Welcome to the only roundtable podcast in compliance. Inspired by our UK colleague, Jonathan Armstrong who inquired if we could explore the guilty plea of Michael Cohen and the guilty verdict against Paul Manafort, we dedicated two episodes to issues surrounding, raised by or related to these two events. In this episode we have commentary by Jay Rosen and Jonathan Armstrong (last week was Mike Volkov and Matt Kelly). After the commentary we follow with rants.

  1. Jay Rosen-begins with the Tom Fox mantra of Document Document Document to consider the use of documents in both cases. The Cohen case was built on the paper trail. He explains how prosecutors used it to uncover the fraud and why companies must properly record documents. Jay gives a shout out to John McCain for his services to our country.
  1. Jonathan Armstrong-There is much discussion in the US about whether prosecutors should or even can investigate the President, his team and family for their actions. He uses this as a jumping off point to consider if a UK PM and his team engaged in such blatant corruption, would UK prosecutors have the ability to engage in such investigations? What is the relationship of the CPS & SFO to the party in power for criminal investigations? Armstrong rants on curse of the enthusiastic amateur.

The members of the Everything Compliance panelist are:

  • Jay Rosen– Jay is Vice President, Business Development Corporate Monitoring at Affiliated Monitors. Rosen can be reached at JRosen@affiliatedmonitors.com
  • Mike Volkov– One of the top FCPA commentators and practitioners around and the Chief Executive Officer of The Volkov Law Group, LLC. Volkov can be reached at mvolkov@volkovlawgroup.com.
  • Matt Kelly– Founder and CEO of Radical Compliance. Kelly can be reached at mkelly@radicalcompliance.com
  • Jonathan Armstrong– Rounding out the panel is our UK colleague, who is an experienced lawyer with Cordery in London. Armstrong can be reached at armstrong@corderycompliance.com

The host and producer (and sometime panelist) of Everything Compliance is Tom Fox the Compliance Evangelist.

Brighton Rock is 80 this year. It was the first novel by Graham Greene and for many of us, it was our first introduction into his works. This novel has several different styles and themes intertwined. It is clearly a crime novel but also an underworld thriller. I found it to be almost noir in its atmospherics. The anti-hero, Pinkie, is a sociopath teenager who takes over a local gang through murder then continues his mayhem throughout the book. Along the way, he marries another teenager to prevent her from talking to the local constabulary, thinking there is a marriage privilege. When he finally figures out that strategy will not work, the book becomes an interesting lens to view Catholic ideas on morality, the nature of sin and even suicide. Graham Chainey, writing in TLS, focused on the city of Brighton itself, which he found to be the protagonist. The multiple foci of the story inform today’s blog post on the recent Securities and Exchange Commission (SEC) Foreign Corrupt Practices Act (FCPA) enforcement action involving United Technologies Corporation (UTC).

According to Harry Cassin, writing in the FCPA Blog, “In late 2013 and early 2014, United Technologies self-disclosed to the DOJ, SEC, and the SFO the status of an internal investigation regarding a non-employee sales rep for the sale of jet engines and aftermarket services in China.” This turned out to be one of the smartest moves UTC made as with even some egregious facts and some very high-level subsidiary employee involvement, UTC was able to obtain a relatively mild SEC Ordermandating profit disgorgement of $9 million plus interest of about $919,000 and a penalty of $4 million; for a total fine and penalty of $13.9 million. Earlier in the spring the Department of Justice (DOJ) closed out its investigation without assessing a fine or penalty.

The bribery schemes involved three UTC subsidiaries: Otis Elevator Company (Otis), Pratt & Whitney (PW) and International Aero Engines AG (IAE), a joint venture that became majority owned by PW in 2012. Each subsidiary had its own bribery scheme so the Order is instructive for the compliance professional to study. The bribery schemes lasted from 2009-2015.

Otis Elevator in Azerbaijan

Beginning in 2012 Otis implemented a corruption scheme to bribe local government officials in Baku, Azerbaijan, to purchase its elevator equipment. The municipal entity was named “Liftremont”. The first sale used subcontractors to pay some $790,000 in bribes or at least under a contract where “payments to the subcontractors were made without appropriate documentation of services being provided.”

A second corruption scheme was unveiled in 2013/2014 for more sales. This second scheme involved using distributors to purchase the elevators and then “elevator equipment to the intermediary at one price, knowing that the intermediary would sell the equipment to Liftremont at a significantly higher price. The spread between the prices, at least $11.8 million, was intended in part for Liftremont officials.”

These distributors had no experience in the elevator business, did not go through any background due diligence and in one instance “one of the intermediaries was not a registered entity until February 2014, well after participating in Otis’s transactions with Liftremont in 2013.” Moreover, “The transactions with the intermediaries should have raised significant red flags because Otis Russia already had an approved joint venture (“JV”) partner that was authorized to make the sales in Azerbaijan, and no legitimate business justification was provided for using the four intermediaries instead.”

The scheme by Otis was so brazen that commissions and other illegal payments were made outside the countries of origins of the distributors. Otis provided fraudulent tax and shipping stamps. No other corporate disciplines at Otis could seem to be bothered to perform any reviews or do anything other than rubber stamp the corrupt payments schemes. At one-point Otis even made Liftremont a distributor so corrupt payments could be made to certain Liftremont officials.

Finally, when someone from Otis’ Legal Department in Russia raised a question about one of the intermediaries, he was provided “a letter from the Liftremont Senior Official containing a perfunctory explanation for why Liftremont needed the new intermediary inserted into the contract. Although the Regional lawyer initially challenged the perfunctory explanation, he ultimately approved the contract.” But here’s the kicker, someone else from Otis legal had already approved the contract between the corrupt intermediary and Otis some four months earlier.

IAE and Pratt & Whitney in China

Here the corruption scheme involved the use of an agent. This agent was retained in 2006 and up until that time had been in the toll road construction business. However IAE and PW retained him to help sell aircraft engines in China, which he did in a very big way generating some $55 million in commissions from 2009 to 2013 alone. An ingenious method used to fund the bribes was a request by the China agent for “a commission advance of $2 million purportedly for an office expansion. The agent provided no documentation to support its need for the advance. Moreover, there was little basis to believe that the agent, who mainly arranged introductions and meetings, actually intended a $2 million office expansion.” Nevertheless, “the GM and VP agreed to advance the commissions to the agent.”

Rather amazingly, the next month this agent obtained confidential information of a competitors bid, which IAE used to modify its bid pricing.  The next month IAE won the Air China contract. The corrupt agent paid some $960,000 to a corrupt Air China official for this confidential information.

Another bribery scheme used in China advance payments for sponsorship of events for Chinese officials. PW China senior executives paid nearly $100,000 for a two-day golf event. They created a fraudulent agenda which was approved by company legal.

Otis Elevator in China

Otis relied on its distributor model to make corrupt payments in China for the sale of four elevators units to a state-owned bank. A corrupt official approached Otis and apparently told them he would award them the contract for a bribe payment, which turned out to be $98,000. Otis China then appended a corrupt distributor on the deal who marked up the price by the bribe amount. When it was paid it was rebated back to the corrupt official.

UTC and Travel Everywhere

UTC itself was involved in the bribery and corruption through funding of leisure travel for government officials from China, Kuwait, South Korea, Pakistan, Thailand and Indonesia. While such approval required legal department approval, UTC “employees frequently circumvented this requirement by submitting travel for foreign officials for approval without disclosing the leisure and entertainment component. On occasion, the travel was included as a cost component in the contract with the end customer and was therefore not submitted for appropriate approval.”

The travel included locations where UTC did not have any business, manufacturing facilities or products in such places as Orlando (M-I-C-K-E-Y M-O-U-S-E). While some travel was to locations which did have UTC facilities, such as subway systems in NYC, Washington DC, Italy and Greece; no inspections of these facilities were ever recorded. Between 2009 and 2015 UTC recorded some $134,000 in such expenses.

Even with all of the above UTC got a great result. In addition to its self-disclosure, it thoroughly cooperated with the SEC in the investigation. The remediation had several key features including, “termination of employees and third parties responsible for the misconduct and enhancements to its internal accounting controls. UTC strengthened its global compliance organization; enhanced its policies and procedures regarding travel, the due diligence process, and the use of third parties; created positions to address potential risks; and increased training of employees on anti-bribery issues.”

The most superior UTC result makes clear that the DOJ’s new FCPA Corporate Enforcement Policy offers some very strong and real incentives to meet the four prongs. The very low SEC fine and penalty speaks with equal strength. Just as Brighton Rockcan be read from a variety of angles, the UTC FCPA enforcement action should also be so read.

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, 2018

You can put away your all white linen suits and your seersucker suits as well. With that hint of fall in the air, we are upon the (unofficial) end of summer with the Labor Day Weekend, Tom and Jay are back with a look at some of the week’s top compliance and ethics stories.

  1. Second Circuit affirms most of Hoskins dismissal. Dick Cassin reports in the FCPA Blog.
  2. With a nod to Dwight Eisenhower, Hui Chen says compliance is about process not outcomes. Check out her article in Bloomberg.
  3. The 1MDB scandal only gets weirder. First Malaysian spies are linked to the scandal, Dick Cassin writes in the FCPA Blog. Next it turns out Chris Christie is representing Jho Low on a forfeiture case. Bradley Hope, Tom Wright and Rebecca Davis O’Brien report in the Wall Street Journal.
  4. Legg Mason bookends it NPA with a settlement with the SEC on its FCPA violations in Libya. Jack Hagel reports in the WSJ Risk and Compliance Journal. Tom reports in a tribute to Ed King on the FCPA Compliance and Ethics Blog. Dick Cassin reports in the FCPA Blog.
  5. Jaclyn Jaeger details some of the lessons learned from the Wynn scandal in Compliance Week. (sub req’d)
  6. Why is it important for integrity to a part of your brand. Nelson Pratt explains on Navex’s blog, Ethics and Compliance Matters. Tom tackles integrity in a tribute to John McCain on the FCPA Compliance and Ethics Blog.
  7. Does power corrupt or simply change you? Caterina Bullgarella explains why you must pay attention in a piece on Forbes.com.
  8. Microsoft in trouble for its distributor network? Dick Cassin reports in the FCPA Blog. Tom details how to manage the distributor risk in Compliance Week. (sub req’d)
  9. Now former Cleveland Browns linebacker Mychal Kendricks indicted for insider trading. Tom Schad reports in USA Today. Once again demonstrating why they are the worst run organization in all of pro football, Browns only find out about the facts after then indictment and then cut him.Reported by Charlotte Carrol in Sports Illustrated.
  10. On this week’s featured podcast series, Tom explored the interestion of King Arthur and compliance. In Part 1 it was Arthuian leadership. In Part 2 it was the Pentecostal Oath and a Code of Conduct. In Part 3 it was the Round Table and whistleblowing. In Part 4 it was the Green Knight and whistleblower protection. In Part 5 it was the quest for the Holy Grail and a compliance defense for the FCPA.
  11. As the play off race begins to take shape, Astros lead the West by 2.5 games after taking 2 of 3 from the A’s in Houston. After being swept by the Rays, the Sox take it out on the Marlins and their lead is back to 7.5 games over the Yankees.
  12. The Compliance Master Class is coming to Boston on September 25 & 26. Learn how to create, design and implement a best practice compliance program from Tom Fox, the Compliance Evangelist. For information, click here. For registration click here.


For more information on how an independent monitor can help improve your company’s ethics and compliance program, visit our sponsor Affiliated Monitors at www.affiliatedmonitors.com.

What is due diligence? What is zero tolerance? How do these impact employee morale? How do these concepts link together? Richard Lummis and I explore these questions and more in considering the July Houston Astros trade for closer Roberto Osuna. The primary reason for these questions was that Osuna came off a 75-game suspension by Major League Baseball (MLB) for violation of its domestic abuse policy. It involved an incident for assault, for which Osuna pleaded not guilty to in a criminal case in Ontario. Some of the questions we consider are:

What is Zero Tolerance? Overlaid with Osuna and his suspension were the Astros, who have (or perhaps more appropriately had) a zero-tolerance policy for domestic abuse. David Barron, writing in the Houston Chronicle, said the club’s response was that the zero-tolerance policy did not apply to Osuna because the alleged assault occurred before he joined the Astros and that Osuna would benefit from “great examples of character in our existing clubhouse that we believe will help him and his family establish a fresh start.”

What is the purpose of employment sanctions?Should a person who commits a crime or unethical action be forever banned from practicing their craft? In his article Barron quoted Cindy Southworth, an executive vice president of the National Network to End Domestic Violence, who posed the following question “How do you balance redemption and behavioral change with holding people accountable?” She then answered her own question with “It’s messy. It’s not straightforward. But you can do both.” I would only add (parenthetically) that if your right arm is a cannon, you will probably get such a chance.

What are red flags and are they a predicter of future events?One incident of unethical behavior would be seen as a red flag for similar behavior in the future. It might be enough to prevent such a person or entity from passing a due diligence background screening. On the other hand, a person convicted or found guilty of bribery and corruption might well serve their time, become rehabilitated and use those experiences to help others avoid the scourge of corruption going forward.

What is Due Diligence?Is it a formal record check to see if a person is on the despicable persons list, have committed criminal acts or are at least alleged to have violated laws. Is due diligence determining whether someone or some other organization meets the minimum standards you set for yourself or your organization (See: zero tolerance, above)? Gonzales said, the “Astros say they truly don’t know the details about what took place between Osuna and the alleged victim.”

What is employee morale? Osuna is under charges in the province of Ontario for his domestic assault, to which he has pled not guilty. What will be the effect on all of this be in the Astros clubhouse, given the stances by several players on domestic abuse? Barron noted in his article that Astros pitchers Justin Verlander and Lance McCullers had previously made statements “against players who commit domestic violence.” Verlander said after the trade was announced “Obviously I’ve said some pretty inflammatory things about stuff like this in the past and I stand by my words. But I think in an ongoing case as is this one, we’ll see what happens.” Gonzales reported that Collin McHugh, the team’s representative with the Major League Baseball Players Association, was a bit more direct saying, “I don’t think anybody’s comfortable with the situation,” McHugh later told the media. “I don’t think anybody in baseball is comfortable with this situation. There’s a lot of ongoing things; there’s things that are happening. Nobody in this clubhouse is going to condone anything that’s happened off the field.”

Moral bankruptcy or shrewd business move?As for the Astros, it is pretty clear that the right arm of Osuna is the only currency the club is concerned about as it mounts a defense of its 2017 World Series championship. Yet in the court of public opinion, the Astros have certainly dropped a few notches. ESPN’s Buster Olney said of the trade, “Surprising…disappointing…shocking….appalling.” Yahoo! Sports’ writer Jeff Passan was even more direct when he said the Astros had engaged in “moral bankruptcy by acquiring a player of tainted character, because, in this case, he can get outs in the ninth inning.”

Ed King died last week. If you are a real rock and roller you may recognize his name as a part of the three-axe triumvirate from the first three Lynyrd Skynyrd albums. While he originally joined the band as a bassist, he later switched over to full guitar, which, for a short three-year period, provided all axe-heads with some of the most stunning triple guitar work ever recorded. However King foreshadowed his work with Skynyrd by co-writing one of the great psychedelia songs of all time Incense and Peppermint while with the Strawberry Alarm Clock. It is one of my all-time favorite rock songs, just ahead of Free Bird. A Rolling Stone online obituary, quoted Guitarist Gary Rossington, the lone original member of the Lynyrd Skynyrd who tours today, “I’ve just found out about Ed’s passing and I’m shocked and saddened,” he said. “Ed was our brother, and a great songwriter and guitar player. I know he will be reunited with the rest of the boys in Rock and Roll Heaven.” So crank it up to 11 and listen to both Incense and Peppermint and Free Bird. It introduces our discussion of the Legg Mason enforcement action.

King’s back story of starting with the great psychedelic band Strawberry Alarm Clock and then moving to the Southern rockers Lynyrd Skynyrd, informs today’s blog post on the Legg Mason, Inc. (LM) Securities and Exchange Commission (SEC) Foreign Corrupt Practices Act (FCPA) enforcement action. This is the companion action to the Non-Prosecution Agreement (NPA) entered into with the Department of Justice (DOJ) this past June. LM resolved its SEC enforcement action via a Cease and Desist Order (Order). The conduct at issue related to one of LM’s former asset management subsidiaries Permal Group Ltd., (“Permal”), which partnered with Société Générale S.A., (“Société Générale”) to solicit business from state-owned financial institutions in Libya (“Libyan Financial Institutions”). In connection with this effort, bribes were paid through a Libyan middle-man to obtain investments from Libyan Financial Institutions.

While there was no evidence presented of direct LM involvement, the Order detailed a series of actions by Permal whose representatives directly engaged in bribery and corruption. As a “former management asset subsidiary” of LM, LM was responsible under the FCPA for its actions, which was based on three areas.

First, “Legg Mason failed in a timely manner to devise and maintain an adequate system of internal accounting controls with respect to the Company’s widespread use of introducing brokers and other intermediaries in emerging markets, including Libya. The controls in place during the relevant period were minimal and deficient.” Second, LM’s “internal accounting controls were not reasonably sufficient with respect to the Company’s use of, and payments to, intermediaries. Legg Mason did not timely institute appropriate risk-based due diligence and compliance requirements pertaining to the retention and oversight of such agents and business partners.” Finally, “Legg Mason did not take adequate steps to identify or mitigate the risks of bribery and corruption in making use of middlemen such as the Libyan Intermediary.”

Unlike Société Générale which did not receive cooperation credit from the DOJ, the SEC acknowledged LM’s cooperation with the SEC, stating, “Legg Mason provided to the Commission staff throughout the investigation. Legg Mason’s cooperation included summarizing the findings of its internal investigation, making foreign-based employees available to the Commission staff including providing for their travel to the United States for interviews, and providing timely factual summaries of witness interviews and other information developed in the course of its internal investigation. Legg Mason’s cooperation assisted the Commission in collecting information that might not have been otherwise available to the staff.” LM also engaged in extensive remediation including, “replacing the employees involved in the violation, increasing the number of professionals focused on the company’s compliance efforts including establishing a new anti-corruption officer position, and enhancing its internal accounting controls to prevent and detect the type of misconduct”.

Yet perhaps the most interesting insight from the enforcement action was the DOJ’s new “Piling On” policy in action. Under the NPA, it stated LM “agrees to pay a monetary penalty in the amount of $32,625,000.00 to the United States Treasury no later than five business days after the Agreement is fully executed, and to pay $31,617,891.90” in profit disgorgement. The SEC Order specified that it was not imposing a civil fine “based upon the imposition of a $32 million criminal fine by the DOJ.” Further, the profit disgorgement in the SEC Order of $27.6 million, coupled with prejudgment interest of $6.9 million was offset by the profit disgorgement payment to the DOJ. As Dick Cassin, writing in the FCPA Blog, noted, “After applying the credit for $31.6 million as set out in the June 4 NPA, Legg Mason will pay the SEC $2.4 million for the resolution.”

Now with the SEC concluding its FCPA enforcement action with LM, we can see the full scope of the new FCPA Corporate Enforcement Policy and “piling on” policy at work. Obviously, LM obtained a superior result from the DOJ with its NPA. Due to its extensive cooperation and extensive remediation, it received a 25% discount off the low end of the US Sentencing Guidelines bottom range. LM also benefited from the “piling on” policy as it received full credit for the profits disgorged to the DOJ under the SEC Order.

The DOJ has now put in this component of the new FCPA Corporate Enforcement Policy. The SEC has now honored the DOJ’s “piling on” policy into an enforcement action. We previously saw the presumption of a declination come to fruition in the Dun & Bradstreet Inc. (D&B) declination. The LM enforcement action provides solid information for every compliance practitioner to use in setting up compliance programs to prevent, detect and remediate. It also gives companies a clear incentive to step up and follow the new policy. Now imagine if LM had self-disclosed the matter, what level of sanction would they have received?

All of this leads to the unmistakable conclusion that FCPA regulators, both the SEC and DOJ, have provided solid incentives for companies to come in and self-disclose, cooperate and remediate. When you add the factors present in the D&B declination, you see this is precisely the certainty that companies want to have when making the decision to self-disclose and cooperate. These tangible and meaningful incentives will continue to drive more and greater compliance initiatives going forward.

Ed King Set List-all from YouTube

Incense and Peppermint

Free Bird

Sweet Home Alabama

Simple Man


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, 2018