April 18th, 2014

Friday Roundup

Telling, scrutiny alerts and updates, and query whether.  It’s all here in the Friday roundup.

Telling

It is a rather telling indication of the nonsensical nature of criminal law “enforcement” when what is presumed to be a well-intentioned legislator introduces a bill that fails in its intended purpose.

Case in point, Representative John Conyers (D-Michigan) recently introduced the “Corporate Crime Database Act” to require the Attorney General to:

“acquire data, for each calendar year, regarding all administrative, civil, and criminal judicial proceedings initiated or concluded by the Federal Government and State governments against any corporation or corporate official acting in an official capacity involving a felony or misdemeanor charge or any civil charge where potential fines may be $1,000 or more.”

The problem of course, and why the bill fails in its intended purpose, is that a meaningful percentage of DOJ enforcement actions do not result in “judicial proceedings.”  Rather, many DOJ enforcement actions are resolved through non-prosecution agreements.  Moreover, many of the requirements in the bill hinge on “charges” and NPAs do not involve charges.

(See here and here for similar posts).

Scrutiny Alerts and Updates

GSK

In this week’s GSK news, as reported here:

“GlaxoSmithKline is facing a criminal investigation in Poland for allegedly bribing doctors to promote its lung drug Seretide, adding to problems for a company already accused of corruption in China and Iraq. Poland’s Central Anti-Corruption Bureau, or CBA, said on Monday that 13 people had been charged in connection with the investigation launched by Polish prosecutors. Britain’s biggest drugmaker said one employee had been disciplined following a company probe into the matter and it was co-operating with the Polish authorities. ”The investigation found evidence of inappropriate communication in contravention of GSK policy by a single employee. The employee concerned was reprimanded and disciplined as a result,” the drugmaker said in a statement.”

Further, as reported here:

“[GSK] is investigating claims its employees bribed doctors in Jordan and Lebanon by offering perks such as flexible travel arrangements and free samples that doctors could sell on, according to emails reviewed by The Wall Street Journal.  [...]  Glaxo has said it has launched an internal investigation into its operations in the United Arab Emirates, Qatar, Bahrain, Oman, Kuwait, Lebanon, Syria, Jordan and Iraq.  [...]  Glaxo sales representatives allegedly bribed doctors in Jordan to prescribe Glaxo drugs by issuing free samples that the doctors were then allowed to sell on, according to the emails. Glaxo representatives also allegedly permitted Jordanian doctors to bring their spouses on business trips that Glaxo paid for, according to the emails. Doctors were issued with business-class tickets to attend conferences but would exchange them at travel agencies for two economy-class tickets, allowing their spouses or other family members to come along free, a practice local Glaxo employees were aware of, according to the emails. Glaxo said that it is against company policy to allow airplane tickets to be exchanged for tickets of a lower value or refunded. The emails allege Glaxo sales representatives gave doctors in Jordan up to 60 free samples of its vaccine Synflorix, which they then sold on at up to $70 a vial. In Lebanon, Glaxo employees allegedly gave doctors free Synflorix vials as part of an incentive scheme to get them to prescribe the vaccine and not its competitors, another email to company representatives said. In both countries, Glaxo made payments to “key opinion-leader” doctors—influential and leading practitioners in their field—for lectures and other speaking engagements that may not have taken place, the emails allege, in return for them prescribing more Glaxo drugs.”

In response to the above recent media reports, GSK released this statement which states, in pertinent part, as follows.

“GSK can confirm we are investigating allegations regarding the activity of a small number of individuals in our operations in Jordan and Lebanon. We started investigating using internal and external teams as soon as we became aware of these claims. These investigations have not yet concluded.  We have zero tolerance for unethical or illegal behaviour. We expect our employees to uphold our high standards and we believe the vast majority do so. GSK welcomes and respects people speaking up where they have concerns and we have a number of channels internally to enable them to do this, including hotlines and online portals. We implement regular training for employees in compliance matters and we continue to improve compliance processes and procedures wherever we see a need. We publicly disclose all cases of misconduct identified in the company. Last year there were 161 violations relating to breaches of our sales and marketing polices, resulting in 48 dismissals and 113 written warnings. These numbers are very similar to those reported by other companies in our sector. We are confident in our processes and controls and that we do not have a systemic issue with unethical behaviour in GSK. However, we recognise there are concerns regarding interactions between pharmaceutical companies and doctors, particularly related to perceptions of conflicts of interest. That’s why we are the first company to have committed to undertake fundamental reforms to our business model to eliminate this concern by stopping payments to doctors to speak about our products, stopping payments to doctors to attend medical conferences and stopping pay for our sales reps being linked to individual sales targets.”

BSG Resources / Beny Steinmetz

Regarding BSG Resources and Beny Steinmetz, as reported here:

“Billionaire Beny Steinmetz approved millions of dollars in payments to a wife of the former president of Guinea as he fought to keep part of the world’s largest iron-ore deposit, a suspect in a U.S. graft investigation said in conversations secretly taped by the FBI.  The 109 pages of transcripts were among a cache of evidence posted on a Guinean government website April 9. The transcripts were introduced in the course of an investigation by the West African nation into whether bribery was used to obtain rights to the Simandou deposit. The Federal Bureau of Investigation shared evidence with the Guinean government from its own probe into the circumstances surrounding the award of the licenses, according to the Guinean release.  Both Steinmetz and his company BSG Resources Ltd. have denied any wrongdoing by the Guernsey-based company or its employees. BSGR said April 10 it would prove all allegations of bribery and corruption are false.”

Alstom / Marubeni Related

As reported here and here:

“Indonesia’s main anti-corruption court sentenced a lawmaker to three years’ jail today for accepting bribes from French company Alstom and Japan’s Marubeni in a multimillion-dollar contract.  Izedrik Emir Moeis was found guilty of accepting USD 357,000 from the companies to help them secure a USD 118 million joint contract in 2004 to supply and install boilers at a power plant on the island of Sumatra.”

(See here and here for previous posts on the related FCPA enforcement actions).

Query Whether

Given a common theory of FCPA enforcement, query whether hotels in the Middle East are state-owned or state-controlled.  Arabianbusiness.com reports:

“Almost 55 percent of hotel suppliers have been asked to offer a monetary bribe by a hotel procurement manager, while 72.6 percent of suppliers know of other supply firms that are using bribes, according to the results of a new industry survey carried out earlier this year.  The Hotelier Middle East Supplier Survey 2014, which received 108 responses during January and February of this year, also found 46.8 percent of suppliers believe that corruption, in terms of bribery, is a problem in the region’s hotel supply sector that is negatively impacting business.”

*****

A good weekend to all.





April 17th, 2014

Bribery Of A Foreign Official On U.S. Soil

[This post is part of a periodic series regarding "old" FCPA enforcement actions]

The core enforcement action described below highlights a rare instance of FCPA violations being charged along with violations of the U.S. domestic bribery statute.  The enforcement action is also a rare instance of the United States being the location where the foreign official was allegedly bribed.

Control Systems Specialist / Darrold Crites

In this 1998 criminal information, the DOJ alleged that Control Systems Specialist, Inc. (“Control Systems” a company engaged in the purchase, repair, and resale of surplus military equipment) and its President Darrold Crites made improper payments to a Brazilian Air Force Lt. Colonel (“Col. Z”) stationed at Wright Patterson Air Force Based in Ohio.  The information describes Col. Z  as follows.

“Col. Z was the Foreign Liaison Officer for the Air Force of the Republic of Brazil … and was authorized to make purchases of military equipment on behalf of the Brazilian Aeronautical Commission (“BAC”), the purchasing agent of the Brazilian Air Force.  The BAC was an “instrumentality” of the Government of Brazil.”

The DOJ alleged that Crites met with a civilian employee of the United States Air Force who worked at Wright Patterson Air Force Base as the Command Country Manager (“Country Manager”) for Brazil and was responsible for representing the United States Air Force in dealings with Col. Z.

According to the DOJ, “Country Manager agreed to provide Crites with surplus part numbers, model numbers, and U.S. military sources of surplus parts in exchange for the promise of payments of money, using information he would obtain through his position as a civilian employee of the United States Air Force.”

In turn, the DOJ alleged that “Crites would thereafter purchase the surplus equipment identified by the Country Manager, recondition it, and resell the same to the BAC.”  According to the DOJ, Col. Z would approve the BAC’s purchase from Control Systems in exchange for payments of money.  Specifically, the DOJ alleged that Crites paid Col. Z “a series of bribes, disguised as ‘consultant fees,’ for each bid accepted by Col. Z on behalf of the BAC.”

The DOJ also alleged that Crites formed a separate company (“Company Y”) with the assistance of an Ohio businessman (“Businessman X”) to pay bribes to Col. Z “in exchange for his approval of Company Y’s bids to sell surplus U.S. military equipment to the BAC.”

According to the DOJ, Crites and Businessman X, as officers of Company Y “arranged not less than forty-four purchases of surplus U.S. military equipment for repair and resale to the BAC.”  The DOJ alleged as follows.

“Some of the surplus equipment was obtained by the BAC through the Defense Reutilization and Marketing Service (DRMS) under the Foreign Military Sales (FMS) program and then provided to Control Systems for repair.  Other equipment was purchased directly by Control Systems or Company Y, repaired, and then sold to the BAC.  In all cases, after each purchase was effected, Col. Z was paid for his approval of the transactions.”

According to the DOJ, Crites, Control Systems and others “paid a total of $99,000 to the Country Manager and a total of $257,139 to Col. Z.”

Based on the above allegations, the DOJ charged Control Systems and Crites with conspiracy to violate the FCPA’s anti-bribery provisions and a substantive violation of the FCPA’s anti-bribery provision.  Based on the allegations involving the Country Manager, the DOJ also charged Control Systems and Crites with violating 18 USC 201, the domestic bribery statute.

Pursuant to this plea agreement, Crites pleaded guilty to the three charges described above.  In the plea agreement, Crites agreed to cooperate with the DOJ.  According to the statement of facts in the plea agreement, “Crites and Control Systems received approximately $672,298 as a result of the contracts received from the government of Brazil.”  According to a docket entry, Crites was sentenced to three years probation (with the first six months of probation to be spent in home confinement with electronic monitoring with work release privileges) and 150 hours of community service.

Pursuant to this plea agreement, Control Systems also pleaded guilty to the three charges described above.  According to a docket entry, Control Systems was ordered to pay a $1,500 fine and was sentenced to one year probation.

International Materials Solutions Corp. / Thomas Qualey

Based on the same core allegations in the Control Systems / Crites enforcement action, in 1999 the DOJ also alleged in this criminal information that International Materials Solutions Corporation (“IMS” – like Control Systems an Ohio company that engaged in the purchase, repair, and resale of surplus military equipment) and Thomas Qualey (the President of IMS) conspired to violate the FCPA’s anti-bribery provisions and violated the FCPA’s anti-bribery provisions.  According to the information, IMS and Qualey paid a total of $67,563 to Col. Z to induce the approval by Col. Z of a bid by IMS for the acquisition and repair of ten fork lift trucks.

Pursuant to this plea agreement, Qualey pleaded guilty to the two charges described above.  According to the Statement of Facts in the plea agreement, Qualey and IMS “received approximately $392,250 as a result of the contracts received from the Government of Brazil.”  According to this judgment, Qualey was sentenced to three years probation ((with the first four months of probation to be spent in home confinement with electronic monitoring with work release privileges) and 150 hours of community service and ordered to pay a $5,000 fine.

Pursuant to this plea agreement, IMS pleaded guilty to the two charges described above.  According to this judgment, IMS was ordered to pay a $1,000 fine plus and was sentenced to one year probation.

See this prior post for another FCPA enforcement in connection with the U.S. Foreign Military Sales program.





April 16th, 2014

Further To The Clustering Phenomenon

Earlier this week, the DOJ announced that two additional individual defendants have been added to the Foreign Corrupt Practices Act (and related) enforcement action against individuals associated with broker dealer Direct Access Partners.  (See here for the original May 2013 enforcement action against Jose Hurtado and Tomas Clarke and here for an additional individual, Ernesto Lujan, being added to the enforcement action in June 2013).

Like in the previous enforcement actions, the additional defendants (Benito Chinea and Joseph DeMeneses, the Chief Executive Officer and a managing partner, respectively of Direct Access Partners) were criminally charged in connection with alleged improper payments to Maria Gonzalez (V.P. of Finance / Executive Manager of Finance and Funds Administration at Bandes, an alleged Venezuelan state-owned banking entity that acted as the financial agent of the state to finance economic development projects).

As noted in the DOJ’s release, Chinea and DeMeneses were each charged with one count of conspiracy to violate the FCPA and the Travel Act, five counts of violating the FCPA, and five counts of violating of the Travel Act. Chinea and DeMeneses were also charged with one count of conspiracy to commit money laundering and three counts of money laundering. DeMeneses was further charged with one count of conspiracy to obstruct justice.  (See here for the SEC’s announcement of a related enforcement action against Chinea and DeMeneses.  Like the SEC’s prior enforcement actions against the other individuals, Chinea and DeMeneses are charged with various securities law violations, but not FCPA offenses as the individuals – while associated with a broker dealer –  are not associated with an issuer).

As noted in the DOJ’s release, in August 2013 Lujan, Hurtado and Clarke each pleaded guilty to conspiring to violate the FCPA, to violate the Travel Act and to commit money laundering, as well as substantive counts of these offenses.

The DOJ’s enforcement action against Chinea and DeMeneses is further to the curious clustering phenomenon clearly observable in FCPA enforcement.

As highlighted in this previous post (with statistics calculated through the end of 2013), 53% of the individuals charged by the DOJ with FCPA criminal offenses since 2008 have been in just four cases and 75% of the individuals charged by the DOJ since 2008 have been in just nine cases.

Of further note (and again with statistics calculated through the end of 2013), of the 89 individuals charged by the DOJ with FCPA criminal offenses since 2008, 61 of the individuals (69%) were employees or otherwise affiliated with private business entities (for instance – Haiti Teleco related enforcement actions, Control Components Inc. Latin Node, Nexus Technologies, BizJet, not to mention failed prosecutions against various Africa Sting defendants and individuals associated with Lindsey Manufacturing).

This is a striking statistic given that 48 of the 60 corporate DOJ FCPA enforcement actions since 2008 (80%) (again using statistics calculated through the end of 2013) were against publicly traded corporations.  In short, a private entity DOJ FCPA enforcement is approximately three times more likely to have a related DOJ FCPA criminal prosecution of an individual than a public entity DOJ FCPA enforcement action.

Thus far in 2014, the trends have been further magnified.  In addition to this week’s action:

  • 5 individuals associated with private company Group DF were charged with FCPA offenses (see here); and
  • 3 individuals associated with private company PetroTiger Ltd. were charged with FCPA offenses (see here)




April 15th, 2014

HP Enforcement Action – Where To Begin?

Where to begin?

That is the question when analyzing last week’s $108 million Foreign Corrupt Practices Act enforcement action against HP and related entities.  (See here).

Should the title of this post have been “The FCPA’s Free-For-All Continues”?

Should the title have been “HP = Hocus Pocus” (as in look what the enforcement agencies pulled out their hats this time)?

Should the title have been “Warning In-House and Compliance Professionals:  This Post Will Induce Mental Anguish”?

Unable to arrive at the best specific title for this post, I simply picked the generic “Where to Begin?”

In short, if the HP enforcement action does not leave you troubled as to various aspects of FCPA enforcement you: (i) may not be well-versed in actual FCPA legal authority; (ii) don’t care about the rule of law; or (iii) somehow derive satisfaction from government required transfers of shareholder money to the U.S. treasury regardless of theory.

Least there be any misunderstanding, let me begin this post by stating that the enforcement actions against HP Poland, HP Russia and HP Mexico allege bad conduct by certain individuals –  a “small fraction of HP’s global workforce” to use the exact words of the DOJ. As to that “small fraction,” those individuals should be held accountable for their actions by relevant law enforcement authorities.

However, as to the actual defendants charged in the enforcement actions – HP Russia, HP Poland and HP Mexico in the DOJ actions – and HP in the SEC administrative proceeding – there are actual legal elements that must be met and there is also prior enforcement agency guidance that ought to be followed.  The entire credibility and legitimacy of the DOJ and SEC’s FCPA enforcement programs depend on these two basics points.

For instance, in what is believed to be an FCPA first, the DOJ charged two non-issuers (HP-Russia and HP-Poland) with substantive violations of the FCPA’s books and records and internal controls provisions – provisions which only apply to issuers.   This is concerning in and of itself.

Yet the resulting landscape from the HP enforcement action is of more concern and it should induce mental anguish for many for the following reasons.

Issuers have an obligation under the FCPA to “devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that,” among other things, transactions are executed in accordance with management’s general or specific authorization.  Failure to adopt such internal controls is a violation of law.

Conversely, and here is where the “hocus pocus” part comes in, if an issuer does adopt such internal controls and a “small fraction” of employees at certain foreign subsidiaries engage in covert means to willfully circumvent those internal controls, well, that is a violation of law as well in the eyes of the enforcement agencies.

The DOJ’s and SEC’s own allegations paint a picture of HP establishing, particularly given the time periods relevant to the enforcement actions, a system of internal accounting controls sufficient to provide reasonable assurances as to the conduct at issue. yet being a victim of the willful and deceptive conduct of a “small fraction” of employees who designed covert means to circumvent HP’s internal controls.

For instance, as to HP Poland, the criminal information alleges, in pertinent part as to the relevant time period (2006 to 2010):

“At all times relevant to this Information, HP policies prohibited corruption, self-dealing, and other misconduct.  HP’s Standards of Business Conduct (“SBC”) in effect during the relevant time period specified company rules and regulations governing legal and ethical practices, preparation of accurate books and records, contracting, and approvals and engagements of third parties.  The SBC applied to all HP Co. business divisions and subsidiaries, including HP Poland.  HP Poland employees, including HP Poland Executive, received mandatory SBC training annually, among other training.”

“The SBC manuals specifically referenced the FCPA, and prohibited, among other items, bribes, corrupt practices, ‘side letter,’ ‘off-the-books’ arrangements,’ and ‘other express or implied agreements outside standard HP contracting processes.’  The SBC manuals in effect during this period further instructed employees of HP that they were not to ‘commit [the relevant HP business] to undertake any performance, payment or other obligation unless [the employee was] authorized under the appropriate HP [business] delegation of authority policies,’ and further required accurate accounting records and proper finance practices.”

Notwithstanding these controls, the information alleges that an HP Poland Executive caused falsification of HP’s books and records and circumvented HP existing internal controls.  Among other things, the information alleges that the gifts to the Polish Official ”violated HP internal controls relating to gift-giving, and were not properly reflected in HP’s books and records.”  The information alleges that the HP Poland Executive ”willfully circumvented HP’s internal controls, and falsified corporate books and records relied on by HP’s officers and external auditors to authorize transactions and prepare HP’s consolidated financial statements.”  The information alleges that HP Poland Executive devised covert means – such as communicating through anonymous e-mail accounts and prepaid mobile telephones – in connection with his bribery scheme.  The information even alleges that the HP Poland Executive and the Polish Official drove around in vehicles in “remote locations” and “would type messages in a text file, passing the computer between themselves.” According to the information, “communications were made in this fashion to avoid possible audio recording of the discussions by hidden devices, and to circumvent HP’s internal controls.”

Nevertheless, the DOJ alleges:

“Although HP had certain anti-corruption policies and controls in place during the relevant time period, those policies and controls were not adequate to prevent the conduct described herein and were insufficiently implemented at HP Poland.”

As discussed in this prior post, what is the source for this dramatic conclusory allegation?  Nothing more than ipse dixit and subjective say-so.

The same holds true for the DOJ’s allegations concerning HP Mexico.  The non-prosecution agreement contains the same two substantive allegations concerning HP’s internal controls set forth above relevant to HP Poland, plus the following as to the relevant time period (2006 to 2009):

“HP’s policies permitted legitimate commission payments to channel partners.  These policies required that the recipient of commissions enter into a written channel partner contract with an addendum permitting the payment of commissions be pre-approved, subjected to due diligence, and registered in HP’s partner system.  HP Mexico’s policy also required channel partner commissions to follow an approval matrix, with commissions exceeding a particular percentage of the transaction’s total volume regarding additional approvals.”

Notwithstanding these controls, the information alleges that certain HP Mexico sales managers on one deal deceived HP.  The NPA states:

“[The Consultant at issue] was not an approved HP Mexico channel partner and had not entered into a written channel partner agreement as required by HP’s internal controls and policies.  In circumvention of these internal controls and policies, HP Mexico executives pursuing the BTO Deal arranged for another entity (“Intermediary”), which was already an approved HP Mexico channel partner, to join in the transaction.  HP Mexico’s sales managers arranged for the Intermediary to receive commissions from HP Mexico and then pass those monies along to Consultant, after deducting a portion as a fee. Although Intermediary played no role in negotiating the BTO Deal, HP Mexico executives recorded Intermediary as the deal partner in its internal tracking system.”

“By arranging payments to be made through the Intermediary to Consultant, HP Mexico was able to circumvent HP’s policies requiring pre-approval of channel partners and written agreement for third-party payments.  HP Mexico further circumvented HP’s controls by failing to identify the role of Intermediary in the BTO Deal …  In addition, HP Mexico’s books and records falsely reflected that the Intermediary was the deal partner and principal recipient of the commission on the BTO Deal, which ultimately caused certain HP books and records to be falsified.”

Nevertheless, the DOJ alleges:

“Although HP had certain anti-corruption policies and controls in place during the relevant period, those policies and controls were not adequate to prevent the conduct described herein and were insufficiently implemented at HP Mexico.  This allowed HP Mexico to circumvent HP’s internal accounting controls and falsify its books and records as described herein.”

What is the source for this dramatic conclusory allegation?  Nothing more than ipse dixit and subjective say-so.

The same holds true for the DOJ’s allegations concerning HP Russia.  The information contains the same two substantive allegations concerning HP’s internal controls set forth above relevant to HP Poland and HP Mexico, plus the following as to the relevant time period (2000 to 2007).

“HP’s policies placed restrictions and due diligence requirements on contracts with third parties, including ‘HP customers, channel partners, suppliers, other business partners or outside parties.’  They required credit checks and approvals for certain third parties, and required the preparation of ‘Subcontractor Qualification Worksheets’ and ‘Pre-Bid Risk Identification & Assessment Questionnaires’ that related to qualifications and financial capabilities of certain third parties.  Among other due diligence requirements, the policies required telephonic interview of certain third parties regarding experience, references, checks to determine whether the third party had the capacity and geographic coverage for the project, and an overall evaluation of doubts, reservations, and ‘risks/weaknesses’ of the third party.”

“HP’s Solution Opportunity Approval and Review (‘SOAR’) process applies to all service-related projects valued at greater than $500,000 anywhere in the world, including Russia.  Among other things, the SOAR process was designed to provide HP’s senior company management visibility into pricing, discounts, and profit margins for transactions.  It required review of relationships with third parties, including scope of work, contract terms, qualifications, and necessity of services.  Business, legal, finance, credit, tax, and other units participated in the SOAR review.  No services-related transaction greater than $500,000 could proceed without SOAR approval.”

“Pursuant to the Sarbanes-Oxley Act of 2002, HP management was required to certify the accuracy of HP’s financial statements and the adequacy of its related internal controls to develop those statements.  In supporting these certifications, HP executive management required senior and regional management of HP’s business units to sign sub-certifications certifying that HP’s financial statements were accurate and that their internal controls provided assurances that transactions were properly authorized and recorded, and assets were safeguarded from improper use.”

Notwithstanding these controls, the information alleges that five HP Russia employees deceived HP.  For instance, the information specifically alleges that the individuals created a secret slush fund and to “execute and hide the scheme … willfully circumvented existing internal controls, and falsified corporate books and records relied upon by HP officers and external auditors to authorize the transaction and prepare HP’s consolidated financial statements.”

According to the information, the slush fund “was concealed in the project’s financials” and “HP Russia maintained two sets of project pricing records:  off-the-books versions, known only to the conspirators, which identified slush fund recipients, and sanitized versions of the same documents which were provided to HP credit, finance, and legal officers outside of HP Russia.”

According to the information, “one example of an off-the-books document was an encrypted, password-protected spreadsheet” which contained different information than the “on-the-books version.”  According to the information, a Pricing Worksheet “provided to management outside of HP Russia omit[ed] all references to the slush fund payments, instead inflating hardware prices to create margin for the payments.”

In addition, the information alleges “concealment of [the] slush fund during SOAR Review.”  According to the information, “in early August 2003, HP management in Europe pressed HP Russia to begin the SOAR process for the GPO contract so that it could be executed.  In circumvention of company policy, however, HP Russia Executive 1 had already [signed the relevant contract and executed it] with no authorization and no power of attorney.”

According to the information, “the HP credit officer assigned to the SOAR review initially denied credit approval to proceed with the contract …”.  The information then alleges that the HP Russia Manager provided false information to the HP Credit Officer. The information further alleges that when the HP Credit Officer asked other questions regarding the relevant transaction, the HP Russia Manager provided other false information.

Regarding an actual SOAR meeting in 2003, the information alleges that the day before this meeting, the HP Russia Manager emailed relevant management with false information and thereafter provided additional false information to the HP Credit Officer in connection with relevant transaction.

According to the information, when it came time for the HP Russia Executive to certify the accuracy of the company’s financial statements and adequacy of internal controls pursuant to SOX, the HP Russia Executive falsely certified the requested information and that such certification was relied upon by other HP managers.

According to the information, members of the Russian conspiracy ”structured bribe payments to individuals associated with [the Russian government] through a “off-the-books contract” and specifically alleges as follows:

“In circumvention of HP internal controls, including third party due diligence requirements and prohibitions against ‘side letters,’ ‘off-the-books’ arrangements, or other express or implied agreements outside standard HP contracting process,’ HP Russia never disclosed the existence of the [off-the-books contract] to internal or external auditors or management outside of HP Russia, and conduct no due diligence of [the relevant entity]“

The information alleges that the purpose of the conspiracy was to “conceal[] and disguise[] the payments by falsifying HP Russia’s and HP’s books and records; and evading and failing to implement internal controls meant to detect and deter such payments.”  Specifically, the information alleges:

“HP Russia, through its executives and employees, together with others, knowingly and deliberately failed to implement internal accounting controls and circumvented existing internal accounting controls designed to detect and prevent such improper conduct.  HP Russia entered into off-the-books contracts, maintained two sets of accounting records, failed to conduct appropriate due diligence of third parties, concealed the existence of third-party relationship from HP management, executed contracts without authorization, and made misrepresentations to HP audit, compliance, credit and legal officers.”

Among other things, the information alleges that HP Russia employees  ”avoided controls over third-party vendors and off-the-books contracts,” “created and used certain mechanisms for making and concealing payments to third parties,” and “secretly executed certain contracts without proper authority.”

Nevertheless, the DOJ alleges:

“While the SBC prohibited corrupt payments, required due diligence of third-parties, and included other control requirements to maintain accountability for assets, the policies were not adequate to detect and prevent the misconduct described herein, and in practice certain HP business divisions and subsidiaries failed to implement and enforce the policies consistently, and on occasion circumvented or disregard the policies entirely.”

What is the source for this dramatic conclusory allegation?  Nothing more than ipse dixit and subjective say-so.

Unlike the DOJ enforcement actions (in which HP was not an actual defendant but merely guaranteed payment of fine and penalty amounts and had compliance obligations imposed upon it), in the SEC’s enforcement action HP is the sole defendant (technically a respondent since the enforcement action was an administrative proceeding not subjected to one ounce of judicial scrutiny).  The SEC’s action is based on the same HP Poland, HP Russia, and HP Mexico conduct alleged in the DOJ enforcement actions.

Prior to the stating the SEC’s conclusory statement as it relates to HP itself, it is useful to review the DOJ’s allegations HP-specific allegations because there is little logical consistency between those allegations and the SEC’s conclusory statement.

Again, the DOJ alleged that HP:

  • Had existing FCPA and related policies and procedures in place and that all relevant employees received training on the policies;
  • Had existing policies and procedures in place related to commission payments to channel partners, due diligence of channel partners, and other tracking policies regarding channel partners;
  • Had an existing approval process in place that applied to all service-related projects valued at greater than $500,000 anywhere in the world and as part of that process HP managers questioned relevant subsidiary employees at questionable information;
  • Had an existing SOX certification and sub-certification process in place as relevant to the referenced subsidiaries.

Yet, and here comes the “hocus pocus” moment, the SEC states against the backdrop of the same covert means, concealment, and misrepresentations and deception alleged in the DOJ actions that:

“[A]lthough HP had certain anti-corruption policies and controls in place during the relevant time period, those policies and controls were insufficiently implemented on the regional or country level.  Further, HP failed to devise and maintain an adequate system of internal accounting controls sufficient to provide reasonable assurance that (i) access to assets was permitted only in accordance with management’s authorization; (2) transactions were recorded as necessary to maintain accountability of assets; and (3) transactions were executed in accordance with management’s authorization.”

It is difficult to reconcile the SEC’s HP allegations against actual legal authority in that the internal-controls provisions are specifically qualified through concepts of reasonableness and good faith.  The only judicial decision to directly address the substance of the internal-controls provisions states, in pertinent part, as follows:

“It does not appear that either the SEC or Congress, which adopted the SEC’s recommendations, intended that the statute should require that each affected issuer install a fail-safe accounting control system at all costs.”

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

The SEC’s allegations against HP are further difficult to reconcile with SEC guidance concerning the internal controls provisions. This guidance states, among other things:

“Inherent in this concept [of reasonableness] is a toleration of deviations from the absolute.”

“The test of a company’s internal control system is not whether occasional failings can occur. Those will happen in the most ideally managed company.”

The critical point in assessing an issuer’s internal controls is at the time of the alleged conduct and whether – at that time – the issuer had internal controls sufficient to provide various reasonable assurances.   In other words, the critical point is not 5 or 10 years later and the issue is not – with the benefit of perfect hindsight – whether the issuer could have done more.

Further problematic in the SEC’s enforcement action against HP is that it is yet another example of “non-charged bribery disgorgment” and among the most vocal critics of this SEC theory is a former high-ranking SEC enforcement attorney (see here).

Whether the proper title should have been “The FCPA’s Free-For-All Continues,” “HP = Hocus Pocus” or how the HP enforcement action, with reason, should induce mental anguish among many, there is much to analyze and critique in the DOJ’s and SEC’s enforcement actions against HP and related entities.

The same applies to much recent FCPA enforcement activity.

To recap, since December 2013 the FCPA enforcement agencies have extracted approximately $546 million against risk averse corporations:

  • (i) based on enforcement agency allegations that the parent company issuer was a victim of deceptive conduct and actions by a “small fraction” of its global workforce;
  • (ii) based on enforcement agency allegations that the corporate entities were victims of a corrupt Ukraine government that refused to pay VAT refunds that the companies were legitimately owed (see here); and
  • (iii) in a case concerning alleged conduct (approximately 10 to 15 years ago) by a consultant who was criminally charged by another law enforcement agency, put the law enforcement agency to its burden of proof at trial, and the law enforcement agency dismissed the case because there was no ”realistic prospect of conviction” (see here).
Posted by Mike Koehler at 12:04 am. Post Categories: Books and RecordsForeign Non-Issuer CompanyH-PInternal ControlsParent - Subsidiary Issues




April 14th, 2014

Richard Bistrong … In His Own Words

Richard Bistrong.

Most people likely associate his name with the manufactured Africa Sting FCPA enforcement action. The Africa Sting action involved a purported deal to purchase equipment for the presidential guard of an African Government with FBI agents posing as African Government officials and Bistrong working as an undercover informant.

The Africa Sting enforcement action resulted in criminal charges against 22 individuals.  After extensive motions practice and two trials, all charges against all defendants were ultimately dismissed by the DOJ and the action ended with Judge Richard Leon (D.D.C.) calling the entire case a “long and sad chapter in the annals of white collar criminal enforcement.” (See here).

Bistrong was not charged in the Africa Sting case, but previously pleaded guilty to “real-world” Foreign Corrupt Practices Act conduct, including conspiring with others to bribe United Nations officials, Dutch officials, and Nigeria officials.  (See here and here). This charge stemmed from Bistrong’s work as the international sales vice president for a large, successful and publicly traded multi-national corporation.  Bistrong started to cooperate with the DOJ in June 2007 and Judge Leon ultimately credited Bistrong’s extensive cooperation at sentencing.  (See here).

FCPA Professor seeks to highlight a wide range of voices on FCPA issues.  With this goal in mind, I requested to communicate with Bistrong with the permission of his attorney.  Bistrong’s attorney, Brady Toensing (diGenova & Toensing) would not allow his client to discuss questions about the Africa Sting case.

At present, Bistrong is out of prison but still serving the supervised release portion of his sentence.

In this detailed Q&A, Bistrong describes: the circumstances that put him in a position to violate the FCPA; what made him think he could get away with it; his thought process when he realized he was caught; and how he spent his time in federal prison. In the Q&A Bistrong not only looks back, but forward as well and shares what he learned from his experience and what he hopes to accomplish in the future, including through his recently launched blog.

Posted by Mike Koehler at 12:04 am. Post Categories: Africa StingArmor HoldingsGuest PostsRichard Bistrong