What is a company to do if, in order to obtain a contract with a foreign government, they must agree to invest a percentage of the proceeds of the transaction into the community in which it operates as a “charitable donation”? This issue was considered in the second FCPA Opinion Procedure Release of 2010, 10-02. This issue is often negotiated with the foreign government and can include cash or in-kind contributions of computers, equipment or appliances to schools, communities or organizations. While not a payment to a governmental official, it is still a payment to a governmental entity for the purpose of securing a lucrative contract and requires careful consideration. This spectra is currently required in some countries by law and these payments have generated some questions with regard to compliance with the Foreign Corrupt Practices Act (FCPA) as such donations could be interpreted as corruptly giving or offering anything of value to any “foreign official” in order to assist “in obtaining or retaining business for or with, or directing any business to, any person . . . .” 15 U.S.C. § 78dd-2(a)(1).

Background

The Opinion Release dealt with a US based micro financial institution (MFI) operating in an unnamed Eurasian country. This MFI desired to convert its local operations from a “humanitarian status” to a commercial status. The relevant government licensing authority in the country in question required that as a condition precedent to obtaining this commercial license, the MFI would be required to make a substantial grant to some other local MFIs, providing a list of one or more that the US MFI could choose. The US MFI was concerned that by making such a donation a condition precedent and specifying the list of local MFIs to which the donation could be made, the US MFI could run afoul of the FCPA’s proscription of “corruptly giving or offering anything of value to any foreign official” in order to assist “in obtaining or retaining business for or with, or directing any business to, any person . . . .”

In addition to the specific discussion of the due diligence performed by the US MFI and noting the controls it had put in place after the funding was scheduled to be made the DOJ also listed several of the due diligence and/or controls that it had previously set forth in prior Opinion Releases relating to charitable donations. These included:

  • certifications by the recipient that it will comply with the requirements of the FCPA;
  • due diligence to confirm that none of the recipient’s officers or directors are affiliated with the foreign government at issue;
  • a requirement that the recipient provide audited financial statements;
  • a written agreement with the recipient restricting the use of funds to humanitarian or charitable purposes only;
  • steps to ensure that the funds were transferred to a valid bank account;
  • confirmation that contemplated activities had occurred before funds were disbursed; and
  • ongoing auditing and monitoring of the efficacy of the program.

DOJ Analysis

In stating that the DOJ “does not intend to take any enforcement action with regard to the proposed transaction” the Opinion Release specified the three levels of due diligence that the US MFI had engaged in on the proposed locals MFIs which were listed as eligible to receive the funding. The DOJ noted that [it] “is satisfied, however, that the Requestor has done appropriate due diligence and that the controls that it plans to institute are sufficient to prevent FCPA violations. As noted above, the Requestor [US MFI] conducted three rounds of due diligence. The controls that the Requestor proposes would ensure with reasonable certainty that the grant money from the Eurasian Subsidiary would not be transferred to officials of the Eurasian country.”

Discussion

Opinion Release 10-02 provides a wealth of information to the FCPA practitioner and compliance counsel. It gives specific guidance on the levels of due diligence that a US company should go through when investigating a charitable institution selected, or suggested by a foreign governmental official, to be the recipient of a company’s charitable donations. Further it lists the controls that a US company should put in place, should it determine that a charitable donation is to be made. In short Opinion Release 10-02 gives significant guidance in pre-donation due diligence investigation, evaluation and post donation monitoring going forward to manage the process. Opinion Release 10-02 is a very large and helpful educational tool in the FCPA compliance arena.

Ted Lindsay died Monday. He was the final surviving member of the famed Detroit Red Wings Production line to pass away. The Production Line led the Red Wings to four National Hockey League (NHL) titles in the 1950s. According to his New York Timesobituary, “the Red Wings won the Stanley Cup in 1950, defeating the Rangers, 4 games to 3; in 1952, sweeping the Montreal Canadiens, 4-0; and in 1954 and 1955, beating the Canadiens each time, 4-3. In 133 playoff games, Lindsay had 47 goals and 49 assists for 96 points.” Lindsey was mean SOB but as Hall of Fame referee Bill Chadwick once said, “Ted was a mean hockey player but he was the kind of guy I would have wanted to play for me. He’d do anything to get the puck in the net.” Now reunited with Gordie Howe and Sid Abel in the great ice in the sky, I hope you boys are scoring some goals.

The call, email or tip comes into your office; an employee reports suspicious activity somewhere across the globe that might well turn into a Foreign Corrupt Practices Act (FCPA) issue for your company. As the Chief Compliance Officer (CCO), it will be up to you to begin the process to determine, in many instances, how the company will respond going forward.

This scenario was driven home in a FCPA enforcement action brought by the Securities and Exchange Commission (SEC) in July 2015 involving Mead Johnson Nutrition Company (Mead Johnson). In that case, the company performed two internal investigations into allegations that its Chinese business unit was engaged in conduct which violated the FCPA. Unfortunately, the first investigation, performed in 2011, did not turn up any evidence of FCPA violations. It was not until 2013, when the SEC made an inquiry to the company that it performed an adequate internal investigation which uncovered FCPA violations.

Similarly, consider Zimmer Biomet Holdings Inc., which (when it was only Biomet) resolved an FCPA violation in 2012 for nearly $23MM and entered into a Deferred Prosecution Agreement (DPA). Within the year, Biomet notified its Monitor that it had found evidence of additional FCPA violations, which in turn violated the terms and conditions of the DPA. However, these additional violations by the company turned out to have been actions which occurred in 2010, well before the initial DPA but were not uncovered in the company’s worldwide investigation which led to the first settlement. Zimmer Biomet paid an additional $13MM for this oversight and extended out both the DPA and the Monitorship, all because the company had failed to fully investigate itself thoroughly.

The 2012 FCPA Guidance states the following on investigations, “Moreover, once an allegation is made, companies should have in place an efficient, reliable, and properly funded process for investigating the allegation and documenting the company’s response, including any disciplinary or remediation measures taken.” That is simply it. This simple introduction was expanded upon in the Department of Justice’s (DOJ) Evaluation released in February. Prong 7 in the makes the following inquiries:

Effectiveness of the Reporting Mechanism How has the company collected, analyzed, and used information from its reporting mechanisms? How has the company assessed the seriousness of the allegations it received? Has the compliance function had full access to reporting and investigative information? 

Properly Scoped Investigation by Qualified Personnel How has the company ensured that the investigations have been properly scoped, and were independent, objective, appropriately conducted, and properly documented? 

Response to Investigations Has the company’s investigation been used to identify root causes, system vulnerabilities, and accountability lapses, including among supervisory manager and senior executives? What has been the process for responding to investigative findings? How high up in the company do investigative findings go? 

The Mead Johnson and Zimmer Biomet matters are but two examples which make clear the need to have robust, integrated investigations. Marc Bohn, writing in the FCPA Blog, said about the Mead Johnson matter, “Investigations that lack sufficient depth, resources, or forethought can pose significant risk because they increase the likelihood that something critical will be overlooked, potentially permitting misconduct to continue unabated.” Both Mead Johnson and Zimmer Biomet point to the critical nature of FCPA investigations and why the government takes this requirement so rigorously. But more than protecting a company from liability under the FCPA, the internationalized world of global compliance investigations are becoming more important. Bio-Rad Laboratories, Inc., recently announced that its FCPA settlement was a “risk-factor” which required public disclosure under US securities law.

In the domestic arena, internal investigations can go a long way towards helping a company move past a public relations debacle or perhaps abate negative publicity. One need only consider the recently released internal investigation report commissioned by the Wells Fargo Board of Directors around the bank’s fraudulent accounts scandal. The report was merciless in its criticism of certain structural and cultural failures at the bank. It named names of culpable former senior executives at the company. However, one thing it did not address were allegations from multiple whistleblowers who claimed to have reported the fraudulent conduct and were ignored or actively retaliated against. If the internal investigation turns out to have white washed these whistleblowers, the financial penalty and negative public reaction could be both swift and severe.

Corruption investigations are never a good thing for a company as they can disrupt business relationships and future opportunities. Yet today they are even more important. It is necessary to create, design and implement a robust investigation protocol for an internal investigation and determine when you should bring in outside counsel for an independent investigation. Further, you must consider the Board of Director’s role in investigations and other corporate functions such as internal audit, IT and legal in any investigation. Finally, do not disregard special issues such as privilege, Upjohn and Miranda warnings and data privacy.

Lastly, it is prudent to recall Hallmark Seven of the Ten Hallmarks of an Effective Compliance program which states, in part, “An effective compliance program should include a mechanism for an organization’s employees and others to report suspected or actual misconduct or violations of the company’s policies on a confidential basis and without fear of retaliation” so take time to also review your hotline protocol, from implementation to its use in your best practices 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, 2019

Can you hire a foreign official as your agent? Is a foreign official always a foreign official for the purposes of the Foreign Corrupt Practices Act (FCPA)? Can a person be a foreign official yet not under a contract for third party services? After all, the FCPA does not prohibit business relations with or even payments to foreign officials as there must be evidence of corrupt intent. Put another way, while such a scenario is certainly high risk under the FCPA, just because it is high risk does not mean that it cannot be accomplished. It simply means the risk management must be higher. In this podcast I explore this issue as it was was laid out in Opinion Release 10-03.

Background

The case involved the Requestor who was only identified as a US Limited Partnership which was in the natural resources trading and infrastructure business, both certainly recognized as high risk industries under the FCPA. The Requestor wanted to pursue a natural resources infrastructure project using a “novel approach” for the product development. Because of this novel approach, the Requestor, “and the market is dominated by a consortium of established companies, the Requestor determined that it required assistance in entering into discussions with the foreign government.”

This help was going to come in the form of a third-party consultant who, while a US citizen, held contracts to represent the foreign government in question, market on behalf of the foreign government’s Ministry of Finance and to lobby on behalf of the foreign government in the US. Most significantly, “The Consultant has represented ministries of the foreign government that will play a role in discussions of the Requestor’s initiative.” The Consultant would be paid a signing bonus if the contract was executed, “but the bulk of any payment by the Requestor to the Consultant under the contract will come in the form of success fees, should the Consultant’s efforts result in the foreign government entering into a business relationship with the Requestor.”

Requestor Representations

Clearly there were several red flags identified in the paragraph. First the Consultant, by virtue of its representation of the foreign government would be a foreign official for the purposes of the FCPA. Second was that the Consultant had consulting contracts with and did work directly for one or more of the foreign agencies which would consider the Requestor’s approval. Third is the payment arrangement which included a large success fee if a contract was signed. But once again, simply because something is high-risk does mean you cannot or even should not do it, it simply means the management of that risk must be correspondingly robust. To that end, the Requestor made the following representations:

  • The owner of the Consultant will cease to lobby on behalf of the foreign government, although other employees of the Consultant could continue to represent the foreign government in the United States;
  • A Chinese Wall would separate those lobbying efforts for the foreign government will be walled off from those working on the representation of the Requestor;
  • The Consultant nor its company would take on any additional representation of the foreign government be undertaken for the duration of the consultancy;
  • The Consultant did not and would not have any decision-making authority on behalf of the foreign government;
  • Under local law, the Consultant was not an employee or otherwise an official of the foreign government;
  • The Requestor has secured a local law opinion, stating it was “permissible for the Consultant to represent both the foreign government and the Requestor at the same time”;
  • The proposed contract required that the Consultant confirm that none of its employees were foreign officials and that no employee or associated individual will become a foreign official during the term of the agreement;
  • The contract between the Requestor and Consultant was disclosed to the Ministry of Finance of the foreign government;
  • Preapproval by the Requestor would be required before the Consultant would engage in action(s) with respect to the foreign government’s officials;
  • The Consultant committed that he will not represent nor have additional business relationship with the foreign government in connection with the project; and, finally,
  • The Consultant would not communicate with the foreign government in any respect outside the scope of the services they were providing to the Requestor, with the exception of those communications related to the ongoing representation of the foreign government which have been previously disclosed.

DOJ Discussion

The Department of Justice (DOJ) began its analysis by noting, it “has in the past considered proposed business arrangements with individuals who act on behalf of foreign governments under the Opinion Procedure. Notably, the FCPA does not per se prohibit business relationships with, or payments to, foreign officials. In such cases, the Department typically looks to determine whether there are any indicia of corrupt intent, whether the arrangement is transparent to the foreign government and the general public, whether the arrangement is in conformity with local law, and whether there are safeguards to prevent the foreign official from improperly using his or her position to steer business to or otherwise assist the company, for example through a policy of recusal.”

Discussion

Here the Consultant was clearly an agent of a foreign government, as there were situations where he was acting on behalf of the foreign government. However, for purposes of the consulting contract with the Requestor, the Consultant was not acting on behalf of the foreign government and therefore is not a foreign official under the definition of the FCPA. Yet there were other protections which were critical to the DOJ coming to this conclusion.

  1. The Consultant was walled off from work his company did on behalf of the foreign government.
  2. There was full disclosure of the relationships to the relevant governmental agencies.
  3. The arrangement was permissible under local law and there was a local law firm opinion to back up this assertion.
  4. The consulting contract had contractual protection in place to limit further representation of the foreign government by the Consultant.

Because the Opinion Release turned on the issue of the Consultant’s status as a foreign official, the DOJ did not offer an opinion on the payment arrangements.

Recently Louis Sapirman and I had the opportunity to participate in webinar hosted by Hanzo, on the intersection of compliance and communications. In it we discussed the relationship between marketing and compliance; including both the regulatory risks of social media and digital content and the opportunities of collaborating and leveraging each other’s strengths. Sapirman gave insights from his former role as CCO at Dun & Bradstreet. It was a fascinating exploration of how breaking down the silos between your compliance function and your corporate communication function can lead to much more effective and efficient compliance.

The webinar was sponsored by Hanzo. You can check out more information on Hanzo at their website, found here.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

André Previn died this week. He was described in his New York Times obituary as a musician “who blurred the boundaries between jazz, pop and classical music — and between composing, conducting and performing — in an extraordinarily eclectic, award-filled career”. He won four Oscars for musical scores, was married to Mia Farrow (between her marriages to Frank Sinatra and Woody Allen) as was “as a “wunderkind in a turtleneck” and the “Mickey Mouse maestro” when he was in his 20s and 30s. He was often compared to Leonard Bernstein, a similarly versatile conductor, composer and pianist.”

It was in this period I first became acquainted with Previn when he succeeded Sir John Barbirolli as the conductor of the Houston Symphony Orchestra (HSO), if only for a short glorious year, before he decamped to London to become the Principal Conductor of the London Symphony Orchestra. My introduction to classical music was when my mother dragged me, kicking and screaming to see him lead the HSO. I was mesmerized, leading to a life-long love of classical music.

One thing Previn acceded at was communication and preparation. These are two key components to the auditing of third parties, which is critical to any best practices compliance program and an important tool in operationalizing your compliance program. It is a key for a company to manage its third-party relationships after a contract is signed and one which the government will expect you to engage in going forward. Regulators have begun to question companies about the status of their third-part audit program; its frequency, the basis for the decision on whom to audit, its robustness and the follow up from the results.

Marianne Ibrahim, Director of Global Compliance at Baker Hughes, a GE company, has led her company’s efforts in this area for several years. Ibrahim said you should plan out four to six weeks in advance, you should perform the audit under your legal counsel’s lead to preserve privilege, work with the appropriate business unit sponsor of the third-party to establish key business contacts, discuss audit rights and processes with the third-party. Your audit team should also include at least two forensic auditors, who have a strong finance and audit backgrounds. The selection of the third-party to audit can be based on a variety of factors such as audit rotation, internal risk-ranking and market intelligence.

Next, you should prepare initial document request lists from the third-party, delivered in a timely manner, so that you can review them prior to the audit. You should also review findings from previous audits and resolutions and also review details of opened and closed internal investigations, if there are any Code of Conduct questionnaires available take care to review and, finally, be cognizant of any related Department of Justice (DOJ) and/or Securities and Exchange Commission (SEC) enforcement actions.

The next step is to determine the entry points of foreign government involvement, both direct and indirect. The direct category includes: customs and duties, corporate taxes and penalties, social security or national insurance issues for employees, obtaining in-country visas and work permits, public official gifts and entertainment, training of and attendant travel for employees of government owned entities, procurement of business licenses and permits to perform work and areas around police escort and security. In the indirect category, some of the key areas to review are: customs agents and freight forwarders, visa processors, commercial sales agents, including distributors and those who might be consultants or other channel partners.

Ibrahim noted that setting expectations with your third-party is a key step when you sit down to perform the audit. She said that she begins by sitting down with the third-party to “thank them for their time when we review the audit rights” clause from their contract. She added that “especially in Asian culture is the expectation in writing to remind them these are the audit rights that we are enforcing. It really just set the tone for expectations.”

Your lead interviewer should be an attorney to preserve privilege, who should also be culturally sensitive, patient and create a good working relationship with the forensic auditors on your audit team who will be reviewing the documents. Ibrahim cautioned that you are not conducting “an investigative interview. This is an exploratory interview.” The reason is because you are trying to get them to open up and to be comfortable with audit process. At the same time the attorney-led interview is ongoing, the forensic auditors are reviewing their books and records including petty cash funds; bank accounts; general ledger account, including travel, entertainment, meals and gifts; charitable and political donations, and payments to customs and freight boarders.

You should also use this interview process to educate the third-party on any gaps around your compliance program. This can be done directly in the interview process or at the end of the audit, when you review the results with the third-party to give immediate feedback. Of course, if something more sensitive has been uncovered in the audit, you may want to do additional research or have further review in your corporate office.

Perhaps the over-riding theme from Ibrahim was ongoing communications both before, during, and after the audit. It begins with setting appropriate expectations with the third-party, moves to remediation, if needed, quickly and efficiently, and also sitting down with a third party to reviewing the audit findings. At the end of the day, your third-party should be seen as a partner in the compliance efforts for the company.

Andre Previn set list (all from YouTube)

Jazz Offerings

All The Best

A Touch of Elegance

Just in Time

Classical Selections

AndréPrevin conducts Mozart Symphony no. 39-VHS

Andre Previn conducts Russlan & Ludmilla

Romeo And Juliet Scenes And Dances

Movie Soundtracks/Song

AndréPrevin-Music Films

Over the Rainbow

West Side Story

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, 2019