August 7th, 2014

Are We Carelessly Inviting Corrupt Behavior?

Today’s post is from Dr. Roger Miles.  Dr. Miles (PhD, Risk) is Behavioral Risk Lead at Thomson Reuters and he develops human factor analyses for Conduct Risk governance and compliance solutions.  His academic research focus is the “what actually happens” gap between designed systems and enacted human behavior.

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Are We Carelessly Inviting Corrupt Behavior?

By Dr Roger Miles

As regulators wrestle to assert new controls over corruption (and of course various other abuses), we’re reminded that the wider history of regulation resembles a trail littered with the carcasses of well-intended initiatives that failed.  Regulatory controls tend to fail because the people who design them often ignore how real people respond in practice, often contrarily, to having a control imposed on them.

A function of effective risk leadership in senior management – including compliance officers – should therefore be to pause to consider human aspects of control failures.  Where are the human-factor hazards brewing?  Do we know enough about these to keep ahead of them and head off problems early?

One way to overtake this hazard is to familiarize oneself with “dark side” research among people who game the rules (my special research interest as it happens).  This insight will rapidly rid us of the faulty assumption that rulebooks (whether in the context of the Foreign Corrupt Practices Act or otherwise) describe, or prescribe, what actually happens in organizations.  The reality of what actually happens is always something different, usually that the rulebook doesn’t foresee.  Once we make a habit of questioning the gap between what the rulebook says should be happening, and our observations of how people behave in reality, we become better both at spotting the early signs of “creative compliance” and at preventing all kinds of troublesome behavior.  A few examples make the point:

What Groups Do…

Formal demands (including the top-down introduction of rules and sanctions) often provoke ‘informal groups’ of work colleagues to respond in unorthodox local ways that create conditions for the control to fail later on.  The alert manager will watch for signs that ‘game-playing’ is becoming accepted as normal behavior, such as meaningless box-ticking (in response to quality control questionnaires); and filtering of inconvenient incident reports.  Also be alert for the many ways of massaging statistical reports, such as cherry-picking only the most favorable test results, re-basing of a reporting index, or redefining the thing that we’re reporting on.  Informal groups also like to ridicule anyone who dissents from their view of “how we do things here” – even (perhaps especially) when this contradicts what the rules require.  For the FCPA compliance leader, therefore, the first question should always be “who’s really in charge in this organization?”

What Individuals Do…

At a personal level, gaming responses include ‘presenteeism’ (physically turning up for work but leaving your motivation at the front door) and seeking to shift onto others any blame for failures.  Watch for early warning signs such as a person disengaging from routine involvement in work activities, disowning their own presence in management processes, or ignoring the legitimate authority of others.  Consistent with informal groups’ “how we do things”, individual rule-gamers will be active at making alternative sense of how rules apply (or don’t apply) locally to them.  They will be adept at coping, workarounds, and writing creative reports.  Alternatively they may retreat into fatalism, rationalizing that “it’s OK not to care because either nothing will change if I do, or I’ll only be labelled a trouble maker”.

In the Organization’s Structure

Sometimes we inadvertently design an organization to encourage rule-gaming responses.  To prevent this effect we need to become more skilled at spotting these preconditions for bad behavior, and design them out.  The preconditions include:

  • Lack of any coherent challenge from outsiders (advocacy groups, regulators, government)
  • A regulator who depends on regulatees for information (“enforced self-regulation”)
  • No apparent penalties for delay in responding to a question
  • Risk-taking uncoupled from consequence, with short-term rewards
  • Little required interaction with shareholders or other funding sources
  • The full Board meets only rarely; executive committees hand-picked by the Chairman
  • Power concentrated narrowly with CEO, Chairman, or Head of Sales
  • Penalties for non-compliance reported as a “normal friction cost of business”
  • An except reporting (whistleblowing) procedure exists but gets no explicit support from managers – it may          even be the  target of jokes

There is a large and expanding research field examining the gaps between control systems as designed and “what actually happens” when real people are told to use the controls.  A new approach to regulatory design intended to deal with this in the FCPA context and otherwise, behavioral regulation, is still in its infancy.  We should watch for developments.

Posted by Mike Koehler at 12:03 am. Post Categories: ComplianceGuest PostsInternal Controls




August 6th, 2014

Judge Rakoff Offers A Few Final Zingers

If you have not noticed by now, I admire Judge Jed Rakoff (S.D.N.Y.).

Although outside the Foreign Corrupt Practices Act context, FCPA Professor has covered from day one (see here and here) Judge Rakoff’s concerns about SEC settlement policy as expressed in SEC v. Citigroup.  As highlighted in this post, the Second Circuit recently rebuked Judge Rakoff for his refusal to sign off on the settlement and concluded that the SEC does not need to establish “the truth” of the allegations against a settling party as a condition for approving consent decrees because, in the words of the Court, “trials are primarily about truth” whereas “consent decrees are primarily about pragmatism.”

On remand and obligated to assess the SEC v. Citigroup settlement through the narrow prism the Second Circuit adopted, Judge Rakoff had little choice but to approve of the settlement.  However, in doing so in his opinion yesterday, Judge Rakoff offered a few final zingers as he wrote:

“Nonetheless, this Court fears that, as a result of the Court of Appeal’s decision, the settlements reached by governmental regulatory bodies and enforced by the judiciary’s contempt powers will in practice be subject to no meaningful oversight whatsoever. But it would be a dereliction of duty for this Court to seek to evade the dictates of the Court of Appeals. That Court has now fixed the menu, leaving this Court with nothing but sour grapes.”

In the prior post highlighting the Second Circuit’s decision, I noted that the most troubling aspect of the decision is the statement that if the “S.E.C. does not wish to engage with the courts, it is free to eschew the involvement of the courts and employ its own arsenal of remedies instead.”  As highlighted in my article “A Foreign Corrupt Practices Act Narrative,” in the FCPA context this is largely the path the SEC has chosen.  As noted,  in 2013 50% of SEC corporate FCPA enforcement actions were not subjected to one ounce of judicial scrutiny either because the actions were resolved via a non-prosecution agreement or administrative cease and desist orders.

On this issue, Judge Rakoff states in a footnote as follows.

“[T]he Court of Appeals invites the SEC to avoid even the extremely modest review it leaves to the district court by proceeding on a solely administrative basis. (“Finally, we note that to the extent that the S.E.C. does not wish to engage with the courts, it is free to eschew the involvement of the courts and employ its own arsenal of remedies instead.” ). One might wonder: from where does the constitutional warrant for such unchecked and unbalanced administrative power derive?”

As to this last point, see also this recent Wall Street Journal opinion piece by Russell Ryan ((King & Spalding and previously an Assistant Director of the SEC Enforcement Division).

“[A]  surge in administrative [SEC] prosecutions should alarm anyone who values jury trials, due process and the constitutional separation of powers. The SEC often prefers to avoid judicial oversight and exploit the convenience of punishing alleged lawbreakers by administrative means, but doing so is unconstitutional. And if courts allow the SEC to get away with it, other executive-branch agencies are sure to follow. [...]  On its website, the SEC accurately describes itself as “first and foremost” a law-enforcement agency. As such, the agency should play no role in deciding guilt and meting out punishment against the people it prosecutes. Those roles should be reserved for juries and life-tenured judges appointed under Article III of the Constitution. Today’s model of penal SEC law enforcement is categorically unsuited for rushed and truncated administrative hearings in which the agency and its own employees serve as prosecutor, judge and punisher. Such administrative prosecution has no place in a constitutional system based on checks and balances, separation of powers and due process.”

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I also tipped my hat to Judge Rakoff in this November 2013 post for his speech “Why Have No High Level Executives Been Prosecuted in Connection with the Financial Crisis?” As highlighted in the post, Judge Rakoff hit on many of the same general issues (outside the FCPA context) I discussed in my 2010 Senate FCPA testimony - namely the general lack of individual enforcement actions in connection with most corporate FCPA enforcement actions and how this dynamic (far from the “but nobody was charged” claim)  could best be explained by the quality and legitimacy of the corporate enforcement action in the first place given the prevalent use of non-prosecution and deferred prosecution agreements to resolve corporate FCPA enforcement actions.  As highlighted in the post, in answering his own question, Judge Rakoff offered that “one possibility … is that no fraud was committed.  This possibility should not be discounted.”

Posted by Mike Koehler at 12:03 am. Post Categories: Enforcement Agency PolicyNeither Admit or DenySEC




August 5th, 2014

Leading FCPA Practitioner Calls For An FCPA Compliance Defense

Joseph Warin (Gibson Dunn) is a leading FCPA practitioner.  With the DOJ’s blessing, Warin has also served as a corporate monitor in connection with several Foreign Corrupt Practices Act enforcement actions.

In short, Warin knows the FCPA and FCPA compliance.

In this recent article in Corporate Disputes, Warin and his co-authors renew the call for an FCPA compliance defense.  In pertinent part, the article states:

“[This new era of FCPA enforcement] has wrought drastic change on the compliance landscape for transnational corporations, which devote significant resources to promoting FCPA compliance among their thousands of employees and contractors operating in international fora.  In particular, internal compliance, reporting and mitigation systems have grown significantly more robust in past years as companies seek to prevent corrupt practices and – when issues of noncompliance arise – to ferret them out and terminate them.  Even so, the lack of binding guidelines for framing compliance programs and the lack of assurances that robust programs will reliably mitigate the DOJ’s decisions to bring criminal charges leaves corporations in a state of uncertainty:  despite pouring millions into meaningful compliance regimes and sincere efforts to comply with the law, corporations are no more certain than they were 30 years ago that the actions of one, or a few, rogue employees will not bring debilitating criminal liability upon an entire entity.”

[...]

[The enforcement agencies] continued resistance to a compliance defense in light of a completely changed FCPA playing field is short-sighted.  The DOJ and SEC have strong interests in promoting self-policing within companies and turning them into corporate partners.  Where corporate compliance programs are functioning as they should – i.e. internally identifying employees who are operating outside of the bounds of company policy and extinguishing and mitigating illegal practices – companies should be rewarded with indemnification from the actions of those outsider employees, not punished with the threat of criminal and/or civil charges for actions that they took substantial steps to prevent.”

[...]

“It is time to reconsider the need for either an administrative or a statutory compliance defense.  The government’s focus on stemming corporate corruption has also raised the stakes for transnational corporations with ties to the United States.  The costs of internal investigations and compliance efforts are higher than ever before, and yet – as the DOJ and SEC acknowledge in their 2012 FCPA Resource Guide – ‘no compliance program can ever prevent all criminal activity by a corporation’s employees.’  Rather than continue to toe the anti-compliance defense line of a decade ago, the DOJ and SEC should acknowledge this changed landscape and give ethical companies that implement strong compliance programs assurance that they will not be punished for those occasional, inevitable acts by rogue employees who violate otherwise effective corporate policies.”

Warin’s call for an FCPA compliance defense mirror my own – see here for my 2011 article “Revisiting a Foreign Corrupt Practices Act Compliance Defense” (the most extensive article written on the subject).

Numerous posts on FCPA Professor have since returned to the issue of an FCPA compliance defense – see here, here, and here for the most recent posts.

An FCPA compliance defense is a not panacea, but it is the best positive incentive to achieve greater FCPA compliance. The goal of an FCPA enforcement program ought to be constructing an enforcement regime that best promotes compliance, reduces improper conduct, and best advances the FCPA’s objective of reducing bribery.  However, the DOJ and SEC have a “wooden attitude” when it comes to a compliance defense and are seemingly incapable of grasping the benefits of a compliance defense to their enforcement programs.  Can the enforcement agencies soften this “wooden attitude”?  Are the enforcement agencies capable of diverting attention from enforcement statistics, settlement amounts, and political statements filled with empty rhetoric?

The FCPA has witnessed courageous moments before and a courageous moment is once again presented.

Warin’s call for an FCPA compliance defense is an important contribution to the current dialogue.

Posted by Mike Koehler at 12:03 am. Post Categories: Compliance DefenseFCPA Reform




August 4th, 2014

Former Alstom Executive Lawrence Hoskins Files Motion To Dismiss

Lawrence Hoskins is a United Kingdom citizen who lived and worked his entire life in the U.K. with the exception of a 35 month period between 2001 and 2004 during which he worked for Alstom in France.  In 2004, he resigned from his job at Alstom to resume his career in the U.K. and retired in 2010.  In April 2014 Hoskins and his wife disembarked from a ferry in the U.S. Virgin Islands en route to Dallas, Texas when he was arrested by U.S. authorities for an alleged bribery scheme dating back to his time at Alstom.

So began the Foreign Corrupt Practices Act journey of Lawrence Hoskins.

As highlighted in this previous post, Hoskins was criminally charged in connection with the same Indonesian power plant project that also resulted in criminal charges against other individuals associated with Alstom - Frederic Pierucci, David Rothschild, and William Pomponi.

Pierucci, Rothschild and Pomponi have all pleaded guilty.  However Hoskins is fighting the criminal charges filed against him and last week he filed a motion to dismiss.

The Memorandum in Support of the Motion to Dismiss states, in pertinent part, as follows.

“Resting as it does, upon an infirm foundation of aged allegations, overly expansive applications of law, and novel theories of criminal liability, the Indictment in this case suffers from numerous and fatal defects of law and logic. Among other things, it charges stale and time-barred conduct that occurred more than a decade ago; it asserts violations of U.S. law by a British citizen who never stepped foot on U.S. soil during the relevant time period; and, it distorts the definition of the time-worn legal concept of agency beyond recognition. In other words, the Indictment marks an excessive and improper exercise of executive authority. This is an Indictment that never should have been brought.

The Indictment seeks to hold Lawrence Hoskins, a retired 63-year-old British citizen, responsible for his alleged conduct that occurred—outside the United States more than ten years ago—while he was working in Paris at Alstom Holdings, SA (―Alstom‖), the parent company of the French conglomerate. The Indictment asserts that Mr. Hoskins, in his capacity as a Senior Vice-President of the Alstom parent company, approved and authorized the retention and compensation of two consultants, knowing that they would bribe Indonesian officials to help a consortium (including Alstom and one of its U.S. subsidiaries) obtain a contract to construct a power plant in Indonesia. According to the Indictment, Mr. Hoskins‘s limited, dated, and purely extraterritorial conduct subjects him to liability for two conspiracies and a total of ten substantive violations of the Foreign Corrupt Practices Act (―FCPA‖) and United States‘ money-laundering statutes. These charges all fail.

First, the Indictment is time-barred. Mr. Hoskins resigned from Alstom ten years ago, in August 2004, after 35 months of employment with the parent company and, when he did so, he withdrew from any alleged conspiracy operating therein. Second Circuit precedent makes clear that resignation from a business constitutes withdrawal from any criminal conduct operating within that entity if, following resignation, there is no promotion of or benefit received from the alleged illegal activity. Mr. Hoskins passes the Second Circuit‘s test with ease. After he resigned from Alstom, he immediately moved from Paris back to his home in England and started a new job, at a new company, in a new industry. He had no contact with, and received nothing from, any of his alleged co-conspirators. He also had no involvement with criminal conduct of any kind. To the point, the last act attributable to Mr. Hoskins in the Indictment occurred in March 2004, and the wire transfers that constitute the FCPA and money-laundering offenses all occurred long thereafter, between November 2005 and October 2009. Thus, Mr. Hoskins successfully withdrew from any alleged criminal conduct upon his resignation from Alstom. As such, all of the charges in the Indictment are time-barred and should be dismissed.

Second, the FCPA charges are facially defective. The Indictment alleges that Mr. Hoskins was an ―agent of a domestic concern,‖ to wit, an agent of Alstom‘s U.S. subsidiary. While it is black letter law that the fundamental characteristic of agency is control, the supporting factual allegations in the Indictment make plain that Mr. Hoskins was in no way under the control of the U.S. subsidiary. Indeed, much to the contrary, the Indictment demonstrates that Mr. Hoskins was ―approving‖ and ―authorizing‖ certain requests from employees of subsidiary companies ―in his capacity‖ as an executive of the Alstom parent company. Thus, because the allegations in the Indictment describe conduct bearing no semblance to an agency relationship, the FCPA-related charges are facially defective and should be dismissed.

Third, the Indictment‘s use of the term ―agent‖ is so counter-intuitive to the common understanding of that phrase that its application to Mr. Hoskins‘s relationship with the U.S. subsidiary renders the FCPA unconstitutionally vague as applied. Such a construction of the term ―agent‖ could not have provided Mr. Hoskins with fair warning that his alleged conduct—authorizing and approving matters at the request of employees of subsidiaries in his oversight capacity at the parent company—could expose him to criminal liability. As such, the FCPA charges are also constitutionally flawed and should be dismissed.

Fourth, the FCPA charges do not apply to Mr. Hoskins‘s purely extraterritorial conduct. Though Congress directed certain provisions of the FCPA to have extraterritorial effect, the subsection of the FCPA charged in the Indictment was not included in any such direction. Accordingly, the presumption against extraterritoriality applies. Thus, because all of Mr. Hoskins‘s alleged conduct occurred outside of the United States in the territory of a foreign sovereign, the substantive FCPA charges fail and should be dismissed.

Fifth, given the pronounced defects with the Indictment‘s FCPA charges, any theory of liability premised upon conspiracy and/or aiding and abetting also necessarily fail. Applicable Supreme Court precedent holds that when Congress affirmatively chooses to exclude a certain class of individuals from liability under a criminal statute, the government cannot circumvent that intent by alleging conspiracy. Moreover, federal courts have repeatedly held that ancillary offenses, including aiding and abetting and conspiracy, are only deemed to confer extraterritorial jurisdiction to the extent of the offenses underlying them. For these reasons, the conspiracy and aiding and abetting theories advanced in the Indictment cannot stand once the underlying FCPA charges fail.

Finally, the money-laundering charges are improperly venued in the District of Connecticut. The venue provision of the money-laundering statute establishes that venue lies only where the predicate money laundering transaction was ―conducted. The Indictment makes clear that the allegedly offending transfers were initiated from Maryland. As such, the District of Maryland is the only proper venue for the money-laundering charges, and they should be dismissed.

For the reasons described above and explained below, all of the charges should be dismissed. Mr. Hoskins never should have been charged on such old, infirm, and overextended allegations and legal theories. He should be freed to resume his life in England.”

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Hoskins is represented by Christopher Morvillo (Clifford Chance) and Brian Spears (Brian Spears LLC).  Both were previously AUSAs at the DOJ.

Posted by Mike Koehler at 12:03 am. Post Categories: Agency IssuesALSTOMConspiracyJurisdictionLawrence HoskinsStatute of Limitations




August 1st, 2014

Friday Roundup

When the dust settles, scrutiny alerts and updates, quotable and for the reading stack.  It’s all here in the Friday roundup.

When the Dust Settles

Given the ease in which information now flows and the world-wide interest in corruption and bribery, FCPA enforcement actions are read around the world.  It is thus not surprising that when the dust settles on the U.S. FCPA enforcement action, many are left wondering … who are those “foreign officials”?

Most recent case in point concerns this week’s FCPA enforcement action against Smith & Wesson which involved alleged conduct in Indonesia, among other countries.  According to the SEC:

“In 2009, Smith & Wesson attempted to win a contract to sell firearms to a Indonesian police department by making improper payments to its third party agent in Indonesia, who indicated that part of the payment would be provided to the Indonesian police officials under the guise of legitimate firearm lab testing costs. On several occasions, Smith & Wesson’s third-party agent indicated that the Indonesian police expected Smith & Wesson to pay them additional amounts above the actual cost of testing the guns as an inducement to enter the contract. The agent later notified Smith & Wesson’s Regional Director of International Sales that the price of “testing” the guns had risen further. Smith & Wesson’s Vice President of International Sales and its Regional Director of International Sales authorized and made the inflated payment, but a deal was never consummated.”

As noted in this Jakarta Post article:

“The Indonesian Corruption Watch (ICW) has called for an investigation into an alleged attempt by US gunmaker Smith & Wesson to bribe officials at the National Police.  [...] In response to the SEC [action], ICW legal researcher Donal Fariz urged the Corruption Eradication Commission (KPK) to look into the scandal.  The National Police may face a conflict of interest by handling the case. So, it is better to entrust the investigation with the KPK. The KPK needs to ask for the detailed report [from the SEC] on the police officials who were involved in the scandal,” he said on Wednesday in a telephone interview”

Nominate

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 nominating FCPA Professor for the ABA Journal’s Blawg 100 list (see here).

Scrutiny Alerts and Updates

Bloomberg reports here:

“British prosecutors told several former employees of Alstom SA that they’ll be charged as part of its prosecution of the French train-maker, according to two people with knowledge of the situation.The prosecutor contacted the individuals yesterday to offer to start plea discussions, the people said, asking not to be identified because the correspondence isn’t public. Some may appear with the company at a London court on Sept. 9, according to the people. The U.K. Serious Fraud Office charged Alstom’s U.K. subsidiary with corruption and conspiracy to corrupt yesterday following a five-year investigation. The company was charged in relation to transport projects in India, Poland and Tunisia, the agency said. The SFO contacted at least five individuals about two months ago inviting them for plea discussions, people with knowledge of the matter said in June. The SFO then decided to postpone the talks until it decided whether to prosecute Alstom.”

Bloomberg reports here:

“Wynn Resorts said it has been contacted by Macau’s anti-corruption agency regarding the company’s land purchase for its new resort-casino on the Cotai Strip. “We are working cooperatively with” the city’s Commission Against Corruption, the Las Vegas-based company said in an e-mailed reply to questions yesterday. The Macau Business newspaper reported July 11 that the agency is investigating why Wynn Resorts was made to pay 400 million patacas ($50 million) for the land rights, citing Commission Chief Fong Man Chon.  Wynn Resorts had to buy the rights from certain mainlanders, though the Land Public Works and Transport Bureau said it wasn’t aware of their involvement, according to the Macau Business report.”

As highlighted in this February 2012 e-mail, Wynn Resorts was under FCPA scrutiny for its $135 million donation to the University of Macau. See here for an update based on the company’s disclosures.

Quotable

Thomas Baxter (Executive Vice President and General Counsel of the Federal Reserve Bank of New York) stated, in pertinent part, as follows in a recent speech:

“[T]here is one part of the FCPA that makes me uncomfortable.  The FCPA’s bribery prohibition, and the compliance officers in the audience will know this well, contains a narrow exception for “facilitating or expediting payments” made in furtherance of routine governmental action.  [...]  The real mischief is what this exception might do to an organizational value system.  When an organizational policy allows some types of official corruption (and we have come up with candy coated names for this, like facilitation or expediting payments), this diminishes the efficacy of compliance rules that are directed toward stopping official corruption.  Again, the best compliance cultures are formed when the rules and the organizational value system are in perfect harmony.  So, for U.S. chartered institutions, perhaps this is a place where your organizational value system should go beyond black-letter U.S. law.  If you tolerate a little corruption, watch out!”

I generally agree and as highlighted in this recent post when it comes to employee FCPA training, companies should consider omitting reference to the FCPA’s facilitating payments exception and affirmative defenses.  The Global Anti-Bribery Course I have developed in partnership with Emtrain best assists companies in reducing their overall risk exposure by omitting reference to the FCPA’s facilitating payments exception and affirmative defenses in rank-and-file employee training.

To learn more about the course, see here.

To read what others are saying about the course, see here.

Michael Volkov at the Corruption, Crime & Compliance site often tells-it-like-it-is and this post begins as follows.

“The Internet is littered with FCPA Mid-Year Assessments and reports on enforcement activity and so-called trends and developments. Talk about making mountains out of molehills. Some of the reports are excellent; others are rehashes filled with “analysis” that are intended to promote FCPA fear marketing.”

Reading Stack

This recent article in the Corporate Law & Accountability Report details comments made by SEC FCPA Unit Chief Kara Brockmeyer.  In the article Brockmeyer talks about:

  • SEC administrative proceedings;
  • the 11th Circuit’s recent “foreign official” decision; the recent conclusion of the SEC’s enforcement action against Mark Jackson and James Ruehlen which she called “a very good settlement for us”;
  • the origins of SEC FCPA inquiries; and
  • holistic compliance and typical risk areas.
Posted by Mike Koehler at 12:03 am. Post Categories: ALSTOMFacilitating PaymentsFCPA Inc.SECSerious Fraud OfficeSmith and WessonUnited KingdomWynn Resorts