October 10th, 2014

Friday Roundup

A tribute, resource alert, bureaucratic brazennessscrutiny alerts and updates, a bushel, quotable, and for the reading stack. It’s all here in the Friday roundup.

James McGrath

I join Tom Fox (FCPA Compliance and Ethics Blog) in paying tribute to James McGrath.  Owner of his own Ohio-based firm McGrath & Grace and founder and editor of his own Internal Investigations Blog, McGrath was a bear of a man as Fox wrote.  Yet a gentle and kind bear and I will remember Jim for his desire to learn and engage with students.  He was an occasional contributor to FCPA Professor (see here) and his candid wit resulted in this classic post.  I last communicated with Jim a few weeks ago and he was excited to share some new things in his life and I was happy and excited for him.  Moreover, Jim paid me a visit in Southern Illinois this past spring which is no small feat as one has to make a big of effort to get here.  I enjoyed our visit and discussion.

You will be missed Jim, rest in peace.

Resource Alert

The University of Houston Law Center announced:

“[Release of] a searchable database that contains the compliance codes for Fortune 500 companies.  The project was led by Houston attorney Ryan McConnell, an adjunct professor at the University of Houston Law Center. McConnell worked with a team of recent graduates and current students to develop the database, which covers 42 different topics. “The free database allows any company to conduct benchmarking on virtually every compliance area covered in a code of conduct and to spot compliance trends within their industry,” McConnell explained. “In addition to proactively building a program, when compliance failures occur, whether a foreign bribery violation or environmental issue, stakeholders – whether they are shareholders in a lawsuit or criminal investigators – frequently scrutinize the company’s compliance program.  This database provides a powerful tool for anyone to evaluate the strength of a company’s compliance program, including subject matters addressed in the code and the organization’s core values.”

Bureaucratic Brazenness

This recent Wall Street Journal column “The New Bureaucratic Brazenness” caught my eye.

“We’re all used to a certain amount of doublespeak and bureaucratese in government hearings. That’s as old as forever. But in the past year of listening to testimony from government officials, there is something different about the boredom and indifference with which government testifiers skirt, dodge and withhold the truth. They don’t seem furtive or defensive; they are not in the least afraid. They speak always with a certain carefulness—they are lawyered up—but they have no evident fear of looking evasive. They really don’t care what you think of them. They’re running the show and if you don’t like it, too bad.

[...]

Everything sounds like propaganda. That will happen when government becomes too huge, too present and all-encompassing. Everything almost every level of government says now has the terrible, insincere, lying sound of The Official Line, which no one on the inside, or outside, believes.

[...]

We are locked in some loop where the public figure knows what he must pronounce to achieve his agenda, and the public knows what he must pronounce to achieve his agenda, and we all accept what is being said while at the same time everyone sees right through it. The public figure literally says, “Prepare my talking points,” and the public says, “He’s just reading talking points.” It leaves everyone feeling compromised. Public officials gripe they can’t break through the cynicism. They cause the cynicism.”

I sort of feel this way when I hear DOJ and SEC FCPA enforcement attorneys speak.  Do you?

For instance, last year I attended an event very early in tenure of a high-ranking SEC enforcement official.  This person – who came to the SEC from private practice – candidly stated something to the effect that given his very new position he did not yet know what he was supposed to say.

Scrutiny Alerts and Updates

Sanofi

As recently reported in this Wall Street Journal article:

“Sanofi said it has told U.S. authorities about allegations of improper payments to health-care professionals in the Mideast and East Africa, joining a lineup of pharmaceutical companies that have faced similar claims. Among the allegations are that Sanofi employees made improper payments to doctors in Kenya and other East African nations, handing out perks based on whether the doctors prescribed or planned to prescribe Sanofi drugs, according to the firm and e-mails from a tipster The Wall Street Journal viewed. The French pharmaceutical company said it hired New York law firm Weil Gotshal & Manges LLP to look into the claims and the investigation is continuing. “At this stage, it is too early to draw conclusions,” a company spokesman said. “Sanofi takes these allegations seriously.”

[...]

“The Sanofi investigation began after the firm received a series of anonymous allegations that wrongdoing occurred between 2007 and 2012 in parts of the Middle East and East Africa, the company said. One allegation was that employees of subsidiary Sanofi Kenya bribed medical professionals, a claim made via emails sent to Sanofi senior management last October and in March and viewed by the Journal. Sanofi paid for influential medical professionals to attend conferences, many of which were abroad, and gave them cash and gifts at its own events to win business, the emails allege. Copies of letters the tipster said were sent to Sanofi Kenya by medical professionals, as well as what the emails describe as other Sanofi documents, which were also reviewed by the Journal, indicate that doctors would request money from Sanofi Kenya to attend conferences and events and that Sanofi employees would take into account the applicant’s value to Sanofi’s business before deciding whether to sponsor them or not.”

As highlighted in this August 2013 post, Sanofi’s conduct in China has also been under scrutiny.

GSK

As recently reported in this Reuters article:

“GlaxoSmithKline, which was slapped with a record $489 million fine for corruption in China last month, said on Tuesday it was looking into allegations of corruption in the United Arab Emirates. Britain’s biggest pharmaceuticals group confirmed the investigation following allegations of improper payments set out in a whistleblower’s email sent to its top management on Monday. The email, purporting to be from a GSK sales manager in the Gulf state, was seen by Reuters. The company is already investigating alleged bribery in a number of Middle East countries, including Lebanon, Jordan, Syria and Iraq, as well as Poland. ”As we have already said, we are undertaking an investigation into our operations in the Middle East following complaints made previously. This investigation continues and these specific claims were already being investigated as part of this process,” a GSK spokesman said.”

DynCorp

The Washington Times reports here

“State Department investigators uncovered evidence that agents working for one of the largest U.S. military contractors paid tens of thousands of dollars in bribes to Pakistani officials to obtain visas and weapons licenses, but records show the government closed the case without punishing DynCorp.

[...]

But investigators closed the case after deciding they couldn’t prove or disprove the company had the “requisite corrupt” intent required to prove a violation of the Foreign Corrupt Practices Act (FCPA), which bars U.S. companies from bribing foreign officials.

“There was no evidence to support the allegations that DynCorp or its employees had specific knowledge of bribes paid Pakistani government officials,” an investigator wrote in a memo closing out the case last year.

Still, investigators concluded there were violations of the FCPA involving both Speed-Flo and Inter-Risk, both of which are based in Islamabad.”

AgustaWestland / Finmeccanica Related

As noted in this Wall Street Journal article:

“An Italian court found Giuseppe Orsi, the former chief executive of defense firm Finmeccanica, not guilty of international corruption, absolving him of the most serious charge he faced in connection with a 560-million-euro contract won in 2010 to supply the Indian government with 12 helicopters. The three judge panel found Mr. Orsi, 68, guilty of falsifying invoices and sentenced him for that crime to two years in prison, a penalty that was immediately suspended. “A nightmare is over for me and my family,” a visibly relieved Mr. Orsi told reporters after the judge had read the verdict. Italian prosecutors had argued that Mr. Orsi, who at the time of the alleged corruption was CEO of Finmeccanica unit AgustaWestland, directed a plan to pay tens of millions of dollars to Indian officials, including the former top officer in the Indian air force, to win the helicopter-supply competition. Mr. Orsi rose to become CEO of Finmeccanica in 2011 and resigned last year when the corruption charges surfaced. The court also absolved Bruno Spagnolini, who followed Mr. Orsi as CEO of AgustaWestland, of corruption while finding him guilty of falsifying invoices. In reading the verdict, the judge said that while prosecutors had proven that fake invoices had been issued, there was no corruption. Prosecutors had argued there was a direct connection between the false invoices and the payment of kickbacks.”

A Bushel

Matthew Fishbein (Debevoise & Plimpton) was awarded an FCPA Professor Apple Award for this this recent article titled “Why Aren’t Individuals Prosecuted for Conduct Companies Admit.”  Fishbein continues with his spot-on observations in this recent Corporate Crime Reporter Q&A.  For additional reading on the same topics see:

The Facade of FCPA Enforcement“ (2010)

My 2010 Senate FCPA testimony (“The lack of individual prosecutions in the most high-profile egregious instances of corporate bribery causes one to legitimately wonder whether the conduct was engaged in by ghosts. [...]  However, a reason no individuals have been charged in [most FCPA] enforcement actions may have more to do with the quality of the corporate enforcement action than any other factor. As previously described, given the prevalence of NPAs and DPAs in the FCPA context and the ease in which DOJ offers these alternative resolution vehicles to companies subject to an FCPA inquiry, companies agree to enter into such resolution vehicles regardless of the DOJ’s legal theories or the existence of valid and legitimate defenses. It is simply easier, more cost efficient, and more certain for a company … to agree to a NPA or DPA than it is to be criminally indicted and mount a valid legal defense – even if the DOJ’s theory of prosecution is questionable …”.

But Nobody Was Charged” (2011)

“DOJ Prosecution of Individuals – Are Other Factors At Play?” (2011) (2013) (2014)

Why You Should Be Alarmed by the ADM Enforcement Action” (2014).

Quotable

In this recent speech, SEC Chair Mary Jo White stated:

“In fiscal year 2013, we brought more than 675 enforcement actions and obtained orders for $3.4 billion in total penalties and disgorgement.  We will soon be announcing the results for our 2014 fiscal year, which ended yesterday.  It was another very productive year as those numbers will show. But numbers only tell part of the story. The quality and breadth of actions are really the more meaningful measure of an effective enforcement program. (emphasis added).”

As to international cooperation, White stated:

“International cooperation is essential to the SEC’s enforcement program, and indeed, to all of our enforcement programs.  In today’s global marketplace, fraudulent schemes and other misconduct commonly have cross-border elements, and the need for seamless cooperation among us has never been greater.

The SEC’s investigations and enforcement actions often involve witnesses and evidence in different countries around the world.  And I know that the same is true in your investigations and enforcement cases.

Faced with this simple reality, if we are to continue to conduct these investigations successfully, and prosecute the offenses and wrongdoers to the fullest extent of our laws, broad and effective use of the MMoU, and our bilateral agreements, is more important than ever.

No one knows that better than the SEC.  Virtually every week, I meet with my fellow Commissioners to decide which cases to bring.  Rarely is there a week when one or more of the cases recommended by the enforcement staff does not involve critical international assistance.  In fact, in the last fiscal year, the SEC made more than 900 requests for international assistance and, as a result, we were able to obtain critical evidence that helped us prosecute wrongdoers for a vast array of serious offenses.

In one recent FCPA case, for example, the SEC obtained valuable evidence — bank and other corporate records — from German prosecutors. [HP] And, we received great support from regulators in Australia, Guernsey, Liechtenstein, Norway, Canada, Switzerland, and the United Kingdom in another major FCPA action. [Alcoa].”

From the Houston Chronicle, a Q&A with former Deputy Attorney General – and current FCPA practitioner – George Terwilliger.

Q: How will enforcement of the Foreign Corrupt Practices Act (FCPA) hinder U.S. energy companies from doing business abroad?

A: Notwithstanding all the good things that are happening with energy upstream production in the United States, the real growth opportunities remain overseas. And a lot of them are in places that are ethically challenged at best in terms of their business and legal cultures. Two things cause problems for companies subject to U.S. law.

One, ambiguities are in the law itself. What is a foreign official? What organizations are covered as entities of foreign governments that are state-owned enterprises three times removed?

Then there’s the uncertainty of the parameters of enforcement policy. Why is this case prosecuted and that one isn’t? Why does this case settle for this much money and that one for that much money? There’s not a lot of transparency, and it’s not apparent to the people who work at this all the time exactly where those parameters are.

Q: Why is that a problem?

A: A company subject to U.S. law that is looking at an opportunity overseas looks at what the profitability model is and then they look at the risk inherent in doing business in that environment. The least little thing that comes up in that process — there’s a piece of real estate they want us to use as a staging area that’s owned by the brother-in-law of the cousin of the oil minister — and they look at it and go, “You know what? We’re not going to do that. It’s not worth the risk.”

Q: Are companies passing up business opportunities because of those risks?

A: Yes, that happens. Companies forgo economic opportunities because the uncertainties are perceived to be too great given the potential return on the investment. The objective of the law is to have a corruption-free level playing field. Most American business people I think believe that given a level playing field they can compete very well, particularly with foreign competitors. The problem is when that playing field is knocked out of kilter by the influence of corruption. Perhaps companies from other countries don’t operate under these constraints, then the playing field isn’t level anymore.

Q: What can mitigate those risks and balance the playing field for U.S. companies abroad?

A: For some time I have advocated some kind of corporate amnesty for companies that investigate themselves, fix their problems and disclose them to the government. If companies become aware of corrupt activity, I think given an incentive to report that they would do it. And that will help the government and help the objectives of this program rather than playing a kind of gotcha game.

Q: Are there any incentives now for companies to disclose potential violations?

A: The Securities Exchange Commission and the Justice Department have articulated policies that whatever the penalty should be for some wrongdoing, it will be less if you self-report, cooperate with an investigation and so forth. I don’t think that’s widely believed in the U.S. corporate community. And it’s almost impossible to measure. I have represented companies where we have made voluntary disclosures that have not been prosecuted. And the government has said the reason they are not prosecuting is because of internal investigation and cooperation. So I’m not saying it doesn’t happen. At the end of the day, companies wrestle with the question of, “Is it really worth it?” All the heartache that’s going to flow from a voluntary disclosure, particularly on something that may be marginal as a violation, is it worth what that’s going to cost? In terms of damage to reputation, shareholder issues, management issues with the board and so forth, is that going to be worth it in terms of what a company might get in terms of some forbearance of penalty?

Reading Stack

“It’s as if the FCPA Super Bowl just ended in a tie.”  (See here from Bracewell & Giuliani attorneys Glen Kopp and Kedar Bhatia regarding the Supreme Court recently declining to hear the “foreign official” challenge in U.S. v. Esquenazi).   

A legitimate concern or a bluff?  (See here from The Globe and Mail – “The head of Canadian engineering giant SNC-Lavalin Group Inc. says any move by authorities to charge the company in connection with an extensive bribery scandal would immediately threaten its future and could force it to close down.”).

An interesting video on Bloomberg’s “Market Matters” regarding the DOJ’s approach to prosecuting alleged corporate crime. The FCPA is not specifically discussed, although the issues discussed are FCPA relevant.

From the Economist “The Kings of the Courtroom:  How Prosecutors Came to Dominate the Criminal-Justice System.” (“The prosecutor has more control over life, liberty and reputation than any other person in America,” said Robert Jackson, the attorney-general, in 1940. As the current attorney-general, Eric Holder, prepares to stand down, American prosecutors are more powerful than ever before. Several legal changes have empowered them. The first is the explosion of plea bargaining, where a suspect agrees to plead guilty to a lesser charge if the more serious charges against him are dropped. Plea bargains were unobtainable in the early years of American justice. But today more than 95% of cases end in such deals and thus are never brought to trial.”).

*****

A good weekend to all.





October 9th, 2014

Recent DOJ Speeches

Speaking8Previous posts here and here highlighted recent speeches by top Department of Justice officials on topics relevant to the Foreign Corrupt Practices Act.

This post highlights additional recent speeches by Assistant Attorney General for the Criminal Division Leslie Caldwell on October 1st and by Principal Deputy Assistant Attorney General for the Criminal Division Marshall Miller on October 7th.  The speeches are near carbon-copies of each other, but both are excerpted below in one space for ease of reference.  Moreover, Caldwell’s speech further expounds on cooperation issues previously articulated in Miller’s September 17th speech.

Before excerpting the speeches, it is worth noting that the DOJ officials (as prior DOJ officials have in the past) made several important acknowledgments relevant to the difficulties of FCPA compliance and in support of the policy rationales for an FCPA compliance defense.  (See here for the article “Revisiting a Foreign Corrupt Practices Act Compliance Defense”).  In pertinent part, the DOJ officials stated:

“While the Justice Department is often the last line of defense against fraud and corruption, all of you [compliance professionals] are the first.  Criminal prosecutions can and do deter future bad behavior, but they most often serve as an after-the-fact sanction for misconduct.  Your collective work is designed to ensure corporate compliance and ethical practices from the outset.”

“[W]e recognize that even with proper support of a compliance program by management, perfect compliance in this increasingly global economy is incredibly difficult.  Compliance departments are asked to monitor business units that are spread about the globe.”

“Every company hires human beings who, when they are in a tough and maybe unfamiliar situation with no clear guidance about what is expected, will sometimes choose the wrong path.  And that becomes even harder when they are operating in countries with business cultures very different from their own.”

“Corporations do not act, but for the actions of individuals.  In all but a few cases, an individual or group of individuals is responsible for the corporation’s criminal conduct.”

“Compliance must be incentivized.”

“Although increasingly rare in this day and age – more than a decade after the passage of the Sarbanes Oxley Act – we are still encountering prominent companies with no real compliance programs. Hard to believe, but true.”

“[E]ven companies with strong compliance programs can and do detect and report criminal misconduct by employees.”

“While the Justice Department is often the last line of defense against fraud and corruption, all of you who work in compliance are the first. Criminal prosecutions can and do deter future bad behavior, but your work can prevent that conduct before it happens.”

For additional writing and videos on many of the same points discussed in the DOJ speeches see:

Assistant Attorney General Caldwell’s October 1st Speech

“While the Justice Department is often the last line of defense against fraud and corruption, all of you are the first. Criminal prosecutions can and do deter future bad behavior, but they most often serve as an after-the fact sanction for misconduct.

Your collective work is designed to ensure corporate compliance and ethical practices from the outset. The importance of your work cannot be overstated: it serves to protect the integrity of our public markets, the country’s financial systems, our intellectual property, the retirement accounts of our hardworking citizens, and our taxpayer dollars used to fund healthcare programs and government and military contracts.

A very large part of the mission of the Criminal Division is fighting major corporate fraud and corruption. Our Fraud Section employs approximately 100 prosecutors who are experienced in investigating health care fraud, defense procurement fraud, securities and financial fraud, and violations of the Foreign Corrupt Practices Act.

Our Asset Forfeiture and Money Laundering Section investigates and prosecutes international money laundering and violations of U.S. sanctions laws, and it recovers the proceeds of foreign official corruption by kleptocrats.

Unfortunately, in our fraud, corruption, money laundering, and sanctions cases, we have seen too many failures of corporate compliance.

In this day and age – more than a decade after the Sarbanes-Oxley Act – we come across very few companies that do not have any compliance program. In fact, we have seen a marked improvement in compliance programs over the years. In years past, it was not uncommon to see companies with only rudimentary compliance programs.

That situation is illustrated by a case resolved just last year, involving Weatherford International, a Swiss oil services company that trades on the New York Stock Exchange. Three subsidiaries of Weatherford International pleaded guilty to violating the anti-bribery provisions of the Foreign Corrupt Practices Act and export controls violations.

Before 2008, the company had little more than a weak paper compliance program. The subsidiaries admitted that the company did not have a dedicated compliance officer or compliance personnel, did not conduct anti-corruption training, and did not have an effective system for investigating employee reporting of ethics and compliance violations. Weatherford companies paid $252 million in penalties and fines.

It is increasingly rare that we encounter circumstances in which a company has such a feeble compliance program. And I doubt that anyone in this audience works for a company like that, or you probably would not be here.

More often, we encounter companies with compliance programs that are strong on paper, but much weaker in practice.”

[...]

“Now, we recognize that even with proper support of a compliance program by management, perfect compliance in this increasingly global economy is incredibly difficult. Compliance departments are asked to monitor business units that are spread about the globe.

More than the geographic divide, however, there often are cultural divides from country-to-country that you must bridge.”

[...]

“There is no doubt that monitoring compliance on a global scale is a difficult, but difficulty cannot be used as an excuse to turn a blind eye to problematic business practices. Compliance programs must be put into place and—more importantly—communicated repeatedly and enforced properly throughout the entire organization.

The emphasis on compliance must be heard not only in the executive suites at headquarters, but wherever the company operates around the globe.

When considering criminal action against a company, one factor that the Justice Department evaluates is the company’s compliance program.

Under the department’s internal guidance, the Principles of Federal Prosecution of Business Organizations, prosecutors must consider “the existence and effectiveness of the corporation’s pre-existing compliance program.”

As all of you know, the United States Sentencing Guidelines also expressly include a company’s corporate compliance program as a factor in corporate sentencing in criminal cases.

There is, of course, no “off the rack” compliance program that can be installed at every company. Effective compliance programs must be tailored to the unique needs and risks faced by each company.

But there are hallmarks of good compliance programs. The department includes many of these in our non-prosecution agreements and deferred prosecution agreements, and I’d like to discuss them with you.

1. High-level commitment. A company must ensure that its directors and senior management provide strong, explicit, and visible commitment to its corporate compliance policy. Stated differently, and again, “tone from the top.”

This means that the importance of compliance should be communicated from the very top of the company. I once heard of a large company whose prominent CEO refused to put his signature on a company-wide communication announcing the company’s new compliance program.

When asked why not, he replied: “Because we don’t hire those kinds of people.” Well, he could not have been more wrong. Every company hires “those kinds of people.”

Every company hires human beings who, when they are in a tough and maybe unfamiliar situation with no clear guidance about what is expected, will sometimes choose the wrong path. And that becomes even harder when they are operating in countries with business cultures very different from our own.

2. Written Policies. A company should have a clearly articulated and visible corporate compliance policy memorialized in a written compliance code. Again, employees need to know what to do–or not do–when faced with a tough judgment call involving business ethics. Companies need to make that as easy as possible for their employees.

3. Periodic Risk-Based Review. A company should periodically evaluate these compliance codes on the basis of a risk assessment addressing the individual circumstances of the company. Companies change over time through natural growth, mergers, and acquisitions.

Compliance policies should be live organisms that also change and grow with the company. You are only as strong as your weakest flank.

I once represented a company that had an A+ compliance program. But then they acquired a Chinese subsidiary and for several years failed to communicate to their new—and then not-so new–Chinese employees the need for FCPA compliance.

The predictable result: the Chinese employees continued doing business in the way that was familiar to them. And the US parent found itself in deep violation of the FCPA.

4. Proper Oversight and Independence. A company should assign responsibility to senior executives for the implementation and oversight of the compliance program.

Those executives should have the authority to report directly to independent monitoring bodies, including internal audit and the Board of Directors, and should have autonomy from management. Compliance programs needed to be funded; they need to have resources.

And they need to have teeth and respect within the company. For years, Wall Street banks housed their compliance programs across the Hudson River, in New Jersey. They were out of sight, out of mind. They were underpaid. And nobody paid much attention to them.

Compliance programs need to have an appropriate stature within the company, or compliance will be the last thing on the mind of an employee tempted to engage in wrongdoing.

5. Training and Guidance. A company should implement mechanisms designed to ensure that its compliance code is effectively communicated to all directors, officers, employees. This means repeated communication, frequent and effective training, and an ability to provide guidance when issues arise.

And as I said before, employees should see that the importance of compliance is being communicated from the top—whether the CEO, the Board, the General Counsel, or some other very highly respected senior-level figure within the company.

6. Internal Reporting. A company should have an effective system for confidential, internal reporting of compliance violations. I know that many companies have multiple mechanisms, which is good.

7. Investigation. A company should establish an effective process with sufficient resources for responding to, investigating, and documenting allegations of violations. What this means on the ground will depend on the company. A sophisticated multi-national corporation obviously will be expected to have more resources devoted to compliance than a small regional company.

8. Enforcement and Discipline. A company should implement mechanisms designed to enforce its compliance code, including appropriately incentivizing compliance and disciplining violations.

And the response to a violation must be even-handed. Too often, we see situations where low level employees who may have implemented the bad conduct are fired, but their boss, who saw what they were doing and did nothing—and maybe even the directed the conduct—is left in place.

This should not happen. Not only from a department perspective, but from a business perspective. Leaving in place senior managers who sanction bad behavior sends a very wrong message about the company’s true commitment to compliance and ethics.

People watch what people do much more carefully than what they say. When it comes to compliance, you must both say and do.

9. Third-Party Relationships. A company should institute compliance requirements pertaining to the oversight of all agents and business partners.

I cannot emphasize strongly enough the need to sensitize third parties, like vendors, agents, and consultants, to the importance of not compliance.

And these partners need to understand that the company really expects its partners to be compliant. This often means more than just including a boilerplate paragraph in a contract in which the partner promises to comply with the law and company policies. It means warning, and even terminating, relationships with partners who fail to behave in a compliant manner.

10. Monitoring and Testing. A company should conduct periodic reviews and testing of its compliance code to improve its effectiveness in preventing and detecting violations. Kick the tires regularly. As I said, compliance programs must evolve with changes in the law, business practices, technology and culture.

As I said, there is no “one-size fits all” compliance program. But these are guideposts that we consider important to the success of a strong program.

And as important as the compliance program itself is implementation. When we investigate a case, we look at the messages about compliance that are given to employees.

More than just reading the paper program or the code of conduct, we look at what employees are told in their day-to-day work.

We are looking at e-mails, chats, and recorded phone calls. We are talking to witnesses about the messages they received from their supervisors and management – did they receive messages about compliance, or about making money at all costs.

And we examine the incentives that a company provides to encourage compliant behavior – or not. If a company is actually encouraging compliance, if its values are to be ethical and within the law, then that message must be conveyed to employees in a meaningful way. Otherwise, the Department of Justice will not view the compliance program as credible.

And sometimes, effective implementation of a compliance program means standing apart from the other companies in your industry. We have seen significant misconduct taking place throughout an industry.

But the excuse that “everyone else is doing it” didnd’t work in grade school, and it sure won’t work when federal agents come knocking at your door.”

[...]

“Effective compliance programs must be embedded in a company’s culture. And they need to be applied even in the face of misconduct by other companies in the same industry, even if that might mean a short-term competitive disadvantage.

A company’s executives can choose to rise above the rest — or race to the bottom. I am telling you that the Criminal Division will hold responsible companies and individuals that knowingly violate the law, no matter if the excuse is that “everyone” was doing it.

Now what should you do when your robust compliance program fails? Or, when it works, allowing you to discover criminal misconduct? I encourage you to conduct a thorough investigation and to disclose potentially criminal misconduct to the Justice Department.

When criminal misconduct is discovered, a critical factor in the department’s prosecutorial decision making is the extent and nature of the company’s cooperation.

The department’s Principles of Federal Prosecution of Business Organizations provides that prosecutors should consider “the corporation’s timely and voluntary disclosure of wrongdoing and its willingness to cooperate in the investigation of its agents.”

Now let me flesh out the often discussed, but sometimes poorly understood, concept of cooperation.

Most companies now understand the benefits of voluntarily disclosing the misconduct before we come asking, and the benefits of conducting an internal investigation and providing facts about the misconduct to the government.

But companies all too often tout what they view as strong cooperation, while ignoring that prosecutors specifically consider “the company’s willingness to cooperate in the investigation of its agents.”

Corporations do not act, but for the actions of individuals. In all but a few cases, an individual or group of individuals is responsible for the corporation’s criminal conduct. The prosecution of culpable individuals – including corporate executives – for their criminal wrongdoing continues to be a high priority for the department.

For a company to receive full cooperation credit following a self-report, it must root out the misconduct and identify the individuals responsible, even if they are senior executives.

We are not asking that you become surrogate FBI agents or prosecutors, or that you use law enforcement tactics like body wires. And we do not need to hear you say that executive A violated a particular criminal law. All we are saying is that we expect you to provide us with facts. We will take it from there.

But a company that interviews its employees in an effort to whitewash the facts or spread the company’s narrative spin risks receiving any cooperation credit.

Additionally, for a company to receive full cooperation credit, the company must provide relevant documents and evidence, and should do so in a timely fashion.

We find that global companies are increasingly hasty to invoke foreign data privacy laws to avoid providing evidence to the department. While we recognize that some of these laws pose real challenges to data access and transfer, many do not.

As a result, we are looking closely – with an ever more skeptical eye – to ensure that these claims are honest and not obstructionist. A company that reads foreign data protection laws expansively, to restrict its disclosure of documents, when it could be read more narrowly, is in dangerous territory if it wants to receive full cooperation credit.

Although the department welcomes and encourages corporate cooperation, we do not rely upon it. We conduct our own robust investigations – often alongside that of the company – to build our own criminal cases and to pressure-test corporate claims of cooperation.

Companies claiming to cooperate while conducting lackluster investigations with little results should not be surprised when they do not get credit for their supposed efforts. And they should not be surprised when they face the consequences of our own investigations.

The benefits of corporate cooperation are clear. We often explicitly describe the benefits when we reach resolutions with companies. As just one example, earlier this year, the department announced Alcoa World Alumina’s guilty plea to FCPA charges stemming from its payment of millions of dollars in bribes to officials of the Kingdom of Bahrain.

As part of the plea, Alcoa paid $223 million in criminal fines and forfeiture. The department publicly commended Alcoa for its cooperation, which included conducting an extensive internal investigation, making proffers to the government, voluntarily making current and former employees available for interviews, and providing relevant documents to the department.

Alcoa’s cooperation was mentioned specifically as a factor that lowered the size of the criminal fine. In fact, absent cooperation, Alcoa could have faced a fine of more than $1 billion. Many people, however, want concrete examples of cases where we decided not to pursue charges at all in light of a company’s cooperation. The department is not typically in a position to disclose these declinations, and indeed many companies do not want the world to know that they were under department scrutiny.”

[...]

“The Criminal Division is more committed than ever to investigating corporate fraud and corruption. We will investigate regardless whether a company choses to cooperate.

But for a company to receive credit for its compliance program, it must have demonstrated effectiveness, with messages about compliance that come from the top and echo throughout the corporate hallways.

And for a company to receive full cooperation credit, it must uncover the misconduct, identify the responsible individuals, and fully disclose the facts to the department.”

Deputy Attorney General Miller’s October 7th Speech

“I suspect that everybody in this room is familiar with the Principles of Federal Prosecution of Business Organizations, or the Filip factors, upon which we base our corporate charging and resolution decisions. One of those factors expressly directs us to consider “the existence and effectiveness of the corporation’s pre-existing compliance program” in deciding whether to charge a corporation with a crime.

In fact, one is hard-pressed to find a corporate resolution with the Justice Department that does not contain a prominent reference – positive or negative – to the corporation’s compliance program. The existence of an effective compliance program can make all the difference when a corporation is in the Justice Department’s sights.

Today, I would like to highlight a few primary strengths and weaknesses that we have observed in corporate compliance programs of late. As an overarching theme, the failure to expand compliance programs to meet the needs of growing corporations – particularly global corporations – drives many of the compliance problems we have seen. On the flip side, compliance programs that have widespread prophylactic and training mechanisms – as well as procedures designed to uncover wrongdoing and expose individuals responsible for criminal behavior – are the most effective.

A corporation’s ability to use compliance to uncover misconduct and, just as importantly, identify wrongdoers is central to the Justice Department’s evaluation of a compliance program.

As you know, there is no off-the-rack, one-size-fits-all compliance program. Companies must tailor compliance programs to manage their unique risks. There are, however, characteristics that should be present in each program.

In 2012, the Justice Department and the SEC published the Foreign Corrupt Practices Act, or FCPA, Resource Guide, which contains an entire section entitled, “Hallmarks of Effective Compliance Programs.” While the hallmarks in the FCPA Guide are focused on anti-corruption compliance programs, the principles identified apply universally.

Now, I’m not going to go through all the hallmarks with you today – but I will make a couple of overarching points. First, the Justice Department’s hallmarks are designed to encourage a ‘culture of compliance,’ which begins – but doesn’t end – with ‘a tone from the top,’ and extends to actions throughout a company’s ranks.

So hallmark # 1 is high-level commitment. When employees truly understand that a company’s leadership is committed to compliance – even when it runs up against profits – only then does a company truly have a successful compliance program. The quickest way to check on that commitment is to take a look at corporate structure. If you see compliance executives sitting in true positions of authority at a corporation, reporting directly to independent monitoring bodies, like internal audit committees or boards of directors, you likely are looking at a strong compliance program. Compliance programs also need to be resourced; they need to have teeth and respect. By contrast, for years, Wall Street banks housed their compliance programs across the Hudson River, in New Jersey. They were out of sight, out of mind. Compliance programs need to have appropriate stature within corporations.

Another key hallmark is whether the program grows with the company. Any good compliance program needs to be periodically evaluated, using risk assessment models aimed at the individual circumstances of the company. As companies change over time, so must compliance policies.

A strong compliance program must also involve enforcement and discipline. It is human nature to pay more attention to what people do than to what they say. Compliance must be incentivized; violations disciplined. And the response must be even-handed. Too often we see low-level employees who implemented bad conduct fired, but bosses, who did nothing to stop the conduct – and may even have directed it – left in place without sanction.

Although increasingly rare in this day and age – more than a decade after the passage of the Sarbanes Oxley Act – we are still encountering prominent companies with no real compliance programs. Hard to believe, but true.

Just last year, three subsidiaries of Weatherford International, a Swiss oil services company listed on the New York Stock Exchange, pleaded guilty to FCPA and export control violations. Over a period of many years, Weatherford subsidiaries in Africa, the Middle East, and Iraq paid bribes to foreign officials in exchange for lucrative contracts and inside information about competitors. Some of Weatherford’s international subsidiaries also illegally exported oil and gas drilling equipment to countries under United States sanctions – countries like Cuba, Iran, Sudan, and Syria.

But more important to this audience than Weatherford’s conduct itself may be the admissions it made regarding the state of its compliance programs. Weatherford admitted that prior to 2008, the company did not have a dedicated compliance officer or compliance personnel, did not conduct anti-corruption training, and did not have an effective system for investigating employee reporting of ethics and compliance violations.

The most glaring failures occurred in its overseas offices and subsidiaries. Let me give you a revealing example: Despite its global presence, Weatherford did not even bother to translate its compliance policy into languages other than English. Think about that for a second. Weatherford had subsidiaries and operations in more than 100 countries across the globe. It operated in the high-risk environment that is the oil extraction industry. And yet Weatherford didn’t even bother to make its compliance program intelligible to many of its employees – in languages they could understand.

And there’s more. Though in 2004 it began circulating an ethics questionnaire asking if employees were aware of payments to foreign officials, Weatherford had no process to investigate affirmative responses. Indeed, Weatherford did not conduct any follow-up investigation in response to allegations of corruption.

Put simply, Weatherford’s compliance policy was a program in name only. It wasn’t worth the paper it was written on. Had Weatherford employed even a basic compliance program, it may not have found itself paying over $252 million in penalties and fines.

Just last year, three subsidiaries of Weatherford International, a Swiss oil services company listed on the New York Stock Exchange, pleaded guilty to FCPA and export control violations. Over a period of many years, Weatherford subsidiaries in Africa, the Middle East, and Iraq paid bribes to foreign officials in exchange for lucrative contracts and inside information about competitors. Some of Weatherford’s international subsidiaries also illegally exported oil and gas drilling equipment to countries under United States sanctions – countries like Cuba, Iran, Sudan, and Syria.

But more important to this audience than Weatherford’s conduct itself may be the admissions it made regarding the state of its compliance programs. Weatherford admitted that prior to 2008, the company did not have a dedicated compliance officer or compliance personnel, did not conduct anti-corruption training, and did not have an effective system for investigating employee reporting of ethics and compliance violations.

The most glaring failures occurred in its overseas offices and subsidiaries. Let me give you a revealing example: Despite its global presence, Weatherford did not even bother to translate its compliance policy into languages other than English. Think about that for a second. Weatherford had subsidiaries and operations in more than 100 countries across the globe. It operated in the high-risk environment that is the oil extraction industry. And yet Weatherford didn’t even bother to make its compliance program intelligible to many of its employees – in languages they could understand.

And there’s more. Though in 2004 it began circulating an ethics questionnaire asking if employees were aware of payments to foreign officials, Weatherford had no process to investigate affirmative responses. Indeed, Weatherford did not conduct any follow-up investigation in response to allegations of corruption.

Put simply, Weatherford’s compliance policy was a program in name only. It wasn’t worth the paper it was written on. Had Weatherford employed even a basic compliance program, it may not have found itself paying over $252 million in penalties and fines.”

[...]

While the Justice Department is often the last line of defense against fraud and corruption, all of you who work in compliance are the first. Criminal prosecutions can and do deter future bad behavior, but your work can prevent that conduct before it happens.”

Posted by Mike Koehler at 12:01 am. Post Categories: ComplianceCompliance DefenseDOJEnforcement Agency PolicyEnforcement Agency Speeches




October 8th, 2014

Billy Jacobson’s Various Vantage Points

Billy Jacobson has experience with the Foreign Corrupt Practices Act from a number of vantage points few can claim.  He has been an Assistant Chief for FCPA enforcement in the DOJ fraud section.  He has been a Senior Vice President, Co-General Counsel and Chief Compliance Officer for Weatherford International Ltd., a large oil and natural gas services company that does business around the world.  Currently, he is a lawyer in private practice at Orrick and was previously a lawyer in private practice at other firms.

This Q&A explores Jacobson’s unique FCPA insight and experience.

Q: What specific vantage point of a DOJ FCPA enforcement attorney do in-house FCPA counsel and outside FCPA counsel fail to understand or appreciate?

One issue that often gets misunderstood is the notion of “trends” within FCPA enforcement.  While certain actions can be grouped together by those looking to categorize, each case is handled by a Fraud Section prosecutor on its own merits as opposed to being thought of as part of a larger trend.  For sure, there have been, for example, “industry sweeps” in the pharma and medical device industries and there have been many prosecutions of oil and gas companies, but I don’t describe those enforcement actions as trends.

Rather, the prosecutors go where the evidence leads them: if that is to conduct in China, so be it; if it’s to several medical device companies because one has been caught and there is reason to believe others are going about their business in the same fashion, so be it.  And, of course, with oil and gas companies operating in the world’s most important industry and in the world’s most corrupt countries, one will unfortunately find corruption. The term “trend” to describe these enforcement actions is a misnomer, in my opinion.

Q:  What specific vantage point of an in-house FCPA counsel do DOJ FCPA enforcement attorneys and outside FCPA counsel fail to understand or appreciate?

One thing that attorneys other than in-house counsel fail to appreciate sometimes is the level of effort required to create and then maintain a truly robust anti-corruption compliance program.  When I was about to begin at Weatherford, someone told me that my entire perspective would change once I was in-house.  I thought was that was overstated as I tried to be empathetic to the demands on in-house counsel in my other roles over the years.  But, I distinctly recall looking up from my desk at the end of my first week in-house and thinking, “my entire perspective has changed.”  It was true.  Outside counsel gives recommendations about a company’s compliance program and the government (often) criticizes a program, but it’s the in-house counsel that actually has to make the program a reality and maintain the program.  This requires daily coordination with other functions within the company and political negotiations with senior management and the Board in a way that is not always appreciated by those outside.

Q:  What specific vantage point of an outside FCPA counsel do DOJ FCPA enforcement attorneys and in-house FCPA counsel fail to understand or appreciate?

In-house counsel have to work hard to maintain a “world view” and not become so enmeshed in just their company that they lose sight of what’s going on around them.  This can be extremely challenging given the various things going on within a company at any one time.  It is helpful for in-house counsel to attend events sponsored by associations of other in-house counsel, compliance conferences, government presentations, etc., so as to maintain this broader perspective.   FCPA enforcement attorneys, for their part, should appreciate that in-house counsel are dealing with many, varied legal and compliance issues in a given day and it’s not all about the FCPA 24/7.  Outside counsel may have a good perspective in this regard given their role in assisting companies with a variety of different legal and compliance challenges and the many different areas of expertise brought to bear by any one law firm.

Q: Which job category of the three is the most difficult and why?

Without question, in-house counsel has the hardest job of the three.  First, if it ever was true that lawyers went in-house to relax and work 9 to 5, it certainly is not true anymore.  Given the myriad risks faced by companies and the every-expanding reach of regulators, in-house counsel is constantly juggling many responsibilities.  And, increasingly, they are doing so with fewer and fewer resources at their disposal.  “Do less with more,” has become a cliché only because it is a mantra being constantly repeated in every C-suite in the country.

Q:  Which job category of the three can best advance the objectives of the FCPA?

I’m really showing a certain bias here, but I think it is in-house counsel that can best advance the objectives of the FCPA.  It’s with in-house counsel and corporations generally where the rubber meets the road.  DOJ can bring all the cases it wants and outside counsel will do their best to defend those cases, but unless corporations live and breathe their anti-corruption program, corruption will remain a problem.  Incidentally, I think we’ve seen tremendous strides in that direction in the past decade, at least in the US.

Q: In April 2012, while an in-house attorney, you wrote an article (previously highlighted in this post) in which you stated:  ”Current FCPA enforcement policy punishes rather than rewards companies that do all they can reasonably be expected to do to deter corruption and to cooperate with the government.”  More than two years has passed.  Comment on your previous comment – have things gotten better or worse?

I don’t think things have changed in that regard.  I still believe the sort of reform I described in my Bloomberg piece is the best approach to FCPA enforcement reform.  It wouldn’t require any legislation or formal rule making and would result in tangible benefits for the government.  DOJ’s main priority should be prosecuting individuals involved in corruption and my proposal furthers that end while also stressing the importance of a robust corporate compliance program.

Posted by Mike Koehler at 12:02 am. Post Categories: ComplianceFCPA ReformGuest Posts




October 7th, 2014

FCPA Institute – Miami

FCPA InstituteBegin 2015 by elevating your FCPA knowledge and practical skills in Miami, Florida at the FCPA Institute on January 12th-13th.

At a typical FCPA conference, participants are a face in the crowd and information is conveyed in a disjointed fashion by dozens of speakers appearing on multiple panels with little opportunity for actual engagement by participants.

The FCPA Institute is different as information is presented in an integrated and cohesive manner by an expert instructor with FCPA practice and teaching experience. Moreover, the FCPA Institute promotes active learning by participants through issue-spotting video exercises, skills exercises, small-group discussions and the sharing of real-world practices and experiences.

To best facilitate the unique learning experience that the FCPA Institute represents, attendance at each FCPA Institute is capped at 30 participants.

In short, the FCPA Institute elevates the FCPA learning experience for a diverse group of professionals and is offered as a refreshing and cost-effective alternative to a typical FCPA conference. The goal of the FCPA Institute is simple: to develop and enhance fundamental skills relevant to the FCPA, FCPA enforcement, and FCPA compliance best practices in a stimulating and professional environment with a focus on learning.

The FCPA Institute presents the FCPA not merely as a legal issue, but also as a business, finance, accounting, and auditing issue. The FCPA Institute is thus ideal for a diverse group of professionals such as in-house and outside counsel; compliance professionals; finance, accounting, and auditing professionals; and others seeking sophisticated knowledge and enhanced skills relevant to the FCPA. Click here to see what these diverse professionals are saying about the FCPA Institute.

FCPA Institute participants not only gain knowledge, practical skills and peer insight, but will also have their knowledge assessed and can earn a certificate of completion upon passing a written assessment tool. In this way, successful completion of the FCPA Institute represents a value-added credential for professional development.

Click here to register for the FCPA Institute – Miami.

Continuing Legal Education (“CLE”) credit for the FCPA Institute – Miami has been applied for and is pending in Florida and Georgia. Attorneys may be eligible to receive CLE credit through reciprocity or attorney self-submission in other states as well.

Posted by Mike Koehler at 12:02 am. Post Categories: Uncategorized




October 6th, 2014

Supreme Court Declines To Hear “Foreign Official” Challenge

As highlighted in previous posts (here, here and here), the defendants in U.S. v. Esquenazi (see here for the May 2014 11th Circuit decision) petitioned the Supreme Court to hear the case – principally on the “foreign official” issue.  As previously noted, the cert petition was believed to be the first substantive FCPA cert petition in FCPA history and was supported by amicus briefs, including my own.

This morning, the Supreme Court, which decides its own docket, released this Orders List declining to hear the “foreign official” challenge in U.S. v. Esquenazi.

Cert denial in the case means that the 11th Circuit decision stands as a final decision.  Cert denial does not mean that the Supreme Court agreed or disagreed with the 11th Circuit decision.

As noted in previous posts, the Supreme Court has never heard an FCPA case.

*****

The below statement may be attributed to Professor Koehler.

“The reasoning of the Supreme Court in declining to hear the petition is not known, but is likely due to the absence of a circuit split on the “foreign official” issue.  This absence is largely a result of alternative resolution vehicles used by the DOJ (and SEC) as well as other discretionary decisions by the enforcement agencies. So long as these dynamics continue, Supreme Court review of the key elements of a top-priority federal criminal statute of significant importance to all businesses and individuals engaged in international commerce is unlikely.”

Counsel for Esquenazi (Markus Funk and Michael Sink – both of Perkins Coie) offered the following statement.

“Statistically speaking, having the Supreme Court hear Mr. Esquenazi’s case was of course a long-shot.  But, as the amicus petitions highlighted, the confusion the appellate court’s ruling added to the ongoing muddle of what qualifies as an ‘instrumentality’ of a foreign government provided some hope that the Court might weigh in on this issue of great concern to the global business community.  That the Court decided to pass on the opportunity is disappointing.”

Posted by Mike Koehler at 10:18 am. Post Categories: Carlos RodriguezForeign OfficialJoel EsquenaziSupreme Court "Foreign Official" Petition