A Q&A With Homer Moyer

In running a site called "FCPA Professor" it is only appropriate to touch base with a "Dean" on occasion.

I do so in this post with Homer Moyer, a "dean" of the FCPA bar. Moyer, a partner with Miller & Chevalier (see here) addresses a variety of topics in this Q&A - from evolution of the FCPA and FCPA enforcement to voluntary disclosure and investigative fees. Moyer closes out the Q&A with a few FCPA reform proposals of his own.

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Your government experience prior to law practice was with the Commerce Department, not the DOJ or SEC as is typical of many FCPA enforcement lawyers. How has your Commerce Department experience informed your FCPA practice?

I was at the Commerce Department when the FCPA was enacted, and I chaired an inter-agency group on FCPA issues. Of greater value to my later FCPA practice, however, was having served as general counsel of the Department that deals most directly with corporate issues and that both promotes and regulates American businesses. Also of great value were the experiences of having litigated cases as both a prosecutor and defense counsel. Perhaps most important, however, is having now seen hundreds of different FCPA issues for dozens of different clients.

Working on FCPA cases at the SEC or DOJ provides prosecutors with unique experience, but not the opportunity to counsel and represent corporate clients, manage complex legal issues for them, or help them devise and implement innovative compliance programs.

Describe your first FCPA matter or case? What were the issues? What were your client's concerns?

One of my early cases, some 20 years ago, presented a host of issues that had not yet become commonplace. The case I have in mind involved potential vicarious liability for the acts of a third party, a third party who claimed that the work it did for a U.S. company created a “constructive partnership” that entitled it to share the company’s profits, questions of whether to consult voluntarily with DOJ, an industry with which DOJ was not yet well-acquainted, innovative compliance enhancements, related civil litigation, and forged evidence presented to a court.

That matter ended well, but it presented issues of first impression and foreshadowed how complicated FCPA cases could be.

The FCPA has evolved much since your first case. From your perspective, has this evolution been positive? Any negative aspects of this evolution? How has this evolution affected your practice and your clients?

The evolution of FCPA enforcement has unquestionably brought more and more attention to the issue of official corruption and has had an indisputable impact on corporate behavior, or the “supply side” of the bribery equation. In addition, it has done something that unilateral U.S. laws rarely do, namely, led to a far-reaching change and consensus in the international legal landscape, as now reflected in international anti-corruption conventions to which more than 150 countries have become signatories.

Despite two sets of amendments, the FCPA itself has changed relatively little since it was adopted in 1977. Its “evolution” has primarily been through a steady escalation in enforcement -- the number and variety of enforcement actions, expansive interpretations of key provisions, the size and variety of penalties, the frequency of voluntary disclosures, and a steady rise in the levels of sophistication the government looks for in independent investigations, due diligence processes, and compliance programs.

Has this evolution been positive or negative? Few people would now dispute that corruption and bribery of foreign officials imposes staggering economic and social costs, frequently on countries that can afford it least. The question then becomes whether FCPA enforcement has made a positive difference in reducing or eliminating corruption. It probably has, but more relevant today is the continuing pervasiveness of official corruption and the daunting challenges to controlling it on a global basis.

With respect to the FCPA itself, complaints that it has created an “uneven playing field” have been somewhat undercut by aggressive FCPA enforcement against non-U.S. companies, by new international anti-corruption conventions, and by the beginnings of genuine enforcement in some other countries. And the lament that few FCPA cases are adjudicated in court does not distinguish FCPA enforcement from the enforcement patterns of many other regulatory laws. The infrequency of judicial review may occasionally embolden the government to overreach, but it has rarely resulted in abusive prosecutions.

In terms of our own practice, the increase in enforcement has plainly caused clients to be far more focused on anti-corruption issues than was once the case. This has certainly caused Miller & Chevalier’s long-standing FCPA practice to grow dramatically. It also appears to have created something of a traffic jam of newly minted “FCPA lawyers.”

Your point “that few FCPA cases are adjudicated in court does not distinguish FCPA enforcement from the enforcement patterns of many other regulatory laws” is a very valid point. However, isn’t a key difference though that other laws have benefited from several dozen circuit court opinions and perhaps a few Supreme Court decisions, such that the parameters of the law are at least set by someone other than the enforcement agencies? [Granted, 2011 will likely see several trial court decisions as to certain FCPA elements, but the FCPA is still a law that is lacking much meaningful precedential case law.]

One has to take the view -- and I certainly do -- that independent judicial review is a good thing -- a critical part of our legal system and important to preserving the rule of law. Judicial review, or the prospect of judicial review, can help prevent regulatory or enforcement excesses. In some regulatory programs -- environmental statutes come to mind -- the level of judicial review is robust. And we are beginning to see more judicial review in FCPA cases involving individual defendants.

At the same time, some regulatory areas have been subject to as little, or even less, judicial scrutiny than the FCPA. Statutory restrictions on judicial review and judicial deference to agency interpretations of regulations having “national security” ramifications effectively reduce judicial oversight. One can look long and hard for good case law on the regulations enforced by the Office of Foreign Assets Controls (“OFAC”) or on export controls rules under the ITAR (International Traffic in Arms Regulations), each of which has seen regulatory overreaching and little accountability. One recent Federal Circuit Court opinion referred to the discretion reserved by the Executive Branch combined with the lack of clarity in the ITAR as something that would be expected of a totalitarian regime, not the United States Government.

In the end, however, the amount of judicial review is determined by the private sector. Clients are, of course, free to challenge FCPA enforcement actions, although historically corporate clients have tended to favor settlement as a preferable route. Moreover, recent FCPA court decisions reflect that courts will not necessarily interpret laws differently from enforcement agencies. Nonetheless, both corporate and individual defendants are free to challenge agency interpretations of the laws they enforce, and I and many other counsel would undoubtedly be available to help.

When President Obama, high-ranking DOJ officials and others in government talk about corruption and bribery, they talk about the bridge that crumbles because the contractor was selected based on a bribe payment or other similar scenarios. However, very few FCPA enforcement actions fit this scenario, rather the alleged violator is generally viewed as an industry leader that sells the best products for the best prices. Do you agree that a divide exists between such government or civil society statements and typical FCPA enforcement action scenarios? If so, how do we bridge this divide?

Bribery of foreign officials is, in the first instance, typically designed to overcome market forces and to distort competition, not to ensure the purchase of the best products at the best price. Whether or not a bridge is the best metaphor, FCPA violations reflect illicit payments that are made to enrich corrupt officials and that shift that cost to consumers and taxpayers. The consistent scenario in FCPA enforcement actions is that an alleged violator, or someone acting on its behalf, did, in fact, pay bribes, often egregious ones.

The most significant “divide” today is the uneven enforcement among signatories to anti-corruption conventions. Whereas the 1980s saw an industry push to repeal or relax the FCPA on the grounds that it was creating a competitive disadvantage for American companies, the more common complaint today is that other countries must consistently and meaningfully enforce their own anti-corruption laws to assure that the proverbial playing field is level.

Many calls to roll back the FCPA are now anomalous, as they would put the United States out of compliance with international conventions that the FCPA inspired and that the United States fought hard to achieve. They also run counter to the anti-corruption momentum of the last 20 years and would effectively legalize some practices that are coming to be universally condemned, if not yet universally punished.

I find that most U.S. multinational corporations would be delighted to compete on the merits. Indeed, some companies are affirmatively using integrity in the marketplace to gain a competitive advantage. Many have voluntarily prohibited “facilitating payments,” even though they are permissible under the FCPA. It is also interesting to note that Siemens, after paying record-shattering FCPA fines and taking aggressive steps to transform its entire corporate culture, has been posting record profits.

What is your reaction to this statement from a recent high-ranking DOJ official - "“the government sees a profitable program, and it’s going to ride that horse until it can’t ride it anymore.” Do you believe that FCPA enforcement has become a government cash cow? FCPA enforcement fines and penalties simply go into the U.S. Treasury. Are there better places for this money accepting the notion that bribery results in victims?

FCPA fines probably don’t rise to the level of a governmental “cash cow.” In fiscal terms, they are of no real moment. The government unfortunately needs some much bigger revenue cows.

I do believe, however, that law enforcement penalties should be a consequence of, not a reason for, enforcing criminal laws. And although penalties have risen, I do not have the sense that revenue production has been a driver of FCPA enforcement.

Your interesting question about whether penalties might be used to compensate the “victims” of corruption is a favorite in developing countries. It highlights the difficulties of tracing, seizing, and repatriating funds that corrupt officials have stolen from their countries. Even where recovery of funds is possible, assuring that they are then used to benefit the citizens who were cheated by official corruption is a challenge. That is, however, the right use of repatriated funds.

Because countries that have been cheated by their own rulers have rarely been able to recover the stolen funds, some have asked whether they should be compensated with funds collected as penalties in anti-corruption enforcement actions. This would be a break from past law enforcement patterns, and the idea appears not to have gained significant traction. The strongest case for making that break probably relates to funds collected as disgorgement of profits rather than pure fines. Indeed, one could argue that it would be more just for the bounties that whistleblowers can now earn under the Dodd-Frank law to go not to whistleblowers, but rather to the countries affected for the benefit of the victims of corruption.

Your response speaks of corrupt “officials,” “official corruption” and “rulers.” Yet, the vast majority of FCPA enforcement actions involve no such individual – rather the alleged recipient of the bribe is an employee of an alleged state-owned or state-controlled enterprise. In these cases, would not the most direct victim be the competitor who lost the contract or did not have the opportunity to bid. Are you in favor of an FCPA private right of action?

In most FCPA violations, there is more than one victim. Competitors can certainly be victims. So can government agencies or instrumentalities that are procuring goods or services. Even where there is an admitted bribe, however, determining which competitors may have been “victims” would undoubtedly be a messy and imperfect process. And allegations of improper payments are far more common than proof of improper payments, as any practitioner knows, and the complications of trying to identify victims and allocate compensation among everyone claiming status as a victim might make us long for the days when the principal issues were simply the ones you have asked about here.

What percentage of internal investigations you have worked on in the past 3-5 years that ended with a conclusion that the company violated the FCPA resulted in a voluntary disclosure? Same question for investigations you worked on during the time period 1995-2005? Why the difference?

Although we have clients who, after weighing all the relevant factors, have elected not to disclose, the percentage of matters that result in voluntary disclosures has plainly been rising. The reasons include changes in the sentencing guidelines, the enactment of Sarbanes-Oxley, greater Audit Committee oversight of investigations, the campaign by enforcement agencies to assure companies that voluntary disclosure and cooperation will result in “tangible benefits,” and the gradually spreading view that this is true, if not numerically predictable.

With Avon's recent disclosure that it has spent over $100 million in professional fees and expenses in connection with an FCPA inquiry and other similar disclosures (albeit perhaps not as dramatic) have professional fees and expenses (law firm, accounting firm, etc.) associated with FCPA internal investigations gotten out of control?

I have to confess to being stunned at some of the reported costs of investigations. To be sure, the costs of investigations have risen with increased emphasis on electronic documents and the insistence that investigations must be independent, thorough, and knowledgeable.

Accepting those requirements, the cost-effectiveness of an investigation can be significantly improved by developing a careful work plan, utilizing a firm with experienced FCPA lawyers at all levels of seniority, tailoring the type of investigation to the type of issue, and making informed and reasonable judgments about when to stop an investigation and focus on remediation. In my experience, it is often possible to have a reasoned and productive dialogue with enforcement agencies about the scope and extent of investigations.

FCPA reform proposals are floating around and are reportedly being considered by certain members of Congress. In your view what reform proposals have merit and what issues are at the top of Homer Moyer's FCPA reform list?

I find some of the calls for statutory reform less than compelling. Proposals to change the statute in ways that would be inconsistent with international conventions to which the U.S. is committed are unlikely to be successful, in my view, and could well open the door to other “reforms” that advocates for change might dislike, such as eliminating the exception for facilitating payments.

To be sure, in enforcing the FCPA, the government tries to overreach from time to time -- exercising anti-bribery jurisdiction over foreign subsidiaries and aggressive applications of dd-3 jurisdictional on the grounds that some step in the process took place “in the territory of the United States” come to mind as occasional examples. When enforcement agencies overreach, they should be challenged.

My dream list of “reforms” might read something like the following:

• Internal DOJ guidance that voluntarily disclosed matters must normally be resolved by the Department within 90 days after completion of an internal investigation; that agencies should make public their calculations of credit for voluntary disclosure and coordination; and that the Department will publish sanitized summaries of its declinations.

• An amendment to tweak the whistle-blower provision of Dodd-Frank to relieve the SEC of the conundrum of implementing the statute consistent with its terms but in a manner that does not undercut effective corporate compliance programs;

• An agreement among prosecutors that in the case of parallel investigations by more than one country, private parties may request state-to-state consultations (as called for by the OECD convention), and the consulting states should assure that investigations are coordinated and penalties made complementary so that companies do not face redundant penalties or unnecessarily overlapping investigations.

• Insistence by the OECD that OECD membership for China, Russia, and India must include accession to the Anti-Corruption Convention, accelerated peer review, and possible reconsideration of OECD membership if implementation and enforcement of anti-corruption laws prove to be insufficient.

• Multilateral reform measures designed to minimize current legal impediments to identifying and seizing funds stolen by corrupt officials and to facilitate repatriation of such funds.

Uneven Justice: A Critical Look at FCPA Enforcement

The week starts with a guest post from Michael Volkov.

Volkov (here) is a partner at Mayer Brown LLP. His practice focuses on white collar defenses, FCPA enforcement and compliance, and litigation. The views expressed in this article are his own and do not represent those of his law firm, Mayer Brown LLP. He can be reached at mvolkov@mayerbrown.com.

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UNEVEN JUSTICE: A CRITICAL LOOK AT FCPA ENFORCEMENT

By Michael Volkov

The United States is a nation of laws: badly written and randomly enforced. ~Frank Zappa

Much has been written about the overall fairness of the Justice Department’s and the Securities and Exchange Commission’s aggressive FCPA enforcement program. Some have argued that DOJ and SEC have engaged in uneven justice: corporations plead to non-FCPA offenses, pay big fines, and continue business as usual. Others argue that DOJ has failed to prosecute individual executives and officers, or to ensure that corporations are debarred or suspended from continuing to sell to the federal government.

As a former federal prosecutor with nearly 20 years experience in the criminal justice system, I can assure you that some of the criticisms are accurate but some completely miss the mark. Last year, the Senate Judiciary Committee examined the controversy surrounding FCPA enforcement, and this year the House Judiciary Committee is planning to look at the issue.

DOJ is proud of its enforcement program. And rightly so – they have resuscitated a program which was dormant for years which now collects over one half of all criminal fines imposed each year in the United States. That is an impressive record.

Aside from the fundamental deficiencies inherent in DOJ’s voluntary disclosure process, DOJ claims that it gives adequate credit for corporate compliance programs, early cooperation and full disclosure. In response some suggest that plea agreements which are designed to protect companies from debarment and include pleas to non-FCPA charges are unfair. Part of that point is correct; the other part is flat out wrong.

Our criminal justice system operates day-to-day based on plea agreements. In the federal system, over 90 percent of federal cases are resolved through plea agreements. As part of that process, charge-bargaining is a critical component. DOJ’s decision to permit corporations, or typically country-specific subsidiaries to plead guilty to a non-FCPA offense, is in keeping with this long tradition. The underlying conduct as described in the plea agreement is known to all – the company engaged in systematic and widespread bribery. Nothing more, nothing less. To extrapolate from such a plea that DOJ is not enforcing the law is misguided and ignores the realities of the plea bargaining process.

On the other hand, DOJ’s willingness to forego debarment and/or suspension is certainly an issue that needs to be examined. As Professor Koehler testified at the Senate Judiciary Committee, BAE was awarded a government contract on the same day it plead guilty to a non-FCPA offense but paid a criminal fine over $400 million. That is certainly uneven justice, and Senators and policymakers should have taken note of this ironic enforcement twist.

Senator Specter and others have criticized the Justice Department for failing to include individual corporate executives and officers in its enforcement actions. The Justice Department’s Antitrust Division has a much better record on this score – corporations and individuals are prosecuted in criminal antitrust cases with equal vigor and results. Why has DOJ shied away from linking corporate cooperation to requiring cooperation against individual executives and officers at the offending company?

If the goal of DOJ’s enforcement program is corporate compliance, then the enforcement program needs to be recalibrated. Deterrence is an admirable objective and will certainly increase compliance, but DOJ has more tools available to it to encourage and promote cooperation. DOJ’s antitrust amnesty/leniency is an example of a program which has been incredibly successful on the enforcement and the compliance ends. While there are certainly problems with the application of a cartel-focused (multi-actor) model to FCPA cases, there are lessons which can be learned from the amnesty/leniency program.

We all aspire to equal justice and we all admire the image of justice that is blind as the hallmark of our judicial system. But right now what is needed is for justice to listen so that it operates with fairness and equal justice for all.

RAE Systems Held Liable For The Acts Of Its Subsidiaries' Joint Venture Partners

If every company voluntarily disclosed that its distant subsidiaries and/or its distant subsidiaries' joint venture partners provided minor things of value (such as a notebook computer, kitchen appliances, and business suits) to someone deemed a "foreign official" by the enforcement agencies, then instead of 15 to 20 core FCPA enforcement actions per year, there would probably be something like 150 to 200 FCPA enforcement actions per year.

If every issuer voluntarily disclosed that its internal controls were imperfect as to distant subsidiaries or its distant subsidiaries' joint venture partners, and that such distant entities failed to follow issuer instructions or issuer provided training and guidance, then instead of 15 to 20 core FCPA enforcement actions per year, there would probably be something like 1,500 to 2,000 FCPA enforcement actions per year (recognizing that the FCPA's books and records and internal control provisions equally apply to domestic operations).

So why did RAE Systems voluntarily disclose such conduct to the DOJ and the SEC? Would it not have been more efficient and cost-effective for the company to effectively remedy these issues internally?

Do the high professional expenses connected with voluntary disclosures (compared to effectively remedying issues internally) have anything to do with the increase in voluntary disclosures? (See here for a prior post on the issue). In RAE Systems annual report for the year ended December 31, 2009 (see here), filed in March 2010, the company disclosed that it had (at that point) incurred $4 million in professional fees in connection with the FCPA investigation.

From an enforcement standpoint, is the Foreign Corrupt Practices Act becoming an all-purpose corporate governance instrument? Should it?

These are some of the questions raised by the odd RAE Systems enforcement action.

Last Friday, the DOJ and SEC announced (see here and here) a joint enforcement against RAE System (a San-Jose, California based company with shares on the New York Stock Exchange) "a leading global provider of rapidly deployable connected, intelligent gas detection systems that enable real-time safety and security threat detection." (See here for the company website). In September, RAE Systems signed a definitive agreement to be acquired by Battery Ventures. The transaction is expected to close by the end of the first quarter of 2011.

This post summarizes the DOJ and SEC enforcement actions in which RAE Systems agreed to pay approximately $2.95 million in fines and disgorgement.

DOJ

Pursuant to a three-year non-prosecution agreement, RAE Systems acknowledged its "knowing violations of the internal controls and books and records provisions" of the FCPA "arising from and related to improper benefits corruptly paid by employees of two joint ventures majority owned and controlled by RAE Systems to foreign officials of departments, agencies, and instrumentalities" of the Chinese government." Pursuant to the NPA, RAE Systems agreed to pay a $1.7 million penalty.

According to the NPA, RAE Systems "had significant operations" in China organized "under a holding company called RAE Asia, headquartered in Hong Kong." RAE Systems "sold products and services in mainland [China] primarily through second-tier subsidiaries organized as joint ventures with local Chinese entities.

One of the joint ventures is RAE-KLH (Beijing) Co., Limited ("RAE-KLH"). RAE Systems acquired a 64% stake in RAE-KLH in 2004 and upped the stake to approximately 96% in 2006. The other joint venture is RAE Coal Mine Safety Instruments (Fushun) Co., Ltd. ("RAE-Fushun"). In 2006, RAE Systems acquired a 70% interest in RAE Fushan.

Both RAE-KLH's and RAE Fushun's financial results were included in the consolidated financial statements that RAE Systems filed with the SEC.

According to the NPA, "a significant number of RAE-KLH's and RAE Fushun's customers" in China were "government departments and bureaus and large state-owned agencies and instrumentalties." The NPA states as follows. "The Lanzhous City Honggu Mining Safety Bureau, for example, was a government customer. Other government clients included regional fire departments, emergency response departments, and entities under the supervision of the provincial environmental agency, among others. Accordingly, officers and employees of a significant number of RAE-KLH's and RAE Fushun's customers were 'foreign officials' within the meaning of the FCPA ...".

The NPA then contains a heading that states, "RAE System's Knowing Failure to Implement Systems of Effective Internal Controls at RAE-KLH and RAE Fushun Post Closing."

The NPA then cites various company documents that suggest RAE was aware that KLH sales personnel were making kickbacks or otherwise engaging in questionable sales tactics with its customers. The NPA cites a document from a RAE Systems employee from the United States who met with KLH personnel that stated "we knew this risk all along and have accepted it upon entering the JV deal."

Following the acquisition, the NPA states that "RAE Systems did provide some FCPA training to RAE-KLH personnel and did tell RAE-KLH personnel to stop paying bribes and providing other improper benefits, but such steps were half-measures." The NPA states that "RAE Systems did not impose sufficient internal controls or make sufficient changes to high-risk practices."

As to RAE-Fushun, the NPA states that "RAE Systems did not conduct pre-acquisition corruption due diligence of RAE Fushun" but that "given RAE's System's experience with KLH described above, the high-risk nature of the location, and the existence of numerous government customers, pre-acquisition corruption-focused due diligence was merited. The NPA further states "as was later confirmed, improper business practices had occurred at RAE Fushun before the acquisition and continued post-acquisition, as RAE Systems failed to implement an effective system of internal controls at RAE Fushun."

Based on the above facts, the NPA states that "RAE Systems knowingly failed to implement a system of effective internal accounting controls at RAE-KLH and RAE Fushun...".

According to the NPA, the "lack of effective internal accounting controls permitted improper payments to continue at RAE-KLH and RAE-Fushun after acquisition."

As to RAE-KLH, the NPA states that certain sales representatives at RAE-KLH "used cash advances and reimbursements for improper purposes, including the corrupt giving of gifts and paying for entertainment, as well as direct or indirect payments to customers." According to the NPA, "the gifts included, among other things, a notebook computer for the son of the deputy director of a state-owned chemical plant as part of efforts to obtain business from that entity." The NPA also states that RAE-KLH made payments under contracts with a purported consultant and that some or all of the payments were funneled to officials of a state-owned enterprise and government departments.

As to RAE Fushun, the NPA likewise statements that certain sales representatives at RAE Fushun "used cash advances and reimbursements for improper purposes including the corrupt giving of gifts and paying for entertainment, as well as making direct or indirect payments, to officers and employees of customers." According to the NPA, "these gifts to certain officials of state-owned enterprises and government departments included, among other things, a variety of luxury items, such as jade, fur coats, kitchen appliances, business suits, and high-priced liquor."

The NPA then states that the "lack of effective internal controls and continued improper payments led to inaccurate books and records."

During the three-year term of the NPA, RAE Systems agreed to undertake a host of compliance reforms and to report to the DOJ on an annual basis.

The DOJ agreed to enter into the NPA "based in part, on the following factors: (a) RAE System's timely, voluntary, and complete disclosure ...; (b) RAE System's thorough, real-time cooperation with the DOJ and SEC; (c) the extensive remedial efforts already undertaken and to be undertaken by RAE Systems; and (d) RAE System's commitment to submit periodic monitoring reports to the DOJ."

SEC

The SEC's complaint (here) is based on the same core set of facts described above. It charges RAE Systems, not only with FCPA books and records and internal control violations, but anti-bribery violations as well.

The complaint begins by alleging that "from 2004 through 2008" RAE Systems violated the FCPA "by paying, through two of its joint venture entities in China, approximately $400,000 to third party agents and government officials in China to influence acts or decisions by foreign officials to obtain or retain business for RAE Systems." According to the complaint, the payments "were made primarily by the direct sales force utilized by RAE Systems" at its two Chinese joint-venture entities: RAE-KLH and RAE-Fushun.

According to the SEC, RAE System's "illicit payments to government officials and third-party agents generated revenues worth over $3 million and gross margin of $1,147,800."

The complaint states: "While the payments were made exclusively in China and were conducted by Chinese employees of RAE-KLH and RAE-Fushun, RAE Systems was aware of significant indications of ongoing bribery at RAE-KLH. At the time, RAE Systems failed to effectively investigate these indications, or red flags, and to stop the bribery from continuing. RAE System's failure to act on these significant red flags allowed, at least in part, bribery to continue at RAE-KLH."

RAE Systems was held liable for RAE-KLH's improper payments even though the SEC complaint states that "RAE Systems Instruct[ed] KLH Personnel to Stop Bribery Practices." According to the SEC, "while RAE Systems communicated these instructions to RAE-KLH personnel, RAE Systems did not impose sufficient internal controls or make any changes to the practice of sales personnel obtaining cash advances." According to the SEC, RAE System's CFO visited RAE-KLH's Chinese facilities and observed that certain cash advances may be used for "grease payments, to supplement sales employees' incomes and as bribes." In response, RAE Systems, "implemented FCPA compliance training and required each RAE-KLH employee to certify that he or she did not engage in bribery practices." However, the SEC alleged "again, however, [RAE Systems] did not impose sufficient internal controls or make changes to the practice of sales personnel obtaining cash advances."

Without admitting or denying the SEC's allegations, RAE Systems agreed to pay $1,147,800 in disgorgement (plus $109,212 in prejudgment interest) and to undertake a host of FCPA compliance measures.

Cheryl Scarboro (Chief of the SEC's FCPA Unit) stated as follows. "RAE Systems develops products to detect harmful emissions, yet it did not have adequate measures in place to detect and root out internal wrongdoing. Companies that fail to respond to red flags can be held liable for the acts of their joint venture partners."

Carlos Ortiz (a former DOJ attorney now at LeClair Ryan - here) and Roy McDonald (DLA Piper - here) represented RAE Systems.

The FCPA and Potential Reforms

Last week's U.S. Chamber of Commerce Annual Legal Reform Summit included a panel titled: "Navigating a Global Marketplace — Foreign Corrupt Practices Act and Potential Reforms."

Amanda Ulrich (here), an associate in the New York office of Debevoise & Plimpton, LLP, provides a summary in this guest post.

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The recent expansion of FCPA enforcement and new FCPA-related bounty provisions in the Dodd Frank Act had audience members thoroughly engaged as an impressive assembly of speakers from the public and private sectors gathered to discuss these issues at the United States Chamber of Commerce’s Annual Legal Reform Summit last week.

Michael B. Mukasey, former Attorney General of the United States and current partner at Debevoise & Plimpton LLP, introduced and moderated a panel that also included John S. Darden, former Assistant Chief of the Fraud Section of the Department of Justice (“DOJ”) and currently a partner at Patton Boggs, LLP, Cheryl J. Scarboro, Chief of the FCPA Unit within the Division of Enforcement at the U.S. Securities and Exchange Commission (“SEC”), George J. Terwilliger III, former DOJ Deputy Attorney General and currently global head of the White Collar Practice Group of White & Case LLP, and Andrew Weissmann, former Chief of the Criminal Division of the U.S. Attorney’s Office for the Eastern District of New York and Co-Chair of the White Collar Practice at Jenner & Block LLP. The audience was treated to a vigorous debate on FCPA enforcement between representatives of the private sector who called for more clarity and predictability in enforcement, and individuals arguing the federal government’s perspective, looking to level the playing field for business through increased enforcement and increased cooperation among foreign and domestic agencies.

The discussion opened with remarks by Judge Mukasey, who commented that the rapid expansion of FCPA enforcement in the United States since 2004 has brought increased anxiety to companies, which are concerned about competitive disadvantages in the global business environment. Judge Mukasey suggested, however, that this anxiety should be tempered by the fact that 34 countries have signed on to the Organization of Economic Cooperation and Development’s Convention on Combating Bribery of Foreign Public Officials in International Transactions. He noted further that although the United States remains in the forefront of enforcement, with the UK’s Anti-Bribery Bill coming into effect next year, there is a global trend towards more vigorous enforcement of anti-bribery laws.

Expanding Views on Jurisdiction have led to Global Enforcement by the DOJ

Mr. Darden presented the DOJ’s perspective on the expansion of FCPA enforcement, and explained that, since 2005, the DOJ’s Fraud Section has concluded more than 40 criminal FCPA matters and collected over $2 billion in criminal fines. He noted that the six largest FCPA investigations have been resolved in the past 22 months, that more than 75 individuals have been criminally charged with FCPA violations since 2005, and that more than 45 of those individual prosecutions have taken place in the past two years. These statistics dwarf those of the first thirty years of FCPA enforcement.

According to Mr. Darden, the recent surge in enforcement is the result of an expanding view of jurisdiction by the government, as applied to both corporations and individuals. For corporations, the FCPA applies not only to U.S. corporations and foreign companies whose shares are traded on U.S. exchanges and regulated by the SEC, but also individuals and companies that take any action in the United States in furtherance of a bribery scheme. As a result of a more expansive jurisdictional reach, Mr. Darden argued that the idea that U.S. companies are disadvantaged by stringent FCPA provisions has been turned on its head; he noted that five of the six largest FCPA actions have involved foreign corporations.

Mr. Darden pointed out that the expanding fight against bribery has extended beyond the scope of the FCPA itself. Although the FCPA punishes only the payor (as opposed to the Federal Anti-Kick Back Law, which punishes both the payor and the payee), at least two FCPA-related cases in the last few months have involved charges against foreign officials under other statutes.

SEC stepping up enforcement, increasing cooperation with other agencies, but approaching remedies with more flexibility

Ms. Scarboro described the FCPA program at the SEC, where, she noted, FCPA enforcement has been a high priority for quite some time. In 2010 alone, with several cases still ongoing, the SEC has settled with 11 corporations and 7 individuals, recovering over $400 million in disgorgement and civil penalties.

Ms. Scarboro reminded the audience that the SEC has reorganized its efforts and now has a dedicated unit focused exclusively on combating foreign bribery. She said that the division has become smarter, more proactive, and more internally coordinated; the unit has also increased the SEC’s coordination with the DOJ. In addition, there have been more coordinated efforts with investigative authorities in other countries, including in connection with the Siemens investigation and this year’s Innospec case. Ms. Scarboro said that the SEC and the DOJ have been at the forefront of enforcing this country’s OECD obligations and have begun encouraging and engaging international counterparts in the pursuit of anti-bribery enforcement.

Ms. Scarboro emphasized that the SEC will continue to pursue disgorgement of profits in its FCPA investigations, and also explained that the SEC has begun to focus on industry-wide corruption, taking individual instances of bribery and investigating whether patterns emerge within a given industry. The SEC has stepped up its pursuit of individuals, she said, viewing enforcement against individuals as a better deterrent than enforcing sanctions against a company.

The SEC has pursued a more flexible approach to remedies in its investigations. To encourage cooperation by businesses under scrutiny by federal agencies, Ms. Scarboro explained, the SEC has begun pursuing deferred prosecution and cooperation agreements with companies that voluntarily report and cooperate with the SEC. She said that the SEC fashions relief on a case-by-case basis, given that the facts and circumstances of each case, as well as the level of cooperation, differ significantly, and the SEC considers a broad range of factors in determining the relief in each case.

Calls for Reform from the Private Sector

Andrew Weissman has written critically about the statute in the past, and recently released an article, sponsored by the U.S. Chamber of Commerce’s Institute for Legal Reform, calling for specific reforms to the statute. Mr. Weissmann expressed concern that, because the vast majority of FCPA-related cases against corporations, like those involving allegations of other criminal law violations, are settled without trial, the DOJ and the SEC serve as the judge and jury; thus, there is no meaningful way to question their interpretation of the FCPA’s grey areas.

Mr. Weissman’s second major stated concern was that, due to the lack of clarity in enforcement, companies are less likely to pursue business opportunities in countries seen as highly corrupt, such as China, where the risks of running afoul of the FCPA are high. The potential for FCPA enforcement hangs over such business ventures, and Mr. Weissman characterized this as a tax on companies looking to do business abroad.

Mr. Weissman encouraged the United States to adopt a provision similar to one contained in the UK’s Anti-Bribery Bill, which, when it becomes effective in April 2011, will provide a defense to enforcement actions for companies that devote “adequate” resources to creating and enforcing anti-bribery procedures. Mr. Weissman suggested that the British statute recognizes the limitations of what a corporation can do about the actions of its individual employees.

Mr. Weissman also called for more clarity with respect to what constitutes an “instrumentality” of a foreign government, light-heartedly suggesting that almost everyone in China is an instrumentality of the government. Mr. Weissman fears that, without more clarity, a business would not know whether it could take someone employed at General Motors out to dinner (as the U.S. government is now a shareholder). Similar arguments might apply to hospitality provided to an employee of Bloomberg (as New York Mayor Michael Bloomberg owns 85% of that company), or a Professor at Columbia (a school that receives public grants).

Judge Mukasey noted that the United States has a facilitation payment exception that the UK statute does not have, but Mr. Weissman described the facilitation payment exception as very narrow, and limited to grease payments that expedite inevitable occurrences. Judge Mukasey characterized this exception as applying to payments that help a company to “move up the list” toward an approval it would obtain in any event as opposed to helping a company “get on the list.” Mr. Weissman also noted that there is no de-minimis exception in the FCPA, putting companies at risk of FCPA violations even for very minor favors or transactions.

Although the new UK statute goes beyond the FCPA in some ways – including its extension to commercial bribery – Mr. Weissmann believes that the availability of the “adequate procedures” defense makes that statute more reasonable than the FCPA.

The intent standard applied in FCPA enforcement actions also concerns Mr. Weissman. For individual prosecutions under the FCPA, he explained, the intent standard is “willfulness,” which is considerably more stringent than the “knowing” standard applied to corporations. The “knowing” standard, Mr. Weissman argued, makes doing business in certain countries very risky, as the act in furtherance of the bribery needs to be only an intentional act, that is, not one that is a mistake.

Anomalies Resulting from Increased Enforcement

Mr. Terwilliger began his discussion of anomalies in increased enforcement by noting that U.S. companies are devoted to free market principles, and that corrupt markets are not free – a principle sufficient to justify anti-bribery enforcement but not necessarily sufficient to justify uneven enforcement.

Mr. Terwilliger outlined problems with what he described as the great leverage held by the DOJ and the SEC in FCPA enforcement: few trials (almost no trials involving corporate defendants) and no body of jurisprudence governing the field, which results in no real opportunity for corporations to contest the government’s decision to pursue an FCPA enforcement action.

Although prosecutors stress the benefits of self-reporting and internal investigations, Mr. Terwilliger expressed an ongoing concern of many corporations that plaintiff’s lawyers representing shareholders and sometimes competitors have begun to latch on to those self-reports in pursuing litigation against companies who report bribery activities.

Similarly, Mr. Terwilliger explained that, in his view, the new bounty provisions of the Dodd Frank Act, which provide for recoveries of up to 30% of settlements with the SEC in excess of $1 million, misalign incentives that are crucial for successful self-reporting. The best source for self policing bribery issues are a company’s employees, and as such, companies are now required to rely on people who have financial incentive to go directly to the government to report these issues. Mr. Terwilliger said he viewed this as a major concern given that a company’s willingness to self-report is often a consideration in the remedies pursued by government agencies.

Incentives for Self-Reporting

Mr. Terwilliger argued that the incentives for companies faced with potential FCPA violations are also skewed in the self-reporting context. The better the procedures to detect bribery, the more likely the company will be to uncover bribery and face the decision of whether or not to self-report. Rather than being rewarded for voluntarily rooting out bribery problems, companies are often faced with costly punishment, an anomaly that weighs heavily in the board room when determining whether to self-report. Mr. Terwilliger called for the creation of a presumption of non-criminal disposition and reduced penalties for companies voluntarily reporting FCPA violations. Judge Mukasey added that such an approach could help lawyers in advising their clients on FCPA compliance policies.

Mr. Darden responded that the DOJ would see this as an unnecessary step, because the program is working well without such a “carrot.” Characterizing Mr. Terwilliger’s suggestion as amnesty and comparing it to the anti-trust division’s amnesty program, Mr. Darden said that the DOJ does not need companies to come forward and voluntarily report, whereas the anti-trust division’s amnesty policy is justified by the fact that it is impossible to investigate a cartel without one member of that cartel coming forward. Mr. Darden said that additional carrots are not needed in anti-bribery enforcement, as companies have shown that there is enough incentive to come forward.

Mr. Terwilliger argued that, in his experience with certain long-running voluntary FCPA investigations, it would have been impossible for the DOJ to gather the same evidence as was gathered in a voluntary investigation, and said that the anti-trust program is a very good analogy to the DOJ’s program. He also noted that he was not discussing amnesty, but rather a reduced penalty that would give the company better incentives to self-report.

Mr. Darden and Ms. Scarboro both stated that only about one-third of FCPA investigations are voluntarily reported to the DOJ or the SEC, but the proportion of cases that are resolved with cooperation of the companies being investigated is much higher than one-third, and in those cases that cooperation factors significantly into the remedies the agencies seek.

Ms. Scarboro noted that the U.S. Sentencing Guidelines, which the DOJ uses (and courts apply) in assessing fines for FCPA violations, provide for downward departures, and the availability of non-prosecution agreements gives the DOJ added flexibility. While other enforcement models, like the UK’s, provide for the negotiation of remedies prior to the investigation, the U.S. model gives federal agencies discretion to account for a variety of facts and circumstances after an investigation to assess the proper penalty. The SEC, for example, in determining whether to bring an action against a corporation, considers the corporation’s cooperation in the investigation and its remediation efforts in determining what remedies the SEC will seek, if any.

Ms. Scarboro noted that, in many cases, the level of cooperation is sufficient that the SEC will not initiate a full investigation. Those cases are generally not publicized in order to avoid unwanted publicity or embarrassment for the cooperating companies. Mr. Darden echoed that sentiment, and said that, while some companies affirmatively publicize their avoidance of FCPA charges, in many cases when the DOJ determines not to pursue charges, companies do not want the publicity of the DOJ’s decision not to prosecute or investigate, because that publicity could give rise to the need to issue a new 8-K.

During a Q&A period, Mr. Darden stated that the Federal Prosecution Principles, which were supposed to add clarity, have in some cases raised more questions than answers. In an attempt to give more clarity, especially in the area of compliance, the Prosecution Principles fail to give guidance about the type of cases the DOJ seeks to pursue. For example, the DOJ cares less about a company with some far flung employee who did not “get the memo” on the company’s anti-bribery compliance policy, than it does about a higher level corporate employee generating phony documents. Mr. Darden said that the failure to distinguish these schemes is a weakness in the Federal Prosecution Principles and is driving a need for more clarity.

Conclusion

Although the private sector has called for reform, the federal agencies responsible for FCPA enforcement have signaled no reversal of the trend of increased enforcement of the FCPA against companies and individuals at home and abroad.

An Immaterial Disclosure?

The securities laws generally require issuers to disclose material facts and events to investors.

What is material?

Technically, there is SEC guidance on the issue (see here).

The issue basically boils down to whether the information would affect the judgment of a reasonable investor in making an investment decision.

As Thierry Olivier Desmet (Assistant Regional Director, FCPA Unit, SEC) explained at the recent World Bribery and Corruption Compliance Forum (here) the concept of materiality itself has two "sub-concepts": (i) quantitative materiality (something that impacts a company's financial statements) - Desmet conceded that very few bribes are quantitatively material; and (ii) qualitative materiality a "complicated gray area" to use Desmet's words. He said that all bribes can be considered qualitatively material because they may "automatically trigger a books and records violation." Because of this, Desmet said that it is "prudent" for any issuer to approach the SEC with any "suspicion" of bribes "as soon as" the company learns of the improper payment.

It is against this backdrop that issuers frequently disclose immaterial payments which may implicate the FCPA.

Case in point, Sensata Technologies Holding N.V. ("Sensata") (here), a global industrial technology company that began trading on the New York Exchange in March 2010 (see here).

The company had this to say in its October 22nd 10-Q filing (here):

"An internal investigation has been conducted under the direction of the Audit Committee of the Company’s Board of Directors to determine whether
any laws, including the Foreign Corrupt Practices Act (“FCPA”), may have been violated in connection with a certain business relationship entered into by one of the Company’s operating subsidiaries involving business in China. The Company believes the amount of payments and the business involved was
immaterial. The Company discontinued the specific business relationship and its investigation has not identified any other suspect transactions. The
Company has contacted the United States Department of Justice and the Securities and Exchange Commission to begin the process of making a voluntary disclosure of the possible violations, the investigation, and the initial findings. The Company will cooperate fully with their review. The FCPA (and related statutes and regulations) provides for potential monetary penalties, criminal and civil sanctions, and other remedies. The Company is unable to estimate the potential penalties, if any, that might be assessed and, accordingly, no provision has been made in the accompanying condensed consolidated financial statements."

Since the disclosure, Sensata's shares have climbed approximately 1.5%.

However, this has not stopped the new breed "FCPA" plaintiff lawyers from acting.

Yesterday, the Shareholders Foundation announced (here) an investigation on behalf of investors of Sensata concerning "whether certain officer and directors of Sensata [...] breached their fiduciary duties and are liable for possibly violating the U.S. Foreign Corrupt Practices Act (“FCPA”)."

The SFO Speaks

Today's post is devoted to the U.K. Serious Fraud Office (SFO), specificaly a recent speech by Richard Alderman (Director of the SFO) on the Bribery Act and a recent webcast delivered by Vivian Robinson QC (General Counsel for the SFO) on the Bribery Act.

Bribery Act 2010 - A New Beginning

Earlier this week, Alderman gave a speech "Bribery Act 2010 - A New Beginning" (see here).

[See here for my recent Q&A with Mr. Alderman on the Bribery Act and other topics].

Below are some excerpted highlights.

"Those corporates and individuals that ignore recent developments in this jurisdiction concerning bribery legislation and the enforcement of the law do so very much at their peril. The UK will soon have the toughest bribery legislation in the world and it will be vigorously enforced by the Serious Fraud Office. In the meanwhile, the work of the SFO in enforcing the current law has been widely praised. Indeed as a result of what we have been doing the OECD, Transparency International and TRACE International have put the UK very much in the lead after the US in enforcing anti-corruption legislation. I have been very pleased to see this. The UK is regarded as an active enforcer of bribery legislation. This is exactly where we need to be."

"We want to encourage corporates that identify a problem to come and talk to us at an early stage. The incentive for them is that a self report could potentially lead to a civil resolution through a Civil Recovery Order. We have done this in two cases that are in the public domain and we currently have some other cases that are being dealt with in this way." [Those two cases are Balfour Beatty Plc (here) and AMEC Plc (here)]

"The sentencing remarks by Lord Justice Thomas in the Innospec case [see here for a prior post] have been regarded as casting some doubt on this. In that case, Lord Justice Thomas stressed the importance of dealing with corruption and the need for very significant sentences when individuals and corporates are brought before the Criminal Courts. He also discussed civil recovery and said that the public would expect suitable cases of corruption to go to the Criminal Courts. I entirely accept this guidance. There will be cases where we shall decide, in accordance with the Code for Crown Prosecutors and the Guidance for Corporate Prosecutions, which because of the nature and seriousness of what is alleged we must prosecute. For example, it is likely that cases involving systemic failings at Board level would be prosecuted. However, there maybe cases where we are unable to prosecute and we consider that a civil recovery order is appropriate. This is a civil remedy. We have given detailed guidance on these issues in the context of corporate prosecutions. There is also Attorney General's guidance on the Use of Civil Recovery."

"While I am talking about guidance from the courts, let me also refer briefly to the comments in the Innospec and Dougall cases concerning documents agreed by the SFO and the corporate when a case comes to a criminal court. The Judge took the view that the SFO had gone too far in these cases in recommending or commenting on the sentence that the Judge should impose. I accept these criticisms. Plea negotiations of this nature are new and there is a lot for us all to learn. We have had other cases where the Judge has been satisfied with the agreed documentation as a basis for sentence. This is what we shall need to aspire to in all of these cases."

"Let me now turn to the subject of the Bribery Act because there are a number of issues here that I would like to talk you through. First of all, I very much welcome the Bribery Act. The SFO has been working with colleagues in Government on proposals for changes in the legislation for a number of years and I am delighted to see the Bribery Act. It is a very tough piece of legislation. It is tougher than the FCPA because it also deals with private sector bribery as well as bribery of public officials and it gives no exemption for small facilitation payments. So it is a tough piece of legislation."

"The offence at the corporate level that you will need to know all about is the provision that makes it an offence for a corporate if it fails to prevent bribery. There is a defence to this if the corporate had adequate procedures to prevent bribery."

"I have heard some people say that this offence is one of strict liability. I do not agree. No offence will have been committed if there were adequate procedures. I have also heard people say that the fact of bribery might mean that there were inadequate procedures by definition and so the defence can never be made out. Again, I do not agree. In the real world there may be occasional lapses despite adequate procedures rigorously enforced. The issue ultimately for the Judge and jury (and for the SFO in deciding on a prosecution) will be - were those procedures adequate?"

"I have mentioned the corporate offence but, of course, the Act goes wider that. There are offences of giving and receiving bribes and there is an offence of bribing a foreign public official. There is also an offence targeted at senior officers of a corporate who consent to, or connive at, bribery."

"The Act also looks at issues of jurisdiction. For the first time non UK corporates will be brought within the jurisdiction of the SFO if they have some business presence in the UK. What this will mean is that a foreign corporate that is involved in corruption anywhere in the world will be within the SFO's jurisdiction if it has a business presence here even if the corruption has no connection with that business presence. This is a very important provision for us. I believe that foreign corporates are waking up to the significance of this."

"Let me comment on two particular issues arising from the Bribery Act because I know that they have caused a lot of concern to the corporate sector. These issues concern promotional expenditure and small facilitation payments. It may be helpful if I comment on both of those issues. In doing this I shall follow an important speech given by the UK's Attorney General, The Rt Honourable Dominic Grieve QC MP, to the World Bribery Forum on 14 September. [See here for my coverage of these remarks]. This speech is available on the Attorney General's website and is particularly important."

"First of all promotional expenditure. There are some who have said that the effect of the Bribery Act is to outlaw all promotional expenditure. I do not agree. Sensible, proportionate expenditure is not unlawful under the Act. But, of course, once the expenditure starts to be on a more lavish scale and is intended to influence decision makers in awarding contracts, then we do get into the area of criminal offences. The Act seems to me to take a very sensible approach. And so the message from me is that sensible proportionate promotional expenditure remains perfectly lawful."

"The other issue that causes difficulty concerns small facilitation payments. I appreciate the difficulties because of the realities of doing business in many parts of the world. I also bear in mind that the US Foreign Corrupt Practices Act exempts these payments from criminal offences in certain circumstances."

"There is a lot of focus on small facilitation payments these days. Just before Christmas the OECD published a paper talking about the corrosive impact that these payments have on societies and calling on Governments to take more vigorous action in order to penalise them. This is an important message to all of us."

"Let us be clear. Small facilitation payments are bribes and they are unlawful under our current law. That will not change and they will be unlawful under the Bribery Act. Nevertheless, I have said in public that the chances of the SFO prosecuting a small (say $50) one off facilitation payment that is picked up and remedied by a corporate's internal processes are remote. That does not mean though that corporates can decide that it is acceptable to have a number of so called one off payments provided that in total they do not exceed shall we say $20 million a year. That is certainly a view that has been put to me. I said that I strongly disagreed. I also said that I could not understand how payments amounting to $20 million a year could be regarded as small one off facilitation payments. They are a course of business that is approved by the corporate. The chances of a criminal investigation and prosecution, where that is company policy, would be high."

"There are two other points I would like to make."

"First, do not under-estimate the scale of the co-operation between the SFO and law enforcement authorities in other countries. This is very extensive particularly with my colleagues in the US Department of Justice but also with other countries such as Australia. It is something that means a lot to us. We discuss cases, intelligence leads, policies and risks. There is a lot of discussion that goes on behind the scenes."

"Finally, there is an invitation from the SFO to approach us to discuss these issues, either directly or through professional advisers. We can discuss your company's policies and we can discuss the issues that you are finding in practice. We find this very beneficial ourselves and I know that corporates do as well. We are very ready to have these discussions with you."

Bribery Act - What Does it Mean?

In a 30 minute webcast (here) Robinson speaks on a variety of topics.

Among other things:

Robinson says that it is right to describe the Bribery Act as the most "draconian" anti-corruption measure in the world.

As to the adequate procedures defense, Robinson says that because of the defense "there is every reason to be optimistic that we won't get as a result of the Act and this particular section a huge expanse in the number of prosecutions of corporates."

As to self-reporting, Robinson says that the SFO will not sit back and wait for cases to come to it. He mentions that there is increased information sharing, greater cross-border cooperation, that the SFO's investigations have dramatically increased, and that more information is coming from whistleblowers. He stated that "companies are at greater risk than ever before that SFO will discover matters on its own." He stated that "self-reporting makes absolute sense [and that the SFO is] encouraging it as strongly as we possibly can."

As to small to medium size companies, Robinson says that smaller organizations are not absolved from liability under the Bribery Act. but that the SFO "would not expect the same from a small or medium size company that we would expect from one of the larger ones." He said that the SFO will take "into consideration the extent to which a small, medium size operation can put in place the same sort of procedures as a larger organiztion with much greater resources." As to due diligence, Robinson says that small to medium size companies "should carry out as much due dilignce as they reasonably can, but what they reasonably can do in that way may not be as much as a large corporate can reasonably be expected to do."

*****

A good weekend to all.

Save The Date .... and ... The Friday Roundup

Save The Date

Deferred prosecution agreements, affirmative defenses, companies x, y, and z.

On a daily basis this site and - those who follow it - are, to use the analogy, generally focused on the trees. However, the trees are part of a vast forest.

Against the backdrop of aggressive enforcement of bribery and corruption laws worldwide, several basic questions remain unanswered, or at least subject to dispute.

It is these big-picture questions that will be the focus of an upcoming roundtable discussion ("Bribery - What is It, What Can Be Done, What Should Be Done, and How to Comply?") at International Law Weekend, an event presented by the American Branch of the International Law Association and the International Law Students Association. The roundtable will take place on Saturday, October 23 at 10:45 at Fordham University School of Law.

I am pleased to co-chair the panel along with Corinne Lammers (Paul, Hastings - see here). Other participants include: Bruce Bean (Michigan State College of Law - here), Daniel Chow (The Ohio State University College of Law - here), Elizabeth Spahn (New England College of Law - Boston - here), and Andy Spalding (Chicago-Kent College of Law - here).

See here for the full event schedule.

Friday Roundup

An FCPA investigation in the midst of a merger, a voluntary disclosure involving "minor" entertainment and gifts relating to a few "discrete transactions involving immaterial revenue," World Bank debarment, and the blogging life ... it's all here in the Friday roundup.

FCPA Investigation in the Midst of a Merger

In June, Spain-based Grifols, S.A. (a global healthcare company and leading producer of plasma protein therapies) and Talecris (a U.S.-based biotherapeutics products company) announced that they signed a definitive agreement by which Grifols will acquire Talecris. See here and here.

In the meantime, Talecris is conducting a mammoth FCPA internal investigation. Here is the lastest from the recent Form F-4 Registration Statement of Grifols.

"Talecris is conducting an internal investigation into potential violations of the FCPA that it became aware of during the conduct of an unrelated review. The FCPA investigation is being conducted by outside counsel under the direction of a special committee of the Talecris Board of Directors. The investigation into certain possibly improper payments to individuals and entities made after Talecris’ formation initially focused on payments made in connection with sales in certain Eastern European and Middle Eastern countries, primarily Belarus, Russia and Iran, but Talecris is also reviewing sales practices in Brazil, China, Georgia, Turkey and other countries as deemed appropriate."

"In July 2009, Talecris voluntarily contacted the U.S. Department of Justice, which is referred to as the DOJ, to advise them of the investigation and to offer its cooperation in any investigation that they want to conduct or they want Talecris to conduct. The DOJ has not indicated what action it may take, if any, against Talecris or any individual, or the extent to which it may conduct its own investigation. The DOJ or other federal agencies may seek to impose sanctions on Talecris that may include, among other things, injunctive relief, disgorgement, fines, penalties, appointment of a monitor, appointment of new control staff, or enhancement of existing compliance and training programs. Other countries in which Talecris does business may initiate their own investigations and impose similar penalties. As a result of this investigation, Talecris suspended shipments to some countries while it put additional safeguards in place. In some cases, safeguards involved terminating consultants and suspending relations with or terminating distributors in countries under investigation as circumstances warranted. These actions unfavorably affected revenue from these countries in 2009 and have an ongoing unfavorable impact on revenue in 2010. Talecris has resumed sales in countries where it has appropriate safeguards in place and is reallocating product to other countries as necessary. To the extent that Talecris concludes, or the DOJ concludes, that Talecris cannot implement adequate safeguards or otherwise need to change its business practices, distributors, or consultants in affected countries or other countries, this may result in a permanent loss of business from those countries. These sanctions or the loss of business, if any, could have a material adverse effect on Talecris or its results of operations."

What has the internal investigation cost thus far?

According to the same filing, approximately $12.9 million (see pg. 303).

The above was not the only FCPA disclosure news this week.

The Voluntary Disclosure Involving "Minor" Entertainment and Gifts Relating to a Few "Discrete Transactions Involving Immaterial Revenues"

Real estate is not generally thought of as an FCPA high-risk industry.

Yet, earlier this week CB Richard Ellis, a "global leader in real estate services" (see here), disclosed as follows in its 8-K:

"As a result of an internal investigation that began in the first quarter of 2010, the Company determined that some of its employees in certain of its offices in China made payments in violation of Company policy to local governmental officials, including payments for non−business entertainment and in the form of gifts. The payments the Company discovered are minor in amount and the Company believes relate to only a few discrete transactions involving immaterial revenues. Nonetheless, the Company believes that the payments may have been in violation of the U.S. Foreign Corrupt Practices Act or other applicable laws. Consequently, the Company voluntarily disclosed these events to the U.S. Department of Justice (the “DOJ”) and the Securities and Exchange Commission (the “SEC”) on February 27, 2010 and has continued to cooperate with both the DOJ and the SEC in connection with this
investigation. The Company engaged outside counsel to investigate these events and has implemented thorough remedial measures.

In addition, in the third quarter of 2010, the Company began another internal investigation, with the assistance of outside counsel, involving the use of a third party agent in connection with a purchase in 2008 of an investment property in China for one of the funds the Company manages through its Global Investment Management business. This investigation is ongoing and at this point the Company is unable to predict the duration, scope or results thereof. In light of the Company’s cooperation with the DOJ and the SEC as described above, the Company voluntarily notified both agencies of this separate internal investigation and will report back to them when the Company has more information."

One can perhaps understand a voluntary disclosure when the payments at issue involve suitcases full of cash to government officials to obtain or retain government contracts.

But a voluntary disclosure based on "minor" entertainment and gifts involving a "few discrete transactions involving immaterial revenues?"

Has it truly come to this rather than the company internally handling such "minor" "discrete transactions involving immaterial revenue" in an effective manner?

Did FCPA counsel advise the company that voluntary disclosure was necessary in this instance? Perhaps not necessary, but preferable? How would you handle this issue if you were the company's in-house counsel or on the company's board?

Interesting questions indeed.

For more on voluntary disclosure and the role of FCPA counsel see this prior post.

World Bank Debarment

The EU and US debarment directives and regulations may be "toothless," but the World Bank is in charge of its own debarment decisions when it comes to World Bank financed or executed projects.

A prior post (here) discussed the World Bank's debarment of Macmillan Limited and recently the World Bank announced (see here) that its Sanctions Board debarred "four companies and two individuals for fraudulent practices in projects in India and Afghanistan" following "inquiries by the World Bank's Integrity Vice Presidency (INT), which is responsible for investigating fraud and corruption in World Bank-financed projects."

According to the release:

"In India, the World Bank Group debarred Ambalal Sarabhai Enterprises Limited (ASE) and Chemito Technologies Pvt. Ltd. (Chemito) for having engaged in fraudulent practices relating to the Food and Drugs Capacity Building project. Both ASE and Chemito are ineligible to be awarded contracts under any Bank Group-financed or Bank Group-executed project or otherwise participate in the preparation or implementation of such projects for three years. The debarment may be reduced to two years if the companies put in place and implement effective corporate compliance programs."

"The third decision relates to fraudulent practices by Global Spin Weave Limited (GSW) and its Director Sudhir Agrawal. The company’s misconduct was substantiated in relation to three Bank-financed projects in India; namely: First Reproductive and Child Health Project, Second National HIV/AIDS Control Project and the Malaria Control Project. According to the Sanctions Board decision, GSW is ineligible to be awarded contracts under any Bank Group-financed or Bank Group-executed project or otherwise participate in the preparation or implementation of such projects for five years. The debarment may be reduced to four years if GSW puts in place and implements an effective corporate compliance program. Mr. Agrawal’s period of ineligibility is three years."

"In relation to the Urban Water Supply and Sanitation Project in Afghanistan, the Sanctions Board debarred Ronberg Gruppe LLC, AG (Ronberg) and its Director Nikolay V. Vakorin for having engaged in fraudulent practices. Ronberg and Mr. Vakorin are ineligible to be awarded contracts under any Bank Group-financed or Bank Group-executed project or otherwise participate in the preparation or implementation of such projects for three years."

The World Bank release notes that the above "cases are eligible for cross debarment under the April 2010 Agreement for Mutual Enforcement of Debarment Decisions entered into by the African Development Bank Group, Asian Development Bank, the European Bank for Reconstruction and Development, the World Bank Group and the Inter-American Development Bank Group." For more on that Agreement see here.

The Blogging Life

Interested in blogging?

See here for my recent interview with Jerod Morris of Corporate Compliance Insights. We also talk a bit about the FCPA!

A good weekend to all.

A Conversation With Richard Alderman - Director of the U.K. Serious Fraud Office

While in London recently to chair the World Bribery & Corruption Compliance Forum (see here, here and here for previous posts), I was pleased to accept the invitation of the U.K. Serious Fraud Office to visit its offices and meet top-level SFO personnel to discuss Bribery Act and other anti-corruption issues and topics. As part of the invitation, Richard Alderman (here), the Director of the SFO, invited me to submit questions to him on any topic of my choosing.

I submitted approximately thirty detailed questions covering a broad range of topics, including the role and policies of the SFO, the Bribery Act, the BAE and Innospec cases, Bribery Inc., and other questions of general interest. Except for certain questions regarding the BAE case, which is still pending in the U.K. courts, Mr. Alderman provided answers to every question, including on topics I have been critical of the SFO in the past.

In his answers, Mr. Alderman, among other things:

(i) compares and contrasts the SFO's role with the DOJ's role in enforcing the Foreign Corrupt Practices Act, including the more active and independent role U.K. courts have in reviewing SFO charging decisions;

(ii) talks about voluntary disclosure, and the role of non-prosecution and deferred prosecution agreements;

(iii) discusses reputational harm, debarment, and reparations; and

(iv) talks specifically about the Bribery Act which is to be implemented in April 2011.

I thank Mr. Alderman and other SFO personnel for taking a keen interest in my work and commend the "active engagement" approach the SFO has taken in going about its work.

My complete "conversation" with Mr. Alderman can be downloaded here.

World Bribery & Corruption Compliance Forum - Comments by U.S. Officials

As promised in yesterday's post (here) that provided a summary of comments by U.K. officials at the World Bribery & Corruption Compliance Forum in London hosted by IBC Legal Conferences, today's post provides a summary of Charles Duross's (Deputy Chief - Fraud Section, DOJ) special address as well as comments made by Duross and Thierry Olivier Desmet (Assistant Regional Director, FCPA Unit, SEC) during a panel discussion about voluntary disclosure.

Duross began by noting that the DOJ’s FCPA unit is still very much in a transition phase. He stated that the unit recently added prosecutors with expertise in gathering foreign evidence as well as new prosecutors with the ability to try substantial criminal cases to verdict. Duross stated that the “ability to try lengthy and complex trials” is critical to the FCPA unit’s success and that the unit must continue to be willing to try cases and be put to its burden. Duross stated that the DOJ’s FCPA unit consists of “world class prosecutors” “pure and simple” and that these prosecutors and other personnel make “tremendous personal sacrifices” in their mission of combating bribery. For instance, he noted that in the past few months DOJ prosecutors have traveled to a dozen different countries on four different continents to gather evidence and investigate cases.

Duross also noted that the DOJ works with “tenacious” agents willing to pursue any lead. These agents include, most notably, FBI agents, as well as agents from Immigration, the Internal Revenue Service, Office of Foreign Assets Control, and the Office of Export Enforcement. He said that these agents will “follow the evidence to where it leads them” and that these agents will use traditional law enforcement tools including surveillance, warrants, and wire taps.

Duross stated: “let me be clear – paying bribes to foreign officials to secure business is illegal and is a crime, you will be investigated like any other criminal, and that it doesn’t matter if you wear a tie or you went to a fancy business school.” He said that “if [the DOJ] wins, and we win often, you will go to prison.” He stated that the DOJ is “normally outnumbered by armies of defense attorneys and accountants,” but that DOJ prosecutors are “never outworked and never outhustled.” Duross stated that the DOJ is “always pursuing justice and that it is always seeking to do the right thing.”

Duross also stated that the DOJ continues to expand its network and further development its relationships with foreign counterparts around the world. He stated that the DOJ has “no stronger ties” than with the U.K. and that to say the DOJ has a “close relationship” with the U.K. and the Serious Fraud Office “would be an understatement” as demonstrated by the recent BAE and Innospec prosecutions.

Duross admitted that he takes his new position with a bit of “trepidation” given that he has big shoes to fill (he made specific praise for Peter Clark and Mark Mendelsohn) and given that each new case is followed more closely than the last. He stated that such “scrutiny and criticism can be constructive” and that if it means the DOJ needs to review past practices “we will do so” and that the only way for DOJ to get better is for it to reevaluate what it is doing.

Duross also noted that the DOJ’s FCPA program will be “graded” later this year under the peer review process sponsored by the OECD. The lead examiners in this process are representatives from Argentina and the United Kingdom. He noted that the examiners spent three days in Washington D.C. over the summer and the examiners were provided over 1,000 pages of documents. He also stated that the examiners spent considerable time with the private sector without DOJ involvement something he termed “unprecedented.” According to Duross, the examiner’s report will be made public in mid-October as well as the U.S. response to OECD’s phase 3 questionnaire.

Duross is confident that the U.S. “has a tremendous story to tell” and that if the peer review process identifies area for potential improvement, then “we will welcome this.” Duross said that “if the bar is raised we welcome that” “if it is consistent with our treaty obligations and if all countries are treated equally.”

Duross explained that the FCPA unit has a “number or pending trials” and a significant number of investigations “in the pipeline.” He mentioned upcoming trials in Miami in connection with the Haiti Teleco enforcement actions (see here for prior postings); the upcoming trial of various executives of Control Components Inc. in California – a trial he expects to last two months (see here for prior postings); the pending trials of the Africa Sting defendants in Washington, D.C. (see here for prior postings); and a pending trial in Houston.

In each of these cases, Duross said that the DOJ FCPA unit partners with local AUSA’s who are experts on local trial procedure and have familiarity with the judge. He said that these partnerships are “critical” to the FCPA unit’s success, even if, per DOJ policy, all FCPA prosecutions must be handled by DOJ Main Justice. Duross noted that recently over 90 prosecutors (both DOJ and SEC) participated in “three intense days” of FCPA training at the SEC’s headquarters (see here for a prior post). In concluding on this issue, Duross stated that it would be an “understatement” to say that the DOJ’s team is growing.

In addition to trials, Duross noted that the DOJ’s “pipeline” of investigations “continues to grow.” He said it would “short sighted” if one was left with the view that the only way DOJ receives leads is through voluntary disclosures. Duross dispelled the notion that voluntary disclosures make up the “majority” of its cases. He said that this was “not true and has never been.” According to Duross, when DOJ last looked into this issue a few years ago, the percentage of voluntary disclosure cases was approximately 1/3. On voluntary disclosure, Duross stated that DOJ “has and will continue to provide meaningful credit for companies that provide voluntary disclosures.” He also stated that several voluntary disclosures result in DOJ declinations and that these declinations, which are not often made public, “should not be underestimated.”

During the public Q&A session, I asked Duross about DOJ declinations in FCPA inquiries. I noted that through the FCPA Opinion Release Procedure, DOJ often makes its no-enforcement action decision known as to contemplated business conduct. I asked whether it is in the public interest for the DOJ to publicly disclose its declination decisions, including the facts disclosed by the company and why DOJ, on those facts, declined prosecution. Duross said that the question presented a “difficult issue” and he shared an example of a company that disclosed conduct to the DOJ, but the DOJ declined to prosecute. According to Duross, DOJ asked the company whether it wanted the declination decision to be made public and the company said no - reasoning that it already had disclosed the issue and that there was no need for another public disclosure.

Duross noted that the DOJ receives allegations from a number of sources: the FBI, pro-active investigations, tips from U.S. embassies around the world, anonymous tips, e-mails, and whistleblowers. As to anonymous tips, e-mails, and whistleblowers, Duross stated that DOJ does not immediately launch a full-blown investigation, rather DOJ does its best to verify the information, weight other information, and to make the best judgment possible before commencing an investigation. In sum, Duross said “I don’t want to leave you with the impression that but for voluntary disclosures we would be sitting around on our hands.”

Duross emphasized that the DOJ and its law enforcement partners “make tons of efforts to pursue matters pro-actively” and that the “likelihood of getting caught is increasing over time” and that the world is getting smaller. For instance, Duross said he receives Google Alerts that contain the word bribe. He also shared a story about a “major Fortune 50 company” being the focus of a bribery-related story in a Chinese newspaper. Duross said that the DOJ saw the story on a Sunday night and that by 9:30 a.m. on Monday morning the DOJ had already sent a letter to the general counsel of the company asking for an explanation. Duross explained, that after learning the facts, the DOJ concluded that the newspaper story was incorrect because the case was merely an employee embezzlement matter and had nothing to do with bribery.

Duross next spoke about “tone at the top” and how important it is because non-executive employees look to the board and senior managers for guidance. Duross said that boards and executives should not “let their employees down” and should make clear that unethical and illegal behavior will not be tolerated and that company leaders “should mean it.” On this issue, Duross said that frequently a company voluntarily disclosing will, at the first meeting with DOJ, “slap down on the table its compliance policy.” Duross will then ask the company representative whether anyone has ever been reprimanded for conduct in violation of the policy and that the answer is often “no.” Duross stated that it is “not enough to have a compliance program and a tone at the top,” but rather for a company to “make sure that it means it.”

As to the role of compliance officers, Duross said that vocal support within the business is critical to support the compliance officer so that he/she will not be ignored or willfully disobeyed. Although compliance departments are not viewed as profit centers, Duross encouraged companies to make compliance positions an attractive career track with room for advancement and promotion.

After his remarks, Duross was asked about the general lack of judicial scrutiny of FCPA enforcement actions. He talked about the three FCPA trials in 2009 and said that DOJ is “excited about the upcoming trials” and that the DOJ “welcomes judicial input” on the FCPA.

In his answer, Duross also mentioned the Nexus Technologies enforcement action and how in that action the parties fully briefed the “foreign official” element and that DOJ “won that case.” Although Duross conceded that the judge in that case did not issue a written opinion on the “foreign official” element, Duross did note that the judge, under Rule 11 of the Federal Rules of Criminal Procedure, was required, before accepting the plea, to make sure each element of the crime was met.

[It should be noted that in the Nexus Technology briefing, the DOJ specifically urged the judge, on a number of occassions, not to consider the defendant's substantive "foreign official" argument because they were premature. The following are snippets from the DOJ's brief: (i) "the Court need not address any of these faulty arguments at this time:" (ii) "although styled as a motion to dismiss, Defendants’ submission is instead a premature request for a ruling on the sufficiency of the Government’s evidence before any of that evidence has been presented. These arguments, which are premature at best, will be moot after presentation of the Government’s case." (iii) "because Defendants’ arguments turn entirely on issues of fact, they are premature."]

During a panel discussion on voluntary disclosure both Duross and Desmet answered questions posed by John Rupp (Covington & Burling - see here).

The first question posed by Rupp was - when is it a crime not to disclose a suspicion of bribery of a public official?

Desmet answered that the concept of materiality is important - would a reasonable investor consider the information important in making a buy or sell decision. Desmet said that the concept of materiality itself has two "sub-concepts": (i) quantitative materiality (something that impacts a company's financial statements) - he conceded that very few bribes are quantitatively material; and (ii) qualitative materiality a "complicated gray area" to use Desmet's words. He said that all bribes can be considered qualitatively material because they may "automatically trigger a books and records violation." Because of this, Desmet said that it is "prudent" for any issuer to approach the SEC with any "suspicion" of bribes "as soon as" the company learns of the improper payment. When an issuer makes such a disclosure, Desmet said that the Commission will give the company credit for doing so.

Duross answered the question by saying that from the FCPA unit's perspective, "if there is a bribe we want to hear about it, even if it is small" and that good advice is "to come in and let us know about it."

Rupp next posed the question - at what point do you expect a company to make a voluntary disclosure?

Duross said, "the earlier the better" although he did also say that the DOJ "does not want to get inundated with a bunch of false starts." Duross shared an example he said was "troubling" and that was a recent situation where the company voluntarily disclosed a few days after terminating employees in connection with the investigation. When the DOJ asked the company about the employees implicated in the conduct at issue, the company said we terminated them a few days ago and the company then proceeded to say that it no longer had access to the employees.

According to Duross, this "seemed like a bad decision" for the company to make and the conclusion he drew from the company's decison was that the company did not "want to make the employees available to us." Duross also added that while a company is often under no affirmative obligation to voluntary disclose, once the voluntary disclosure decision is made, the relationship between the DOJ and company counsel is all about trust and credibility.

Duross said that it is "incredibly difficult" for the DOJ to make important decisions affecting the company if the DOJ senses that the investigation was not done properly or if the DOJ senses that the company is not truly cooperating. Duross said that if the DOJ does not trust company counsel, it may ask the company to go back and redo the investigation of the conduct at issue. According to Duross, a reason a company should consider early in the process to voluntarily disclose is to perhaps save money. He said that the DOJ FCPA unit is "pretty reasonable" and that if a company comes in before the investigation is complete, the DOJ can have some input as to the scope of the investigation - which may turn out to be more limited than what the company may have thought was going to be expected.

In sum, Duross sees the benefits of an early voluntary disclosure as building trust and credibility and perhaps saving the company money.

Duross said that counsel should also not assume that a voluntary disclosure will result in a "passive approach" from the DOJ. Even if a company has voluntarily disclosed conduct, Duross said that the DOJ will go talk to witnesses and use the Mutual Legal Assistance Treaty process to gather evidence. Duross shared a story of outside counsel meeting with the DOJ and giving DOJ a big Powerpoint presentation, when the reality of the situation was that, through no fault of outside counsel, outside counsel had "absolutely no idea of what was going on" because DOJ, as a result of its independent fact-gathering, knew information that even outside counsel did not know.

Duross also cautioned companies to make accurate public statments during an investigation and voluntary disclosure process. On this issue, Duross shared that the DOJ has reached out to companies in the middle of an FCPA inquiry to let the company know that DOJ may disagree with various aspects of the public statements the company is making about the investigation.

Rupp asked - do companies in discussions with you, run the "footnote language by" the DOJ? Duross said, it depends on the practitioner. He did say "to be honest, we don't want to get into that level of detail in which we are blessing company filings." Duross did say though that if the company proposes language for a filing or public statement and the DOJ says "no comment" that this should be interpreted by the company as "probably not a good thing."

Desmet said that when he opens up an FCPA investigation, one of the first things he does is read the company's SEC filings, including a very detailed review of the company's MD&A section of the financial statements.

Rupp next asked questions about the SEC's new whistleblower provisions and asked what will happen if the company has a mere suscipion of an improper payment, the company is in the very early stages of an investigation, a document hold has been issued, electronic documents are being pulled, the company is lining up employees that may have knowledge - but that during this process, a whistleblower contacts the SEC. Rupp asked - will the company in this situation lose the benefits of voluntary disclosure because the whistleblower first contacted the SEC? (See here for my prior post on this issue).

Duross said that the above company probably would be negatively affected under the U.S. Sentencing Guidelines, and probably not receive the sentencing credit for voluntary disclosure, but that this should not be the beginning and end of the analysis. Duross said that there are "lots of different factors" the DOJ considers when resolving an FCPA inquiry per the DOJ's Principles of Prosecution of Business Organizations and that just because the company was technically not the first in the door does not mean that the DOJ will not try to achieve a "just and fair result." Duross stated that the SEC, not the DOJ, is in charge of the whistleblower program, but again stated that companies should not think the "world is going to be over" just because a whistleblower "is in first" even if that fact may impact the Sentencing Guidelines culpability score.

Desmet's answer was very similar on this issue. He noted that while final rules are yet to be issued as to the whistleblower program, he hopes that the Commission would not be rigid in the face of such a hypothetical. He said that if the company comes in a "few days or a few weeks after a whistleblower" that he would "like to think" that such a company would still get credit for self-reporting. In this type of situation, Desmet said that the whistleblower, if otherwise qualified under the provisions, would likely get his/her bounty and the company would likely still get the benefit of self-disclosure as well.