Recently President Obama nominated Loretta Lynch (U.S. Attorney, Eastern District of New York) to be the next Attorney General.
This post highlights Lynch’s responses to various Foreign Corrupt Practices Act or FCPA related questions originally posed in this September/October 2013 Q&A with the Society of Corporate Compliance and Ethics’ magazine Compliance & Ethics Professional and posted on the DOJ’s website.
In the Q&A, Lynch speaks generally about corruption and compliance and specifically about Morgan Stanley’s so-called “declination” and the FCPA enforcement action against Ralph Lauren. For additional information on Morgan Stanley’s so-called “declination” (see here and here) and for additional information on the Ralph Lauren enforcement action (see here, here and here).
Q: What did you learn about compliance programs, good and bad, in your [prior private] practice?
A: The most important thing I learned about compliance programs is also the most basic thing—the tone at the top truly sets the
parameters for whether one has an effective or ineffective compliance program. And by effective, I don’t mean a program in a company where there is never any wrongdoing, because that company does not exist. If there is one message I’d like to leave with corporate America, it is that the government actually does understand that things can and will go wrong, even where there is a strong compliance program. Every company develops issues. It’s how you deal with them that defines your corporate culture and informs me if you are serious about fixing the problem and preventing it from recurring going forward.
Q: One of the things that strikes me about your career in the U.S. Attorney’s Office is that fighting corruption has been an ongoing focus. And, it’s notable to point out that we’re not just talking about the Foreign Corrupt Practices Act (FCPA), but also corruption here in the U.S. Are there common threads that you see among government corruption cases everywhere?
A: Corruption, whether here in Brooklyn or on the other side of the globe, has real and far-reaching consequences. The common
thread is that someone in power loses their connection to the constituency they are supposed to serve, whether citizens or shareholders. When government officials engage in self-dealing, when they abdicate their responsibility, when they succumb to greed, the average citizen pays for it dearly and on many levels. Constituents everywhere end up spending more for services—infrastructure, healthcare, education—and sometimes have to go without these vital services, when government officials line their own pockets with public funds. Law-abiding companies here in the U.S. and abroad are placed at a competitive disadvantage when business is won or lost based on bribes, not the quality of a company’s products and services.
And because corruption involves, at its heart, the breaking of a trust relationship, its ramifications often go far beyond the financial. Corruption infects society as a whole, increasing the level of cynicism and distrust that constituents have about their elected officials and government processes. In this way, corruption also impacts those government officials who are truly trying to do the right thing. They get tarred with the same brush. We all deserve honest and effective representation, and my office is committed to investigating and prosecuting those who trade on the trust we place in them to enrich themselves, who let greed get in the way of helping the people that they represent.
Q: The Morgan Stanley FCPA case was a very high-profile declination by main Justice and your U.S. Attorney’s Office. They don’t come that often, and it’s very rare to see compliance efforts cited so widely as the reason why. Can you give a brief description of the case for those who are not familiar with it?
A: Absolutely. In April of 2012, my office and the Department of Justice’s (DOJ) fraud section prosecuted Garth Peterson, the former Managing Director in charge of the Morgan Stanley’s real estate group in Shanghai, China. Peterson had engaged in a conspiracy to sell an ownership interest in a Shanghai building owned by Morgan Stanley to a local government official who had provided assistance to Peterson in securing business for Morgan Stanley in China. During the conspiracy, Peterson repeatedly and falsely told Morgan Stanley that the corporation buying the ownership interest in the building was owned by the Shanghai government when, in fact, it was owned by Peterson and the local government official, among others. By lying and providing false information to Morgan Stanley, Peterson was circumventing the company’s internal controls, which were created and intended to prevent FCPA violations. Peterson was charged with one count of conspiring to circumvent Morgan Stanley’s internal controls, and after pleading guilty, he was ultimately was sentenced to a period of incarceration. We declined to take any action against Morgan Stanley in that case.
Q: Again, what’s notable is that it was the first major FCPA case I can recall in which there was a public declination, and just as importantly, the compliance program was cited so publicly as a major part of the reason why. In fact, it’s hard to remember many cases of any type in which the compliance program’s effectiveness was cited so publicly, which suggests to me that even people without FCPA risks should take note. What made this case so different?
A: You’re right. This was an unusual case. Morgan Stanley self-reported Peterson’s conduct, and cooperated fully and extensively
with the government’s investigation. But that’s not what made the case different. What set Morgan Stanley apart was that, after considering all the available facts and circumstances, the government concluded that Morgan Stanley was a company that had done all that it could. It had a compliance program specifically tailored to its business risks, with commitment to compliance from the very top of the company, that itself did not tolerate wrongdoing. The bank acted to fire Peterson before any of the facts became
public. We concluded that Peterson was the quintessential “rogue employee” who schemed to affirmatively sidestep compliance because he knew his behavior would not be countenanced. Every company says its bad actors are “rogues,” and that they do not promote corruption, but at Morgan Stanley we could see it. There was a stark contrast between the bank’s corporate culture and Peterson’s actions.
This presented a fundamentally different situation from companies that say they don’t tolerate wrongdoing, yet push employees to meet goals and quotas overseas with little to no guidance on the risks and consequences. It was fundamentally different from companies who distance themselves from their agents and consultants overseas, and then argue that they have to “go along” to avoid being disadvantaged in overseas markets. And it was fundamentally different from companies that say “That’s not who we are,” yet have nothing on record that informs me otherwise.
What we saw was that Morgan Stanley conducted extensive due diligence with respect to the sale that Peterson orchestrated.
We saw that Peterson had circumvented a compliance program that was an active component of the company’s business—Peterson himself was trained on FCPA compliance seven times and reminded about FCPA compliance at least 35 times. Compliance
at Morgan Stanley was also proactive, with the bank routinely adjusting and updating its compliance program to address new
issues and problems as they arose. It was not simply a program that was put in place 10 years ago, set apart from the business, and
left unchanged over time, without regard to changes in the company’s business or the increasing complexity of transactions. When we looked at Morgan Stanley, we also saw a bank that invested resources, that had internal controls in place to ensure accountability, that regularly monitored transactions, and that randomly audited employees, transactions, and business units.
This case stands out because it also touched on a common complaint in the FCPA world, and that is the supposed lack of transparency regarding the government’s consideration of a company’s compliance efforts in making charging decisions. The lengthy description of Morgan Stanley’s compliance program in the Peterson charging document was a deliberate response to that criticism. The Peterson case was even cited for that purpose in the FCPA Resource Guide prepared by DOJ and the Securities and Exchange Commission (SEC) in November 2012.
Q: What should compliance professionals take away as key learning from that case?
A: There are actually two “takeaways” in this case. The first is that the government will aggressively pursue those who engage in criminal conduct involving corporate corruption. The second is that companies that employ robust and effective compliance programs are not only better able to detect and identify potential compliance issues that may negatively affect the company’s business and reputation, but also those unusual instances where an employee is intent on circumventing a company’s internal controls. An added benefit for a company that employs a robust compliance program is that the company will be in a better position to address concerns raised by regulators or the government, if the company’s conduct ever comes under scrutiny. Morgan Stanley was able to demonstrate that Peterson truly was a “rogue,” that he had betrayed them, and he had rejected their culture of compliance.
Q: More recently we had the declination in the Ralph Lauren case. In that case, Ralph Lauren discovered questionable payments by a third party working on their behalf in Argentina. You were the US attorney on that case as well. What were some of the factors that led to the decision not to prosecute?
A: Actually we did not decline prosecution in that case. Rather, we entered into a non-prosecution agreement with Ralph Lauren. The agreement is for a two-year term and requires the implementation of various corporate reforms. Ralph Lauren also paid an $882,000 penalty to the DOJ and disgorged $700,000 in ill-gotten gains and interest to the SEC. There were several reasons for that outcome. Ralph Lauren discovered criminal conduct involving violations of the FCPA while it was in the midst of trying to improve its internal controls and compliance worldwide. Our investigation revealed that, over the course of five years, the manager of Ralph Lauren’s subsidiary in Argentina had made roughly $580,000 in corrupt payments to customs officials for unwarranted benefits, like obtaining entry for its products into the country without the necessary paperwork or without any inspection at all. The bribes were funneled through a customs broker who, at the manager’s direction, created fictitious invoices that were paid by Ralph Lauren in order to cover up the scheme.
Several factors compelled our decision to enter into a non-prosecution agreement with Ralph Lauren. First, there was the detection
of the wrongdoing by the corporation itself, as part of an effort to improve global compliance standards. Following the discovery of the corruption, the company also undertook an exceedingly thorough internal investigation of the misconduct and cooperated fully with our investigation. They made foreign witnesses available for government interviews; they provided real-time translation
of foreign documents.
It was also very significant that Ralph Lauren implemented a host of extensive, remedial measures, including the termination of employees engaged in the wrongdoing, and improvements in internal controls and compliance programs. Finally, we took into account that they swiftly and voluntarily disclosed the conduct to the government and the SEC. The company first self-reported the misconduct to the government within two weeks of discovering it. They basically did everything that a company that finds itself in that unfortunate situation can possibly do.
Q: This was the first time the SEC publicly stated it would not proceed. What got their attention and led to the decision?
A: I cannot speak for the SEC, but we do typically have parallel investigations of FCPA violations, and I believe that they were swayed by the same factors that we were. Although Ralph Lauren did not have an anti-corruption program and did not provide any anticorruption training or oversight during the five-year span of the conspiracy, all of the government agencies investigating the case were impressed with their resulting commitment to compliance in this area globally, as well as their self-disclosure and full cooperation.
Q: Finally, are we seeing the start of a new era in which compliance programs are going to be looked at more closely by prosecutors? And, just as importantly, will good programs earn organizations public credit for their efforts?
A: Absolutely. Compliance is the lens through which we view your company. A robust compliance program demonstrates to us that the company “gets it.” Making your compliance program a top priority is an investment a company can’t afford not to make. To put it more bluntly, by the time you have a problem that has drawn the government’s attention, under our principles and guidelines that govern corporate prosecutions, the existence of a robust compliance program can save you, as in the Morgan Stanley case.