Agatha ChristieI conclude my week of exploration of Agatha Christie’s Miss Marple short stories and the Securities and Exchange Commission’s (SEC) enforcement of the Foreign Corrupt Practices Act (FCPA) by reviewing some of the new things I’ve learnt during this week of research. I learned that Christie made several social observations and revealed much about herself through these stories. She is very much constrained by the roles given to women in the early to mid-1920s, including the lack of a proper education. She also writes about some of the disdainful attitudes of people to an older woman. I found a number of inside jokes that Christie placed into the stories, even referring to the prevalence of detective fiction in print and on the stage at the time the stories were written. Finally is the fact that people make the mistake of not noticing her but that she is watching them and listening and that they will remain unaware of her presence for not too much longer.

In his recent blog post, entitled “Are You An FCPA Contender Or Pretender?”, the FCPA Professor suggested that if you want to practice in the area of FCPA compliance, you really should take the time to read some of the very few underlying sources and documents relating to the subject. After my week exploration of the SEC enforcement of the FCPA, I would note that you can learn quite a bit by heeding his advice.

Internal Controls

There was a trend, beginning in the fall of 2014 of SEC FCPA enforcement actions, where the Department of Justice (DOJ) either declined to prosecute the company or settled with the company via a Non-Prosecution Agreement (NPA). This led me to conclude that the SEC was ramping up its review and enforcement of the accounting provisions under the FCPA separate and apart from criminal side enforcement of the FCPA by the DOJ. Earlier this month, when Andrew Ceresney, the SEC Director, Division of Enforcement, spoke at CBI’s Pharmaceutical Compliance Congress in Washington DC he discussed the importance of internal controls in SEC enforcement. While his remarks were primarily directed “in the context of financial reporting” I believe they could be equally applicable in the FCPA compliance context.

Ceresney said, “What kinds of practice pointers for how to avoid these issues? Well, in cases we have brought, we see controls that were not carefully designed to match the business, or that were not updated as the business changed and grew. And we see that senior leadership was not asking the tough questions – and sometimes not even asking the easy questions. Senior management in some cases was just not engaged in any real discussion about the controls. As a result, employees did not properly focus on them and the firm and its shareholders are put at risk.” I think these statements, particularly taken in the context of his overall remarks, portend a greater focus on internal controls review and enforcement in the FCPA context.

Finally, in the area of internal controls, is the interplay of Sarbanes-Oxley (SOX) with FCPA enforcement and several sections of the Act that have FCPA implications. These include SOX §302 that requires the principle officers of a company to “take responsibility for and certify the integrity of these company’s financial reports on a quarterly basis.” Under SOX §404 companies must present annually their conclusion “regarding the effectiveness of the company’s internal controls over accounting.” Finally, SOX §802 prohibits “altering, destroying, mutilating, concealing or falsifying records, documents or tangible objects” with the intent to obstruct or influence a federal investigation, such as the FCPA.

Every public company is required to report on its internal controls. The SEC may well start mining those required, annual public disclosures for information on compliance internal controls. If the SEC finds a company’s report lacking and then after requesting further information, still finds a company’s response lacking, a company may be looking at strict liability and a financial penalty based on profit disgorgement as I lay out next.

Strict Liability

I have written about the coming of strict liability to the SEC enforcement of the FCPA’s accounting provisions, including books and records and internal controls. However, after having read, re-read and reviewed the FCPA and commentary, I now believe that a strict liability interpretation for enforcement of the FPCA is fully supported by the plain language of the Act itself. I come to this conclusion because there is no language in the text of the Act that ties the accounting provision requirements to any other operative violation of the statute. In other words, there is no language that says that an accounting provisions violation must be tied to an offer or payment of a bribe to obtain or retain business. While the FCPA does not specifically say that a company will be strictly liable for a violation of the accounting provisions, it is certainly not prohibited. Since violations of the accounting provisions as enforced by the SEC are civil violations only, I now believe that such a position is not prohibited by the Act.

Profit Disgorgement 

Similar to my views on strict liability for accounting violations, I have also come to believe that profit disgorgement is a remedy fully supported and available to the SEC in FCPA enforcement actions. This change was made by an un-related law, entitled The Penny Stock Reform Act of 1990, which amended the Securities Exchange Act of 1934 to: allow the SEC to (1) impose tiered civil money penalties pursuant to administrative findings of violations of the Act; (2) enter an order requiring an accounting and disgorgement; (3) issue cease and desist orders; and (4) issue temporary restraining orders. Profit disgorgement has generally been considered an equitable remedy. Sasah Kalb and Marc Alain Bohn, in their article “Disgorgement: The Devil You Don’t Know, wrote “As an equitable remedy, disgorgement is not intended as tool to punish, but as a vehicle for preventing unjust enrichment. The SEC is therefore only permitted to recover the approximate amount earned from the alleged illicit activities. Disgorging anything more would be considered punitive.”

In conjunction with this equitable nature for profit disgorgement, is the concept of proportionality. In the article by David C. Weiss, entitled “The Foreign Corrupt Practices Act, SEC Disgorgement of Profits and the Evolving International Bribery Regime: Weighing Proportionality, Retribution and Deterrence”, he wrote that regarding proportionality “punishment schemes fail a utilitarian test when the punishment exceeds, or threatens to exceed, the offense. Put another way, deterrence requires that a punishment be proportionate to the harm—allowing for some multiplier based on the likelihood of being caught. Punishments that are not proportionate are not justified under this utilitarian theory.”

Profit Disgorgement as a Remedy for Strict Liability

In this final section, I give my opinion as to where I think the next step of SEC enforcement may be headed. I think it will be a combination of the enforcement of the accounting provisions of the FCPA through a strict liability reading of them by the SEC to the remedy of profit disgorgement. Admittedly this opinion seems contrary to the equitable nature of the remedy of profit disgorgement. However the greater focus of SEC scrutiny and enforcement of the accounting provisions point me in that direction. While it is also true that profit disgorgement has traditionally required some specific ill-gotten gains; with the statutory authority provided by the Penny Stock Act to the SEC allows for disgorgement with no language around its equitable beginning, this may be enough for the SEC to make such an intellectual leap. Further, as noted by Kalb and Bohn, “Because calculations like these often prove difficult, courts tend to give the SEC considerable discretion in determining what constitutes an ill-gotten gain by requiring only a reasonable approximation of the profits which are causally connected to the violation.”

The final component is the lack of judicial review in FCPA enforcement actions. Every practitioner is aware of the absolute dearth of cases in this area. With the SEC moving towards more administrative actions, through the 2010 Dodd-Frank amendment that enables the SEC to collect civil penalties through administrative proceedings, there may not be many federal district court reviews going forward. Of course to have a federal district court review of a remedy, it generally takes the defendant to make some objection and companies seemingly do not wish to take on the SEC in any FCPA enforcement matter (or the DOJ for that matter). But even if there was a federal district review of a Cease and Desist Order filed before it, you almost never hear the court reject an agreed Order on the grounds that the remedy was too harsh or unwarranted.

I hope you have enjoyed and learned something this week unique to the SEC enforcement of the FCPA. I know I have both enjoyed reading many of the excellent commentators I have reviewed during my research. David Weiss, Marc Alain Bohn, Sasha Kalb, Russ Ryan and the FCPA Professor have all contributed significant legal work and thought leadership in this area that I have built some of my theories on so I thank them for their contributions. Another joy was reading Agatha Christie’s Miss Marple short stories. If you have a few evenings or some down time for spring break or summer vacation, I suggest you pick up the volume. It is just like visiting with an old friend on a dark and stormy night…

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, 2015

 

 

Blue GeraniumIn Christie’s The Blue Geranium a difficult and cantankerous semi-invalid wife is looked after by a succession of nurses. They changed regularly, unable to cope with their patient, with one exception Nurse Copling who somehow managed the tantrums and complaints better than others of her calling. The wife had a predilection for fortunetellers and one announced that the wallpaper in the wife’s room was evil; pronouncing she should “Beware of the Full Moon. The Blue Primrose means warning; the Blue Hollyhock means danger; the Blue Geranium means death.” Four days later, one of the primroses in the pattern of the wallpaper in the wife’s room changed color to blue in the middle of the night, when there had been a full moon.

On the morning after the next full moon, the wife was found dead in her bed with only her smelling salts beside her. Once again Miss Marple has the solution remembering that potassium cyanide resembled smelling salts in odor. The wife took what she thought were smelling salts but was in reality potassium cyanide. The flowers on the wallpaper had been treated with litmus paper which the turned the geranium in question blue, which unmasked the killer.

I found this story to be an interesting way to introduce the topic of the Securities and Exchange Commission’s (SEC’s) damage remedies. While some are obvious, such as the fines and penalties which are listed in the text of the Foreign Corrupt Practices Act (FCPA), another one, that being profit disgorgement must be seen through the lens of multiple legislations.

Monetary Fines

The damages that are available to the SEC differ in some significant aspects from those available to the Department of Justice (DOJ) in its enforcement of the criminal side of the FCPA. According to the FCPA Guidance, “For violations of the anti-bribery provisions, cor­porations and other business entities are subject to a civil penalty of up to $16,000 per violation. Individuals, including officers, directors, stockholders, and agents of companies, are similarly subject to a civil penalty of up to $16,000 per violation, which may not be paid by their employer or principal. For violations of the accounting provisions, SEC may obtain a civil penalty not to exceed the greater of (a) the gross amount of the pecuniary gain to the defendant as a result of the violations or (b) a specified dollar limitation. The specified dollar limitations are based on the egregious­ness of the violation, ranging from $7,500 to $150,000 for an individual and $75,000 to $725,000 for a company.”

As straightforward as these monetary amounts may seem, the totals can become very large very quickly. As noted by Russ Ryan in a guest post on the FCPA Professor’s blog, entitled “Former SEC Enforcement Official Throws The Red Challenge Flag, the SEC significantly multiplied those amounts in a default judgment context against former Siemens executives by claiming that “four alleged bribes should be triple-counted as three separate securities law violations – once as a bribe, again as a books-and-records violation, and yet again as an internal-controls violation – thus artificially multiplying four violations to create twelve.” Further, under the specific books-and-records and internal-controls allegations “the SEC was super aggressive, taking the position that these classically non-fraud violations involved “reckless disregard” of a regulatory requirement, thus allowing the SEC to demand the maximum $60,000 per violation in “second-tier” penalties rather than the $6,000 per violation in the “first-tier” penalties ordinarily associated with non-fraud violations.”

Profit Disgorgement

In addition to the above statutory fines and penalties, “SEC can obtain the equitable relief of disgorgement of ill-gotten gains and pre-judgment interest and can also obtain civil money penalties pursuant to Sections 21(d)(3) and 32(c) of the Exchange Act. SEC may also seek ancillary relief (such as an accounting from a defendant). Pursuant to Section 21(d)(5), SEC also may seek, and any federal court may grant, any other equitable relief that may be appropriate or necessary for the benefit of investors, such as enhanced remedial measures or the retention of an independent compliance consultant or monitor.” These remedies can be sought in a federal district court of through the SEC administrative process.

As explained by Marc Alain Bohn, in a blog post on the FCPA Blog entitled “What Exactly is Disgorgement?” profit “Disgorgement is an equitable remedy authorized by the Securities Exchange Act of 1934 that is used to deprive wrong-doers of their ill-gotten gains and deter violations of federal securities law. The Act gives the SEC the authority to enter an order “requiring accounting and disgorgement,” including reasonable interest, as part of administrative or cease and desist proceedings”. In another article Bohn co-authored with Sasha Kalb, entitled “Disgorgement – the Devil You Don’t Know” published in Corporate Compliance Insights (CCI), they set out how such damages are calculated. They said, “In calculating disgorgement, the SEC is required to distinguish between legally and illegally obtained profits. The first step in such calculations is to identify the causal link between the unlawful activity and the profit to be disgorged. Once this causal link is established, the SEC may assert its right to disgorge illicit profits that stem from this wrong-doing. Because calculations like these often prove difficult, courts tend to give the SEC considerable discretion in determining what constitutes an ill-gotten gain by requiring only a reasonable approximation of the profits which are causally connected to the violation.”

However if you read the FCPA quite closely you will not find any language regarding profit disgorgement as a remedy. Nevertheless a simple reading of the statute does not limit our inquiry as to this remedy. In a Note, published in the University of Michigan Journal of International Law, entitled “The Foreign Corrupt Practices Act, SEC Disgorgement of Profits and the Evolving International Bribery Regime: Weighing Proportionality, Retribution and Deterrence”, author David C. Weiss explained the development of the remedy of profit disgorgement. As noted by Bohn, profit disgorgement was always available to the SEC from the very beginning of its existence, through the enabling legislation of 1934. But as explained by Weiss, in the completely unrelated legislation entitled The Penny Stock Reform Act of 1990, profit disgorgement was “authorized by statute [as a remedy to the SEC] without a limitation to the FCPA.”

Finally, and what many compliance practitioners do not focus on for SEC enforcement of the FCPA, was the enactment of Sarbanes-Oxley Act of 2002 (SOX). Weiss said, “The most recent change to the way in which the SEC enforces the FCPA—and a critical development to consider—is SOX, which affects virtually all of the SEC’s prosecutions, including those under the FCPA. When assessing penalties, the SEC draws on SOX to provide great latitude in determining the types of penalties it enforces. While SOX did not amend the FCPA itself, it did amend both civil and criminal securities laws relating to compliance, internal controls, and penalties for violations of the Exchange Act. Since the enactment of SOX, the SEC has possessed the power to designate how a particular penalty that it assesses will be classified.” [citations omitted]

There has been criticism of the SEC using profit disgorgement as a remedy. As far back as 2010, the FCPA Professor criticized this development in his article “The Façade of FCPA Enforcement” where he found fault with the remedy of profit disgorgement for books and records violations or internal controls violations only, where there is no corresponding “enforcement action charging violations of the anti-bribery provisions.” He wrote “It is difficult to see how a disgorgement remedy premised solely on an FCPA books and records and internal controls case is not punitive. It is further difficult to see how the mis-recording of a payment (a payment that the SEC does not allege violated the FCPA’s anti-bribery provisions) can properly give rise to a disgorgement remedy.”

Bohn and Kalb said, “Over the last six years, disgorgement has served to significantly increase the financial loss that companies are exposed to in FCPA enforcement matters. In addition to the considerable civil penalties often imposed by the SEC as part of FCPA settlements, the SEC has made clear that it will not hesitate to seek recovery of large sums through disgorgement provided they are reasonably related to the alleged misconduct. Yet the methodology used by the SEC to support the amounts it seeks to disgorge has not been much discussed.  In the absence of adequate guidance as to how these sums are calculated, disgorgement poses an even greater risk in the current aggressive FCPA enforcement climate.” I would only add to their conclusion that profit disgorgement is here to stay.

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, 2015

FCPA-InstituteWhat is accountability in your compliance program? How does it relate to responsibility for a company to prevent, detect and remediate any issues that might arise under a Foreign Corrupt Practices (FCPA) compliance program? What if a company is so big that it cannot provide meaningful oversight of its FCPA compliance program? Robert Jenkins explored these issues, in the context of the ongoing HSBC scandal in the UK, in a recent Financial Times (FT) article entitled “How the HSBC chairman can restore accountability at his bank”. Jenkins chastised the current bank Chairman, Douglas Flint, who claimed that he was not “responsible and therefore accountable” for the bank’s ongoing woes because of the bank’s unwieldy corporate structure.

In a public statement Flint said, “We deeply regret and apologise for the conduct and compliance failures highlighted which were in contravention to our own policies as well as our expectations of us.” Jenkins commended the sentiment but correctly pointed out “management and chairmanship involves more than setting out policies. It involves ensuring that they are carried out and that the culture is conductive to doing so.” Simply put, “the notion of being responsible but not accountable does not wash.”

If I have one colleague who is both responsible and accountable it is the FCPA Professor. As clearly denominated by his moniker, the FCPA Professor, he teaches law with a specialization in the arena of the FCPA. While he teaches classes at a law school, through his blog postings and other writings he also puts on classes around the FCPA for the rest of us through his FCPA Institute, which I am pleased to report is coming to Houston this May. The event will be held over two days, May 4 and 5, and is hosted by the law firm of King and Spalding LLP.

The Professor’s stated goal in leading this first Institute is “to develop and enhance fundamental skills relevant to the FCPA and FCPA compliance in a stimulating and professional environment with a focus on learning. Information at the FCPA Institute is presented in an integrated and cohesive way by an expert instructor with FCPA practice and teaching experience.” Some of the topics, which will be covered, include the following:

  • An informed understanding of why the FCPA became a law and what it seeks to accomplish;
  • A comprehensive understanding of the FCPA’s anti-bribery and books and records and internal controls provisions and related enforcement theories;
  • Various realties of the global marketplace which often give rise to FCPA scrutiny;
  • The typical origins of FCPA enforcement actions including the prominence of corporate voluntary disclosures;
  • The “three buckets” of FCPA financial exposure and how settlement amounts in an actual FCPA enforcement action are typically not the most expensive aspect of FCPA scrutiny and enforcement;
  • Facts and figures relevant to corporate and individual FCPA enforcement actions including how corporate settlement amounts are calculated;
  • How FCPA scrutiny and enforcement can result in related foreign law enforcement investigations as well as other negative business effects from market capitalization issues, to merger and acquisition activity, to FCPA related civil suits; and
  • Practical and provocative reasons for the general increase in FCPA enforcement.

In other words, it is what you have come to expect from the FCPA Professor; well-thought out reasoned analysis, practical knowledge and learning, and provocative thinking and assessment. But this is also your chance to attend a two-day Institute with one of the most original thinkers in the FCPA space. The FCPA Institute will provide insights into the topics more near and dear to my heart as a ‘nuts and bolts guy’. In addition to the above substantive knowledge, FCPA Institute participants will gain in-demand, practical skills to best manage and minimize FCPA risk by:

  • Practicing FCPA issue-spotting through video exercises;
  • Conducting an FCPA risk assessment;
  • Learning FCPA compliance best practices, including as to third parties;
  • Learning how to effectively communicate FCPA compliance expectations; and
  • Grading an FCPA code of conduct.

To facilitate learning some of these practical skills, the FCPA Professor has offered me a guest slot to provide a hypothetical for discussion on Day 2 of the Institute.

At the end of the FCPA Institute, participants can elect to have their knowledge assessed and can earn a certificate of completion upon passing a written assessment tool. In this way, successful completion of the FCPA Institute represents a value-added credential for professional development.

In addition, attorneys who complete the FCPA Institute may be eligible to receive those all-important Continuing Legal Education (“CLE”) credits. The sponsors, King & Spalding, will be seeking CLE credit in CA, GA, NY, TX and if needed in NC and VA. Actual CLE credit will be determined at the end of the program based on actual program time. Attorneys may be eligible to receive CLE credit through reciprocity or attorney self-submission in other states as well.

I hope that you can join the FCPA Professor for this FCPA Institute. I have previously said, “if the FCPA Professor writes about it you need to read it. While you may disagree with him, your FCPA perspective and experience will be enriched by the exercise.” I would now add to this statement that if the FCPA Professor puts on his FCPA Institute you should attend. Not only will you garner a better understanding of the theoretical underpinnings of the law and the plain words of its text; you will also be able to articulate many of the issues which befall companies caught up in a FCPA investigation to your senior management in a way that will help them understand the need for a robust compliance program.

After attending the sessions I am also certain that you will be to explain to a Board, Chief Executive Officer (CEO) or senior management member the need for both accountability and responsibility in your FCPA compliance program. The FCPA Professor holds himself accountable for the opinions he takes and the positions he stakes out. By attending his FCPA Institute, I am certain you will be able to take those concepts to your senior management and prevent bunkum from coming out of your company if it has to remedy any FPCA compliance issues going forward.

To register for the FCPA Institute, or for more information, click here.

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, 2015

Welles at 100As the first blog post of 2015, I thought it appropriate to highlight two outstanding confluences. The first is that this year is the centenary of the birth of Orson Welles. While not occurring in 2015, near the end of 2014 we had the settlement of the long-standing Alstom Foreign Corrupt Practices Act (FCPA) enforcement action announced. Both are worthy on note this second day of our mid-decade mark. First Welles. Many consider him one of the most talented directors ever to come through the American film industry. Almost any cinema-goer will recognize the names of Citizen Kane and The Magnificent Ambersons as two of greatest films of all-time. But I found The Lady from Shanghai, Macbeth and most particularly Touch of Evil all to be excellent films for their respective genres. And do not forget his acting; not only in the aforementioned Citizen Kane and Touch of Evil but also as Harry Lime in The Third Man. Welles could also be a philosopher. Kristin M. Jones, writing in the Wall Street Journal (WSJ), in an article entitled “Welles at 100”, quoted him for the following, “Art is the lie that makes us realize the truth.” She ended her piece with the observations that “Searching for the truth beyond Welles’s beautiful lies is still a journey worth taking.”

All of which brings us to Alstom and the resolution of its FCPA enforcement action. Over the next couple of posts, I will be looking the enforcement action for it is certainly ‘a journey worth taking’ to try and glean nuggets for the compliance practitioner. Today I will review the amounts of money involved and some of the larger concepts that I see at play in this matter. Next I will review the specifics of the Deferred Prosecution Agreements (DPAs) and see what lessons we may draw from them. Beyond that, we will have to see where the journey takes us.

First, and foremost, is how did Alstom find itself in the position that it now occupies as Number 2 on the all-time hit parade of FCPA enforcement actions? Particularly, as noted by the FCPA Professor in his post, entitled “All About the Alstom Enforcement Action”, that “Alstom employed approximately 110,000 employees in over 70 countries. The information contains specific allegations as to 9 individuals associated with Alstom and 9 consultants associated with Alstom.”

Usually when someone comes in at Number 2, the ranking comes with some ignominy. Though for Alstom it is not because they did not win but because they now have the second highest total FCPA monetary fine in the history of the world at a stunning $772,290,000. I say total because the current Number 1, Siemens, is at $800MM and included both a Department of Justice (DOJ) component of $450MM and Securities and Exchange Commission (SEC) component of $350MM. However with the Alstom fine, the entire amount was paid to DOJ as a fine and no monies were paid to the SEC because at the time of the resolution, Alstom was not an ‘issuer’ under the FCPA and the SEC had no jurisdiction. This makes Alstom the largest criminal FCPA fine of all-time. One interesting note is that two other French companies, Total SA and Technip SA, join Alstom on the all-time Top 10 list. Somewhere I am sure Mr. French is shaking his very well coiffured head in shame in the great TV Land in the sky.

I would say the amounts paid out and benefits received by Alstom were stunning but it might do a disservice to the word stunning. So below I have laid out information below.

Alstom Bribery Box Score

Country Bribe Amount Paid Benefit Received
Indonesia (not listed) $378MM
Saudi Arabia $51.2MM $3bn
Egypt ‘Millions and millions’ $175MM
Bahamas $1MM (not listed)
Taiwan (not listed) $15MM
Total $75MM $4bn in contracts with $296MM in profits

The FCPA Professor also noted, “at its core, the Alstom enforcement action involved inadequate controls concerning the engagement, monitoring and supervision of the consultants.” However it is most difficult to believe that Alstom suffered from a corporate culture which was at best make your numbers or at worst something much more nefarious. The amounts paid were simply so large and the bribery schemes so pervasive that there had to be much more than simply 9 persons lying, cheating and stealing all while merrily skipping home to Grandmother’s house in the woods. Indeed, as noted by WSJ reporters Joel Schechtman and Brent Kendall, in their article entitled “Alstom to Pay $772 Million to Settle Bribery Charges”, “The record criminal bribery penalty comes after more than six years of investigations into Alstom from law enforcement in 10 countries. The company and its subsidiaries’ schemes lasted for more than a decade, into at least 2011”.

Also of note is that the Alstom enforcement action was the first in 2014 where the fine was not at either the low range or even lower than calculations the Sentencing Guidelines would have suggested. The range for the fine was calculated to be between $592MM and $1.184bn. This range was a direct result of the failure of Alstom to take the investigation seriously, to cooperate with the DOJ or to even put anything like a positive step forward in the way of remedial actions during a large part of the investigative process. The DOJ Press Release quoted Assistant Attorney General Leslie R. Caldwell that “This case is emblematic of how the Department of Justice will investigate and prosecute FCPA cases – and other corporate crimes. We encourage companies to maintain robust compliance programs, to voluntarily disclose and eradicate misconduct when it is detected, and to cooperate in the government’s investigation. But we will not wait for companies to act responsibly. With cooperation or without it, the department will identify criminal activity at corporations and investigate the conduct ourselves, using all of our resources, employing every law enforcement tool, and considering all possible actions, including charges against both corporations and individuals.”

Finally, from a big picture perspective was the international scope of the investigation. In the DOJ Press Release, FBI Executive Assistant Director Robert Anderson Jr. said that “This investigation spanned years and crossed continents, as agents from the FBI Washington and New Haven field offices conducted interviews and collected evidence in every corner of the globe.” Further, the DOJ acknowledged significant cooperation from “the law enforcement colleagues in Indonesia at the Komisi Pemberantasan Korupsi (Corruption Eradication Commission), the Office of the Attorney General in Switzerland, the Serious Fraud Office in the United Kingdom, as well as authorities in Germany, Italy, Singapore, Saudi Arabia, Cyprus and Taiwan.” Truly worldwide in scope.

Next, I will look at some of the specifics in the various Alstom DPAs to determine where best practices compliance program may be headed.

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, 2015

 

 

Geronimo's CadillacToday I conclude my 2014 blog posts with a final look at the Avon Foreign Corrupt Practices Act (FCPA) enforcement action. Before getting to the key lessons that a compliance practitioner may draw from this enforcement action, allow me to thank you for letting me be a part of your FCPA and greater compliance and ethics experience. This has been a memorable year in social media for me, both in blogging, publishing and podcasting. (If you have not listened to one of my podcasts please head over to the FCPA Compliance and Ethics Report on the web or on iTunes and check it out.) I have learned quite a bit this year, in writing, podcasting and listening. I hope that you will continue to follow me in 2015 through my blogs, podcasts and via some of the other sites and magazines that I write for. I plan to publish more books, in both print and electronic format, and pen more long form articles that will provide a deeper dive into various topics that I think will be of interest to the FCPA compliance and ethics practitioners out there. But I am getting a bit ahead of myself so back to today’s topic and where we are on the Avon FCPA enforcement action, and the big question of what does it all mean for the compliance practitioner and companies worldwide?

And The Money Kept Rolling Out

Unlike Eva Peron and the Foundacion Eva Peron, Avon had the opposite problem; the money never seemed to stop rolling out for Avon. As the FCPA Professor said in his blog post, entitled “Issues to Consider from the Avon Enforcement Action”, “Avon’s FCPA scrutiny was also very expensive. For years, the whisper in the FCPA community was how expensive – and dragged out – FCPA’s internal investigation and pre-enforcement professional fees and expenses were. Not all companies disclose pre-enforcement action professional fees and expenses, but Avon did and those figures were approximately $500 million”. Even the Department of Justice (DOJ) questioned why the company’s investigative costs were so high.

In an article in Bloomberg News, entitled “Avon Bribe-Probe Clean-Up Neared $500 Million as Sales Cratered, Tom Schoenberg and David Voreacos reported, “In a 2010 meeting, government officials took the unusual step of questioning why Avon’s legal costs were so high at that point, according to two people familiar with the meeting who weren’t authorized to discuss it publicly. Avon said its legal bills had ballooned in part because the company operated in more than 100 countries without consolidated transaction records, according to one of the people.” The article quoted Matthew Axelrod, former senior Justice Department official, who said, “Though unusual, DOJ may call in company counsel to discuss when an outside law firm is going too far afield from what is necessary.” He added the “DOJ doesn’t want a company to have to spend unnecessary millions of dollars on an internal investigation any more than the company itself does”.

If there is one over-riding lesson for all companies to take away from this enforcement action it is that the cost can quickly spiral far out of control and beyond anything you might budget for. While the events at issue took place in 2003-08, the clear import is that it is much cheaper to spend the money to have a compliance program in place now rather than roll the dice and wait. This may mean you need to look at your internal financial accounting systems to determine if they can be monitored adequately and efficiently, yet in a cost-effective manner. While I have not reviewed the internal controls component of this FCPA enforcement action, it is also clear that internal controls need to be in place to detect, in a timely manner, when something goes askance. Of course, if it is in your corporate culture to lie, cheat and steal, it really does not matter what the standard of your internal controls is because the powers that be will find a way around them.

Will No One Rid Me of This Meddlesome Priest?

Henry II and his famous dictum surely seemed to exist at Avon corporate headquarters. If management wants sales accomplished in any way possible then that is the message that is communicated down the line to the troops in the field. Avon had a Code of Conduct that prohibited bribery and corruption, yet the company’s own internal investigation revealed that most company employees were not even aware such a document existed. There was no such thing as FCPA training at the time of the events in question. But more than simply the message of ‘Make Your Numbers; Make Your Numbers; (and then) Make Your Numbers’, Avon had a culture that actively hid criminal acts. For when credible information came to light that Avon China was violating the FCPA, the company went into full cover-up mode, even ordering the destruction of soft and hard copies of the Draft Audit Report. The cover-up was accomplished at the highest levels of the company, with the settlement documents noting the involvement of Avon Executive 1, Avon Executive 2 (believed to be the head of Avon’s Internal Audit function when he left the company), Avon Executive 3, another senior executive in Avon’s Internal Audit function, and two lawyers, Avon Attorney 1, who was identified as “a senior executive in the Office of the General Counsel at AVON” and Avon Attorney 2 who was identified as “an executive in the Office of the General Counsel at AVON”.

High Reward = High Risk

In their Bloomberg News article, Schoenberg and Voreacos reported that Avon was “among the first companies to obtain a license to sell products directly to consumers – the cornerstone of its business model – after Chinese authorities ended a ban on direct sales in 2006.” Further, “By July 2006, Avon had hired more than 114,000 door-to-door salespeople in China. [Then Avon CEO Andrea] Jung said at the time the company viewed the country as a potential $1 billion market. Sales in China surged 28 percent to $67.2 million in the company’s fourth quarter that year.” This means that in less than one year after receiving its license to do business in China, Avon China had one quarter of sales in excess of $60MM. That is quite a lot of Ding Dong, Avon Calling plus following up that doorbell ringing with some serious sales.

Here the lesson is that if there is a new business opportunity that results in an explosion of sales it is probably because of some high risk involved. That may be financial risk, it may be political instability risk, it may be weather-related risk, it may be currency fluctuations risk or it may be some other type of risk. When a business is regulated down from the national to the provincial to the municipality level, it probably means multiples of government interactions for permits and licenses to do business. The compliance function must be integrated into the business operations of a company well enough to be put on notice when such an opportunity presents itself, perform some type of risk assessment and then plan out and implement a strategy to manage those risks going forward. If the first time the compliance function hears about something askance from a FCPA perspective is when it is brought up by internal audit, it is already too late.

The Compliance Committee and Geronimo’s Cadillac

Just as Michael Murphy’s song Geronimo’s Cadillac was intended to show every irony he could ever think of about American culture in two words, the Avon Compliance Committee was about as ironic; although and admitted it is three words. For a corporate Compliance Committee is not simply a vehicle to bring and show off when someone might be around to take pictures. A corporate Compliance Committee has to function and be involved, actively, in an appropriate level of oversight. If a Compliance Committee is informed of credible allegations of a FCPA violation, it simply cannot accept information that it is ‘unsubstantiated’ at a later date. A Compliance Committee must be actively involved in the investigation, it must review the investigation protocol, review information and findings as they become known, direct outside counsel in the investigation and, finally, take charge to remediate the issues involved. It has to have real authority, real power and be taken seriously, not simply have a meaningless title of “Compliance Committee”.

As 2014 draws to a close, I for one am glad that the long Avon FCPA saga has at least come to this stage. For bribe payments totaling over $8MM, Avon has or will pay upwards of $750MM to get through the FCPA Professor’s “three buckets” of FCPA enforcement action costs. This staggering cost should be a clear lesson that now is the time to implement or enhance a compliance program. The number of persons effected by the fallout from this case start with the former head of the company, Andrea Jung, several high ranking executives, the company’s balance sheet and perhaps even some of the lawyers involved in the investigation of this matter. One of the first things that Jung’s replacement did was bring in new counsel to advise the company. After all, someone had to come up with the low-ball opening bid to the DOJ and Securities and Exchange Commission (SEC) of $11MM and then advise Avon to negotiate in public with them using that figure.

On that note, I wish everyone a safe New Year’s Eve and prosperous New Year.

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, 2014