Archive for the ‘Voluntary Disclosure’ Category

Little New Information Of Significance In SEC Director Ceresney’s FCPA Speech

Thursday, November 19th, 2015

CeresneyYesterday’s post highlighted Assistant Attorney General Leslie Caldwell’s recent speech before a Foreign Corrupt Practices Act audience.

Today’s post provides equal time to Andrew Ceresney’s (Director of the SEC’s Enforcement Division) FCPA speech to the same audience.

To those well-versed on prior SEC FCPA policy speeches, there was little new information of significance in Ceresney’s speech (and you can assess this for yourself by visiting this subject matter tag which highlights every SEC FCPA policy speech in the public domain over the last several years). Indeed, significant portions of Ceresney’s speech were near carbon copies of prior speeches he delivered at the same event one year ago and two years ago (see here and here for prior posts).

[From a LinkedIn comment: "I agree with your assessment of Director Ceresney's speech. In fact the majority of the attendees who were present during the luncheon speech felt the same way. And judging from his presentation, he was hardly enthused about the speech. Basically, it was just read off paper word for word not even looking up. But you also have to put his speech in the proper context. It was something designed to take up the slack time between the main meal and waiting for the dessert to come out."]

The only new item in Ceresney’s speech was the following statement: “the Enforcement Division has determined that going forward, a company must self-report misconduct in order to be eligible for the Division to recommend a DPA or NPA to the Commission in an FCPA case.”

As a practical matter, this statement is not very significant as the SEC has only used NPAs or DPAs three time since the SEC authorized their use in 2010. Moreover, the SEC has handled voluntary disclosure in the FCPA context in several different ways.  In certain instances, civil complaints are filed in connection with voluntary disclosures; in other instances, administrative cease and desist orders are used in connection with voluntary disclosures; and in other instances  - as noted by Ceresney – NPAs and DPAs are used in connection with voluntary disclosures.

Prior to excerpting Ceresney’s speech, a few observations about the individual prosecution and BHP Billiton portions of the speech.

Individual Proseuctions

Ceresney stated:

“Outside the FCPA context in particular, over the last five years, 80% of the SEC’s enforcement actions (excluding follow-on administrative proceedings and delinquent filings) have involved charges against individuals.  This focus on individuals also applies to FCPA cases.”

Ceresney did not provide statistics for individual prosecutions in connection with corporate SEC enforcement actions so I will. As noted in prior posts here and here, since 2008 83% of SEC corporate FCPA enforcement actions have not resulted in any SEC charges against company employees.

No doubt in recognition of these FCPA specific statistics, Ceresney attempted to articulate why FCPA enforcement actions against individuals “present formidable challenges.” However, most of the factors listed are also present in corporate FCPA enforcement actions. There is however a key difference.  In the FCPA’s history, it is not believed that the SEC has ever had to prove a case against an issuer whereas individuals are more likely to, and have, put the SEC’s to burden of proof and the SEC has never satisfied its ultimate burden of proof against an individual when this happens.

BNY Mellon / Anything of Value

Similar to his speech last year at the same event, Ceresney devoted a material portion of his remarks to an FCPA element that is seldom the focus of much discussion:  anything of value.   In the words of Ceresney “enforcing the FCPA to its fullest extent.”

Ceresney provided a list of questions regarding less tangible things of value that will be of value to compliance practitioners.

In connection with this portion of his speech, Ceresney defended the SEC’s enforcement action against BNY Mellon which focused on the company’s internship practices. He called criticism of the enforcement action “unfounded.”

However, Ceresney failed to address many of the other criticisms of the enforcement action not necessarily connected to the anything of value element such as corrupt intent, obtain or retain business, and other statutory issues. (See here).

The remainder of this post excerpts Ceresney’s speech.

“Pursuing violations of the FCPA remains a critical part of the SEC’s enforcement efforts.  The SEC has taken a lead role in combatting corruption worldwide, enforcing the FCPA vigorously against issuers and individuals within its jurisdiction and working with foreign partners to enhance their anticorruption efforts.

The Division of Enforcement – including its specialized FCPA Unit, as well as other members of the staff – continues to be very active holding wrongdoers accountable for FCPA violations.  The Commission’s enforcement efforts over the last ten years, along with those of our partners at the DOJ and FBI, have resulted in a sea change in enhancing the focus on FCPA compliance issues.


I thought I would spend some time this afternoon discussing a few issues that are important to the SEC’s FCPA program: self-reporting and cooperation; holding individuals accountable for FCPA violations; cooperation with foreign regulators; and ongoing efforts to ensure that the FCPA is enforced to its fullest extent.

The Importance of Self-Reporting and Cooperation

I want to start with the importance of self-reporting and cooperation in FCPA cases.  The Commission launched its formal cooperation program a little more than five years ago, and as I have explained in other contexts, it has been a great success overall.  Even before that formal cooperation program was implemented, the SEC was rewarding cooperation in FCPA matters, and it has continued to do so under the more formal program.  In the last fiscal year alone, the Commission gave significant credit for cooperation in more than half a dozen cases.  These included the settlement with Layne Christensen, which included a significantly reduced penalty of 10% of the disgorgement amount; a settlement with PBSJ, where we entered into a deferred prosecution agreement and the penalty was a small fraction of disgorgement; and a settlement with Goodyear, which was the first case where the Commission agreed not seek any penalty in recognition of the company’s significant cooperation.  These cases should send the message loud and clear that the SEC will reward self-reporting and cooperation with significant benefits.  Companies should understand that the benefits of cooperating with the SEC are significant and tangible.

Let me spend a moment on self-reporting because that is an issue that has attracted lots of attention in recent years.  Self-reporting is critical to the success of SEC’s cooperation program.  Self-reporting allows the Enforcement staff to discover misconduct more quickly and reliably than otherwise would be possible.  In certain cases, particularly when misconduct occurs overseas, companies may be in a better position to quickly investigate misconduct and the information provided by companies as part of their self-reporting often gives a significant head start on our investigations.

Self-reporting also is a valuable tool for parties who want to maximize the benefits available for cooperation.  As the cases I just mentioned make clear, there are significant benefits available to companies who self-report violations and cooperate fully with our investigations.  Benefits range from reduced charges and penalties, to deferred prosecution or non-prosecution agreements – known as DPAs or NPAs – in instances of outstanding cooperation, or in certain instances when the violations are minimal, no charges.

However, beyond these benefits, which are the carrot, there is also a stick that should further incentivize self-reporting.  Companies that make a decision not to self-report misconduct take the chance that the Enforcement Division will learn of this misconduct through other means.  The SEC’s whistleblower program has created real incentives for people to report wrongdoing to us.  If the Enforcement Division finds the violations through its own investigation or from a whistleblower, the consequences to the company will likely be worse and the opportunity to earn additional cooperation credit may well be lost.  As I’ve said before, when discussing our cooperation program in general and specifically in the FCPA context, companies are gambling if they fail to self-report FCPA misconduct to us.

Given the importance of self-reporting to our FCPA investigations, the Enforcement Division continues to looks for ways to encourage self-reporting of violations through our cooperation program.  Towards that end, the Enforcement Division has determined that going forward, a company must self-report misconduct in order to be eligible for the Division to recommend a DPA or NPA to the Commission in an FCPA case.  I am hopeful that this condition on the decision to recommend a DPA or NPA will further incentivize firms to promptly report FCPA misconduct to the SEC and further emphasize the benefits that come with self-reporting and cooperation.

It is important to note here that while the Division will require a company to self-report in order to be eligible for a DPA or NPA, self-reporting alone is not enough.  Determinations of how much credit to give an entity for cooperation, including whether to take the extraordinary step of entering into a DPA or NPA, are made by evaluating the broad factors set out by the Commission in the Seaboard report. In addition to self-reporting, these factors include a corporation’s self-policing, remediation, and cooperation. While DPAs and NPAs are valuable tools, they reflect a significant level of cooperation and have been a relatively limited part of Commission enforcement practice.  I think this is appropriate and should continue to be the case.  But the Division will not even consider this step if a company fails to self-report.

Requiring a company to self-report potential FCPA violations in order to be eligible for a DPA or NPA is consistent with the SEC’s practice since the introduction of our formal cooperation program in 2010.  In each FCPA case where the SEC entered into a DPA or NPA, the company involved self-reported the violations, and then provided significant cooperation throughout the investigation.

The most recent example is the DPA the Commission entered into with PBSJ Corporation earlier this year.  In that case, the Commission charged a former officer of the Florida engineering and construction firm with violating the FCPA by offering and authorizing bribes and employment to foreign officials to secure Qatari government contracts. The Commission determined that a DPA with the company was appropriate.  PBSJ self-reported the violations to the SEC, took immediate steps to end the misconduct, and fully cooperated with the investigation, including voluntarily making foreign witnesses available for interviews and providing factual chronologies, timelines, internal summaries, and full forensic images to the SEC.  Under the DPA, PBSJ agreed to pay more than $3 million in disgorgement and prejudgment interest and a penalty of $375,000 – approximately 10% of the disgorgement level – and to comply with certain undertakings.

Similarly, in 2013 the Commission entered into its first ever FCPA NPA with Ralph Lauren Corporation in connection with bribes paid by a subsidiary to government officials in Argentina.  In determining to enter a NPA with the company, the Commission recognized the company’s prompt self-reporting of the violation – within two weeks of discovering the illegal payments – and its extraordinary cooperation with the SEC’s investigation, which included voluntarily and expeditiously producing relevant documents, providing translations of foreign-language documents, providing witness interview summaries from its internal investigation, making overseas witnesses available, and bringing witnesses to the U.S.  The Commission also took into account significant remedial measures undertaken by Ralph Lauren.  Under the NPA, the company paid more than $700,000 in disgorgement and pre-judgment interest.

Finally, self-reporting was a key consideration leading to the DPA with Tenaris, S.A., in 2011, which was the SEC’s first DPA since the introduction of the cooperation program.  The agreement with Tenaris involved allegations that the global manufacturer of steel pipe products made almost $5 million on contracts obtained through bribes of Uzbekistan government officials during a bidding process to supply pipelines for transporting oil and natural gas. The Commission determined that a DPA with Tenaris was appropriate.  The company immediately reported the violations to the SEC, conducted a thorough internal investigation, fully cooperated with the investigation, and implemented significant remediation efforts.  Under the DPA, Tenaris paid $5.4 million in disgorgement and prejudgment interest and agreed to enhance its compliance practices.  Tenaris paid no penalty.

I hope that by highlighting the benefits of cooperation and detailing the efforts companies took to self-report and cooperate, the Enforcement Division can help provide a blueprint for companies regarding what kind of cooperation and remediation efforts are required to maximize the benefits of the SEC’s cooperation program.

Focus on Individual Liability

The next area I want to talk about today is our focus on individual liability.  Holding individuals accountable for their wrongdoing is critical to effective deterrence and, therefore, the Division considers individual liability in every case.  Outside the FCPA context in particular, over the last five years, 80% of the SEC’s enforcement actions (excluding follow-on administrative proceedings and delinquent filings) have involved charges against individuals.  This focus on individuals also applies to FCPA cases.  When we are able to recommend a case against individuals for FCPA violations, we do so.

However, it is also true that FCPA cases often present formidable challenges to establishing individual liability.  In most FCPA cases, the individuals most directly involved in the wrongdoing are foreign nationals who live outside the United States.  As a result, it is often difficult to establish personal jurisdiction over potential wrongdoers, particularly if they are employees of the foreign subsidiary rather than the parent issuer.  In addition, most of the witnesses and documents are located overseas, which presents evidentiary challenges.  The cases are very time-consuming and resource-intensive to litigate, and if the wrongdoer is a foreign national with no assets or ties to the U.S., recoveries may be limited.  Finally, given the evidentiary challenges and complexity of FCPA investigations, the statute of limitations also complicates these cases.  The statute of limitations applicable to Commission actions is not tolled when foreign evidence requests are outstanding.

However, where the Division’s investigations find sufficient evidence to bring charges and establish personal jurisdiction, the Commission brings those cases.  Over twenty percent of the SEC’s FCPA cases this past year were brought against individuals, sometimes in conjunction with a case against the issuer, and sometimes before or after the issuer case was brought.  In the PBSJ case I discussed earlier, while the Commission entered into a DPA with the company, it charged the former PBSJ officer who orchestrated the scheme with violating the anti-bribery provisions of the FCPA.  As set out in the SEC’s order, the officer offered to funnel funds to a local company owned and controlled by a foreign official in order to secure two multi-million Qatari government contracts for PBSJ and also offered employment to a second foreign official in return for assistance as the bribery scheme began to unravel. The officer agreed to settle the charges and pay a significant penalty.

In August, the Commission brought charges against a former executive at a worldwide software manufacturer for violating the FCPA by bribing Panamanian government officials through an intermediary to procure software license sales.  As set out in the SEC’s order, the executive orchestrated a scheme to pay bribes to one government official and promised to pay two others in order to obtain four contracts to sell software to the Panamanian government.  The executive, who lives in Miami, agreed to settle the charges and disgorge all of his ill-gotten gains.

And earlier this fiscal year, the SEC charged two former employees in the Dubai office of a U.S.-based defense contractor with violating the FCPA by providing government officials in Saudi Arabia with improper benefits to help secure business for the company.  The individual employees settled the charges and each agreed to pay a significant penalty.

The Commission is committed to holding individuals accountable and I expect you will continue to see more FCPA cases against individuals.

Effective Coordination with International Regulators and Law Enforcement

One of the reasons we’ve been able to achieve such success in our FCPA cases over the past few years – both against companies and individuals – is the Division’s effective coordination with international regulators and law enforcement.  In today’s globalized marketplace, the SEC’s ability to protect investors and maintain fair and efficient markets is often dependent on Enforcement’s ability to investigate misconduct that takes place, at least in part, abroad.  This is especially true with FCPA investigations, which routinely rely on evidence obtained from foreign jurisdictions, and often are conducted in parallel with foreign governments.

Over the past five years, the Enforcement Division has experienced a transformation in the ability to get meaningful and timely assistance from international partners.  Enforcement has greatly expanded its efforts to obtain evidence of potential wrongdoing from around the globe with the assistance of the SEC’s Office of International Affairs and continues to strengthen our partnerships with other countries.  There has also been an important trend of significant growth in focus and legislation on corruption issues worldwide over the last few years.  The result has been a tremendous increase in cooperation from other governments and better access to evidence in foreign countries.

This increased coordination helps the SEC successfully conclude significant enforcement actions.  For example, assistance from foreign authorities was critical to the Commission’s recent case against Hitachi.  The investigation was greatly assisted by the African Development Bank and the South African Financial Services Board.  And the resulting case charged Hitachi with violating the FCPA by inaccurately recording improper payments to a front company for the African National Congress – the ruling party in South Africa – in connection with contracts to build two power plants.  The company agreed to settle the charges and pay a $19 million penalty for its FCPA violations.

In April of this year, the SEC also charged FLIR Systems, Inc. for violating the FCPA by financing what an employee termed a “world tour” of personal travel for government officials in the Middle East who played key roles in decisions to purchase products from FLIR. The Commission’s order found that FLIR earned more than $7 million in profits from sales influenced by the improper travel and gifts.  We received valuable assistance in our investigation from the United Arab Emirates Securities and Commodities Authority.  To settle the matter, FLIR agreed to pay more than $9.5 million in disgorgement and penalties and report its FCPA compliance efforts to the agency for the next two years.  In the BHP Billiton matter I mentioned earlier, the Division received assistance from the Australian Federal Police.

These are just three recent examples of the Division’s success in working with the international community to receive documents and other types of foreign assistance.  I fully expect the pace and extent of foreign agencies’ cooperation in the FCPA space to grow over the coming years as the Division continues to forge new relationships abroad and strengthen those we already have.

Enforcing the FCPA Statute to its Fullest Extent

Finally, I thought I would say a few words about the Commission’s efforts to enforce the FCPA to the fullest extent of the statute.  As this audience surely knows, the statute precludes the payment or provision of “anything of value” to a foreign official in order to induce that official to take official action or obtain an improper advantage for the purpose of obtaining or retaining business.

And of course “anything” of value is, on its face, a broad term.  Obviously, cash payments count.  Similarly, tangible gifts to foreign officials undoubtedly qualify as things of value.  But the Commission has also successfully brought FCPA cases where other, less traditional, items of value have been given in order to influence foreign officials.  For example, last year, I discussed a series of cases in which the Commission brought bribery charges against companies that made contributions to charities that were affiliated with foreign government officials, provided no-show jobs to the spouse of a foreign official, or paid for the honeymoon of a foreign official’s daughter, all to induce those officials to direct business to the companies.  Each of these benefits qualifies as something of value under the FCPA statute.

The SEC’s recent case against BNY Mellon, its first FCPA case against a financial institution, also illustrates this approach.  The Commission’s case charged that the firm violated the FCPA by providing valuable student internships to family members of foreign government officials affiliated with a Middle Eastern sovereign wealth fund.

Some have expressed concern about these cases, arguing that it is difficult to draw a clear line between what constitutes a violation and what does not, in cases involving less traditional items of value.  In my view, these concerns are unfounded.  The line between what is acceptable and what constitutes a violation of the law is in the same place it always has been:  when something of value – which can include a gift, donation, favor, or hiring decision – is given or taken with intent to influence the foreign official in his or her official actions or obtain an improper advantage.  While this analysis is dependent on the facts and circumstances of each particular case, it is the same analysis companies routinely conduct when considering how their employees interact with government officials in the course of business. The relevant questions include:

  • Was the gift, donation, favor, or hiring asked for by the foreign official?
  • Did the company official believe that the gift, donation, favor, or hiring would advance their business interests and help them obtain particular business, or at least obtain an improper advantage with the foreign official?
  • Was the gift, donation, favor, or hiring consistent with company policy and practice?
  • Were the company’s normal procedures followed in connection with the gift, donation, favor, or hiring?
  • Would the gift, donation, favor, or hiring have been made if there were no potential business benefit?

In the BNY Mellon case for example, the Commission’s order described the following facts.  The sovereign wealth fund officials explicitly and repeatedly requested the internships and the BNY Mellon employees viewed providing the internships as important to keeping the sovereign wealth fund’s business and potentially obtaining new business.  Indeed, one BNY Mellon employee stated that failure to provide the internships would “potentially jeopardize our mandate” with the sovereign fund and another stated that providing the internship was “the only way” to increase BNY Mellon’s share of business from the sovereign funds’ European office. In addition, the bank did not evaluate or hire the officials’ relatives through its internship program, which had stringent standards, including a minimum grade point average, relevant prior work experience, and multiple rounds of interviews.  In fact, the family members hired did not meet the basic entrance standards for any established BNY Mellon internship program, did not have the requisite academic or professional credentials, and were not even required to interview before being offered the positions.

Under these circumstances, I would suggest that there was ample basis for viewing the internships as something of value to the foreign officials who requested them for their relatives, and for concluding that they were given in an attempt to influence the foreign officials in connection with the performance of their official duties or to obtain an improper advantage from the foreign officials.

As I’ve said before, bribes come in many shapes and sizes.  And in my view, the FCPA is properly read to cover providing valuable favors to a foreign official, as well as providing cash, tangible gifts, travel or entertainment.


To sum up, the Enforcement Division is committed to aggressively pursuing violations of the FCPA by entities and individuals.  We will continue to use our cooperation program and to coordinate with international regulators and law enforcement to do so more effectively.  It is my hope that we can continue to build on the solid foundation we have created for FCPA compliance in the coming years.”

Little New Information In Assistant AG Caldwell’s FCPA Speech

Wednesday, November 18th, 2015

caldwellYesterday, Assistant Attorney General Leslie Caldwell delivered this speech before a Foreign Corrupt Practices Act audience.

To those well-versed on prior DOJ FCPA policy speeches, there was little new in Caldwell’s speech (and you can assess this for yourself by visiting this subject matter tag which highlights every DOJ FCPA policy speech in the public domain over the last several years).

The only “new” item in Caldwell’s speech was her announcement that the DOJ is ”preparing to add 10 new prosecutors to the Fraud Section’s FCPA Unit, increasing its size by 50 percent.” But here again, for years the DOJ and/or FBI have been trumpeting the ever increasing persons in their respective FCPA units.

Prior to excerpting, Caldwell’s speech, a few observations about the voluntary disclosure and “secret” FCPA enforcement aspects of Caldwell’s speech.

Voluntary Disclosure

Caldwell stated yesterday:

“[The DOJ] is not reliant on corporate self-reporting in the FCPA or any other context—indeed, the majority of our FCPA cases are investigated and prosecuted without a voluntary disclosure …”.

As noted in this December 2014, the DOJ previously said that it does not track voluntary disclosure statistics. However, as noted in the post, FCPA Professor does based on information in the DOJ’s own resolution documents.  The statistics (current as of the date in the post) were as follows.

  • Since 2011, there have been 31 core corporate DOJ FCPA enforcement actions.  17 of the enforcement actions (55%) have been based on voluntary disclosures per the DOJ’s own resolution documents.  This 55% figure actually under-represents the impact of voluntary disclosures on the DOJ’s FCPA enforcement program because several other FCPA enforcement actions (for instance against Smith & Nephew and Biomet) are generally viewed as “fruits” of a prior voluntary disclosure (Johnson & Johnson). Moreover, the Bilfinger enforcement action was the direct result of the prior Willbros enforcement action (an enforcement action based on a voluntary disclosure).

“Secret” FCPA Enforcment

For years, there have been whispers in the FCPA space about “secret” FCPA enforcement actions.  As noted in this prior post, the 2012 FCPA Guidance seemed to confirm such whispers as the Guidance stated:

  • “Historically, DOJ had, on occasion, agreed to DPAs with companies that were not filed with the court.  That is no longer the practice of DOJ.”
  • The Guidance also suggested that the DOJ has used non-prosecution agreements in individual FCPA-related case (e.g., “If an individual complies with the terms of his or her NPA, namely, truthful and complete cooperation and continued law-abiding conduct, DOJ will not pursue criminal charges.”  The Guidance also states that “in circumstances where an NPA is with a company for FCPA-related offenses, it is made available to the public through DOJ’s website.” (emphasis added).  This statement suggests that when an NPA is with an individual for FCPA-related offenses, the agreement is not made public.

In yesterday’s speech, Caldwell stated:

“We usually publicly announce corporate resolutions and pleas, and make the documents available on our website.” (emphasis added).

This statement only deepens the mystery surrounding apparent “secret” FCPA enforcement and the irony is that Caldwell’s statement was made in the same speech in which she stated “greater transparency benefits everyone.”

The remainder of this post excerpts Caldwell’s speech.

“I appreciate the opportunity to talk with you today about the Justice Department’s (DOJ) increasing attention to the investigation and prosecution of international corruption under the FCPA.

In 1977, when Congress enacted the FCPA, it called the “payment of bribes to influence the acts or decisions of foreign officials…unethical [and] counter to the moral experience and values of the American public.”  In the investigations leading to the act’s passage, Congress uncovered more than $300 million—or nearly $1.2 billion in 2015 dollars—in bribes paid by American companies to foreign officials.

Unfortunately, in the intervening 38 years, corruption has not disappeared.  In fact, as globalization increases, there is some evidence that corruption has as well.  The FCPA has, however, helped bring to justice some of the largest-scale perpetrators of economic corruption, and in 2014, companies paid more than $1.5 billion in corporate FCPA penalties to DOJ alone.  And that does not include payments made to other U.S. and foreign entities.  Clearly, our work to uphold the “moral experience and values of the American public” remains unfinished.

As you may know, that work is led by a team of federal prosecutors in the Criminal Division’s Fraud Section.  They are joined in this fight against international corruption by their colleagues in the Asset Forfeiture and Money Laundering Section—known as AFMLS—which pursues prosecutions against institutions and individuals engaged in money laundering, Bank Secrecy Act violations and sanctions violations.

AFMLS attorneys also seek the forfeiture of proceeds of high-level foreign corruption through the relatively new Kleptocracy Asset Recovery Initiative.  The two units complement each other in their efforts to hold both bribe payers and bribe takers accountable for their criminal conduct.

I would like to talk with you today about our ongoing efforts to enhance the Criminal Division’s ability to root out and prosecute corruption, and also to provide increased transparency about the division’s decision-making.

During this past year, we increased our FCPA resources, including by adding three new fully-operational squads to the FBI’s International Corruption Unit that are focusing on FCPA and Kleptocracy matters.  We are also preparing to add 10 new prosecutors to the Fraud Section’s FCPA Unit, increasing its size by 50 percent.  These new squads and prosecutors will make a substantial difference to our ability to bring high-impact cases and greatly enhance the department’s ability to root out significant economic corruption.

In addition to increased resources directed to FCPA cases, one of my priorities in the Criminal Division has been to increase transparency regarding charging decisions in corporate prosecutions.

Greater transparency benefits everyone.  The Criminal Division stands to benefit from being more transparent because it will lead to more illegal activity being uncovered and prosecuted.  This is in part because if companies know the consideration they are likely to receive from self-reporting or cooperating in the government’s investigation, we believe they will be more likely to come in early, disclose wrongdoing and cooperate.

On the flip side, companies can also better evaluate the consequences they might face if they do not merit that consideration.  In both ways, transparency helps achieve the deterrent purpose of the FCPA because comparatively opaque or unreasoned enforcement action can make it more difficult for companies to make their own rational decisions about how to react when they learn of a bribe.

Transparency also helps to reduce any perceived disparity, in that companies can compare themselves to other similarly-situated companies engaged in similar misconduct.  There are often limits to how much we can disclose about our investigations and prosecutions—particularly for investigations in which no charges are brought—but we are trying to be more clear about our expectations in corporate investigations and the bases for our corporate pleas and resolutions.

Let me provide some examples to illustrate this point.

Just a few months ago, the former co-CEO of PetroTiger pleaded guilty to conspiring to violate the FCPA.  He joined his fellow co-CEO and the company’s former general counsel in being convicted of bribery and fraud charges after a DOJ investigation that revealed a scheme to secure a $39 million oil-services contract for PetroTiger through bribery of Colombian officials.  This was serious misconduct that went to the very top of the company, and in a typical case, criminal charges for the company may well also have been appropriate.

We learned about this misconduct through voluntary disclosure by PetroTiger, however.  And after that self-disclosure, the company fully cooperated with the department’s investigation of the misconduct and of the individuals responsible for it.  As you likely know, the department ultimately declined to prosecute the company, or to seek any NPA (non-prosecution agreement) or DPA (deferred prosecution agreement) with it, even though we clearly could have done so.

By contrast, in December of last year—about a month after I last addressed this conference—Alstom S.A., the French power company, pleaded guilty to violating the FCPA.  In fact, Alstom was sentenced just last week.  Alstom admitted to its criminal conduct and agreed to pay a penalty of more than $772 million, the largest foreign bribery resolution with the Justice Department ever.  In addition, Alstom’s Swiss subsidiary pleaded guilty to conspiracy to violate the anti-bribery provisions of the FCPA.  Two U.S.-based subsidiaries also admitted to conspiring to violate the FCPA and entered into deferred prosecution agreements.  The investigation resulted in criminal charges against five individuals, including four corporate executives, in connection with the bribery scheme.  To date, four of those individuals have pleaded guilty.

Given the significant scope of the misconduct in that case—including the involvement of corporate executives—it is fair to say that the factors we look at in these cases weighed in favor of some kind of criminal disposition.  And it would also be fair to point out that what was missing in those factors was any strong argument, of the type that PetroTiger was able to make, for prosecutorial consideration for Alstom’s own efforts to mitigate the misconduct.  Rather, unlike PetroTiger, Alstom did not voluntarily disclose the misconduct and refused to cooperate with our investigation until years later, after we had already charged company executives.

When we talk about this kind of credit for mitigation in FCPA corruption cases, we cannot talk simply about “cooperation.”  Cooperation is only one element of mitigation.  In our view, a company that wishes to be eligible for the maximum mitigation credit in an FCPA case must do three things: (1) voluntarily self-disclose, (2) fully cooperate and (3) timely and appropriately remediate.

When a company voluntarily self-discloses, fully cooperates and remediates, it is eligible for a full range of consideration with respect to both charging and penalty determinations.

Of course, in some cases the scope or seriousness of the criminal activity or the company’s history will mandate a criminal resolution, but in those cases it will be even more important for the company to present the strongest possible mitigation.  And companies that fail to self-disclose but nonetheless cooperate and remediate will receive some credit.  But that credit for cooperation and remediation will be measurably less than it would have been had the company also self-reported.

Let me walk through now in more detail the elements of those three factors.

First, as I have said before, companies for the most part have no obligation to self-disclose criminal wrongdoing to the Justice Department.  That has not changed.  And we are not reliant on corporate self-reporting in the FCPA or any other context—indeed, the majority of our FCPA cases are investigated and prosecuted without a voluntary disclosure and sometimes, as in the Alstom case, without corporate cooperation.

As time passes and the world continues to shrink, we have more and more sources of information about FCPA violations, ranging from whistleblowers, to foreign law enforcement, to competitors, to current and former employees, the foreign media, and others.   So if you discover an FCPA violation that you opt not to self-report, you are taking a very real risk that we will one day find out, or that we already know, and you will not be eligible for the full range of potential mitigation credit.

That said, we recognize that companies often are reluctant to self-report FCPA violations, especially when they believe that we may not otherwise learn of the misconduct.  And we also recognize that FCPA investigations present challenges for us that make them different in some important ways from other types of white collar crime.

By their nature, overseas bribery schemes can be especially difficult to detect, investigate and prosecute.  Individuals who violate the FCPA and relevant evidence often are located overseas—sometimes in jurisdictions with which we have limited relationships.  FCPA violations often involve one or more third parties, such as resellers or agents, also located overseas.  Money often moves through multiple offshore accounts, usually in the names of shell corporations.  The transactions almost always are concealed in some fashion from the company’s books and records.  And the company often is much better-positioned than the Justice Department to get to the bottom of things in an efficient and timely fashion.

For these reasons, voluntary self-disclosure in the FCPA context does have particular value to the department.   Because of that, we want to encourage self-disclosure by making clear that, when combined with cooperation and remediation, voluntary disclosure does provide a tangible benefit.

What do I mean by voluntary self-disclosure?  I mean that within a reasonably prompt time after becoming aware of an FCPA violation, the company discloses the relevant facts known to it, including all relevant facts about the individuals involved in the conduct.

To qualify, this disclosure must occur before an investigation—including a regulatory investigation by an agency such as the SEC—is underway or imminent.  And disclosures that the company is already required to make by law, agreement or contract do not qualify.

Second, in line with the focus on individual accountability for corporate criminal conduct announced earlier this year by Deputy Attorney General Sally Yates, companies seeking credit must affirmatively work to identify and discover relevant information about the individuals involved through independent, thorough investigations.

Companies cannot just disclose facts relating to general corporate misconduct and withhold facts about the individuals involved.  And internal investigations cannot end with a conclusion of corporate liability, while stopping short of identifying those who committed the underlying conduct.

In addition to identifying the individuals involved, full cooperation includes providing timely updates on the status of the internal investigation, making officers and employees available for interviews—to the extent that is within the company’s control—and proactive document production, especially for evidence located in foreign countries.

Some have expressed concern that we now expect companies to conduct more extensive—and expensive—investigations to obtain credit for cooperating.  That is not the case.  As I have said before, we are not asking companies to boil the ocean.

As always, we continue to expect investigations to be thorough and tailored to scope of the wrongdoing, and to identify the wrongdoing and the wrongdoers.  We expect cooperating companies to make their best effort to uncover the facts with the goal of identifying the individuals involved.  To the extent companies and their counsel are unclear about what this means, we remain willing to maintain an open dialogue about our interests and our concerns, which should help save companies from aimless and expensive investigations.

A company that does not have access to all the facts, despite its best efforts to do a thorough and timely investigation, will not be at a disadvantage.  Our presumption is that the corporate entity will have access to the evidence, but if there are instances where you do not, or you are legally prohibited from handing it over, then, again, you need to explain that to us.  And know that we will test the accuracy of your assertions.

We, of course, recognize that we sometimes can obtain evidence that a company cannot.  We often can obtain from third parties evidence that is not available to the company.  Also, we know that a company may not be able to interview former employees who refuse to cooperate in a company investigation.  Those same employees may provide information to us, whether voluntarily or through compulsory process.  Likewise, there are times when, for strategic reasons, we may ask that the company stand down from pursuing a particular line of inquiry.  In these circumstances, the company of course will not be penalized for failing to identify facts subsequently discovered by government investigators.

Finally, remediation includes the company’s overall compliance program as well as its disciplinary efforts related to the specific wrongdoing at issue.  For example, we will consider whether and how the company has disciplined the employees involved in the misconduct.  We will also examine the company’s culture of compliance including an awareness among employees that any criminal conduct, including the conduct underlying the investigation, will not be tolerated.

A well-designed and fully-implemented compliance program is key.  Such a program should have sufficient resources relative to the company’s size to effectively train employees on their legal obligations and to uncover misconduct in its earliest stages.  Compliance personnel should be sufficiently independent so that they are free to report misconduct even when committed by high-ranking officials.

Because this area is nuanced, the Fraud Section has recently retained an experienced compliance counsel to help assess these programs.  She has many years of experience in the private sector assisting global companies in different industries build and strengthen compliance controls.  We look forward to her insights on issues such as whether the compliance program truly is thoughtfully designed and sufficiently resourced to address the company’s compliance risks and whether proposed remedial measures are realistic and sufficient.  She also will be interacting with the compliance community to seek input about ways we can work together to advance our mutual interest in strong corporate compliance programs.

Let me reiterate: there is no requirement that a company self-disclose, fully cooperate or remediate FCPA offenses, and failure to do those things, or to do them to the standards I have described here, in and of itself, does not mean that charges will be filed against a company any more than it would with respect to an individual.  But when it comes to serious, readily-provable offenses, companies seeking a more lenient disposition on the basis that they took steps to mitigate the offense after it was discovered are on notice of what the Criminal Division looks for when we consider these mitigating factors.

Just as we expect transparency from companies seeking prosecutorial consideration for mitigating an FCPA offense, we are doing our best to act in kind.  We recognize that information about the bases for our corporate guilty pleas and resolutions is an important reference point for companies that are evaluating whether to self-disclose a violation or cooperate.

In each of our corporate resolutions—be it a guilty plea, NPA or DPA—we aim to provide a detailed explanation of the key factors that led to our decision.  These include a detailed recitation of the misconduct, as publicly admitted by the company and the corporation’s cooperation—if any—and remedial measures.  We usually publicly announce corporate resolutions and pleas, and make the documents available on our website.

We know that the overwhelming majority of companies try to do the right thing the overwhelming majority of the time.  And we applaud the efforts of corporate counsel and executives alike in establishing and enforcing FCPA compliance programs to prevent violations.  I think we can all agree that the FCPA’s ultimate goal – like that of the other criminal statutes we enforce on a daily basis – is not the prosecution and punishment of individuals and companies engaged in bribery as a business practice but rather an end to corruption before it begins.  I would much prefer to report lower figures in terms of FCPA prosecutions and penalties in future years if it meant less corruption were occurring.

By increasing the size of our FCPA force and by incentivizing early reporting and thorough compliance programs through increased transparency, we are making progress towards that goal.  With the help of companies and their counsel, we can get there sooner.  To that end, we look forward to continuing the dialogue of which this conference is a part.”

Friday Roundup

Friday, August 21st, 2015

Roundup2Wal-Mart related, quotable, spot-on, scrutiny alerts and updates and prosecutorial common law defeat. It’s all here in the Friday roundup.

Wal-Mart Related

In its recent 2Q FY2016 earnings call Wal-Mart stated:

“FCPA and compliance-related costs were approximately $30 million, comprised of approximately $23 million for the ongoing inquiries and investigations, and approximately $7 million for our global compliance program and organizational enhancements. Last year, FCPA and compliance-related costs were $43 million in the second quarter. We expect FCPA-related expenses to continue to trend down, so we now expect our full year FCPA-related expenses to range between $130 million and $150 million. This compares to our guidance in February of $160 to $180 million.”

Doing the math, Wal-Mart’s 2Q FCPA and compliance-related costs is approximately $470,000 per working day.

Over the past approximate four years, I have tracked Wal-Mart’s quarterly disclosed pre-enforcement action professional fees and expenses. While some pundits have ridiculed me for doing so, such figures are notable because, as has been noted in prior posts and in my article “Foreign Corrupt Practices Act Ripples,” settlement amounts in an actual FCPA enforcement action are often only a relatively minor component of the overall financial consequences that can result from corporate FCPA scrutiny.  Pre-enforcement action professional fees and expenses are typically the largest (in many cases to a degree of 3, 5, 10 or higher than settlement amounts) financial hit to a company under FCPA scrutiny.

While $470,000 per working day remains eye-popping, Wal-Mart’s recent figure suggests that the company’s pre-enforcement action professional fees and expenses have crested as the figures for the past seven quarters have been approximately $516,000, $563,000, $640,000, $662,000, $855,000, $1.1 million and $1.3 million per working day.

In the aggregate, Wal-Mart’s disclosed pre-enforcement professional fees and expenses are as follows.

FY 2013 = $157 million.

FY 2014 = $282 million.

FY 2015  = $173 million.

FY 2016 = $63 million (projections for the remainder of the FY of approximately $67 – $87 million)


Regarding the recent BNY Mellon enforcement action, Jay Darden (Paul Hastings and recently the Assistant Chief of the DOJ’s Fraud Section) stated: “it’s not the U.S. government’s job to regulate hiring policy.” (See here).


In this Corporate Crime Reporter, Lamia Matta (Miller & Chevalier) states:

“Companies are less aggressive in [voluntarily] reporting. Companies are finding that they don’t save a whole lot by going in and self-reporting as soon as they find a problem. They are still subject to extensive investigation. The cost is the same if they self-report and then cooperate as it would be if they just cooperate. The agencies say that is not the case. But if you look at the trends, that does seem to be the case.”

“The other thing is that the decision to self-report is taking a lot longer than it once used to. Companies might think — it may make sense to self-report, but we are going to wait it out a bit before we do so. The process is now much more considered than it once used to be.”

“And companies are not as inclined to buy into the agencies’ aggressive theories of jurisdiction as they might have once been. For all of these reasons, you are seeing companies being less quick to self report. I don’t know if the self-reporting numbers are down or not. They are difficult to track.”


This Bryan Cave alert regarding the recent order in the DOJ’s enforcement action against Lawrence Hoskins (see here for the prior post) is spot-on.

It states:

“This holding directly contradicts the “guidance” provided by the U.S. in its Resource Guide, published jointly by the Department of Justice and the Securities and Exchange Commission. That guidance states unequivocally:

‘Individuals and companies, including foreign nationals and companies, may also be liable for conspiring to violate     the FCPA—i.e., for agreeing to commit an FCPA violation—even if they are not, or could not be, independently charged with a substantive FCPA violation.

* * *

A foreign company or individual may be held liable for aiding and abetting an FCPA violation or for conspiring to violate the FCPA, even if the foreign company or individual did not take any act in furtherance of the corrupt payment while in the territory of the United States.’

This Order reminds companies and individuals that some of the legal principles surrounding the FCPA recently have been developed out of settlements with the government instead of through the courts. On issues as important as these, it can be worthwhile to test some of the government’s theories in the only place they can be adjudicated.”

To learn about other selective information, half-truths, and information that is demonstratively false in the FCPA Guidance see “Grading the Foreign Corrupt Practices Act Guidance.”

Scrutiny Alerts and Updates

Ford Motor Co.

Reuters reports:

“The [SEC] is helping German prosecutors to investigate the alleged payment of bribes by Ford to speed the passage of containers through Russian customs, a source at the U.S. carmaker said on Tuesday. Ford and Schenker, the freight business of state-owned German rail company Deutsche Bahn, have been under investigation in Germany since 2013 over suspected bribery and other offences related to the busy Russian port of St. Petersburg. The port is Russia’s European gateway with more than 2,000 companies using it for shipments, according to its website, but it is also known among customers for notoriously long delays. The [SEC] has now joined investigations by prosecutors in Cologne, where Ford’s European headquarters are based, a source at the carmaker told Reuters, confirming a report in Tuesday’s Sueddeutsche Zeitung newspaper. Two Ford employees, eight current and former workers at Schenker and one staffer from a Russian contractor are under investigation, a spokesman at the Cologne prosecutor’s office said.”


In regards to this recent media report, the company stated in this filing:

“Petrobras hereby declares that, in relation to news published in the media concerning the payment of a fine to the U.S. authorities, there are no ongoing negotiations regarding the eventual payment of a fine for the winding up of civil and criminal investigations in the United States regarding the violation of the anti-corruption legislation. Nor has there been any decision by the U.S. authorities regarding the merit of such an investigation or the eventual amounts involved.”

SciClone Pharmaceuticals

One of the longest instances of FCPA scrutiny concerns SciClone Pharmaceuticals.  As highlighted in this prior post, in August 2010 the company disclosed:

“On August 5, 2010 SciClone was contacted by the SEC and advised that the SEC has initiated a formal, non-public investigation of SciClone. In connection with this investigation, the SEC issued a subpoena to SciClone requesting a variety of documents and other information. The subpoena requests documents relating to a range of matters including interactions with regulators and government-owned entities in China, activities relating to sales in China and documents relating to certain company financial and other disclosures. On August 6, 2010, the Company received a letter from the DOJ indicating that the DOJ was investigating Foreign Corrupt Practices Act issues in the pharmaceutical industry generally, and had received information about the Company’s practices suggesting possible violations.”

Recently the company disclosed:

“In July 2015, SciClone reached an agreement in principle with the staff of the US Securities and Exchange Commission (SEC) for a proposed settlement for a range of matters, including without admitting or denying possible violations of the Foreign Corrupt Practices Act (FCPA). The agreement, which includes disgorgement, prejudgment interest, and penalties totaling $12.8 million, is contingent upon the execution of formal settlement documents and approval of the settlement by the SEC’s governing Commission. The Company has not yet reached a resolution of these matters with the Department of Justice (DOJ) and management continues to work diligently to obtain closure on this matter.”

Akamai Technologies 

The company updated its previous FCPA-related disclosure as follows:

“We are conducting an internal investigation, with the assistance of outside counsel, relating to sales practices in a country outside the U.S. that represented less than 1% of our revenue during the three and six months ended June 30, 2015, and in each of the years ended December 31, 2014, 2013 and 2012. The internal investigation includes a review of compliance with the requirements of the U.S. Foreign Corrupt Practices Act and other applicable laws and regulations by employees in that market.  In February 2015, we voluntarily contacted the U.S. Securities and Exchange Commission and Department of Justice to advise both agencies of this internal investigation. We are cooperating with those agencies. As of the filing of this quarterly report on Form 10-Q, we cannot predict the outcome of this matter. No provision with respect to this matter has been made in our consolidated financial statements.”

General Cable 

The company recently disclosed the following regarding its previously disclosed FCPA scrutiny.

“We have been reviewing, with the assistance of external counsel, certain commission payments involving sales to customers of our subsidiary in Angola. The review has focused upon payment practices with respect to employees of public utility companies, use of agents in connection with such payment practices, and the manner in which the payments were reflected in our books and records. We have determined at this time that certain employees in our Portugal and Angola subsidiaries directly and indirectly made or directed payments at various times from 2002 through 2013 to officials of Angola government-owned public utilities that raise concerns under the FCPA and possibly under the laws of other jurisdictions. Based on an analysis completed with the assistance of our external counsel and forensic accountants, we have concluded at this time, that we are able to reasonably estimate the profit derived from sales made to the Angolan government-owned public utilities in connection with the payments described above which we believe is likely to ultimately be disgorged. As a result, we recorded an estimated charge in the amount of $24 million as an accrual as of December 31, 2014. There was no change to the accrual in the second quarter of 2015. The accrued amount reflects the probable and estimable amount of the Angola-related profits that the Company believes is subject to being disgorged, and does not include any provision for any fines, civil or criminal penalties, or other relief, any or all of which could be substantial.
We also have been reviewing, with the assistance of external counsel, our use and payment of agents in connection with our Thailand and India operations and certain transactions in our Egypt and China businesses, which may have implications under the FCPA. We have voluntarily disclosed these matters to the SEC and the DOJ and have provided them with additional information at their request, including information in response to an SEC subpoena. The SEC and DOJ inquiries into these matters are ongoing. We continue to cooperate with the DOJ and the SEC with respect to these matters. At this time, we are unable to predict the nature of any action that may be taken by the DOJ or SEC or any remedies these agencies may pursue as a result of such actions. We are continuing to implement a third party screening process on sales agents that we use outside of the United States, including, among other things, a review of the agreements under which they were retained and a risk-based assessment of such agents to determine the scope of due diligence measures to be performed by a third-party investigative firm. We also have provided anti-corruption training to our global sales force, and ultimately will provide such training to all salaried employees. In addition, we have hired a Chief Compliance Officer, who is responsible for the day-to-day management of our compliance function. The Chief Compliance Officer reports to our Chief Executive Officer, and also has a reporting relationship with the Audit Committee.”
Another Prosecutorial Common Law Defeat

Related to the above, one of the best guest posts in FCPA Professor history was this 2011 post from Michael Levy in which he described the concept of prosecutorial common law.  Prosecutorial common law is all around us.  Take a look at the footnotes of the FCPA Guidance - most of the “authority” cited for “legal” propositions is DOJ or SEC settlements.

For obvious reasons, prosecutorial common law does not sit well with federal court judges.  For instance, in U.S. v. Bodmer, Judge Shira Scheindlin of the Southern District of New York, in rejecting the DOJ’s position that the FCPA’s criminal penalty provisions applied to a foreign national prior to the 1998 FCPA amendments, noted as follows – “the Government’s charging decision, standing alone, does not establish the applicability of the statute.”  Likewise as noted in this previous post about the Giffen enforcement action, Judge William Pauley of the Southern District of New York stated that prosecutorial common law ”is not the kind or quality of precedent this Court need consider.”

Prosecutorial common law recently suffered another defeat when the Southern District of New York ruled that the Food & Drug Administration can’t bar a drug company from marketing a pill for off-label use as long as the claims are truthful.  (See here for the Wall Street Journal article).

The decision follows a 2012 decision in U.S. v. Caronia (see here for the prior post) in which the Second Circuit concluded that the DOJ’s theory of prosecution concerning so-called off-label promotion of drugs was invalid. Prior to Caronia and even after Caronia, the DOJ has used the theory of prosecution to secure billions in settlement against risk-averse pharmaceutical companies.

A good weekend to all.



Issues To Consider From The Mead Johnson Enforcement Action

Monday, August 3rd, 2015

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

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


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

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

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

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

Invoking a Standard That Does Not Even Exist In the FCPA

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

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

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

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

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

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

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

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

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

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

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

Internal Controls – Which Is It?

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

On the one hand, the SEC finds:

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

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

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

The Simplicity of But For

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

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

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

Such a finding is fanciful.

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

Alarming Language from the SEC

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

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

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

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


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

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


Issues To Consider From The Louis Berger Enforcement Action

Wednesday, July 22nd, 2015

IssuesThis recent post highlighted the DOJ FCPA enforcement action against Louis Berger International (LBI) and two former employees.

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

Not The First Time

Last week’s Foreign Corrupt Practices Act enforcement action against LBI was not the only recent enforcement action against the company or related entities.

As highlighted here, in November 2010 the company reached a global settlement with the DOJ related to an investigation of its cost allocating methodologies for overseas U.S. federal contracts. As part of the settlement, the company paid a total of $65 million and the settlement was composed of three separate agreements:

  • A two-year deferred prosecution agreement with the DOJ in which an independent monitor was appointed.
  • A related civil settlement agreement with the DOJ and the relator of a whistleblower lawsuit. In accordance with the agreement, the company accepted responsibility for the actions of former employees who violated the U.S. False Claims Act.
  • An Administrative Agreement with the company’s lead federal agency, the U.S. Agency for International Development.

As highlighted here, in December 2014 Derish Wolff (the former President, CEO and Chairman of the company) pleaded guilty to conspiring to defraud the U.S. Agency for International Development with respect to billions of dollars in contracts for reconstructive work in Iraq and Afghanistan.

As highlighted here, in November 2010 Salvatore Pepe (a former controller and the former CFO of the company) and Precy Pellettieri (a former controller of the company) also pleaded guilty to criminal informations charging them with conspiring to defraud the government with respect to the above conduct.

Government Contracts

Despite the prior enforcement action and the company’s FCPA scrutiny, Louis Berger has raked in numerous government contracts.

For instance, in just the past 9 months the company has been awarded the following government contracts.
  • A $14.8 million operations and maintenance fuels contract by the Defense Logistics Agency Energy for Fort Knox, Kentucky (see here).
  • A $21.6 million operations and maintenance fuels contract by the Defense Logistics Agency Energy at Fort Bliss, Texas (see here).
  • A $20 million contract with Florida’s Turnpike Enterprise to provide facility maintenance and repair services for toll plaza buildings along turnpike roadways in South Florida (see here).
  • A contract to provide air terminal and ground handling services at Kunsan Air base and Gimhae Republic of Korea air base in South Korea under a five-year contract with the United States Transportation Command (see here).
  • A contract from the U.S. Army, Europe to provide transient aircraft services at Stuttgart Army Airfield, Stuttgart Germany, a U.S. Army Airfield operated and maintained by the U.S. Army (see here).
  • A $95 million contract to assist the U.S. Army Corps of Engineers Pittsburgh District in responding to natural disasters and emergencies by providing temporary emergency power (see here).

World Bank Sanction

In February 2015, the company announced that it had accepted a World Bank Sanction based on the Vietnam conduct alleged in last week’s FCPA enforcement action. As noted in the company’s release:

“Louis Berger Group, the U.S.-based operating company within Louis Berger, has been barred from working on World Bank-funded projects for 12 months, subject to compliance with certain conditions. In addition, the Louis Berger parent has accepted terms of a conditional non-debarment for the same period. The sanctions are based on findings of misconduct under the World Bank standards by former employees on two 2007/08 World Bank-funded contracts in Vietnam that Louis Berger self-identified and self-reported to the U.S. government and World Bank.”

Rogue Employees?

Notwithstanding the above prior enforcement action, in relation to last week’s FCPA enforcement action it is fair to pose the question of whether the conduct at issue was engaged in by rogue employees (Richard Hirsch – an employed located in the Philippines, who at times oversaw the Company’s overseas operations in Indonesia and Vietnam and James McClung an employee located in India, who at times oversaw the Company’s overseas operations in Vietnam and India).

For instance, the DPA makes several references to the employees concealing conduct and otherwise creating false documents. Moreover, the DPA twice mentions the “nature and scope of the conduct” as a presumed mitigating factor, something not often found in FCPA resolution documents.

Moreover, compared to most corporate FCPA enforcement actions, there is little mention in the LBI action regarding the company’s control environment or compliance policies and procedures.

Was That Really a Voluntary Disclosure?

The DPA states that LBI voluntarily disclosed the conduct at issue and the Sentencing Guidelines calculation in the DPA credits the company for voluntarily disclosing.

Yet, is it really a voluntary disclosure when the company only took action after – in the words of the DPA – “the government had made LBI … aware of a False Claim Act investigation …”?

Did the Company Need a Compliance Monitor?

The DPA requires that LBI engage a compliance monitor for a three-year period.

Notwithstanding LBI’s prior troubles, query whether the compliance monitor was truly necessary or a government required transfer of shareholder wealth to FCPA Inc. (see here for the prior post).

For instance, in the DPA the DOJ stated that the company “has engaged in extensive remediation, including terminating the employment of officers and employees responsible for the corrupt payments, enhancing its due diligence protocol for third-party agents and consultants, and instituting heightened review of proposals and other transactional documents for all Company contracts.”

Moreover, LBI’s press release (which the company had to clear with the DOJ pursuant to the DPA) states:

“Since 2010, Louis Berger has undergone a massive $25+ million reform effort that resulted in new internal controls, new policies and procedures, and comprehensive systems investments, including a new global accounting system. The company has actively supported the government in its investigation of the culpable individuals and their activities. In addition to separating these former managers from the company, the firm also has added new managers to key positions, including chief financial officer and controller, and regional management teams throughout Asia and the Middle East. Additionally, the company implemented a new corporate operational model to ensure greater centralized oversight and control of overseas business activities. Moreover, the company has reformed its ownership structure by implementing an Employee Stock Ownership Program. The company established an independent compliance and ethics department under the oversight of an independent audit committee, introduced a global helpline through which employees can report potentially non-compliant activities, and implemented a global code of business conduct. Investments also have funded annual worldwide compliance, ethics and anti-corruption training for all employees.”


Regardless of the merits of the voluntary disclosure, according to LBI’s press release the company self-reported the conduct at issue to the U.S. government starting in 2010.

Thus, LBI’s FCPA scrutiny lasted 5 years.