July 14th, 2015

Attend FCPA “Summer School” August 13-14 in Washington, D.C.

FCPA InstituteSummer.

A time for reflection, a time to think, and a time for professionals to elevate their FCPA knowledge and practical skills by attending the FCPA Institute – DC on August 13-14th.

Since its launch in July 2014, the FCPA Institute has elevated the FCPA knowledge and practical skills of lawyers, auditing and finance professionals, compliance personnel and business executives from around the world.

The FCPA Institute is next coming to Washington, D.C. on August 13-14th and lawyers from leading law firms around the world as well as in-house counsel and compliance professionals from leading companies have already registered to attend.

If you too want to elevate your FCPA knowledge and practical skills by attending the FCPA Institute – DC, click here for further details and to register.

The FCPA Institute is different from other FCPA conferences 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.

At the end of the FCPA Institute, participants can elect to 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. In addition, attorneys who complete the FCPA Institute may be eligible to receive Continuing Legal Education (“CLE”) credits.  Furthermore, previous FCPA Institute participants have successfully obtained continuing education units from the Society of Corporate Compliance and Ethics for attending the FCPA Institute.

Set forth below is a sampling of what FCPA Institute “graduates” have said about their experience.

  • “Unlike other FCPA conferences where one leaves with a spinning head and unanswered questions, I left the FCPA Institute with a firm understanding of the nuts and bolts of the FCPA, the ability to spot issues, and knowledge of where resources can be found that offer guidance in resolving an issue.  The limited class size of the FCPA Institute ensured that all questions were answered and the interactive discussion among other compliance professionals was fantastic.” (Rob Foster, In-House Counsel, Oil and Gas Company)
  • “The FCPA Institute is very different than other FCPA conferences I have attended.  It was interactive, engaging, thought-provoking and at the completion of the Institute I left feeling like I had really learned something new and useful for my job.  The FCPA Institute is a must-attend for all compliance folks (in-house or external).” (Robert Wieck, CPA, CIA, CFE – Forensic Audit Senior Manager, Oracle Corporation)
  • The FCPA Institute is a top-flight conference that offers an insightful, comprehensive review of the FCPA enforcement landscape.  Professor Koehler’s focus on developing practical skills in an intimate setting really sets it apart from other FCPA conferences.  One of the best features of the FCPA Institute is its diversity of participants and the ability to learn alongside in-house counsel, company executives and finance professionals. (Blair Albom, Associate, Debevoise & Plimpton)
  • “The FCPA Institute was a professionally enriching experience and substantially increased my understanding of the FCPA and its enforcement. Professor Koehler’s extensive insight and practical experience lends a unique view to analyzing enforcement actions and learning compliance best practices. I highly recommend the FCPA Institute to practitioners from all career stages.” (Sherbir Panag, MZM Legal, Mumbia, India)
  • “The FCPA Institute provided an in-depth look into the various forces that have shaped, and that are shaping, FCPA enforcement.  The diverse group of participants provided unique insight into how, at a practical level, various professionals evaluate risk and deal with FCPA issues on a day-to-day basis.  The small group setting, the interactive nature of the event, and the skills assessment test all set the FCPA Institute apart from other FCPA conferences or panel-based events.” (John Turlais, Senior Counsel, Foley & Lardner)
Posted by Mike Koehler at 12:03 am. Post Categories: Uncategorized




July 13th, 2015

Canadian Government Overhauls the Integrity Regime for Suppliers – Still Tough to Get Over Debar

CanadaToday’s post is from Milos Barutciski and Matthew Kronby (partners with Bennett Jones in Toronto).

It was originally published as a Bennett Jones Client Alert and is reposted below with permission.

 

*****

On July 3, the Government of Canada announced a new Integrity Regime to replace the previous rules for debarment (disqualification) from public procurement. The new Regime, which is effective immediately, responds to more than a year of steady criticism of the previous Integrity Framework first established in 2010 by Public Works and Government Services Canada (PWGSC), the principal procuring arm of the Canadian federal government. That criticism, from business, legal and anti-corruption organizations, argued that the Integrity Framework had become so inflexible, punitive and far-reaching that it would be counterproductive to its objectives, namely to deter criminal misconduct and protect the integrity of the public procurement process. Commentators argued that the actual effect of the old Integrity Framework was to make it difficult for the government to find “clean” suppliers and to discourage companies from acknowledging and remediating wrongdoing.

The Government signaled its intention to address these concerns in its April 2015 budget. The new Integrity Regime goes a considerable distance to correct many of the problems with the Integrity Framework, but falls short in some critical respects.

The Concerns Giving Rise to the New Integrity Regime

Under the former Integrity Framework, suppliers faced disqualification from PWGSC procurements for fraud or corruption offences they or their affiliates have committed. The definition of “affiliates”, which appears to have been drawn from the U.S. debarment rules, is very broad; it covers all relationships where one entity has the power to control the other or a third party has the power to control both. In 2012, the list of offences that could give rise to debarment was expanded to include the bribery of foreign public officials under the Corruption of Foreign Public Officials Act and other federal offences.

None of this provoked particular concern until March 2014, when PWGSC adopted the latest in a series of “get tough” amendments to the Integrity Framework. One of these amendments imposed a mandatory 10-year ineligibility period for suppliers, with no scope for reduction due either to the gravity of the offending conduct or the remediation efforts of the business involved. In contrast with the U.S. and similar regimes elsewhere, which give credit for mitigating circumstances and remediation efforts in determining or subsequently reducing debarment penalties, companies doing significant business with the Canadian government have had little incentive to admit to and redress corrupt conduct and potentially a strong disincentive to do so.

The 2014 amendments also expanded the ineligibility conditions to include foreign offences “similar” to the listed domestic offences. Since the Integrity Framework already extended to the conduct of far-flung affiliates, this meant that Canadian businesses could face automatic 10-year debarments from most federal procurement not only for their own corrupt conduct but for the foreign conduct of remotely related entities over which they exercised no oversight or control. Increasing international enforcement of regulatory laws, such as anti-corruption, economic sanctions, antitrust and competition offences, meant that Canadian companies could face automatic debarment in ever expanding circumstances with no connection to Canada.

Key Elements of the New Integrity Regime

The new Integrity Regime remains under the primary authority of PWGSC and its Minister. The elements of the Regime are set out in a new PWGSC Ineligibility and Suspension Policy. The new Regime introduces key changes in relation to (i) the potential to reduce the length of debarment through remediation in certain circumstances; (ii) interim debarment prior to conviction; (iii) the consequences of “affiliate” conduct, (iv) the impact of conviction for foreign offences, and (v) new administrative and review process within PWGSC.

Potential Reduction of 10-year Debarment

The Regime maintains the 10-year ineligibility period for participation in procurements, which will apply for any convictions for covered offences within the previous three years. However, suppliers, other than those convicted of fraudulent conduct in a government procurement, will have the opportunity to reduce their ineligibility by up to five years by co-operating with law enforcement authorities or implementing appropriate remediation to address the causes of the misconduct. To restore their eligibility, suppliers also will need to obtain independent third-party certification that they have successfully addressed the causes of the misconduct. Suppliers convicted of fraud in connection with Canadian government procurement will remain ineligible indefinitely until they have received a pardon.

Ineligibility extends to sub-contractors as well. Suppliers who without prior Ministerial approval perform government contracts using sub-contractors deemed ineligible under the Integrity Regime will themselves face five-year debarments.

Interim Debarment

In addition to the 10-year ineligibility period, suppliers that have been charged with or admitted to any of the covered offences may be suspended from participating in procurement processes pending completion of the criminal proceedings.

PWGSC will maintain a list of ineligible and suspended companies and individuals.

Affiliates

The actions of an affiliate no longer render the supplier automatically ineligible. Instead, a supplier will be ineligible for the conduct of an affiliate only where the supplier can be shown to have “directed, influenced, authorized, assented to, acquiesced in or participated in” the conduct that would give rise to ineligibility. The Integrity Regime also establishes a review process under which suppliers will have 30 days to contest determinations of ineligibility based on the conduct of affiliates.

Foreign Offences

“Similar” foreign offences remain a basis for ineligibility or suspension under the Integrity Regime. The regime now explicitly contemplates an assessment of that similarity as well as the fairness and legitimacy of the proceedings that produced the foreign conviction. However, it is unclear who will be charged with making those assessments; the Ineligibility and Suspension Policy contemplates suppliers hiring independent third parties to provide information about foreign conviction but states rather vaguely that the “opinion of Canada” will be determinative.

Administrative Process

As under the Integrity Framework, the Government will be able to enter into a contract with an otherwise ineligible supplier where doing so is deemed necessary to the public interest, such as where no other suppliers can perform the contract or where failure to enter into the contract would pose risks to national security or public health.

The Regime contemplates the use of administrative agreements imposing conditions and compliance measures that an ineligible supplier must take to have its 10-year ineligibility period reduced or suspension following charges lifted, or when the Government invokes the public interest exemption or maintains an existing contract with a supplier who has become non-compliant. Supplier compliance with these agreements will be subject to independent third-party monitoring.

Impact Assessment

The new Integrity Regime addresses the overreach and potential unfairness that were inherent in the Integrity Framework’s application to foreign convictions of supplier affiliates. More generally, it adds transparency to the process by which ineligibility decisions will be made.

The elimination of automatic 10-year ineligibility is also a welcome development as it, to some degree, recognizes and encourages cooperation and remediation efforts by suppliers who have committed listed offences.

However, the revised policy fails to make a clear distinction between punishment and deterrence of misconduct (the domain of criminal law) and protecting the integrity of federal procurement and taxpayer dollars (the domain of procurement rules). The growing severity of corporate fines and the risk of individual imprisonment in corporate criminal cases, together with the reputational harm suffered by companies found guilty of white collar crimes, are a very strong deterrent for repeat offences and a general deterrent for other companies. It is unlikely that an automatic five-year debarment from Canadian public procurement will contribute significantly further to deterrence. It will, however, have a detrimental impact on Canadian companies (and their employees) even when they have substantially overhauled their management and practices. The automatic debarment will also harm Canadian taxpayers by eliminating potential suppliers and reducing the number of competitors bidding on public contracts (with the consequential pricing impact of reduced competition).

PWGSC’s claim that the new Regime will encourage suppliers to proactively disclose misconduct seems similarly misguided. Unlike the U.S., which can offer deferred or non-prosecution agreements to enable companies that voluntarily confess their sins to avoid debarment, the only benefit the Regime will offer such companies is that their ineligibility period can begin sooner. Those companies will still face a minimum ineligibility period of five years, more than long enough to have serious or even existential consequences if they are heavily dependent on federal procurement contracts. Companies facing legal exposure in Canada or abroad that include potential ineligibility under the Integrity Regime therefore will want to consider their options carefully, with the assistance of expert legal counsel.

Posted by Mike Koehler at 12:04 am. Post Categories: CanadaGuest Posts




July 10th, 2015

Friday Roundup

Roundup2Scrutiny alerts and updates, asset recovery, Fokker DPA appeal, Holder to private practice, and for the reading stack. It’s all here in the Friday roundup.

Scrutiny Alerts and Updates

Former Yara Executives

Reuters reports:

“A Norwegian court sentenced four former top executives at Yara, the world’s biggest nitrate fertilizer maker, to prison on Tuesday for paying bribes in Libya and India, in one of Norway’s biggest corruption scandals. Prosecutors had accused the men of paying around $8 million in bribes to officials in Indiaand Libya - including to the family of former Libyan leader Muammar Gaddafi’s oil minister and the family of a financial adviser in India’s Ministry of Chemicals and Fertilizers – for the right to establish joint ventures. Former CEO Thorleif Enger got the longest sentence of three years. His lawyer said he would appeal the sentence. Former chief legal officer Kendrick Wallace was sentenced to 2-1/2 years in prison, while former head of upstream activities Tor Holba and former deputy CEO Daniel Clauw were both given two-year jail terms years, court documents showed.”

For more on the underlying Libya investigations, see here.

Cerberus Capital Management

Cerberus Capital Management has been the subject of several recent media articles (see here and here for instance) concerning its purchase of a portfolio of the National Asset Management Agency (Nama) in 2014 in Northern Ireland.  According to reports:

“Northern Irish politicians have called for an investigation after a politican in Dublin alleged that Belfast law firm Tughans had £7m in an account, ‘reportedly earmarked for a Northern Ireland politician’.”

Tughans was engaged as local counsel by Brown Rudnick in connection with its representation of Cerberus. In response to the scrutiny, Brown Rudnick released this statement.

Asset Recovery

The DOJ recently filed this civil forfeiture complaint seeking “£22 million in British pounds (approximately $34 million at current exchange rates) that represent the value of 4,000,000 founders’ shares in Griffiths Energy International Inc. (“Griffiths Energy”), and that are traceable to, and involved in the laundering of, bribe payments made to Chadian diplomats …”.

According to the complaint, Griffiths Energy gave Mahamoud Adam Bechir (“Bechir”), Chad’s ambassador to the United States and Canada from approximately 2004 to 2012, and others “valuable company shares in exchange for Bechir exercising his official influence over the award to the company of lucrative oil development rights in Chad.”

The recent action is the second DOJ civil action filed in connection with the Griffiths Energy matter.  (See here).

See here for the prior post regarding the underlying Canadian enforcement action against Griffiths Energy.

*****

As highlighted in this Bloomberg article:

“The Justice Department is seeking to seize $300 million claimed to be the proceeds of an international bribery conspiracy involving two Russian phone companies, as the U.S. joins a group of European nations in a telecom corruption probe. The U.S. claims VimpelCom Ltd., part-owned by Russian billionaire Mikhail Fridman, and Mobile TeleSystems OJSC used a web of shell companies and phony consulting contracts to funnel bribes to a close relative of Uzbekistan’s president, Islam Karimov, in exchange for access to that country’s telecommunications market. The assets sought by the U.S., in a complaint filed Monday in Manhattan federal court, are held in Bank of New York Mellon Corp. in Ireland, Luxembourg and Belgium. VimpelCom said in March 2014 that its Amsterdam headquarters had been raided by Dutch prosecutors and that the U.S. Securities and Exchange Commission demanded documents as part of the probe into its business.”

Fokker DPA Appeal

This previous post concerned the pending D.C. Circuit appeal of the DOJ – Fokker Services deferred prosecution agreement. Recently David Debruin (Jenner & Block), the court appointed amicus, filed this brief.

Regarding the following issue: “whether the District Court abused its discretion by denying the parties’ motion to exclude time under the Speedy Trial Act [...] which provides for the exclusion of a period of delay pursuant to a deferred prosecution agreement “with the approval of the court.”, the brief states in pertinent part:

“If the Court reaches the merits, it should hold that the District Court had the authority to consider the substantive fairness of the DPA. Under 18 U.S.C. § 3161(h)(2), a DPA requires “approval of the court.” The plain text of this provision grants a district court the discretion to consider the substantive fairness of a DPA before approving it. The parties argue that a district court may reject a DPA only if it concludes that the parties are using the DPA as a pretext for a continuance, but that artificial restriction on judges’ discretion finds no basis in § 3161(h)(2). The legislative history, structure, and purpose of the Speedy Trial Act similarly confirm a district court’s discretion to consider a DPA’s substantive fairness.

Contrary to the parties’ contentions, the District Court’s rejection of the DPA poses no separation-of-powers problem. The District Court’s order does not force the Government to pursue a criminal prosecution. The Government remains free to negotiate a new DPA, try its case, or dismiss the charges. Prosecutorial discretion does not confer upon the Government the right to force a judge to exclude time from the Speedy Trial Act clock for 18 months. A district court order excluding time under the Speedy Trial Act is a judicial act, and separation-ofpowers principles give a judge the authority and the obligation to exercise independent judgment in performing that judicial act. If the Government had wanted to avoid judicial involvement, it should have signed a non-prosecution agreement; by instead choosing to invoke judicial process and filing a motion to exclude time under the Speedy Trial Act, it cannot now characterize the District Court’s denial of that motion as a separation-of-powers violation.

On the merits, the District Court did not abuse its discretion in rejecting the DPA. FSBV willfully violated the U.S. sanctions regime over 1,000 times and repeatedly provided assistance to the Iranian military. Yet under the DPA, as long as it agreed to pay back the revenues it earned and promised not to break the law, it would get off scot-free. The District Court’s conclusion that the DPA was grossly disproportionate to FSBV’s conduct was entirely reasonable.”

Holder to Covington

Recently Covington & Burling announced:

“Former U.S. Attorney General Eric H. Holder, Jr., is returning to Covington as a partner after more than six years of service as the nation’s top law enforcement officer. Mr. Holder will be resident in the firm’s Washington office and focus on complex investigations and litigation matters, including matters that are international in scope and raise significant regulatory enforcement issues and substantial reputational concerns. [...] Mr. Holder was a partner at Covington from 2001 until February 2009, when President Obama appointed and the Senate confirmed him as the nation’s 82nd Attorney General.”

Reading Stack

Gibson Dunn’s Mid-Year FCPA Update is here.

Gibson Dunn’s Mid-Year Update on Corporate NPAs and DPAs is here.

*****

A good weekend to all.

 

 

Posted by Mike Koehler at 12:03 am. Post Categories: Asset RecoveryCerberus Capital ManagementFCPA Inc.Fokker ServicesGriffiths EnergyLibyaNorwayVimpelComYara FertilizerYear in Review 2015




July 9th, 2015

Other Reasons Why Avon Got The License

AvonForeign Corrupt Practices Act enforcement actions are often simplistic regarding the reasons why a company obtained or retained the business at issue in the enforcement action.

The DOJ and/or SEC allege of course that it was because of the alleged improper payments and often ignore other valid and legitimate reasons why the company at issue obtained or retained business.

Indeed, the vast majority of FCPA enforcement actions are against business organizations that are otherwise viewed as industry leaders who sell the best products or offer the best services for the best prices.

With such companies can it truly be said that but for the alleged improper payments the company would not have obtained or retained the business?

This general topic has been explored numerous times on these pages (see hereherehere, and here). Call it the causation gap in most FCPA enforcement actions.

As previously highlighted, the lack of causation between an alleged improper payment and any alleged business obtained or retained is not a legal defense because the FCPA’s anti-bribery provisions prohibit the offer, payment, promise to pay or authorization of the payment of any money or thing of value.  Indeed, several FCPA enforcement actions have alleged unsuccessful bribery attempts in which no business was actually obtained or retained.

Nevertheless, causation should be relevant when calculating FCPA settlement amounts, specifically disgorgement which is often the most prominent component of an SEC FCPA settlement.  However, the prevailing FCPA enforcement theory often seems to be that because Company A made improper payments to allegedly obtain or retain X, then all of Company A’s net profits associated with X are subject to disgorgement.

Consider the December 2014 FCPA enforcement action against Avon.  At $135 million, it was the third-largest FCPA enforcement action of all-time against a U.S. company.

At its core, the enforcement action alleged that various things of value were provided to Chinese officials to induce the officials to award Avon a national direct selling license. The enforcement action alleged that Avon received the license because Chinese officials were provided things of value such as wallets, designer bags, watches, meals, and travel benefits.

In other words, the allegations are simplistic – but for Chinese officials receiving the above things of value, Avon would not have received the license.

However, this ignores other valid and legitimate reasons why Avon got the license.  Indeed, as highlighted in this post for years the U.S. government was encouraging the Chinese government to award direct selling licenses to U.S. companies pursuant to China’s commitment to do so by virtue of its World Trade Organization membership.

Set forth below are relevant excerpts from United States Trade Representative documents during the same time period at issue in the Avon enforcement action.

2004 REPORT TO CONGRESS ON CHINA’S WTO COMPLIANCE

“China is scheduled to implement its distribution services commitments by December 11 of this year and thereby allow foreign enterprises to freely distribute goods within China. While China has issued regulations that call for timely implementation of these commitments, China has not made clear the precise means by which foreign enterprises will actually be able to apply for approval to provide any of the various types of distribution services. In addition, China has not yet fulfilled its commitment to open its market for sales away from a fixed location, or direct selling, by December 11, 2004, as none of the measures necessary to allow foreign participants have been issued. The Administration will pay particular attention to these areas over the coming months to ensure that China fully meets these important WTO commitments.

[...]

In its accession agreement, China committed to eliminate national treatment and market access restrictions on foreign enterprises providing these services through a local presence within three years of China’s accession (or by December 11, 2004), subject to limited product exceptions.

[...]

China committed to lift market access and national treatment restrictions in the area of sales away from a fixed location, or direct selling, by December 11, 2004. China did not agree to any liberalization before that date. China first permitted direct selling in 1990, and numerous domestic and foreign enterprises soon began to engage in this business. In the ensuing years, however, serious economic and social problems arose, as so-called “pyramid schemes” and other fraudulent or harmful practices proliferated. China outlawed direct selling in 1998, although some large U.S. and other foreign direct selling companies continued to operate in China after altering their business models. Throughout 2004, MOFCOM has been drafting three measures to implement China’s direct selling commitment, the Measures for the Administration of Direct Marketing, the Measures for the Administration of Sales Personnel Training and the Regulations on the Prevention of Anti-Pyramid Sales Scams. Despite U.S. requests and the December 11 deadline for China to implement its direct selling commitment, MOFCOM has not made drafts of these measures available for public comment. To date, it has only discussed them in a November 2004 meeting with selected enterprises.

Based on the November 2004 meeting and subsequent bilateral engagement by the United States, it appears that the draft direct selling measures may contain several problematic provisions. For example, one provision raises serious national treatment concerns, as it apparently allows direct selling of domestically produced goods, but requires imported goods to be sold at a fixed location. Other provisions, meanwhile, impose operating requirements that seem designed to make direct selling commercially unviable. The United States has urged MOFCOM to reconsider these provisions. Through the end of 2004 and into 2005, as necessary, the United States will work closely with U.S. companies in an effort to ensure that China develops and implements direct selling measures that facilitate legitimate commerce and are WTO-consistent.”

 2005 REPORT TO CONGRESS ON CHINA’S WTO COMPLIANCE

“China only issued the regulations implementing its commitment to open its market for sales away from a fixed location, also known as “direct selling”, in September 2005, and these regulations contain several problematic provisions that the United States has urged China to reconsider. The Administration will continue to pursue these important issues in 2006 to ensure that China fully meets its commitments.

[...]

Meanwhile, MOFCOM’s ninemonth delay in issuing regulations on sales away from a fixed location, or direct selling, postponed the start-up of direct selling activities by foreign enterprises. A similar delay affected the wholesaling and retailing of pharmaceuticals. These delays have been disappointing, given the fundamentally important nature of China’s distribution services commitments and the repeated assurances by senior-level Chinese government officials that China would implement these commitments on time. In 2006, the United States will closely monitor how MOFCOM and relevant provincial and local authorities exercise their approval authority. In particular, the United States will work to ensure that the approval systems operate expeditiously, in a non-discriminatory manner and without creating any new trade barriers.

[...]

Sales away from a fixed location China first permitted direct selling in 1990, and numerous domestic and foreign enterprises soon began to engage in this business. In the ensuing years, however, serious economic and social problems arose, as so-called “pyramid schemes” and other fraudulent or harmful practices proliferated. China outlawed direct selling in 1998, although some direct selling companies were permitted to continue operating in China after altering their business models. In its WTO accession agreement, China committed to lift market access and national treatment restrictions in the area of sales away from a fixed location, or direct selling, by December 11, 2004. China did not agree to any liberalization before that date. As early as 2002, MOFCOM and SAIC began drafting measures to implement China’s direct selling commitment. Despite U.S. requests and the December 11, 2004 deadline for China to implement its direct selling commitment, the Chinese authorities did not make any drafts of these measures publicly available, instead only providing unofficial drafts to select direct selling enterprises. The Chinese authorities subsequently issued final versions of these measures – the Measures for the Administration of Direct Selling and the Regulations on the Administration of AntiPyramid Sales Scams – in September 2005, nine months late. The final versions of the direct selling measures made some improvements to provisions apparently included in the earlier drafts. Nevertheless, these measures still contain several problematic provisions. For example, one provision would outlaw practices allowed in every country in which the U.S. industry operates – reportedly 170 countries in all – by refusing to allow direct selling enterprises to pay compensation based on team sales, where upstream personnel are compensated based on downstream sales. The United States has pointed out that China could revise this provision to permit team-based compensation while still addressing its legitimate concerns about pyramid schemes. Other problematic provisions include a three-year experience requirement that only applies to foreign enterprises, not domestic ones, restrictions on the cross-border supply of direct selling services and high capital requirements that may limit smaller direct sellers’ access to the market. The United States has urged the Chinese authorities to reconsider the problematic provisions in the direct selling measures, both bilaterally and during the transitional review before the Council for Trade in Services, held in September 2005. MOFCOM has since offered to meet with U.S. and other foreign industry representatives to hear their concerns. This meeting is expected to take place in January 2006. The United States will work closely with U.S. companies in urging China to revise its direct selling measures to facilitate legitimate commerce and to comply with its WTO commitments.”

2006 REPORT TO CONGRESS ON CHINA’S WTO COMPLIANCE

“Another key area involves China’s commitment to open its market for sales away from a fixed location, also known as “direct selling.” Initially delayed, China’s implementation of this commitment has since proceeded slowly and has subjected foreign direct sellers to unwarranted restrictions on their business operations. The United States will continue to pursue these important issues in 2007 to ensure that China fully meets its commitments and will take further appropriate actions seeking the revision or elimination of problematic policies, including through WTO dispute settlement, where appropriate.”

[...]

China first permitted direct selling in 1990, and numerous domestic and foreign enterprises soon began to engage in this business. In the ensuing years, however, serious economic and social problems arose, as so-called “pyramid schemes” and other fraudulent or harmful practices proliferated. China outlawed direct selling in 1998, although some direct selling companies were permitted to continue operating in China after altering their business models.

In its WTO accession agreement, China committed to lift market access and national treatment restrictions in the area of sales away from a fixed location, or direct selling, by December 11, 2004. China did not agree to any liberalization before that date.

As early as 2002, MOFCOM and SAIC began drafting regulations to implement China’s direct selling commitment. Despite U.S. requests and the December 11, 2004 deadline for China to implement its direct selling commitment, the Chinese authorities did not make any drafts of these measures publicly available, instead only providing unofficial drafts to select direct selling enterprises. The Chinese authorities subsequently issued final versions of these measures – the Measures for the Administration of Direct Selling and the Regulations on the Administration of Anti-Pyramid Sales Scams – in August 2005, nine months late. In September 2006, after releasing a draft for public comment, MOFCOM issued the Administrative Measures on the Establishment of Service Network Points for the Direct Sales Industry, which clarified some aspects of the earlier measures.

The final versions of the August 2005 direct selling measures made some improvements to provisions apparently included in the earlier drafts, but they also contained several problematic provisions. For example, one provision essentially outlaws multi-level marketing practices allowed in every country in which the U.S. industry operates – reportedly 170 countries in all – by refusing to allow direct selling enterprises to pay compensation based on team sales, where upstream personnel are compensated based on downstream sales. The United States has pointed out that China could revise this provision to permit team-based compensation while still addressing its legitimate concerns about pyramid schemes. Other problematic provisions include a three-year experience requirement that only applies to foreign enterprises, not domestic ones, a cap on single-level compensation, restrictions on the cross-border supply of direct selling services and high capital requirements that may limit smaller direct sellers’ access to the market. The new service center regulations also include vague requirements that could prove excessively burdensome for small and medium-sized direct sellers.

Working closely with U.S. industry, the United States immediately began urging the Chinese authorities to reconsider the problematic provisions in the direct selling measures, both bilaterally and during the transitional review before the Council for Trade in Services, held in September 2005. After the direct selling measures went into effect in December 2005, moreover, many companies began to apply for direct selling licenses but were confused by the opaque license review process. Despite MOFCOM’s regulatory requirement that direct selling licenses be reviewed within ninety days, many foreign and domestic companies have waited for many months for MOFCOM and SAIC to review their license applications. Accordingly, the United States urged China to address the slow pace and lack of transparency in the licensing process, along with the problematic restrictions in the direct selling measures, during the run-up to the April 2006 JCCT meeting. In response, MOFCOM agreed to hold an informal dialogue with U.S. and other foreign industry representatives in the following months to better understand their concerns about the direct selling measures and to facilitate their efforts to navigate the application and approval process for obtaining licenses. Since then, five U.S. companies had obtained licenses (as of early December 2006), and MOFCOM generally remained slow in processing a growing number of license applications from foreign and domestic companies. The United States, meanwhile, has continued to urge China to revise its direct selling measures and to process direct selling applications in a timely and transparent manner in order to facilitate legitimate commerce and to comply with its WTO commitments, both in bilateral meetings and at the November 2006 transitional review before the Council for Trade in Services. The United States will continue these efforts in 2007.”

Posted by Mike Koehler at 12:03 am. Post Categories: AvonDisgorgement




July 8th, 2015

What’s The Difference?

What's the DifferenceIt was not my intent to publish a third-straight post on double standard issues, let alone a post with the same headline as yesterday (see posts here and here from earlier this week).

However, in writing on the double standard topic (that is how business interactions with alleged “foreign officials” seem to be subject to different standards than business interactions with similarly situated U.S. parties) numerous examples abound that are hard to ignore.

Consider the following.

A Foreign Corrupt Practices Act enforcement action included allegations that a company paid royalties to Argentine physicians and for travel of Chinese physicians.

Another FCPA enforcement action included allegations that a company provided various gifts such as vacation packages, televisions, and laptops to Mexican healthcare workers.

Another FCPA enforcement action included allegations that a company provided various gifts such as meals, wine, visits to bath houses, card games, specialty foods,  door prizes, spa treatments, cigarettes and visits to karaoke bars to Chinese physicians.

Another FCPA enforcement action included allegations that a company provided travel benefits to Polish and Romanian physicians.

Another FCPA enforcement action included allegations that a company provided travel benefits to Croatian physicians; hospitality, gifts, and support for international travel for Chinese physicians; international travel and recreational opportunities for Czech physicians; and gifts, and support for domestic and international travel for Italian physicians.

Another FCPA enforcement action included allegations that a company provided travel to medical conventions for Polish physicians as well as travel and other gifts for Romanian physicians.

Other examples could also be cited, but by now you should get the point – numerous FCPA enforcement actions have included allegations that a company subject to the FCPA provided various things of value to foreign physicians or other foreign healthcare workers.

Against this backdrop, this recent Wall Street Journal article titled “Drug and Medical-Device Makers Paid $6.49 Billion to Doctors, Hospitals in 2014″ notes:

“Drug and medical-device makers paid $6.49 billion to U.S. doctors and teaching hospitals during 2014, according to the federal government’s first full-year accounting of the breadth of industry financial ties with medical providers.

The tally comprises company payments to more than 600,000 doctors and 1,100 hospitals for services such as consulting, research and promotional speeches about drugs, as well as the value of free meals provided to doctors by sales reps pitching products.

[...]

Payments for food, beverages, travel and lodging amounted to $403.64 million, the vast majority of it in in-kind payments. Details of some payments for miscellaneous “entertainment” included a $65 massage at an airport, Alcatraz tickets and a $2,000 payment for a training seminar in the Cayman Islands.”

So what’s the difference between this conduct and the conduct alleged in FCPA enforcement actions?

If your answer is that the FCPA enforcement actions involved “foreign officials” you are correct to the extent the DOJ/SEC alleged that physicians and other healthcare workers of the above healthcare systems were “foreign officials’ even though there is no legal support for this position.

Even if there was,  given that approximately 20% of U.S. hospitals are owned by state or local governments (see here) and an additional 150 or so medical centers are run by the Veterans Health Administration (see here), one can presume that portions of the $6.49 billion in 2014 was given to U.S. officials – if the enforcement theory is to be applied in an intellectually consistent manner.

Yet, one should not hold their breath waiting for enforcement actions under 18 U.S.C 201, the U.S. domestic bribery statute with very similar elements to the FCPA’s anti-bribery provisions.  Nor should one hold their breath as to any books and records or internal controls enforcement actions regarding such payments by issuer companies.

But the question is why?

Assuming that foreign physicians and healthcare personnel are indeed “foreign officials” under the FCPA, why should corporate interaction with a “foreign official” be subject to greater scrutiny and different standards of enforcement than corporate interaction with a U.S. official?  Why do we reflexively label a “foreign official” who receives “things of value” from private business interests as corrupt, yet generally turn a blind eye when it happens here at home?

For additional posts on the specific double standard highlighted above, see here and here.

Posted by Mike Koehler at 12:03 am. Post Categories: Double Standard