Questions 2What is the cost of a Foreign Corrupt Practices Act (FCPA) violation? One subset of that question is what is the cost of not cooperating and not remediating during the pendency of such investigations? Those were two of the questions, which seemed to permeate the resolution of the long running FCPA matter involving the LATAM Airlines Group S.A. (LATAM). The settlement documents released included an Information, detailing the criminal charges; a Deferred Prosecution Agreement (DPA), and a Securities and Exchange Commission (SEC) Cease and Desist Order (Order) outlining the civil violations. LATAM’s predecessor-in-interest is LAN Airlines S.A. (LAN). Today I want to look at the underlying facts and disposition and tomorrow I will consider some of the lessons learned.

Yet before we get to any of these facts, the question which I was asked the most about this case was who was the foreign official bribed in this matter? I have read the Information outlining the criminal conduct and the criminal charges brought; the DPA, the Department of Justice (DOJ) Press Release and the SEC Order outlining the civil violations involved. The bribe payments were made by a LAN Consultant, who was an Argentine government official, to labor union officials in Argentina to secure labor peace for the airline. This person was only identified as “Consultant” in the Information and was further identified in the Order as “a Cabinet Advisor in the Ministry of Federal Planning, Public Investment and Services, Department of Transportation. On January 31, 2005, the Secretary of Transportation appointed the consultant as a Cabinet Advisor “ad-honorem” pursuant to an unpublished Resolution.” This Consultant, a foreign government official under the facts of this case, who made $1.15MM in corrupt payments to Argentinian labor unions.

The bribery scheme was a fairly standard, uninspired scheme in comparison to some of the schemes we have recently seen in FCPA enforcement actions. The pedestrian bribery program was probably due to the fact there was no need to hide it from senior management as it involved, according to the Information, a “LAN Executive” who was a “high-level executive at LAN.” (LAN was the predecessor of LATAM). This LAN Executive “LAN negotiated and executed a fictitious $1.15 million consulting agreement with Consultant, through a company he owned and operated, in order to funnel bribes to labor union officials.”

Of course the agreement was never signed by the corrupt LAN Executive, nor were any of the terms and conditions of the Consultant’s services ever delivered. Indeed, it was this LAN Executive who instructed the company’s Chief Financial Officer (CFO) to make the corrupt payments. In short, the contract was a sham from the start and was simply used to funnel money to the Consultant to pay bribes to labor union officials to keep the peace. Another LAN subsidiary was created to make the corrupt payments and even then, the payments made to the Consultant were to his bank account in the US. The relevant time period of the bribe payments was 2006-2007.

While LAN may not have been a completely corrupt organization, about the best thing one can say about it is that it had no commitment to compliance. They did not have any person tasked with heading the compliance function until at least 2008. It was not until 2013 that LATAM adopted a Code of Conduct, which included anti-corruption provisions. Finally, it was not until 2014 that the company even bothered to implement a new compliance program that included, according to the Order, “an Anti-Corruption Guide, a Gifts, Travel, Hospitality and Entertainment Policy, an Escalation Policy, and Procurement and Payment policies.”

This is one of the rare FCPA enforcement actions where a criminal violation of the Accounting Provisions is found. There were violations of both the Books and Records and Internal Controls Provisions. Regarding the Books and Records Provisions, the Information stated that LATAM did “knowingly and willfully falsified and caused to be falsified its books, records, and accounts and did not, in reasonable detail, accurately and fairly reflect its transactions and dispositions, to wit: the defendant knowingly falsified records relating to the retention and nature of services of, and payments to, Consultant in order to conceal the true purpose of retaining Consultant”.

Regarding the Internal Controls Provisions, the Information stated, “During the relevant period, LAN knowingly and willfully failed to implement a sufficient system of internal accounting controls. In particular and as relevant here, LAN had deficient internal accounting controls that did not require, among other things, (a) due diligence for the retention of third party consultants; (b) a fully executed contract with a third party before payment could be made to it; (c) invoices issued to the LAN entity that in fact engaged the third party; (d) documentation or other proof that services had been rendered by a third party before payment could be made to it; (e) that payment to third parties retained by LAN or LAN entities be made to bank accounts held in the names of those third parties; or (f) oversight of the payment process to ensure that payments were made pursuant to appropriate controls, including those described above.”

In addition to the conduct detailed above, LAN did not self-disclose the FCPA violations to the DOJ and did not cooperate with the DOJ and SEC until some point later in the investigation. LATAM paid a stiff amount for its recalcitrance. As was stated in the DOJ Press Release, “LATAM agreed to pay a $12.75 million criminal penalty, continue to cooperate with the department’s investigation, enhance its compliance program and retain an independent corporate compliance monitor for a term of at least 27 months.” The company also paid a hefty SEC penalty, “it agreed to pay $6.74 million in disgorgement and $2.7 million in prejudgment interest.” The total amount was $22.2MM in fines and penalties.

Finally, as was stated in several places in the resolution documents and citing to the DOJ Press Release, “LATAM failed to discipline in any way the employees responsible for the criminal conduct, including at least one high-level company executive, and thus the ability of the compliance program to be effective in practice is compromised.” All of this means the individual referred to as “LAN Executive” is still in the company and most probably still an executive.

This enforcement action also saw the re-emergence of the requirement for a Corporate Monitor. The period of the monitorship was listed at 27 months and is charged with evaluating the effectiveness of the company’s new compliance program and compliance with the FCPA. The Monitor is also mandated to assess the Board of Directors’ and senior management’s commitment to the corporate compliance program.

 

This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at tfox@tfoxlaw.com.

© Thomas R. Fox, 2016

Chris FroomeI begin today’s post with a tip of the (cycling) helmet to Englishman Chris Froome who yesterday won his third Tour de France championship. Froome overcame a great many obstacles, not the least of which was being involved a couple of crashes and one very over zealous fan. So here is a nod to Froome and I cannot wait for the 2017 Tour.

Now let us return to the fall of 2013, when New York Times (NYT) reported that JPMorgan Chase (JPMorgan) was under Foreign Corrupt Practices Act (FCPA) scrutiny in China for its hiring practices. In an article entitled “Hiring in China By JPMorgan Under Scrutiny”, Jessica Silver-Greenberg, Ben Protess and David Barboza broke the story that both the Department of Justice (DOJ) and the Securities and Exchange Commission (SEC) were investigating JPMorgan to determine “whether JPMorgan Chase hired the children of powerful Chinese officials to help the bank win lucrative business in the booming nation.”

The article detailed several situations where JPMorgan hired the children of Chinese government officials and sometime thereafter the bank was able to secure work from the business or industry of a parent of a hired employee. The examples included the hiring of a “son of a former Chinese banking regulator who is now the chairman of the China Everbright Group, a state-controlled financial conglomerate, according to the document, reviewed by the NYT, as well as public records. After the chairman’s son came on board, JPMorgan secured multiple coveted assignments from the Chinese conglomerate, including advising a subsidiary of the company on a stock offering, records show.” In another instance, the bank hired the daughter of a Chinese railway official. After hiring the daughter, JPMorgan was hired to assist the company to go public.

Things got worse when Dawn Kopecki, in a Bloomberg article entitled “JPMorgan Bribe Probe Said to Expand in Asia as Spreadsheet Is Found”, reported that there was “an internal spreadsheet that linked appointments to specific deals pursued by the bank”. She noted that the original investigation, which began in Hong Kong, had expanded to other countries in Asia and that JPMorgan “opened an internal investigation that has flagged more than 200 hires for review, said two people with knowledge of the examination, results of which JPMorgan is sharing with regulators.” Kopecki quoted Dan Hurson, a former US prosecutor and SEC lawyer, who said the “SEC will hunt for evidence showing “these weren’t real jobs, that they were only there because their father or mother were important public officials””; and “If the public official requested the job for the child, that would be a strong indication to the company that the official was seeking and receiving something of value.” Perhaps, more damaging was that the spreadsheet had information that apparently linked “some hiring decisions to specific transactions pursued by the bank.”

In a later NYT article, entitled “JPMorgan Hiring Put China’s Elite on an Easy Track”, Jessica Silver-Greenberg and Ben Protess further reported that the JPMorgan hiring program even had its own name, which was ‘Sons & Daughters’. Although the program was originally set up to provide transparency and visibility into the hiring process that might implicate FCPA issues, they reported that it went badly “off track”. Under the Sons & Daughters hiring program, a two-tiered track was created in the hiring process, one for regular applicants and one for children of Chinese officials. However, as time passed the program began to be used to allow for fewer job interviews and relaxed hiring standards for the candidates in the program. This allowed the company to hire some candidates who had “subpar academic records and lacked relevant expertise.”

All of this came home to roost last week, when Christopher M. Matthews, Emily Glazer and Aruna Viswanatha, reporting in a Wall Street Journal (WSJ) article entitled “J.P. Morgan Chase Nearing Settlement With Prosecutors on Asia Hiring Probes”, wrote “J.P. Morgan Chase & Co. is expected to pay around $200 million to settle federal investigations into whether it tried to win business by hiring the sons and daughters of powerful people in Asia”. The settlement was based on FCPA violations for the bank’s “hiring of “princelings,” the kin of high-ranking Chinese government officials and managers of state-owned companies, allegedly to curry favor in getting deals.”

The WSJ piece described a much more detailed hiring scheme than had been previously reported, “In all, J.P. Morgan hired 222 candidates under a program known internally as “Sons and Daughters” that ran from 2004 to 2013. They included those referred by officials at nine of 12 large Chinese companies that the bank took public in Hong Kong.”

The WSJ article detailed several instances of the bank’s hiring of unqualified applicants, who became employees, without the basic skills to operate in a US based multinational organization. The article discussed one of the hires, Gao Jue, who “did poorly on his job interviews at J.P. Morgan, messed up his work visa, accidentally sent a sexually explicit email to a human-resources employee and was described by a senior banker as “immature, irresponsible and unreliable,” according to internal bank emails reviewed by the Journal and people familiar with the matter.”

In an interesting portion of the article, it said “Both sides have agreed that an executive of a state-owned company is considered a government official, but there is dispute over what conduct is considered corrupt from a legal point of view in cultures where it is common to hire well-connected individuals.” This would appear to be an acknowledgment of the four US courts that have considered this question and all have found this interpretation to be correct.

Further, the WSJ article noted, “U.S. government officials have told the banks that hiring someone with connections to a government official with the intent of winning business is, in itself, a violation of law even if there isn’t an explicit quid pro quo”. Apparently lawyers for the bank “have accused the government of overreaching in the hiring cases by threatening to criminalize standard business practices in some countries”. Yet the key to the DOJ position seems to be the hiring with intent to influence an official to do something. It is not much of a stretch to find a FCPA violation in such conduct, particularly given the reported facts in this matter.

While there have been two prior FCPA enforcement actions involving the hiring of family members of government officials or employees of state owned enterprises, Qualcomm Inc. and The Bank of New York Mellon, the reported JPMorgan resolution amount will dwarf those settlements. But there may be others in the works as well as the WSJ also noted that other banks are under FCPA scrutiny, including “Citigroup Inc., Credit Suisse Group AG, Deutsche Bank AG, Goldman Sachs Group Inc., HSBC Holdings PLC, Morgan Stanley and UBS Group AG, according to regulatory filings.”

 

This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at tfox@tfoxlaw.com.

© Thomas R. Fox, 2016

 

Show Notes:

Old Way New WayToday, I end my exploration of recent Foreign Corrupt Practices Act (FCPA) enforcement actions (and one UK Bribery Act enforcement issue), which have occurred since the enactment of the Department of Justice (DOJ) Pilot Program in April. These three enforcement actions, which resulted in the companies receiving a Declination to Prosecute from the DOJ. Proving once again that I am never gonna give you up, never gonna let you down; I want to look a these Declinations to see what information they can provide to the compliance practitioner to assist them in guiding their own response should their company find itself embroiled in a FCPA investigation and attendant enforcement action.

The enforcement actions involved Nortek Corporation (Nortek), Akamai Technologies, Inc. (Akamai), and Johnson Controls, Inc. (JCI). Nortek and Akamai received Non-prosecution Agreements (NPAs) from the Securities and Exchange Commission (SEC) and Declinations to Prosecute (Declinations) from the DOJ. JCI received a civil Cease and Desist Order from the SEC and Declination from the DOJ. One other matter was resolved with the DOJ via a NPA, that being Analogic Corporation. I will discuss this matter separately below. 

The Declination Letters

The letters issued by the DOJ did not provide a plethora of detail. The Akamai and Nortek Declination letters were identical with the exception of the different corporate names. In relevant part they stated, “we have reached this conclusion … based on a number of factors, including but not limited to the fact that Nortek’s internal audit function identified the misconduct, Nortek’s prompt voluntary self-disclosure, the thorough investigation undertaken by the Company, its fulsome cooperation in this matter (including by identifying all individuals involved in or responsible for the misconduct and by providing all facts relating to that misconduct to the Department) and its agreement to continue to cooperate in any ongoing investigations of individuals, the steps that the Company has taken to enhance its compliance program and its internal accounting controls, the Company’s full remediation”. It went on to add that the company had agreed to profit disgorgement.

The JCI letter, stated, “We have reached this decision based on a number of factors, including but not limited to: the voluntary self-disclosure of the matter by JCI; the thorough investigation undertaken by the Company; the Company’s full cooperation in this matter (including its provision of all known relevant facts about the individuals involved in or responsible for the misconduct) and its agreement to continue to cooperate in any ongoing investigations of individuals; the steps that the Company has taken and continues to take to enhance its compliance program and its internal accounting controls; the Company’s full remediation”. As with the Nortek and Akamai the JCI letter also noted the company had agreed to disgorge its profits.

About the only difference I can ascertain in the letters is that Nortek and Akamai provide “fulsome” cooperation, and JCI provided “full” cooperation. Yet, the overall point of these Declinations seems to be the cooperation was very substantial.

Contrast the triple declination language with the NPA, which Analogic received, specifically noted the company’s lack of full cooperation. It stated, “the Company did not receive full cooperation credit because, in the view of the Offices, the Company’s cooperation subsequent to its self-disclosure did not include disclosure of all relevant facts that it learned during the course of its internal investigation; specifically, the Company did not disclose information that was known to the Company and Analogic about the identities of a number of the state-owned entity end-users of the Company’s products, and about certain statements given by employees in the course of the internal investigation;”

Box Score Summary of Declinations 

Pilot Program

Factor

Self-Disclosure Cooperation During Investigation Remediation Profit Disgorgement
Akamai Yes – before completing internal investigation 1. Sharing investigation;

2. Identify and present relevant documents;

3. Timely updates;

4. Updates on remedial measures;

5. Translating documents; and

6. Making witnesses available

1. Termination of culpable employees;

2. Revision of internal audit testing and protocol;

3. Strengthening of policies;

4. Creation of Compliance Committee;

5. Institution of mandatory compliance training; and

6. Modify auditing schedule to risk based approach

Yes
Nortek Yes 1. Sharing investigation

2. Timely updates

3. Segregation and organization of documents

4. Translation of documents

5. Making witnesses available

6. Conducting Risk Assessment

1. Due diligence program for 3rd parties;

2. Strengthen compliance policies;

3. Enhance compliance function, name CCO;

4. Institution of mandatory compliance training; and

5. Enhance travel and expense controls in China

 

Yes
JCI Yes – one month after it received a second anonymous complaint 1. Real time updates, interview summaries and all requested documents;

2. Yates binders including hot docs, interview summaries, chronologies and emails;

3. Preservation of evidence.

1. Termination of culpable employees;

2. Suspension of culpable 3rd parties;

3. Incorporation of culpable China office into existing corp structure;

4. Enhanced integrity testing and auditing, including random audits; and

5 Random testing of transactions

Yes

 

 

All parties admitted to facts, which could have formed the basis of a criminal FCPA enforcement action brought by the DOJ, yet they all received Declinations. While it would certainly have been more helpful to have a full release of information by the DOJ, to assist the compliance practitioner in understanding the totality of the facts considered, these three Declinations may well mark a new starting point in criminal FCPA enforcement going forward. Since at least 2014, with the Parker Drilling and Hewlett-Packard FCPA enforcement actions, the DOJ has provided significant credit to companies who thoroughly cooperated and provided extensive remediation during the pendency of their enforcement actions. With the Pilot Program implementation, these shifts are now official DOJ policy.

One other point unrelated to the Pilot Program discussion is the length of time that the Akamai and Nortek matters were concluded. It was less than 18 months for both. This short time frame for a resolution is certainly a welcome development and shows that if a company comes forward quickly, is efficient in its investigation and proactive in its remediation, it can benefit with lower overall investigation and remediation costs as well.

All of the above are most welcome for any compliance practitioner. The DOJ Pilot Program has come out of the box with some solid wins for the companies involved, the DOJ and the greater compliance community. If this pattern continues, it will allow the DOJ to focus its resources in driving home the message that it is doing compliance that will not only work to keep a company out of trouble but will also get a company out of trouble.

 

This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at tfox@tfoxlaw.com.

© Thomas R. Fox, 2016