Archive for the ‘Voluntary Disclosure’ Category

A Closer Look At The U.K.’s First Deferred Prosecution Agreement

Tuesday, December 8th, 2015

Closer LookAs highlighted in this post, there were two firsts in last week’s U.K. Serious Fraud Office enforcement action against Standard Bank Plc (currently known as ICBC Standard Bank Plc): (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 prior post analyzed “what” was resolved (an alleged violation of Sec. 7 of the Bribery Act for failure to prevent bribery).

This post continues the analysis by highlighting “how” the enforcement action was resolved (through a deferred prosecution agreement).

That the U.K’s first DPA was used to resolve a Bribery Act offense is perhaps fitting as U.K. anti-corruption enforcement officials have long expressed a fondness for U.S. alternative resolution vehicles used to resolve alleges instances of FCPA violations. Such fondness was widely seen as a significant driver for the U.K. to adopt DPAs (as highlighted in this prior post, the U.K. rejected NPAs) although DPA’s are authorized to resolve other alleged instances of financial crime as well.

Knowledgeable observers already know that U.K. style DPAs are significantly different than U.S. style DPAs, but in analyzing the U.K.’s first DPA, this fact bears repeating.

Sir Brian Leveson’s Approved Judgment and Preliminary Judgment provide a detailed overview of the U.K’s process for DPAs, including the judicial review aspect of the process, and should be required reading for anyone trying to better understand the DPA process in the U.K.. (This aspect is largely absent in U.S. style NPAs and DPAs – indeed the DOJ has argued on several occasions that the judiciary has no substantive role to play in the DPA process – an issue that is currently before the D.C. Circiut in Fokker Services).

If a nation is to have DPAs, the U.K. model is far more sound than the U.S. model and an initial observation from the U.K.’s first DPA is that it was incredibly refreshing to read a document relevant to an alleged bribery offense drafted by someone other than the prosecuting authority.

The Standard Bank (SB) DPA is similar in many respects to DPAs used to resolve alleged FCPA violations. For starters, the term of the DPA is three years (the typical term of U.S. DPAs tends to be from 18 months to three years).

In the DPA, SB accepted responsibility for the alleged conduct at issue, agreed to on-going cooperation with the SFO and other law enforcement agencies, and agreed to pay the components of the settlement amount. In the DPA, SB also agreed to post-enforcement action compliance reviews and enhancements, including the engagement of PwC to conduct an independent review of the company’s progress.

Similar to U.S. DPAs, the SB DPA also contains a so-called “muzzle clause” in which:

“Standard Bank agrees that it shall not make, and it shall not authorise its present or future lawyers, officers, directors, employees, agents, its parent company, sister companies, subsidiaries or shareholders or any other person authorised to speak on Standard Bank’s behalf to make any public statement contradicting the matters described in the Statement of Facts.”

That the U.K.’s first DPA contains a “muzzle clause” is interesting given that, as discussed in this previous post, Lord Justice Thomas was critical of the SFO’s attempt to insert a “muzzle clause” into the Innospec resolution documents.  Lord Justice Thomas stated: “It would be inconceivable for a prosecutor to approve a press statement to be made by a person convicted of burglary or rape; companies who are guilty of corruption should be treated no differently to others who commit serious crimes.”

Despite the similarities between the SB DPA and U.S. style DPA’s, there are key differences.

For instance, in U.S. DPAs the DOJ claims unilateral power to declare a breach of the agreement (a contractual term many have criticized see here). The SB DPA states, under the heading “Breach of Agreement,” as follows.

“If, during the Term of this Agreement, the SFO believes that Standard Bank has failed to comply with any of the terms of this Agreement, the SFO may make a breach application to the Court. In the event that the Court terminates the Agreement the SFO may make an application for the lifting of the suspension of indictment associated with the DPA and thereby reinstitute criminal proceedings.

In the event that the SFO believes that Standard Bank has failed to comply with any of the terms of this Agreement the SFO agrees to provide Standard Bank with written notice of such alleged failure prior to commencing proceedings resulting from such failure. Standard Bank shall, within 14 days of receiving such notice, have the opportunity to respond to the SFO in writing to explain the nature and circumstances of the failure, as well as the actions Standard Bank has taken to address and remedy the situation. The SFO will consider the explanation in deciding whether to make an application to the Court.”

Another difference, albeit rather minor, concerns the time period to resolve the action. The SFO’s release states that SB’s counsel made the voluntary disclosure in late April 2013. Thus, the time period from start to finish was a relatively swift 2.5 years (at least compared to the typical time frame in the U.S.).

Other interesting aspects of the U.K’s first DPA are as follows.

Regarding SB’s voluntary disclosure and cooperation, Sir Leveson stated:

“Standard Bank immediately reported itself to the authorities and adopted a genuinely proactive approach to the matter [...] In this regard, the promptness of the self-report and the extent to which the prosecutor has been involved are to be taken into account [...] In this case, the disclosure was within days of the suspicions coming to the Bank’s attention, and before its solicitors had commenced (let alone completed) its own investigation.

Credit must also be given for self-reporting which might otherwise have remained unknown to the prosecutor. [...] In this regard, the trigger for the disclosure was incidents that occurred overseas which were reported by Stanbic’s employees to Standard Bank Group. Were it not for the internal escalation and proactive approach of Standard Bank and Standard Bank Group that led to self-disclosure, the conduct at issue may not otherwise have come to the attention of the SFO.

[...]

Standard Bank fully cooperated with the SFO from the earliest possible date by, among other things, providing a summary of first accounts of interviewees, facilitating the interviews of current employees, providing timely and complete responses to requests for information and material and providing access to its document review platform. The Bank has agreed to continue to cooperate fully and truthfully with the SFO and any other agency or authority, domestic or foreign, as directed by the SFO, in any and all matters relating to the conduct which is the subject matter of the present DPA. Suffice to say, this self-reporting and cooperation militates very much in favour of finding that a DPA is likely to be in the interests of justice.”

Regarding “Compensation,” Sir Levenson stated in pertinent part:

“A DPA may impose on an organisation the requirement to compensate victims of the alleged offence and to disgorge profits made from the alleged offence.”

[...]

In the present DPA, Standard Bank would be required to pay the Government of Tanzania the amount of US $6 million plus interest of US $1,153,125. This sum represents the additional fee of 1% of the proceeds of the private placement, paid to EGMA the local partner engaged by Stanbic and very swiftly withdrawn in cash. The fee was paid from the US $600 million capital raised by the placement and the consequence was that the Government of Tanzania received US $6 million less than it would have received but for that payment. The interest figure of US $1,153,125 is calculated by reference to interest paid on the loan and, by the time of repayment, will amount to US $1,153,125.”

That the Government of Tanzania was a victim is speculative and an open to question.

The private placement bond offering SB facilitated was unrated (and thus risky) and represented, according to SB, the first ever benchmark-sized private placement by a sub-Saharan sovereign. According to SB, “the transaction was privately placed with 116 investors with a wide geographic mix of accounts and resulted in the government raising substantial funds for infrastructural investment in a most efficient and cost-effective manner.”

To properly analyze whether the Government of Tanzania was a “victim” of SB’s conduct, two factors would have to be analyzed: (i) did the government have other options in the transaction or was SB the only investment bank willing to facilitate the transaction given its risky nature?; and (ii) if there were other options, what was the fee structure for the other options – more specifically did other investment banks offer to structure the transaction for less than 2.4% of the proceeds (representing the original 1.4% fee plus the additional 1% fee at issue in the enforcement action)? In this regard, it must be noted, as the SEC found in its related enforcement action, that the Government of Tanzania “had been unsuccessful in obtaining a credit rating, making a EuroBond offering unfeasible.”

Regarding disgorgement, Sir Levenson stated:

“The legislation specifically identifies disgorgement of profit as a legitimate requirement of a DPA. [...] The provision is clearly underpinned by public policy which properly favours the removal of benefit in such circumstances. In this case, no allowance has been made for the costs incurred by Standard Bank (to such extent as they can be put into money terms) and the proposal is that it should disgorge the fee which Standard Bank and Stanbic received as joint lead managers in relation to this transaction, namely 1.4% or US $8.4 million. Again, there is no suggestion that Standard Bank does not have the means and ability to disgorge this sum.”

The above logic is simplistic – as it often is in many FCPA enforcement actions – and ignores basic causation issues. (See prior posts hereherehere, and here). Moreover, the disgorgement in the SB action follows the oft criticized “no-charged bribery disgorgement” approach often used in the U.S.

Regarding the financial penalty, Sir Levenson stated:

“[F]or offences of bribery, the appropriate figure will normally be the gross profit from the contract obtained, retained or sought as a result of the offending. As has been discussed in regard to appropriate disgorgement of profits, in this case, it has been taken as the total fee retained in respect of the transaction by Standard Bank and Stanbic as the Joint Lead Managers, that is to say, the sum of US $8.4 million. The Sentencing Council Guideline identifies the starting point for a medium level of culpability as 200% of the ‘harm’ i.e. gross profit, with a range of 100% to 300% (cf. a starting point of 300% with a category range of 250-400% for high culpability).

It is then necessary to fix the level by reference to factors which increase and reduce the seriousness of the offending. As regards aggravation, although not an offence of bribery, there were serious failings on the part of Standard Bank in regard to the conduct at issue at a time when the Bank was well aware that further regulatory enforcement measures were in train: these led to a fine by the FCA for failings in internal controls relating to anti-money laundering. Further, in this context, it must be underlined that the predicate offending by Stanbic resulted in substantial harm to the public and, in particular, the loss of US$ 6m. from the money being borrowed by the Government of Tanzania for much needed public infrastructure projects.

On the other side of the coin, the mitigating features include the fact that Standard Bank (a company without previous convictions) volunteered to self-report promptly and both facilitated and fully cooperated with the investigation which the SFO conducted. Further, there is no evidence that the failure to raise concerns about antibribery and corruption risks (as opposed to money laundering concerns which led to the FCA regulatory action) was more widespread within the organisation. Finally, the transaction took place when the Bank was differently owned and, additionally, the business unit that carried it out is no longer owned by Standard Bank.

In the circumstances, I consider it appropriate that the provisional agreement is to take a multiplier of 300% which is the upper end of medium culpability and the starting point of higher culpability. This leads to a figure of US $25.2 million before the court must (following Step 5 of the Sentencing Council Guideline) ‘step back’ and consider the overall effect of its orders such that the combination achieves “removal of all gain, appropriate additional punishment and deterrence”. Bearing in mind, inter alia, the value, worth or available means of the offender and the impact of the financial penalties including on employment of staff, service users, customers and local economy (but not shareholders), the guideline is clear that: “The fine must be substantial enough “to have a real economic impact which will bring home to both management and shareholders the need to operate within the law”.

In assessing the financial penalty, Sir Levenson found comfort as follows.

“Bearing in mind the observations of Thomas LJ in Innospec Ltd [see here for the prior post], a useful check is to be obtained by considering the approach that would have been adopted by the US authorities had the Department of Justice taken the lead in the investigation and pursuit of this wrongdoing. Suffice to say that the American authorities have been concerned with the circumstances and have been conducting an inquiry in connection with possible violations of the Foreign Corrupt Practices Act, 15 USC para. 78dd-1. Noting the co-operation of Standard Bank and Stanbic with them, the Department of Justice has confirmed that the financial penalty is comparable to the penalty that would have been imposed had the matter been dealt with in the United States and has intimated that if the matter is resolved in the UK, it will close its inquiry. In the circumstances, there is nothing to cast doubt on the extent to which these aspects of the proposed approach are fair, reasonable and proportionate.”

In  conclusion, Sir Levenson stated:

“It is obviously in the interests of justice that the SFO has been able to investigate the circumstances in which a UK registered bank acquiesced in an arrangement (however unwittingly) which had many hallmarks of bribery on a large scale and which both could and should have been prevented. Neither should it be thought that, in the hope of getting away with it, Standard Bank would have been better served by taking a course which did not involve self report, investigation and provisional agreement to a DPA with the substantial compliance requirements and financial implications that follow. For my part, I have no doubt that Standard Bank has far better served its shareholders, its customers and its employees (as well as all those with whom it deals) by demonstrating its recognition of its serious failings and its determination in the future to adhere to the highest standards of banking. Such an approach can itself go a long way to repairing and, ultimately, enhancing its reputation and, in consequence, its business. It can also serve to underline the enormous importance which is rightly attached to the culture of compliance with the highest ethical standards that is so essential to banking in this country.”

That SB “far better served its shareholders” and other stakeholders by voluntarily disclosing is of course an opinion.

In this regard, it bears repeating that SB voluntarily disclosed “within days of the suspicions coming to the Bank’s attention, and before its solicitors had commenced (let alone completed) its own investigation.” In the minds of many, SB’s disclosure is likely to be viewed as premature, careless and indeed reckless.

As it turned out – as further explored in yesterday’s post – the conduct at issue in the SB enforcement action involved just one transaction, against the backdrop of SB having various policies and procedures designed to minimize the same conduct giving rising to the enforcement action, and against the further backdrop of – in the words of the judge - “Standard Bank [having] no previous convictions for bribery and corruption nor has it been the subject of any other criminal investigations by the SFO” and “there is no evidence that the failure to raise concerns about anti-bribery and corruption risks … was more widespread within the organization.”

Given these circumstances, an alternative to voluntary disclosure – and an approach that would have likely better served SB’s shareholders – would have been, after a thorough investigation, promptly implementing remedial measures, and effectively revising and enhancing compliance policies and procedures – all internally and without disclosing to the SFO or other law enforcement agencies.

Friday Roundup

Friday, December 4th, 2015

Roundup2Top blog, event notice, scrutiny alerts and updates, what do DOJ FCPA attorneys do, quotable, and for the reading stack.  It’s all here in the Friday Roundup.

Top Blog

I am pleased to share that FCPA Professor has been honored by the American Bar Association as a “Top 100 Blawg.”  (See here).

Described by others as “the Wall Street Journal concerning all things FCPA-related,” and “the most authoritative source for those seeking to understand and apply the FCPA,” FCPA Professor has previously been named a Top Law Blog for in-house counsel by Corporate Counsel and a Top 25 Business Law Blog by LexisNexis.  FCPA Professor readers include a world-wide audience of attorneys, business and compliance professionals, government agencies, scholars and students, journalists and other interested persons.

In addition to informing readers of FCPA news and developments in a timely and in-depth manner, FCPA Professor is a comprehensive website which features, among other things:

  • links to original source documents;
  • a detailed FCPA 101 page;
  • a resource portal; and
  • hundreds of subject matter categories designed to facilitate in-depth FCPA research and analysis.

All of this takes time, money, and substantial effort, yet the content on FCPA Professor is provided free to readers and without compromising and distracting advertisements.

If FCPA Professor adds value to your practice or business or otherwise enlightens your day and causes you to contemplate the issues in a more sophisticated way, please consider a donation – a voluntary yearly subscription - to FCPA Professor.  Yearly subscriptions to other legal publications or sources of information can serve as an appropriate guide for a donation amount.

Event Notice

I will be participating in a free telephonic event on Tuesday, December 8, 2015 at 3pm EST. Sponsored by the Young Advocates and Criminal Litigation Committees of the ABA, the event is titled: “Ask the Professor: What You Need to Know About Anti-Bribery Laws.”

The event will be moderated by Terra Reynolds (Paul Hastings). Click here to learn more and to register.

Scrutiny Alerts and Updates

British American Tobacco

The company, with ADRs traded in the U.S., was recently the focus of this in-depth piece by the BBC. According to the article:

“[T]he BBC obtained hundreds of documents that reveal how BAT employees bribed politicians, public officials and even people working for a rival company in Africa. [...] In 2012, BAT lobbyist Julie Adell-Owino arranged bribes totalling US$26,000 for three public officials in Rwanda, Burundi and the Comoros Islands. All three officials were connected to a United Nations effort to reduce the number of tobacco related deaths.”

As highlighted in this prior post, in 2010 U.S. tobacco companies Alliance One and Universal Corporation resolved FCPA enforcement based on alleged improper payments, including in Africa.

J.P. Morgan

The Wall Street Journal focuses on J.P. Morgan’s FCPA scrutiny for its alleged hiring practices in China. According to the article, J.P. Morgan hired 222 candidates under a program known internally as “Sons and Daughters.” The article makes much of the alleged fact that 45% of the hires were referred by Chinese government officials or employees of state-owned companies.  However, according to the article, an equal percentage (44%) were nongovernmental referrals – an issue that could be relevant to corrupt intent.

Vimpelcom

This recent post highlighted Vimpelcom’s disclosure of a $900 million reserve in connection with its FCPA and related scrutiny. The prior post noted that the disclosure was ambiguous as to the various components of the $900 million.

Bloomberg reports:

Vimpelcom “is in talks to pay about $775 million — a near record — to settle U.S. allegations it paid bribes in Uzbekistan to win business, according to three people familiar with the matter. The Amsterdam-based company’s resolution with the Justice Department and the Securities and Exchange Commission could be announced in January, said the people, who asked not to be identified because details of the proposed settlement aren’t public.”

Bloomberg also goes in-depth into the burgeoning Uzbekistan telecom scandal here.

PTC

The company (formerly known as Parametric Technology) has been under FCPA scrutiny since 2011 and recently disclosed:

“We have been in discussions with the U.S. Securities and Exchange Commission (SEC) and the Department of Justice (DOJ) to resolve an investigation concerning expenditures by our business partners in China and by our China business, including for travel and entertainment, that apparently benefited employees of customers regarded as state owned enterprises in China. This matter involves issues regarding compliance with laws, including the U.S. Foreign Corrupt Practices Act. We have recorded liabilities of $28.2 million as a result of our agreements in principle with those agencies to settle the matter. There can be no assurance that we will enter into final settlements on the agreed terms with these agencies or, if not, that the cost of any final settlements, if reached, would not exceed the existing accrual. Further, any settlement or other resolution of this matter could have collateral effects on our business in China, the United States and elsewhere.”

 Wal-Mart

The media continues to gush over Wal-Mart’s FCPA scrutiny.  In the latest example, the Wall Street Journal reports:

“A U.S. investigation into potential foreign bribery by Wal-Mart Stores Inc. has unearthed evidence of possible misconduct by the retailer in Brazil, after investigators found little to support the sweeping allegations involving Mexico that initially prompted the probe, according to documents and people familiar with the matter. Federal prosecutors are examining $500,000 in payments that they believe ultimately went to an individual hired to obtain government permits the company needed to build two stores in Brasília, Brazil’s capital, between 2009 and 2012, an investigative document shows.”

What do DOJ FCPA Attorneys Do?

To the extent a job listing is an accurate depiction, this is what DOJ FCPA attorneys do:

“The Criminal Division, U.S. Department of Justice, is seeking qualified, experienced attorneys for two-year renewable term positions in the Fraud Section located in Washington, DC. The incumbent will serve as a Trial Attorney in the Foreign Corrupt Practices Act (FCPA) Unit or the Securities & Financial Fraud Unit (SFF) and, as such, will independently direct, conduct, and monitor investigations, prepare for and conduct trials, and advise on pleadings and other court filings.

Generally, as a Trial Attorney in the FCPA Unit or the SFF Unit, the incumbent:

  • In collaboration with unit managers, carries out and fosters effective investigations and prosecutions, including advising on strategy and legal complexities, and developing litigation priorities, policy, and legislative recommendations. Recommends charging decisions and proposes dispositions with regard to assigned cases.
  • Partners with and leads Assistant U.S. Attorneys and attorneys in other federal law enforcement agencies in the development, management and trial of complex white collar and corporate investigations and prosecutions. Engages in all phases of investigation and litigation, including, but not limited to, using the grand jury, advising federal law enforcement agents, utilizing international evidence collection tools, preparing appropriate pleadings, and litigating motions and trials before U.S. District Courts across the country.
  • Collaborates with foreign prosecutors and foreign law enforcement officers on international investigations.
  • Evaluates reports of potential violations of the FCPA / securities and financial fraud laws from both internal and outside sources to determine whether investigation is warranted.
  • Advises and instructs Assistant U.S. Attorneys on complicated questions of law and Departmental policy with respect to the FCPA / securities and financial fraud laws.
  • Represents the United States in direct negotiations and discussions with corporate counsel and high-level officials. Participates in discussions with opposing counsel for defendants and in the formulation of settlements often having far-reaching legal consequences.
  • Advises and consults with the Assistant Attorney General, Deputy Assistant Attorney General, Section Chief, et al., reporting on the status of all cases and matters related to civil/criminal remedies.
  • Serves as an expert, providing advice and policy determinations in matters involving the planning, discussion and coordination of the activities related to the investigation and litigation of FCPA cases. Oversees the preparation and litigation assignments of lower graded attorneys, paralegals and clerical personnel.”

Quotable

One thing high-ranking DOJ officials most certainly do is give numerous speeches.

In the latest example, DOJ Deputy Assistant Attorney General Sung-Hee Suh delivered this keynote address at the ABA Criminal Justice Section’s inaugural Global White Collar Crime Institute in Shanghai (an event, I am pleased to say, was organized by my Southern Illinois University School of Law colleague Professor Lucian Dervan).

Set forth below is an expert of Suh’s address.

On internal investigations:

“Until last year, I worked for 15 years in private practice representing companies – often in the context of criminal or regulatory investigations. I believe I have a good sense of the challenges that companies and their counsel face in determining the appropriate scope of an internal investigation. But some of those challenges appear to stem from a misperception that the longer and more expensive and more resource intensive the company’s internal investigation, the more favorably the government will view the company’s cooperation. But broad, aimless investigations by a company – just as by the government – are counter-productive. As we in the Criminal Division have long emphasized, and continue to stress today, an investigation should be narrowly focused on getting to the bottom of what happened, identifying who within the company was involved, and – if the company seeks cooperation credit — providing that information to us on a timely basis.”

On transparency:

“[W]e understand that it has not always been clear why the Department required a corporate entity to plead guilty to resolve a criminal case, as opposed to a deferred or non-prosecution agreement, or why we declined to pursue a criminal resolution altogether with another corporate entity that engaged in similar misconduct. I have also heard companies and their counsel say that they have no idea how the government’s monetary resolutions were arrived at – that it sometimes appears as if the government just picks these numbers out of thin air. Also notable has been the trend among companies over the last several years against voluntary self-reporting, including – and perhaps especially – in the FCPA space, in part due to what is perceived, as noted during this morning’s sessions, that there is little or no benefit to self-reporting. Some lawyers have advised their clients that it’s simply more rational to wait to see if the government comes knocking and then cooperate if and when that happens.”

[...]

“[T]o those companies that are disinclined to self-report in the belief that the government will never know – I say, think again. In the anti-corruption space, the Fraud Section and the Federal Bureau of Investigation are deploying significantly more resources to detect and prosecute companies that choose not to self-disclose in FCPA cases. We’re hiring an additional 10 prosecutors in the FCPA Unit, an increase of over 50%, and the FBI has established three new squads devoted to international corruption investigations and prosecutions.”

On compliance programs:

“No compliance program is foolproof. We understand that. We also appreciate that the challenges of implementing an effective compliance program are compounded by the everincreasing cross-border nature of business and of criminal activity. Many companies’ businesses are all over the world. They are creating products and delivering services not only here in China but overseas and are operating across many different legal regimes and cultures. We also recognize that a smaller company doesn’t have the same compliance resources as a Fortune-50 company. Finally, we know that a compliance program can seem like “state of the art” at a company’s U.S. headquarters, but may not be all that effective in the field, especially in far-flung reaches of the globe.”

*****

For your viewing pleasure, a video of a roundtable with new DOJ compliance counsel Hui Chen and DOJ Fraud Section Chief Andrew Weissmann.  The first portion of the event consisted of the DOJ officials respond to (likely scripted) questions by a moderator, the second portion – when the video recorder was turned off – consisted of the DOJ officials responding to audience questions.

Reading Stack

I did not come up with the title of the entry or its narrative, but I did answer the questions posed to me in this Corporate Crime Reporter entry about the political aspects of FCPA enforcement as well as questions about an FCPA compliance defense – a defense I have long advocated for (see here for the article “Revisiting a Foreign Corrupt Practices Act Compliance Defense.”

*****

A Wall Street Journal op-ed by Professor Lucian Dervan titled “The Injustice of the Plea-Bargaining System.”

*****

A good weekend to all.

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.

Conclusion

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)

Quotable

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).

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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.”

Spot-On

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.

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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.”

Petrobras

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.

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A good weekend to all.