effort.”

What’s Up With That Investigation?

One of the many FCPA industry sweeps reportedly underway concerns Hollywood movie industry in China.  (See here for the prior post).  This recent post on the New York Times Media Decoder blog highlights the “powerful gatekeeper of China’s rapidly growing film world, the China Film Group chairman Han Sanping who was recently in the U.S. to receive a China Entertainment Visionary of the Year award, and asks what’s up with the investigation.

I Hear You Travel Alot

My frequent searches for FCPA content often turn up interesting content.  Such as this thread from top-law-schools.com which asks what type of attorneys get to travel the most?  One response was as follows.   ”From what I hear, FCPA is the way to go for travel to other countries because you have lots of interviews of foreign employees.”

The FCPA is certainly the reason for the majority of stamps in my passport.

Counter-Points

Alexandra Wrage (President of Trace International) made some observations recently in her Corporate Counsel column (here) about FCPA enforcement in various Presidential administrations.  While interesting to think about, the actual stats have little substantive value.  Instances of FCPA scrutiny tend to last between 2-4 years (and thus straddle administrations) and various instances of FCPA scrutiny (for instance Pfizer) can last approximately 8 years.  Moreover, rather than “aggressively enforce the FCPA,” as the article notes, what the enforcement agencies more often than not actually do (as evidenced by statistics demonstrating which enforcement actions resulted from voluntary disclosures) is process corporate voluntary disclosures.

There’s An App for That

Law firm O’Melveny & Myers announced (here) the “launch of its FCPA app, the first multi-functional mobile application (app) created by a law firm.”  Richard Grime, partner and head of O’Melveny’s FCPA practice stated as follows.  “We understand the complexities our clients and colleagues face in achieving their business goals in the global marketplace, and thus, have created this mobile application as a fast, yet informative, way for them to remain current with the evolving statutes and provisions imposed by the FCPA and other anti-corruption laws.”

Weekend Reading

Sidley & Austin recently released its Anti-Corruption Quarterly (here).  Among other articles is one focused on the new “sheriff in town.”

The article states as follows.

“Investigating potential violations of the FCPA historically has been the purview of the SEC and the DOJ, but recently, Congress has entered the fray. Two House committees, the House Oversight and House Energy committees, recently instituted an independent FCPA investigation of Wal-Mart, after a New York Times article reported on an alleged massive bribery campaign at Wal-Mart’s Mexican affiliate. These House investigations mean that companies now have to consider the possibility of facing a congressional investigation—in addition to investigations by the SEC and the DOJ—when FCPA violations have occurred.”

The article further states as follows.

“Although congressional committees routinely investigate companies, the current congressional investigation into Wal-Mart is the first investigation in the FCPA context and it may signal the beginning of a trend: high-profile companies or companies that are drawn into political fights (often unwillingly) may find themselves the target of a congressional inquiry if their FCPA problems become public. Whatever effect the congressional investigation may have on Wal-Mart, the possibility of such an investigation is a factor that high-profile companies facing FCPA concerns should weigh.”

For more on Wal-Mart’s FCPA scrutiny, see my recent article “Foreign Corrupt Practices Act Enforcement As Seen Through Wal-Mart’s Potential Exposure” (here).

Miller Chevalier also recently released its FCPA Autumn Review – see here.

Morrison Foerster also recently released its End of Summer Round-Up – see here.

This recent Jones Day publication concerning upcoming FCPA Guidance contains the following paragraph that should be read by those who simply label companies that have resolved FCPA enforcement actions or are the subject of FCPA scrutiny as bad or corrupt companies.

“It is the job of a prosecutor to make charging decisions and to decide in the first instance what does and does not violate the law. As prosecutors and enforcement attorneys assess the facts to make charging decisions, they are compelled to view the world, therefore, in binary terms: black and white, right and wrong. As defense counsel, settlement discussions with our counterparts in the DOJ and SEC frequently hinge on which side of the line the conduct sits. Particularly for those of us who served as prosecutors, we acknowledge in these discussions the difficult mission of the enforcement officials to draw and defend lines. The world of business, however, frequently operates in territory that is somewhat grey: a world in which business persons strive to grow the company ethically in situations where the application of the existing rules are not entirely clear. For instance, in the current era of FCPA enforcement, international businesses struggle with their responsibilities to monitor and control the conduct of third parties with whom they do business: distributors and sub-distributors, joint venture partners, dealers, and resellers. Even for companies that are firmly dedicated to compliance with the FCPA, is not always clear when a third party amounts to an agent whose improper conduct might someday be ascribed to the company and its employees. Good and ethical companies struggle, every day, with the concept of defining an agent of the company as opposed to an independent customer who engages in an arm’s-length transaction to purchase the company’s products.”

*****
A good weekend to all.

First, a recent U.S. Chamber of Commerce report titled “China’s Approval Process for Inbound Foreign Direct Investment” which details a number of trade barriers and distortions (which can serve as breeding grounds for harassment bribery) when doing business in China.

Second, U.S. developments which demonstrate that trade barriers and distortions are a two-way street.  A recent House Intelligence Committee report recommending that the U.S. block acquisitions or mergers involving two Chinese telecom companies and President Obama’s recent Executive Order directing the divestiture by a U.S. company (owned by Chinese nationals) of its investment in Oregon wind farms and a subsequent lawsuit brought by the company.

China’s Approval Process for Inbound Foreign Direct Investment

Why do Foreign Corrupt Practices Act violations occur?

To be sure, certain violations have occurred because a company has a corrupt culture and has used bribery and corruption as a short-sighted business strategy.  However, such occurrences - as evidenced by actual enforcement actions alleging such egregious facts - are rare.  Rather, as I argue in “Revisiting a Foreign Corrupt Practices Act Compliance Defense” (here) many FCPA violations occur because companies are subject to various trade barriers and conditions in foreign markets.

In short, trade barriers (ranging from customs procedures, licensing and certification requirements, foreign government procurement policies, etc.) create the conditions in which harassment bribes flourish as companies are funneled into an arbitrary world of low-paying civil servants.

As relevant to China (a jurisdiction in which many recent FCPA violations have occurred and in which many companies are currently the subject of FCPA scrutiny), the U.S. Chamber of Commerce recently released an extensive report titled “China’s Approval Process for Inbound Foreign Direct Investment:  Impact on Market Access, National Treatment and Transparency” (see here).  The report, based on research conducted by Covington & Burling at the Chamber’s request, should be must read for practitioners advising clients on FDI in China as well as others generally interested in the topic of trade barriers.  Although the report does not contain the words bribery or corruption, it is very much on topic.

The report draws on interviews conducted with foreign companies doing business in China and discusses, among other topics, the following.

How China’s Foreign Investment Catalogue requires “different levels of approval scrutiny or tougher application requirements” for non-Chinese prospective investors and how the Catalogue “may require that investment take certain forms and/or that the foreign shareholder’s proportion of investment in the enterprise be limited.”

Various project and regulatory approvals needed to do business in China and how various characteristics of the approval process have resulted in “application of vaguely written or unpublished rules in ways that restrict or unreasonably delay market entry by foreign companies” and how in other instances “approval authorities have orally communicated deal-specific conditions for investment approval beyond those required by written law.”  As to China’s licensing regimes, the report notes that licenses are required for more than 100 business activities in China and that government approval is also needed for certain modifications to an enterprise “such as change of registered capital, change of shareholders, amendment of business scope, merger, or the acquisition of a company in a restricted industry.”

As if the various Chinese governmental approvals were not enough, the report also notes that obtaining certain governmental approvals is exacerbated by the fact that in certain Chinese – foreign joint ventures, the local partner may serve in certain instances as the applicant and “control the communications channels between the foreign investor and the government approval authorities …”.

House Intelligence Committee Report

As noted in this recent Wall Street Journal article, the House Intelligence Committee has concluded that two Chinese companies (Huawei Technologies and ZTE Inc.) pose security risks to the U.S. because their equipment could be used for spying on Americans,  The House Committee recommended that the U.S. block acquisition or mergers involving the two companies through the Committee on Foreign Investments in the U.S. (“CFIUS”).

The report (here) also accuses Huawei of bribery and corruption.  Page 35 of the report states as follows. ”[Huawei] employees have alleged instances [of] fraud and bribery when seeking contracts in the United States.”  The apparent lack of a “foreign official” may take this alleged conduct outside the scope of the FCPA, but the Travel Act may remain relevant.

President Obama’s Executive Order and Subsequent Lawsuit

As noted in this recent Reuters article, President Obama recently issued an Executive Order ordering Ralls Corp. (a U.S. company owned by two Chinese nationals) to sell off four planned winds farms in Oregon due to national security threats.  As noted in the article, President Obama’s recent order is the first time since 1990 that a President has formally blocked a business transaction.

The Executive Order (here) states that “there is credible evidence” that Ralls Corp. ”might take action that threatens to impair the national security of the United States.”  President Obama’s order followed a recommendation by CFIUS (see here) recommending the divestiture.

In response, Ralls Corp. filed this lawsuit against President Obama, CFIUS and others.  In pertinent part, the suit alleges as follows.

“At no time has Ralls ever had any opportunity to view, review, respond to, or rebut any evidence that CFIUS, the President, or any person or entity acting on their behalf has obtained, reviewed, or relied upon in reviewing the transaction in question, concluding that the transaction raises national security concerns, issuing the aforementioned orders, and imposing the foregoing extraordinary prohibitions and restrictions.  In issuing their respective orders, CFIUS and the President acted in an unlawful and unauthorized manner. By exceeding the powers granted to it [by law] and failing to provide any evidence or reasoned explanation for its decision, CFIUS violated the Administrative Procedure Act. By imposing restrictions far beyond the limited scope of the powers specifically granted to him [by law], the President has committed ultra vires acts in violation of the law. By failing to provide Ralls with sufficient notice and opportunity to be heard prior to prohibiting its acquisition of the windfarms and imposing extraordinary restrictions on the use and enjoyment of its property interests, CFIUS and the President have unconstitutionally deprived Ralls of its property absent due process. And by unfairly and unjustly singling out Ralls for differential treatment compared to similarly situated parties, CFIUS and the President have violated Ralls’s right to equal protection of the law.”

Former U.S. Solicitor General Paul Clement (here) represents Ralls.  For additional analysis, see this recent Covington & Burling alert and this recent Mayer Brown client alert.

Kraft

In February 2010, Kraft acquired Cadbury, and with that, Cadbury’s Baddi, India facility which churns out various chocolates.  Producing chocolates for the mouths of the masses is, all things considered, a low FCPA risk activity.  But alas, company employees had to interact with India’s legendary bureaucracy in regards to licenses, permits, and excise tax issues.  Therein was the FCPA risk as detailed in this recent Forbes India article.

In its most recent quarterly filing (here) the company stated as follows.

“A compliant and ethical corporate culture, which includes adhering to laws and industry regulations in all jurisdictions in which we do business, is integral to our success. Accordingly, after we acquired Cadbury in February 2010 we began reviewing and adjusting, as needed, Cadbury’s operations in light of U.S. and international standards as well as our policies and practices. We initially focused on such high priority areas as food safety, the Foreign Corrupt Practices Act (“FCPA”) and antitrust. Based upon Cadbury’s pre-acquisition policies and compliance programs and our post-acquisition reviews, our preliminary findings indicated that Cadbury’s overall state of compliance was sound. Nonetheless, through our reviews, we determined that in certain jurisdictions, including India, there appeared to be facts and circumstances warranting further investigation. We are continuing our investigations in certain jurisdictions, including in India, and we continue to cooperate with governmental authorities.  As we previously disclosed, on February 1, 2011, we received a subpoena from the SEC in connection with an investigation under the FCPA, primarily related to a Cadbury facility in India that we acquired in the Cadbury acquisition. The subpoena primarily requests information regarding dealings with Indian governmental agencies and officials to obtain approvals related to the operation of that facility. We are cooperating with the U.S. and Indian governments in their investigations of these matters.”

Brookfield Asset Management

The Wall Street Journal reported last week (here - “Brookfield Faces Brazil Accusations”) that “Brazilian authorities are investigating allegations that an executive at Brookfield bribed Sao Paulo officials to secure permits required for renovating three shopping malls in that city.”  According to the article, the allegations were made by the former CFO of a Brookfield subsidiary in Brazil who was fired in 2010, and who the company has sued in Brazil for embezzling funds.  The article further suggests that the former CFO has contacted the SEC about the matter.

Brookfield (here) is “global alternative asset manager with over $150 billion in assets under management … with a 100-year history of owning and operating assets with a focus on property, renewable power, infrastructure and private equity.”  The company’s common shares trade on three stock exchanges, including the New York Stock Exchange.

H-P

As noted in this previous post, H-P has been under FCPA scrutiny since April 2010.  Last week, the Wall Street Journal reported here (“German Prosecutors Name H-P in Bribery Indictment of Employees”) that German prosecutors named H-P in a criminal bribery case against one current and two former employees.  According to the article, the “German prosecutors asked the court to attach H-P to the case, a motion that could lead to fines and other penalties if the court finds that the company benefited from the crime.”  In the article, a H-P spokeswoman said current and former employees had been indicted on charges of “alleged conduct that occurred nearly 10 years ago by a former H-P company” and that H-P had been “only named as a side participant in the proceedings,” not indicted, and was fully cooperating with authorities.

The company’s most recent quarterly filing stated as follows.

“The German Public Prosecutor’s Office (“German PPO”) has been conducting an investigation into allegations that current and former employees of HP engaged in bribery, embezzlement and tax evasion relating to a transaction between Hewlett-Packard ISE GmbH in Germany, a former subsidiary of HP, and the General Prosecutor’s Office of the Russian Federation. The approximately €35 million transaction, which was referred to as the Russia GPO deal, spanned the years 2001 to 2006 and was for the delivery and installation of an information technology network. The U.S. Department of Justice and the SEC have also been conducting an investigation into the Russia GPO deal and potential violations of the Foreign Corrupt Practices Act (“FCPA”). Under the FCPA, a person or an entity could be subject to fines, civil penalties of up to $500,000 per violation and equitable remedies, including disgorgement and other injunctive relief. In addition, criminal penalties could range from the greater of $2 million per violation or twice the gross pecuniary gain or loss from the violation. In addition to information about the Russia GPO deal, the U.S. enforcement authorities have requested (i) information related to certain other transactions, including transactions in Russia, Serbia and in the Commonwealth of Independent States (CIS) subregion dating back to 2000, and (ii) information related to two former HP executives seconded to Russia and to whether HP personnel in Russia, Germany, Austria, Serbia, the Netherlands or CIS were involved in kickbacks or other improper payments to channel partners or state-owned or private entities. HP is cooperating with these investigating agencies.”