FCPA Goes Main Street

Growing up in a village of 1,054 in central Wisconsin, I was not exposed to oil and gas companies, defense contractors, or other companies that tend to have a high FCPA risk profile.

Yet one person I did have contact with on a near daily basis, because she lived around the corner, was the "Avon Lady."

Thus, a bit of my youthful innocence was taken away upon learning last week that Avon Products Inc. (here) of all companies "suspended four executives amid an internal investigation into alleged bribery that began with the company's China operation" and "now involves a dozen or more countries" according to the Wall Street Journal. According to the WSJ, the executives suspended include the president, chief financial officer and top government affairs executive of Avon's China unit as well as a senior executive in New York who was Avon's head of internal audit until the middle of last year.

According to the WSJ, Avon's chief exectuive, Andrea Jung is a "corporate celebrity" in China and she has met frequently with "senior government officials."

The conduct at issue involves alleged "purchase of trips to France, New York, Canada, and Hawaii for Chinese government officials with ties to Avon's business." However, according to the WSJ, "the scope of the investigation has since widened to regions including Latin America, where the company garners the bulk of its sales and profits."

According to the WSJ, what sparked the investigation was "an employee who wrote a letter to Ms. Jung alleging improper spending related to travel with Chinese government officials."

Here is what the company had to say in its 2009 Annual Report (filed in March 2010):

"As previously reported, we have engaged outside counsel to conduct an internal investigation and compliance reviews focused on compliance with the FCPA and related U.S. and foreign laws in China and additional countries. The internal investigation and compliance reviews, which are being conducted under the oversight of our Audit Committee, began in June 2008. We voluntarily contacted the United States Securities and Exchange Commission and the United States Department of Justice to advise both agencies of our internal investigation and compliance reviews and we are, as we have done from the beginning of the internal investigation, continuing to cooperate with both agencies and have signed tolling agreements with them.

The internal investigation and compliance reviews, which started in China, are focused on reviewing certain expenses and books and records processes, including, but not limited to, travel, entertainment, gifts, and payments to third-party agents and others, in connection with our business dealings, directly or indirectly,
with foreign governments and their employees. The internal investigation and compliance reviews of these matters are ongoing. At this point we are unable to predict the duration, scope or results of the internal investigation and compliance reviews."

Based on information that is publicly available, this potential FCPA enforcement action fits the mold of Lucent Technologies and UTStarcom (here), in that it appears focused on excessive travel and entertainment benefits to Chinese "foreign officials."

However, looking to the prior "on-point" Lucent and UTStarcom enforcement actions may not provide much useful guidance. But you probably already knew that, this is FCPA enforcement after all, where predictabilty and transparency are not distinguishing features.

If ever two FCPA enforcement actions were carbon-copies of each other, it would be the December 2007 enforcement action against Lucent and the December 2009 enforcement action against UTStarcom ("UTS") Both enforcement actions involved telecommunications companies, both enforcement actions principally concerned business conduct in China, both enforcement actions involved payment of excessive travel and entertainment expenses, and both enforcement actions were resolved through a DOJ NPA and an SEC settled civil complaint and consent decree. Despite these similarities the end results were significantly different.

UTS settled its matter by agreeing to pay $3 million in total fines and penalties for FCPA antibribery, books and records and internal control violations. However, Lucent settled its matter by agreeing to pay $2.5 million in total fines and penalties for merely FCPA books and records and internal controls violations – in other words no antibribery violations. This despite the fact that, per the government’s statement of facts and allegations, Lucent sponsored more trips than UTS (315 compared to 225) and spent more money on the problematic trips than UTS ($10 million compared to $7 million) to influence more foreign officials in the hopes of winning billion dollar and multi-million contracts. Also relevant is that UTS was charged with antibribery violations and paid a higher combined fine/penalty amount compared to Lucent (based on less severe allegations) despite the fact that UTS, per the DOJ’s release, voluntarily disclosed the conduct at issue – a factor noticeably absent in the DOJ’s Lucent release.

A Double Standard? Part II

A government official has over $7,000 of expenses paid for by an organization hoping to establish a personal connection with the official and seeking access to the official to educate him on a multibillion dollar program favored by the organization.

The same organization spends over $20,000 for baggage-handling tips, alcohol, snacks, refreshments, and other "trip supplies" for another government official.

Sounds like the organization has some FCPA issues, right?

Wrong.

Why?

Because the government officials involved are not “foreign officials,” but rather U.S. government officials and the organization is the U.S. military. (See here for the recent story from the Wall Street Journal).

According to the article, members of Congress are not required to be disclose such expenses and the information is from military expense records obtained through a Freedom of Information Act request.

While not a perfect parallel to an FCPA enforcement action, the above, as well as "A Double Standard Part I" (see here) raise the question of whether there is a double standard.

Will a U.S. company's interaction with a "foreign official" be subject to more scrutiny and different standards than its interaction with a U.S. official?

Do we reflexively label a "foreign official" who receives "things of value" from an organization with a business interest as corrupt, yet when a U.S. official similarly receives "things of value" from an organization with a business interest we merely say "well, no one said our system is perfect"?

Is there any difference between the bottles of wine given to the Thai "foreign officials" in the UTStarcom, Inc. matter (see here para. 23 of the complaint) and the bottles of wine and alcohol given to the U.S. officials by an organization with a business interest pending before the U.S. officials? Is there any difference between the sightseeing trips provided to the Chinese "foreign officials" in the UTStarcom matter and the corporate funded sightseeing trip by the U.S. official discussed in Part I?

One is a crime and the other is ... well what is it, just the way things get done?

As always, your comments are welcome.

Hold the Phone

"Hold the phone" - the ball has yet to drop on the 2009 enforcement year.

Today, the DOJ and SEC announced (see here and here) resolution of an FCPA action against UTStarcom Inc. (UTSI)

The phone analogy is fitting as UTSI is a global telecommunications company that designs, manufacturers and sells network equipment and handsets.

This matter is the latest in a surge of FCPA scrutiny as to the telecommunications industry (Dec. 2009 individual indictments involving Haiti Teleco, April 2009 Latin Node, Inc. action, the Siemens matter concerned (in part) its telecommunications division, Dec. 2007 enforcement action against Lucent Technologies - among others).

According to the DOJ release, UTSI acknowledged responsibility (pursuant to a non-prosecution agreement) "for the actions of UTS-China [its wholly-owned subsidiary) and its employees and agents, who arranged and paid for employees of Chinese state-owned telecommunications companies to travel to popular tourist destinations in the United States, including Hawaii, Las Vegas and New York City."

The release notes that the "trips were purportedly for individuals to participate in training at UTSI facilities" but that "UTSI had no facilities in those locations and conducted no training." According to the release, "UTS-China then falsely recorded these trips as 'training' expenses, while the true purpose for providing these trips was to obtain and retain lucrative telecommunications contracts."

Based on this conduct, UTSI agreed to "pay a $1.5 million penalty, implement rigorous internal controls and cooperate fully with the Department."

According to the release, DOJ agreed to the non-prosecution agreement based on the company's "voluntary disclosure, thorough self-investigation of the underlying facts, the cooperation provided by the company to the Department, and the remedial efforts undertaken by the company."

In a parallel action, the SEC announced that UTSI settled FCPA anti-bribery, books and records, and internal control charges by agreeing to pay a $1.5 million penalty and provide the SEC "with annual FCPA compliance reports and certifications for four years."

According to the SEC complaint (here), "[b]etween 2002 and 2007, UTSI paid nearly $7 million for hundreds of overseas trips by employees of Chinese government-controlled telecommunications companies that were customers of UTSI, purportedly to provide customer training" when "[i]n reality, the trips were entirely or primarily for sightseeing."

The SEC's allegations are broader than the DOJ's and the complaint also notes the following:

"During the same time period, UTSI provided other gifts and benefits to foreign government customers, including paying for them to attend executive training programs at U.S. universities. UTSI also provided foreign government customers or their family members with work visas and purportedly hired them to work for UTSI in the U.S., when in reality they did no work for the company. UTSI also made payments to purported consultants in China and Mongolia who provided no documented services, under circumstances that showed a high probability that the payments would be used to bribe foreign government officials."

According to the SEC complaint, the executive training sessions "covered general management topics and were not specifically related to UTSI's products or business." The complaint further alleges that expenses in connection with these sessions included "travel, tuition, room and board, field trips to nearby tourist destinations, and a cash allowance of between $800 and $3,000 per person."

The SEC's complaint also contains this allegation as to Thailand:

"In 2004, as part of its effort to expand its business outside China, UTSI submitted a bid for a sales contract to a government-controlled telecommunications company in Thailand. While UTSI's bid was under consideration, UTSI's general manager in Thailand spent nearly $10,000 on French wine as a gift to agents of the government customer, including rare bottles that cost more than $600 each. The manager also spent $13,000 for entertainment expenses for the same customer in an attempt to secure the contract."

None of the alleged government owned or controlled telecommunications are identified and for those of you scoring at home, this is yet another FCPA anti-bribery enforcement action based on the government's untested and unchallenged legal theory that employees of alleged state-owned or state-controlled entities are "foreign officials" under the FCPA.

This is not the first time a telecommunications company has settled an FCPA enforcement action in late December based on improper travel/training benefits.

In late December 2007, Lucent Technologies Inc. settled an enforcement action based on substantively similar allegations (see here, here and here).