Archive for the ‘SEC’ Category

Why Does The SEC Have An FCPA Unit?

Tuesday, January 26th, 2016

Women ThinkingNotwithstanding the fact that the SEC played an important role (indeed a more prominent role than the DOJ) in addressing the foreign corporate payment payments problem in the 1970s’s that led to enactment of the Foreign Corrupt Practices Act, it is a historical fact that the SEC never wanted any role in enforcing the FCPA’s anti-bribery provisions.

It is also a historical fact that the SEC did not object to various bills introduced during the FCPA reform debates of the 1980′s that sought to “divest” the SEC of enforcement authority over the anti-bribery provisions.

In both cases, the SEC explicitly stated that enforcement of the anti-bribery provisions was not central to the SEC’s investor protection mission.

Against this backdrop, it is strange that the SEC announced in August 2009 that it was forming a specialized FCPA Unit. In making the announcement, then SEC Enforcement Director Robert Khuzami stated:

“The Foreign Corrupt Practices Act unit will focus on new and proactive approaches to identifying violations of the Foreign Corrupt Practice Act, which prohibits U.S. companies from bribing foreign officials for government contracts and other business. While we have been active in this area, more needs to be done, including being more proactive in investigations, working more closely with our foreign counterparts, and taking a more global approach to these violations.”

In January 2010, the five specialized SEC units, including the FCPA Unit, were formally launched. In making the announcement, Khuzami stated:

“These specialized units address both challenges through improved understanding of complex products and markets, earlier and better capability to detect emerging fraud and misconduct, greater capacity to file cases with strike-force speed, and an increase in expertise throughout the Division.”

Since 2010, the SEC’s FCPA Unit has steadily grown. For instance, in previous public comments Kara Brockmeyer (SEC FCPA Unit Chief) stated:

“the SEC FCPA Unit has about three dozen staff dedicated full-time to the FCPA.  This number is in addition to other enforcement attorneys in SEC offices outside of DC who may also work on FCPA cases.”

SEC FCPA Unit staff are public employees and as public employees it is worth asking the question: what are these approximate 40 people doing on a daily basis?

For instance, in 2014 and 2015 the SEC brought 16 corporate FCPA enforcement actions. 7 (approximately 45%) were the result of corporate voluntary disclosures. In such actions, the word “enforce” the FCPA is a bit too much, when the reality is the SEC largely “processes” the corporate voluntary disclosure.

Regardless of the origins of the SEC’s corporate FCPA enforcement actions, is the SEC actually litigating these cases and having to prove anything (a task that can require substantial time and resources if the defendant is mounting a defense)?

Nope.

Of the 16 corporate FCPA enforcement actions brought by the SEC over the past two years, 14 (88%) were resolved through administrative actions or a deferred prosecution agreement. The other two actions were resolved through settled civil complaints.

As one of only five “specialized units” at the SEC, one might think that a reasonably proportionate total of the SEC’s overall enforcement actions would come from the FCPA Unit.

Not true.

Since 2011, the SEC has broken its enforcement statistics into specific categories. As highlighted by the SEC’s own data below, FCPA enforcement actions are a miniscule percentage of overall SEC enforcement actions.

  • FY 2014 – FCPA actions .9% of total actions
  • FY 2013 – FCPA actions .7% of total actions
  • FY 2012 – FCPA actions 2% of total actions
  • FY 2011 – FCPA actions 2.7% of total actions

[Note: the SEC's fiscal year is not a calendar year]

There is certainly more to having an FCPA unit than srictly enforcement action output.

Nevertheless, given the above output it is a fair question to again ask – what do the approximately 40 people in the SEC’s FCPA Unit actually do on a daily basis?

More fundamentally, why does the SEC have an FCPA Unit?

SEC Enforcement Of The FCPA – Year In Review

Tuesday, January 5th, 2016

SECThis is the first of several posts regarding FCPA 2015 enforcement statistics and issues to be published on FCPA Professor this month.

Yearly FCPA enforcement statistics are interesting, particularly when compared to prior years, but any yearly statistic contains an arbitrary cutoff date and is thus of marginal value.

Moreover, statistics are calculated against the universe of enforcement activity in any given year and in 2015 there were 9 corporate SEC enforcement actions and just 2 corporate DOJ enforcement actions. With such low denominators, yearly enforcement statistics are of further marginal value.

With such limitations in mind, let the 2015 FCPA enforcement statistics begin.

*****

Foreign Corrupt Practices Act enforcement, it is not just about the DOJ.

Granted, as a civil enforcement agency the SEC’s sticks are less sharp than the DOJ’s, but the SEC also claims a significant piece of the FCPA enforcement pie (query whether it should – but that is a subject for another day – for instance as discussed in “The Story of the Foreign Corrupt Practices Act” the SEC wanted no part in enforcing the FCPA’s anti-bribery provisions).

Today’s post is a year in review of SEC FCPA Enforcement.  (See here for a similar post for 2014; here for a similar post for 2013; here for a similar post for 2012; here for a similar post for 2011; and here for a similar post for 2010).

Stay tuned for a similar post on DOJ FCPA enforcement in 2015.

As highlighted below, four statistics stand out from corporate SEC FCPA enforcement in 2015:

(i) unlike in prior years where several SEC corporate enforcement actions also had a DOJ component, each SEC corporate enforcement action in 2015 was a “stand-alone” action;

(ii) compared to prior years, civil penalties comprised a much larger percentage of SEC settlement amounts;

(iii) consistent with prior years, SEC enforcement was largely corporate only as only 2 of the 9 corporate enforcement actions also resulted in related enforcement actions against company employees; and

(iv) compared to prior years, a lower percentage of corporate enforcement actions were the result of voluntary disclosures, but rather originated from pro-active FCPA investigations.

Settlement Amounts and Specifics

In 2015, the SEC collected approximately $114.8 million in 9 corporate FCPA enforcement actions.

By comparison, in 2014 the SEC collected approximately $327 million in 7 corporate FCPA enforcement actions; in 2013 the SEC collected approximately $300 million in 8 corporate enforcement actions; in 2012 the SEC collected approximately $118 million in 8 corporate FCPA enforcement actions; in 2011 the SEC collected approximately $148 million in 13 corporate FCPA enforcement actions; and in 2010, the SEC collected approximately $530 million in 19 corporate FCPA enforcement actions.

The range of SEC FCPA enforcement actions in 2015 was, on the high end, $25 million (BHP Billiton), and on the low end, $75,000 (Hyperdynamics). The median settlement amount was approximately $14.7 million.

All SEC corporate FCPA enforcement actions in 2015 were SEC only – a noticeable difference from prior years in which many SEC corporate FCPA enforcement actions also involved a DOJ component.

Of the 9 corporate enforcement actions from 2015, 7 enforcement actions (78%) were administrative actions, 1 enforcement action (PBSJ) was a deferred prosecution agreement and 1 enforcement action (Hitachi) was a settled civil complaint filed in federal court.

In other words, there was no judicial scrutiny of 89% of SEC FCPA enforcement actions from 2015. By comparison, in 2014 there was no judicial scrutiny of 86% of SEC FCPA enforcement actions and in 2013 there was no judicial scrutiny of 50% of SEC FCPA enforcement actions.

In 2015, the SEC collected approximately $45.2 million in disgorgement and prejudgment interest in enforcement actions that did not charge anti-bribery violations. This is noteworthy because many question, and rightfully so, whether disgorgement is an appropriate remedy in cases that do not charge FCPA anti-bribery violations.  See here for a prior post on so-called “no-charged bribery disgorgement” cases.

By way of comparison, in 2014 the SEC collected approximately $104 million in disgorgement and prejudgment interest in no-charged bribery disgorgement cases; in 2013, the SEC collected approximately $208 million in disgorgement and prejudgment interest in no-charged bribery disgorgement cases; in 2012, the SEC collected approximately $57.4 million in disgorgement and prejudgment interest in no-charged bribery disgorgement cases; and in 2011 the SEC collected approximately $51 million in disgorgement and prejudgment interest in n0-charged bribery disgorgement cases.

The $114.8 million the SEC collected in 2015 FCPA enforcement actions breaks down as follows:

$56.2 million in a civil penalties (Bristol-Myers, Hyperdynamics, Hitachi, BNY Mellon, Mead Johnson, BHP Billiton, FLIR Systems, and PBSJ); and

$58.6 million in disgorgement and prejudgment interest.

This division (only 51% of SEC FCPA settlement amounts in 2015 consisted of disgorgement and prejudgment interest) is noteworthy because in 2014 99% of SEC FCPA settlement amounts in 2014 consisted of disgorgement and prejudgment interest; in 2013 98% of SEC FCPA settlement amounts consisted of disgorgement and prejudgment interest; in 2012 86% of SEC FCPA settlement amounts consisted of disgorgement and prejudgment interest; in 2011, disgorgement and prejudgment interest comprised 94% of SEC FCPA enforcement settlement amounts; and in 2010, disgorgement and prejudgment interest comprised 96% of SEC FCPA enforcement settlement amounts.

If one tries to analyze why some SEC FCPA enforcement actions in 2015 included a civil penalty, disgorgement and prejudgment interest (PBSJ, FLIR Systems, BNY Mellon, Mead Johnson and Bristol-Myers), whereas other enforcement actions included only disgorgement and prejudgment interest (Goodyear), whereas other enforcement actions included only a civil penalty (BHP Billiton, Hyperdynamics, and Hitachi) good luck and please enlighten us all with your insight.

Corporate vs. Individual Actions

Of the 9 corporate SEC FCPA enforcement actions from 2015, 2 (22%) (PBSJ and FLIR Systems) have involved, at present, related SEC charges against company employees.

By way of comparison, in 2014 of the 7 corporate SEC FCPA enforcement actions from 2014, 0 (0%) have involved, at present, related SEC charges against company employees; in 2013 of the 8 SEC corporate FCPA enforcement actions 0 (0%) have involved, at present, related SEC charges against company employees; in 2012, 0 of the 8 corporate (0%) FCPA actions involved related SEC charges against company employees; in 2011, 2 of the 13 (15%) corporate SEC FCPA enforcement actions involved related SEC charges against company employees; in 2010, 3 of the 19 (15%) corporate SEC FCPA enforcement actions involved related SEC charges against company employees.

Voluntary Disclosures

Of the 9 corporate SEC FCPA enforcement actions from 2015, 3 enforcement actions (33%) (PBSJ, Goodyear, and FLIR Systems) were the result of corporate voluntary disclosures. 5 enforcement actions (BHP Billiton, Hyperdynamics, BNY Mellon, Mead Johnson and Bristol-Myers) would appear to be the result of pro-active SEC investigations (i.e. issuance of subpoenas, industry sweeps). The origin of 1 enforcement action (Hitachi) is not specified in the resolution documents.

In  terms of voluntary disclosure, by way of comparison of the 7 corporate SEC FCPA enforcement actions from 2014, 4 enforcement actions (57%) were the result of corporate voluntary disclosures; of the 8 corporate SEC FCPA enforcement actions in 2013, 3 enforcement actions (38%) were the result of corporate voluntary disclosures; in 2012 of the 8 corporate SEC FCPA enforcement actions 4 (50%) were the result of corporate voluntary disclosures; and in 2011 of the 13 corporate SEC FCPA enforcement actions 11 (85%) were the result of corporate voluntary disclosures.

This remainder of this post provides an overview of SEC FCPA enforcement in 2015.

Bristol-Myers Squibb (October 5th)

See here and here for prior posts

Charges:   None. Administrative cease and desist order finding violations of the FCPA’s books and records and internal controls provisions

Settlement:  $14.7 million ($11.4 million in disgorgement, prejudgment interest of $500,000, and a civil penalty of $2.75 million)

Disclosure: According to the company’s disclosures, its FCPA scrutiny began in 2006 when the SEC informed the company that it had begun a formal inquiry into the activities of certain of the company’s subsidiaries and its employees and agents. In March 2012, the company received a subpoena from the SEC issued in connection with its investigation under the FCPA, primarily relating to sales and marketing practices in various countries.

Individuals Charged:  No

Related DOJ Enforcement Action:  No.

Hyperdynamics (Sept. 29th)

See here for the prior post

Charges:   None. Administrative cease and desist order finding violations of the FCPA’s books and records and internal controls provisions

Settlement:  $75,000 civil penalty.

Disclosure: According to the company’s disclosure –  ”the SEC had issued a subpoena to Hyperdynamics concerning possible violations of the FCPA”

Individuals Charged:  No

Related DOJ Enforcement Action:  No.

Hitachi  (Sept. 28th)

See here and here for prior posts

Charges:   Settled civil complaint charging FCPA books and records and internal controls violations.

Settlement:  $19 million civil penalty.

Disclosure:   Not specified in the resolution documents.

Individuals Charged:  No

Related DOJ Enforcement Action:  No.

BNY Mellon (August 18th)

See here and here for prior posts.

Charges:   None.  Administrative cease and desist order finding violations of the FCPA’s anti-bribery and internal control provisions.

Settlement:  $14.8 million ($8.3 million in disgorgement, $1.5 million in prejudgment interest, and a $5 million penalty).

Disclosure:   Unclear from the resolution documents (perhaps the industry sweep of the financial services industry)

Individuals Charged:  No.

Related DOJ Enforcement Action:  No.

Mead Johnson (July 28th)

See here and here for prior posts.

Charges:   None.  Administrative cease and desist order finding violations of the FCPA’s books and records and internal controls provisions.

Settlement:  Approximately $12 million ($7.77 million in disgorgement, $1.26 million in prejudgment interest, and a $3 million penalty).

Disclosure:  The resolution documents state: “In 2011, Mead Johnson received an allegation of possible violations of the FCPA in connection with the Distributor Allowance in China. In response, Mead Johnson conducted an internal investigation, but failed to find evidence that Distributor Allowance funds were being used to make improper payments to HCPs. Thereafter, Mead Johnson China discontinued Distributor Allowance funding to reduce the likelihood of improper payments to HCPs, and discontinued all practices related to compensating HCPs by 2013. Mead Johnson did not initially self-report the 2011 allegation of potential FCPA violations and did not thereafter promptly disclose the existence of this allegation in response to the Commission’s inquiry into this matter.

Individuals Charged:  No.

Related DOJ Enforcement Action:  No.

BHP Billiton (May 20)

See herehere and here for prior posts.

Charges:   None.  Administrative cease and desist order finding violations of the FCPA’s books and records and internal control provisions.

Settlement:  $25 million civil penalty.

Disclosure:   The company disclosed that it received information requests from the SEC in August 2009.

Individuals Charged:  No

Related DOJ Enforcement Action:  No.

FLIR Systems (April 8th)

See here and here for prior posts.

Charges:   None.  Administrative cease and desist order finding violations of the FCPA’s anti-bribery, books and records and internal control provisions.

Settlement:  Approximately $9.5 million (disgorgement of $7,534,000, prejudgment interest of $970,584 and a penalty of $1 million).

Disclosure:   Voluntary disclosure.

Individuals Charged:  Yes in November 2014 (see here for the prior post).

Related DOJ Enforcement Action:  No.

Goodyear (Feb. 24th)

See herehere and here for prior posts.

Charges:  None.  Administrative cease and desist order finding violations of FCPA’s books and records and internal controls provisions.

Settlement:  $16,228,065 (disgorgement of $14,122,525 and prejudgment interest of $2,105,540).

Disclosure: Voluntary disclosure.

Individuals Charged:  No

Related DOJ Enforcement Action: No

PBSJ (Jan. 22nd)

See here for a prior post.

Charges: Violations of the FCPA’s anti-bribery, books and records, and internal controls provisions.

Settlement:  The charges were resolved via a deferred prosecution agreement in which the company agreed to pay approximately $3.4 million (disgorgement and interest of $3,032,875 and a penalty of $375,000).

Disclosure: Voluntary Disclosure

Individuals Charged:  Yes (see below).

Related DOJ Enforcement Action:  No.

SEC Enforcement (Individual)

The SEC brought two FCPA enforcement actions against individuals in 2015.  The enforcement actions are summarized below.

Vicente Garcia (August 12th)

See here for the prior post

Charges: None.  Administrative cease and desist order finding violations of the FCPA’s anti-bribery provisions and internal controls provisions.

Settlement:  Garcia consented to the entry of the cease-and-desist order and agreed to pay disgorgement of $85,965, which is the total amount of kickbacks he received, plus prejudgment interest of $6,430 for a total of $92,395.

Employer Charged:  Garcia was the former head of Latin America sales for SAP, but at present the company has not been charged

Related DOJ Enforcement Action:  Yes

Walid Hatoum (January 22nd)

See here for the prior post

Charges: None.  Administrative cease and desist order finding violations of the FCPA’s anti-bribery, internal controls, and books and records provisions.

Settlement:  Hatoum consented to the entry of the cease-and-desist order and agreed to pay a $50,000 civil penalty.

Employer Charged:  Yes, Hatoum was a former President of PBSJ lnt’l and PBSJ also resolved an FCPA enforcement action on the same day.

Related DOJ Enforcement Action:  No.

Friday Roundup

Friday, December 11th, 2015

Roundup2Standard Bank roundup, recent FCPA sentences, scrutiny alert, and for the reading stack.  It’s all here in the Friday roundup.

Standard Bank Roundup

A roundup within the Friday roundup.

The development of the month so far was the U.K. (and related) enforcement action against Standard Bank – a first in two regards.

(i) the first use of Section 7 of the Bribery Act (the so-called failure to prevent bribery offense) in a foreign bribery action; and

(ii) the first use of a deferred prosecution agreement in the U.K..

  • This post highlighted “what” was resolved - an alleged violation of Sec. 7 of the Bribery Act for failure to prevent bribery.
  • This post highlighted “how” the enforcement action was resolved – the U.K.’s first deferred prosecution agreement.
  • This post highlighted the creativity of the SEC in also bringing an enforcement action against Standard Bank.
  • This post highlighted the thoughts of others about the enforcement action.

Recent FCPA Sentences

In 2013 and 2014 the DOJ brought FCPA and related charges against various individuals associated with broker dealer Direct Access Partners in connection with alleged improper payments to Maria Gonzalez (V.P. of Finance / Executive Manager of Finance and Funds Administration at Bandes, an alleged Venezuelan state-owned banking entity that acted as the financial agent of the state to finance economic development projects).

Recently, Tomas Clarke and Ernesto Lujan were sentenced after pleading guilty to FCPA and related offenses.

Lujan was sentenced to two years in prison, followed by three years of supervised release, and consented to a $18.5 million forfeiture “representing the proceeds and property involved in the commission of the offenses alleged.”

Clarke was also sentenced to two years in prison, followed by three years of supervised release, and consented to a $5.8 million forfeiture “representing the proceeds and property involved in the commission of the offenses alleged.”

Previously, Benito Chinea and Joseph DeMeneses were sentenced to four years in prison and consented to $3.6 million and $2.7 million forfeiture.

Scrutiny Alert

Analogic

The company which has been under FCPA scrutiny since 2011 recently disclosed:

“As initially disclosed in our Annual Report on Form 10-K for the fiscal year ended July 31, 2011, we identified certain transactions involving our Danish subsidiary BK Medical ApS, or BK Medical, and certain of its foreign distributors, with respect to which we have raised questions concerning compliance with law, including Danish law and the U.S. Foreign Corrupt Practices Act, and our business policies. These have included transactions in which the distributors paid BK Medical amounts in excess of amounts owed and BK Medical transferred the excess amounts, at the direction of the distributors, to third parties identified by the distributors. We have terminated the employment of certain BK Medical employees and also terminated our relationships with the BK Medical distributors that were involved in the transactions. We have concluded that the transactions identified to date have been properly accounted for in our reported financial statements in all material respects. However, we have been unable to ascertain with certainty the ultimate beneficiaries or the purpose of these transfers. We have voluntarily disclosed this matter to the Danish Government, the U.S. Department of Justice, or DOJ, and the SEC, and are cooperating with inquiries by the Danish Government, the DOJ and the SEC. We believe that the SEC, DOJ, and Danish Government have substantially completed their investigation into the transactions at issue. We are continuing our discussions with the SEC and have commenced discussions with the DOJ and Danish Government concerning a possible resolution of these matters. During the three months ended July 31, 2015, we accrued a $1.6 million charge in connection with a settlement proposal that we made to the SEC, which proposal was rejected by the SEC. In the first quarter of fiscal 2016, the SEC and DOJ made separate settlement proposals that would include payments in the aggregate amount of approximately $15 million. We are uncertain whether the Danish Government will seek to impose sanctions or penalties against us. We further believe that, under Danish law, amounts paid to the SEC and/or the DOJ would be taken into account in determining penalties that may be sought by the Danish Government. There can be no assurance that we will enter into any settlement with the SEC, the DOJ or the Danish Government, and the cost of any settlements or other resolutions of these matters could materially exceed our accruals. During the three months ended October 31, 2015 and 2014, we incurred inquiry-related costs of approximately $0.03 million and $0.8 million, respectively, in connection with this matter.”

Reading Stack

This Law360 article by Gerry Zack (Managing Director in BDO’s global forensics practice) titled “Implicit Bias – the Hidden Investigation Killer” caught my eye.

“Everyone carries a variety of biases around with them on a daily basis. Yet, many people are confident they can set their biases aside when it comes time to perform a workplace investigation, even referring to the final product as an “unbiased investigation.” But science has repeatedly proven that we aren’t nearly as good at setting our biases aside as we’d like to think  …”

The article touches upon affinity bias, confirmation bias, and priming.

Having conducted numerous internal investigations around the world (in the FCPA context and otherwise), I think there is merit to the issues discussed in the article – issues that contribute to the divide between the DOJ and SEC “processing” corporate FCPA internal investigations and the general struggles of the enforcement agencies proving FCPA offenses in the context of an adversarial proceeding.

*****

From outgoing SEC Commissioner Luis Aguilar – “Commissioner Aguilar’s (Hopefully) Helpful Tips for New SEC Commissioners.”

*****

A good weekend to all.

Enforcement Officials Speak On Compliance And Individual Accountability

Thursday, November 5th, 2015

SoapboxThis post summarizes two recent speeches by DOJ/SEC enforcement officials that touched upon topics relevant to Foreign Corrupt Practices Act enforcement.

In the first speech, Assistant Attorney General Leslie Caldwell, speaking at a financial industry event, focused her comments on compliance and the DOJ’s new compliance attorney position.

In the second speech, SEC Chair Mary Jo White talked about SEC enforcement strategies.

Caldwell’s Speech

As indicated above, Caldwell focused her comments on compliance and the DOJ’s new compliance attorney position.  For prior posts on these topics, see here and here including why the DOJ should be in favor of a compliance defense.  See also “Revisiting a Foreign Corrupt Practices Act Compliance Defense.”

Caldwell stated in pertinent part:

Internal Compliance Officers Perform a Critical Function

[Compliance officers] are often the first line of defense against [legal violations]  Prosecutors cannot be everywhere, and by the time the Criminal Division gets involved, it’s usually too late to stop criminal activity.  Well before a grand jury subpoena is served or a witness is interviewed, compliance officers like you can and do step in and stop issues from becoming problems down the road.

As much as full-throated compliance programs are essential to preventing fraud and corruption, the quality and effectiveness of a compliance program is also an important factor that prosecutors consider in determining whether to bring charges against a business entity that has engaged in some form of criminal conduct.

In this after the fact review, the department looks closely at whether compliance programs are simply “paper programs,” or whether the institution and its culture actually support compliance.  We look at pre-existing programs, as well as what remedial measures a company took after discovering misconduct – including efforts to implement or improve a compliance program.

Criminal Division’s Compliance Counsel

Over the past twenty years or so, the very notion of “compliance” has been evolving rapidly.  Most companies, and maybe especially in the financial sector, have placed more and more emphasis on building strong compliance structures.  Programs have become more sophisticated and more industry and company-specific.

Companies increasingly have tailored compliance programs that make sense not just for their industries but also for their business lines, their risk factors, their geographic regions and the nature of their work force, to name a few.

Unfortunately, a surprising number of companies still lack rigorous compliance programs.  And even more companies have what appear to be good structures on paper, but fail in practice to devote adequate resources and management attention to compliance.

Still other companies fail to consider obvious risks, even in important parts of their businesses.  [...]

To be sure, it’s important for institutions to be mindful of regulatory priorities and guidance in devising and carrying out a tailored, risk-based compliance program.  But a narrow, cramped view of compliance – that it requires only adherence to specific regulations – ultimately will inure to the company’s detriment.  [...]

I believe that the Criminal Division has gotten much better at evaluating compliance programs over the years.  We understand that there is no “one size fits all” compliance program.  We understand that there are vast differences in the quality and effectiveness of programs, even among similar companies.   We have gotten better at suggesting tailored reforms to compliance programs when we resolve a corporate matter.

But we are prosecutors, not compliance professionals.  So, as you may be aware from press coverage, the Criminal Division has hired a compliance counsel to work in the Fraud Section.  While it’s too early to talk about specifics – her first day in the office is tomorrow – I can tell you generally what we’re thinking about.

We want to get the benefit of the expertise of someone with significant high-level compliance experience across a variety of industries, which this person has.  Our goal is to have someone who can provide what I’ll call a “reality check.”

First, the compliance counsel will help us assess a company’s program, as well as test the validity of its claims about its program, such as whether the compliance program truly is thoughtfully designed and sufficiently resourced to address the company’s compliance risks, or essentially window dressing.

Second, she will help guide Fraud Section prosecutors when they are seeking remedial compliance measures as part of a resolution with a company, whether by prosecution or otherwise.  We don’t want to impose unrealistic, unnecessary or unduly burdensome requirements on companies.  At the same time, we want to make sure that appropriate compliance enhancements are included when they are needed.

We understand that no compliance program is foolproof.  We also appreciate that the challenges of implementing an effective compliance program are compounded by the ever-increasing cross-border nature of business and of criminal activity.

Many [companies] operate all over the world.  They are creating products and delivering services not only here in the United States but overseas and are operating across many different legal regimes and cultures.

For this reason, we have chosen a compliance counsel who has the experience and expertise to examine a compliance program on a more global and a more granular level.

I want to correct one impression that has been expressed elsewhere.  Some have suggested that our retention of a compliance counsel is an indication that the department is moving toward recognizing or instituting a “compliance defense.”  That is not the case.

Rather, the Criminal Division will continue to review companies’ compliance programs as one of the many factors to be considered when deciding whether to criminally charge a company or how to resolve criminal charges.  Our hiring of a compliance counsel should be an indication to companies about just how seriously we take compliance.

Hallmarks of an Effective Compliance Program

You’re likely wondering what metrics this compliance counsel will use to assess a particular program.  And I’ll talk about that in a moment, but first I want to put your mind at ease about something.

The vast majority of compliance violations do not result in criminal prosecution.  Rather, the Criminal Division pursues charges when the offending conduct is intentional and particularly egregious or pervasive.

We’re not interested in prosecuting mistakes or accidents, or bad business judgments.  And we are not looking to prosecute compliance professionals.  To the contrary, we view you as the good guys and as our allies.  And we want to make sure that when we review a pre-existing compliance program, or suggest remedial measures, that we get it right.

So, what will the compliance counsel do?  She will help us evaluate each compliance program on a case-by-case basis – just as the department always has – but with a more expert eye, and she will work with our prosecutors to assess:

  • Does the institution ensure that its directors and senior managers provide strong, explicit and visible support for its corporate compliance policies?
  • Do the people who are responsible for compliance have stature within the company?  Do compliance teams get adequate funding and access to necessary resources?  Of course, we won’t expect that a smaller company has the same compliance resources as a Fortune-50 company.
  • Are the institution’s compliance policies clear and in writing?  Are they easily understood by employees?  Are the policies translated into languages spoken by the company’s employees?
  • Does the institution ensure that its compliance policies are effectively communicated to all employees?  Are its written policies easy for employees to find?  Do employees have repeated training, which should include direction regarding what to do or with whom to consult when issues arise?
  • Does the institution review its policies and practices to keep them up to date with evolving risks and circumstances?  This is especially important if a U.S.-based entity acquires or merges with another business, especially a foreign one.
  • Are there mechanisms to enforce compliance policies?  Those include both incentivizing good compliance and disciplining violations.  Is discipline even handed?  The department does not look favorably on situations in which low-level employees who may have engaged in misconduct are terminated, but the more senior people who either directed or deliberately turned a blind eye to the conduct suffer no consequences.  Such action sends the wrong message – to other employees, to the market and to the government – about the institution’s commitment to compliance.
  • Does the institution sensitize third parties like vendors, agents or consultants to the company’s expectation that its partners are also serious about compliance?  This means more than including boilerplate language in a contract.  It means taking action – including termination of a business relationship – if a partner demonstrates a lack of respect for laws and policies.  And that attitude toward partner compliance must exist regardless of geographic location.

[...]

These are just some of the elements of a strong compliance program.  When the Criminal Division evaluates a company’s compliance policy during an investigation, we look not only at how the policy reads on paper, but also at the messages conveyed to employees, including through in-person meetings, emails, telephone calls and compensation.  We look at whether, as a whole, a company tolerated compliance failures year after year because the alternative would have meant a reduction in revenues or profits.”

White’s Speech

Regarding individual prosecutions, White stated:

“Any discussion of strong enforcement tools must include a discussion of our priority of pursuing individuals.  Personal accountability, of course, is a basic tenet of law enforcement.  And individual accountability, particularly at the most senior levels, is a core part of our enforcement program because firms can only act through their people and it is people to whom we are trying to send our strong message of deterrence.  While some cases, because of the available evidence or charges, are appropriate to bring only against companies, we must always look to identify and charge those people who are responsible for their company’s wrongdoing.  In Fiscal Year 2015, about two-thirds of our substantive actions included charges against individuals.

Redress for wrongdoing can never be seen merely as a cost of doing business made good by cutting a corporate check.  When people fear for their own reputations, careers, or pocketbooks, they are more likely to stay in line.  So when investigating misconduct, our staff first looks at the individual conduct and works out to the entity, rather than starting with the entity as a whole and working in.

And when we do bring charges against individuals, we consider, in addition to tough charges and penalties, our remedies to prevent future wrongs as well.  One of our most potent tools is an order imposing a bar on an individual – a bar from, for example, working in the securities industry or serving on the board of a public company.  Such an order can reduce the likelihood that the defendant can defraud and victimize the public again.”

As detailed in this post, approximately 80% of corporate SEC FCPA enforcement actions since 2008 have not resulted in any related enforcement action against a company employee.

Friday Roundup

Friday, October 30th, 2015

Roundup2Scrutiny alerts and updates, civil litigation updates, SEC enforcement statistics, and for the reading stack.  It’s all here in the Friday roundup.

Scrutiny Alerts and Updates

Millicom

The telecom and media company headquartered in Luxembourg with shares traded over the counter (OTC) in the U.S. recently disclosed:

“Millicom … announced that it has reported to law enforcement authorities in the United States and Sweden potential improper payments made on behalf of the company’s joint venture in Guatemala. A Special Committee of the Board of Directors made the decision in connection with an independent investigation being overseen by the Special Committee and conducted by international law firm Covington & Burling LLP, with the support of Millicom’s management team. Millicom is committed to fully cooperating with the authorities. It is not possible at this time to predict the matter’s likely duration or outcome. Millicom is committed to the highest ethical business standards and to full compliance with all applicable laws and regulations in every market in which the company operates.”

AEI

Speaking of FCPA scrutiny in Guatemala, according to this article in the Nation, Jaguar Energy Guatemala, a subsidiary of Houston-based AEI, “participated in an influence-trafficking scheme to obtain privileged information and favors from high-level Guatemalan officials. Among other things, the subsidiary is accused of paying to obtain meetings with the country’s former president Otto Pérez Molina.”

Goldman Sachs

The Wall Street Journal recently went in-depth regarding a Malaysian government investment fund,  1Malaysia Development Bhd., or 1MDB, and the role of Prime Minister Najib Razak. As noted in this article:

“[T]he fund has become the center of a political scandal that has engulfed Malaysia’s government. The fund is mired in debts of over $11 billion. It is a subject of a raft of local and international investigations, including, in Malaysia, by the central bank, auditor general, anticorruption agency and a parliament committee. It has faced accusations that billions of dollars are missing and that money was misused for political purposes or siphoned off in corruption by individuals.”

According to this article:

“Goldman Sachs Group Inc.’s role as adviser to a politically connected Malaysia development fund resulted in years of lucrative business. It also brought exposure to an expanding scandal. As part of a broad probe into allegations of money laundering and corruption investigators at the Federal Bureau of Investigation and the Justice Department have begun examining Goldman Sachs’s role in a series of transactions at 1Malaysia Development Bhd., people familiar with the matter said. The inquiries are at the information-gathering stage, and there is no suggestion of wrongdoing by the bank, the people said. Investigators “have yet to determine if the matter will become a focus of any investigations into the 1MDB scandal,” a spokeswoman for the FBI said.”

Bristol-Myers

It was fairly obvious to knowledgeable observers that when the SEC brought an FCPA enforcement action against Bristol-Myers earlier this month (see here for the prior post), but the DOJ did not, that this signaled that there would not be a DOJ enforcement action as such parallel actions are almost always brought on the same day. Should there be any doubt, the company recently disclosed: “The Company has also been advised by the Department of Justice that it has closed its inquiry into this matter.”

Civil Litigation Updates

As highlighted in Foreign Corrupt Practices Act Ripples, settlement amounts in an actual FCPA enforcement action are often only a relatively minor component of the overall consequences that can result from FCPA scrutiny or enforcement. Among other things, FCPA scrutiny or enforcement often leads to private shareholder litigation as well as other civil claims such as wrongful termination by employees who allegedly “blew the whistle.”

Two developments from the FCPA-related civil dockets.

This recent post highlighted the civil lawsuit filed by Sanford Wadler, the former General Counsel and Secretary of Bio-Lab Laboratories, against the company and certain executive officers and board members in the aftermath of the company’s FCPA scrutiny and enforcement action. In his complaint, Wadler alleged various unfair employment practices. In this recent decision from the Northern District of California, the court largely denied the defendants’ motion to dismiss and allowed the bulk of Wadler’s claims to proceed.

It did not take long for the Ninth Circuit to affirm a lower court order dismissing derivative claims against H-P directors for, among other things, alleged breach of fiduciary duty in connection with the company’s FCPA scrutiny.  The court’s 4 page order is here.

SEC Enforcement Statistics

Although the SEC has a specialized FCPA Unit (one of only five specialized units at the SEC) and declared the FCPA to be a “vital part” of its overall enforcement program, the fact remains that FCPA enforcement is a relatively minor part of the SEC’s overall enforcement program.

Indeed, as noted in this recent SEC release:

“In the fiscal year that ended in September, the SEC filed 807 enforcement actions covering a wide range of misconduct, and obtained orders totaling approximately $4.2 billion in disgorgement and penalties.  Of the 807 enforcement actions filed in fiscal year 2015, a record 507 were independent actions for violations of the federal securities laws and 300 were either actions against issuers who were delinquent in making required filings with the SEC or administrative proceedings seeking bars against individuals based on criminal convictions, civil injunctions, or other orders.”

In the SEC’s FY 2015, there were 13 FCPA enforcement actions.

Nevertheless, the SEC’s release does mention:

Combating Foreign Corrupt Practices

Reading Stack

The most recent FCPA Update by Debevoise & Plimpton is here.

Miller & Chevalier’s Autumn FCPA Review is here.

An informative read here from Professor Peter Henning at his White Collar Crime Watch column in the New York Times titled “Reforming the SEC’s Administrative Process.”

*****

A good weekend to all.