Jay and I return for a wide-ranging discussion on some of the top compliance and ethics related stories, including:

  1. The DOJ announces a major criminal case which rocked the world of college athletics, involving pay for shoes scandal. See article by Michael McCann in Sports Illustrated. See article by Mark Schlabach on ESPN.com. Sam Rubenfeld looks at the corruption in college sports angle in the WSJ Risk and Compliance Journal.
  2. Consumer product sellers need to check the SDN list before a sale? Before shipping? If you are Cartier jewelers, yes, according to SEC enforcement action. See article by Dick Cassin in the FCPA Blog.
  3. Alere settles FCPA and accounting fraud SEC enforcement action. Dick Cassin reports in the FCPA Blog. See copy of SEC Cease and Desist Order.
  4. McKinsey reminds us that a promise to pay can be a FCPA violation as its imbroglio in South Africa continues. See article Tom’s article in Compliance Week.
  5. Todd Haugh, an assistant professor of business law and ethics at Indiana University, wrote in the most recent issue of the MIT Sloan Management Review that even best practices compliance program fail to take into account behavioral best practices and one important but too often overlooked key to strengthening both individual and overall corporate behavior is eliminating rationalizations. See Tom’s blog post in the FCPA Blog.
  6. Uber loses it license in London and for the first time an Uber CEO apologizes for the company’s unethical behavior. Prashant S. Rao and Amie Tsang reports in the New York Times.
  7. After the Equifax breach comes news the SEC was hacked. Joe Mont reports in Compliance Week. Matt Kelly reports on SEC Chairman Jay Clayton’s testimony before Congress on this and other subjects this week in Radical Compliance.
  8. Jose Altuve reaches 200 hits for fourth straight season, becoming on the 4th Second Baseman to do so. He has also clinched the AL top hitter for the 3rd time in four years. Is an MVP far behind. Cubs clinch and Red Sox magic number is 1, having been stomped by the Astros 12-2 last night.
  9. Join Tom’s monthly podcast series on One Month to a More Effective Compliance Program. In October, I will consider compliance with business ventures such as in the M&A context, joint ventures, distributors, channel ops partners, teaming agreements and all other manner of business venture. The first week I take a deep dive in M&A under the FCPA. This month’s sponsor is the Volkov Law Group. It is available on the FCPA Compliance Report, iTunes, Libsyn, YouTube and JDSupra.
  10. The Jay Rosen weekend report preview.

October is my annual Classic Monster Movie month tribute. I recognize it is not yet October but I wanted to begin a bit early this year as September saw the passing of Basil Gogos. He was the prime illustrator for the magazine Famous Monsters of Filmland, one of my two favorite magazines of my childhood and teenaged years (in case you were wondering, the other was Mad Magazine). According to his New York Times (NYT) obituary “Gogos produced dozens of covers for the horror magazine Famous Monsters of Filmland over more than 20 years. Many looked as if Mr. Gogos had invited the monsters into his studio, where he meticulously lighted them and bathed them in brilliant hues.”

Gogos created many of his paintings from black-and-white still photographs of films made at various studios. Most of his classic creations came from Universal Pictures, which started making monster movies in the 1920s. Some of Gogos most superlative creations include the “bug-eyed King Kong with his mouth agape; the Creature From the Black Lagoon as a red-lipped, amphibious humanoid; Lon Chaney in “London After Midnight” as a top-hatted ghoul with blood dropping from his mouth; and Mr. Karloff as the intense, wrinkled, fez-wearing Ardath Bey in “The Mummy” (1932).”

However, for my money his finest achievement, was his haunting drawing of Karloff as Frankenstein’s Monster, appearing in 1969. The Gogos cover appeared as a part of the magazine’s tribute to Karloff who had died shortly before the issue hit the magazine stands. Gogos’ obit correctly noted that he “imbued Frankenstein’s monster with notable compassion.” Gogos once said of Karloff “A superb facial structure with nicely chiseled planes, deeply sunken eye sockets, high cheekbones, with one side of his jawbone deeper than the other — pure drama.”

Gogos and his innate humanity for Frankenstein’s Monster and all his other creations were lacking earlier this week, when the Department of Justice (DOJ) rocked the National Collegiate Athletic Association (NCAA) and college basketball with an indictment of several college assistant coaches, former Vice President (VP) from the shoe company Adidas, sports agents and financial advisors in a massive corruption scandal. Michael McCain, writing in Si.com, stated “On Tuesday, amateurism entered the crosshairs of multiple federal prosecutions. Ten individuals with deep ties to “big time” college sports have been arrested in three related cases that could rock the foundations of college sports.”

The charges related to paying bribes to college coaches, financial advisors and assorted other hanger-oners as well as high school athletes to steer them towards universities under contract to the shoe company Adidas. According to the DOJ Press Release, “The charges in the Complaints result from a scheme involving bribery, corruption, and fraud in intercollegiate athletics. Since 2015, the U.S. Attorney’s Office for the Southern District of New York and the FBI have been investigating the criminal influence of money on coaches and student-athletes who participate in intercollegiate basketball governed by the NCAA. The investigation has revealed two related schemes. In the first scheme (the “Coach Bribery Scheme”), athlete advisors – including financial advisors and business managers, among others – allegedly paid bribes to assistant and associate head basketball coaches at NCAA Division I universities, and sometimes directly to student-athletes at those universities, facilitated by the coaches. In exchange for the bribes, the coaches agreed to pressure and exert influence over student-athletes under their control to retain the services of the bribe-payors once the athletes entered the National Basketball Association (“NBA”).

In the second scheme (the “Company-1 Scheme”), athlete advisors working with high-level Company-1 employees, allegedly paid bribes to student-athletes playing at, or bound for, NCAA Division I universities, and to the families of such athletes. These bribes were paid in exchange for a commitment by the athletes to matriculate at a specific university sponsored by Company-1, and a promise to ultimately sign agreements to be represented by the bribe-payors once the athletes entered the NBA.”

We have not yet heard from the defendants. However, as McCain noted, they will probably argue that “their conduct merely constituted “business as usual” behavior in 21st Century American college sports. It is no secret bribes have taken place in big-time college sports for years—decades, really. The defendants could assert they could not have “intended” to commit a crime if they engaged in commonplace conduct that, while technically in violation of NCAA rules, often goes without detection.” [Sounds familiar to the FCPA practitioner.]

The University of Louisville has taken a very particular black eye already as one recruit to the school was allegedly offered $100,000 paid through Adidas. The fallout was swift with both the Head Coach and Athletic Director being put on administrative leave, both claiming no knowledge of anything about anything. At least two recruits have pulled out from their commitments to the school.

There is another Foreign Corrupt Practices Act (FCPA) angle as some of the charges include a Travel Act component. This is based on the Travel Act shoe-horning of a federal crime on a state law violation where the actions are inter-state. So, for instance, Auburn University assistant Chuck Person was charged in violating Alabama state law on commercial bribery which says that a person commits commercial bribery if he “Confers, or agrees or offers to confer, any benefit upon any employee or agent without the consent of the latter’s employer or principal, with intent to improperly influence his conduct in relation to his employer’s or principal’s affairs;” [emphasis mine – but that is a pretty low bar]. There have been FCPA charges based on state commercial anti-bribery laws.

The next FCPA angle is around internal controls. Recall that the FCPA has a requirement for effective internal controls and accurate books and records. Adidas needs to determine its exposure in these areas. More than Adidas may be at risk as it was reported that Nike received a subpoena today. It would not be much of a stretch for other apparel companies to receive similar subpoenas.

I know that many of you are shocked, just shocked to find out that college athletes were paid. Nonetheless, I am certain that every university will want this scandal to go away as quickly as possible. The longer this case hangs around the more pillars will fall.


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, 2017


Show Notes for Episode 35, week ending January 13, the Friday the 13th edition:

  1. Hernandez and Beech FCPA guilty pleas. Hernandez Criminal Information, Beech Criminal Information.
  2. VW guilty plea in emissions-testing scandal. Link to article in New York Times.
  3. VW executive Oliver Schmidt arrested in US. See article on FCPA Compliance and Ethics Blog.
  4. Zimmer Bio-Met in follow-up FCPA enforcement action. See article on FCPA Blog.
  5. Mondelez FCPA enforcement action. See SEC Cease and Desist Order and article on FCPA Compliance and Ethics Blog.
  6. Supreme Court to take up 5 year statute of limitations for profit disgorgement under Securities Act, which applies to FCPA enforcement actions brought by SEC. Article in Law360.
  7. NFL Playoff update on Patriots, Cowboys and Texans.

In almost every Foreign Corrupt Practices Act (FCPA) enforcement action, there are nuggets to be gleaned for any Chief Compliance Officer (CCO) or compliance practitioner. All one has to do is look for them. Back in 2012, many of us scratched our collective compliance heads when we read and tried to understand the Oracle FCPA enforcement action brought by the Securities and Exchange Commission (SEC). The question which most of us asked was how there could be a FCPA violation with no allegation of bribery.

Since that time the answer has become clear. The Accounting Provisions, including books and records, and internal controls are viewed as the equivalent to strict liability under SEC enforcement theories. The Oracle civil Complaint revealed, “Oracle’s Indian subsidiary Oracle India Private Limited (“Oracle India”) secretly “parked” a portion of the proceeds from certain sales to the Indian government and put the money to unauthorized use, creating the potential for bribery or embezzlement. These Oracle India employees structured more than a dozen transactions so that a total of around $2.2 million was held by the Company’s distributors and kept off Oracle India’s corporate books.” The parent company “failed to accurately record these side funds on the Company’s books and records, and failed to implement or maintain a system of effective internal accounting controls to prevent improper side funds in violation of the FCPA, which requires public companies to keep books and records that accurately reflect their operations.” All of the above led to a penalty with no evidence of a bribe being paid by Oracle or its Indian subsidiary.

Last week brought the Mondelēz FCPA enforcement action, which was settled via a Cease and Desist Order (Order). Mondelēz paid a $13MM fine for the violations. Mondelēz, formerly known as Kraft Foods Inc., has “acquired Cadbury, a U.K.-based confectionary and snack beverage company that had securities registered with the Commission” in 2010. Earlier that year, “Cadbury India Limited (“Cadbury India”), a subsidiary of Cadbury, retained an agent (“Agent No. 1”) to interact with Indian government officials to obtain licenses and approvals for a chocolate factory in Baddi, Himachal Pradesh, India.” It was this Agent No. 1 who laid Mondelēz low with FCPA grief.

There were a few anomalies around this Agent No. 1 and his retention by Cadbury. First there was no substantive due diligence performed on Agent. No. 1, largely at the insistence of Cadbury India employees. He was approved by Cadbury India management without such due diligence. Further, “Other than the invoices from Agent No. 1, which contained a description of the specific licenses or approvals obtained as support for that invoice, Cadbury India did not receive documentary support for Agent No. 1’s services and did not have any written contract with Agent No. 1 when it paid Agent No. 1.”

While the Order ominously notes that Cadbury India employees prepared the required license applications which Agent No. 1 was hired to procure. Added to this was just over $110,000 paid out for six months’ worth of services described as “providing consultation, arrange statutory/government prescribed formats of applications to be filed for the various statutory clearances, documentation, preparation of files and the submission of the same with govt. authorities for specific licenses”. After a tax deduction, Agent No. 1 withdrew “most or all of the funds in cash.” There was no sufficient record of what Agent No. 1 did with the money it withdrew.

While of this was going on with Agent No. 1, Mondelēz acquired Cadbury. The Order noted, “Because of the nature of the acquisition, Mondelēz was unable to conduct complete pre-acquisition due diligence, including anti-corruption due diligence.” Moreover, even though “Mondelēz engaged in substantial, risk-based, post-acquisition compliance-related due diligence reviews of Cadbury’s business”; the “post-acquisition due diligence review did not identify the relationship between Agent No. 1 and Cadbury India.” At some time later in 2010, Mondelēz engaged in an internal investigation of Agent No.1 and “required Cadbury India to end the relationship with Agent No. 1 and no further payments were made.”

FCPA Violations

Mondelēz was charged by the SEC with violations of both prongs of the Accounting Provisions. Under the books and records component, the company did not keep its accounts “in reasonable detail, accurately and fairly reflect the transactions and disposition of the assets of the issuer” and the books and records “did not accurately and fairly reflect the nature of the services rendered by Agent No. 1.”

Under the internal controls prong, there was not sufficient due diligence performed on Agent No. 1 (yes due diligence is an internal control) and no control around enlisting Agent No. 1 without an appropriate exception protocol. Additionally, “Cadbury, did not accurately and fairly reflect the nature of the services rendered by Agent No. 1.” Finally, “by failing to devise and maintain internal accounting controls that were sufficient to provide reasonable assurances that access to assets and transactions were executed in accordance with management’s authorization and specifically to detect and prevent payments that may be used for improper or unauthorized purposes. As a result of Mondelēz’s acquisition of Cadbury stock, Mondelēz is also responsible for Cadbury’s violations.”

Unfortunately, there is no information presented as to the basis of the penalty of $13MM. One might engage in a lengthy round of speculation but based upon the public record, it would only be speculation to try and guess the basis of this penalty.

Lessons Learned

For any CCO or compliance practitioner, there are multiple lessons to be garnered from the Mondelēz FCPA enforcement action. First, and foremost, is to always remember, as we all learned from the Oracle FCPA enforcement action, there is no requirement for the payment of a bribe for there to be a civil enforcement action brought by the SEC. From a compliance program perspective, no third party representative can ever be hired without appropriate due diligence. If there is some level of due diligence that is less than standard, there must be an appropriate level of compliance review, coupled with senior management and, perhaps, even Board oversight. All contracts must be in writing with clearly specified terms. All invoices must be in writing, with sufficient specificity to enable a regulator (or auditor) looking at it years later to determine what services were delivered that were compensated by the company.

Finally, is the area of auditing of third parties as Mondelēz was specifically sanctioned for “not monitoring the activities of” Agent No. 1. Audit rights are specifically set out in the FCPA Guidance as appropriate compliance terms and conditions for every contract with third party representatives. But you must do more than simply secure such rights, you must actually use them to make sure your third party representative is not using the funds you pay them for nefarious purposes.

The Mondelēz FCPA enforcement action provides quite a bit of matter for any CCO or compliance practitioner to consider for their compliance program. Yet the most valuable lesson might well be that having a compliance program is far from doing compliance. If you only draw one lesson from this case, that would be one well worth remembering.


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, 2017

venice-foggyWelcome to my annual Venice travel edition. This week I will have a series of Venice themed posts all centered around a deep dive in to the JP Morgan Chase FCPA enforcement action. We arrived this weekend to find Venice shrouded in a deep fog, which seem an appropriate visual representation of this enforcement action. Once again we have a Chinese business unit of a major US entity which engages in conduct, with clear intent to hide its actions from corporate parent. And, once again, we see a corporate parent who is reluctant to look very closely at a business unit in a high-risk jurisdiction, engaging in conduct identified by the corporate parent as high risk, which somehow cannot seem to see the illegal conduct for at least seven years.

JP Morgan Chase (JPM)  and its subsidiary, JPMorgan Securities (Asia Pacific) Limited (JPM-APAC) resolved its Foreign Corrupt Practices Act (FCPA) matter last week, obtaining a Non-Prosecution Agreement (NPA) from the Department of Justice (DOJ) with a penalty of $72MM, agreeing to a Cease and Desist Order (Order) from the Securities and Exchange Commission (SEC), with a penalty consisting of profit disgorgement and interest of $135MM, and reaching an agreement with the Federal Reserve Bank (Fed) for a Consent Cease and Desist Order (Fed Order) to put in place a best practices compliance program and pay a penalty of $61MM. The total fines and penalties paid by JPM for its violation of the FCPA was $268 MM. This week I will review the underlying facts of the enforcement action, consider the penalties, the egregious conduct and attempts to hide their actions and discuss the multiple lessons to be garnered for the compliance professional.

The conduct involved JPM-APAC’s Client Referral Program, named the “Sons & Daughters Program” (Sons and Daughters), which targeted children of high Chinese government officials and employees of state owned enterprises, together with other close family members and even close friends and associates of these officials and employees for hiring in a blatant attempt to win business. It was designed, created and implemented by the top management of JPM-APAC, which went so far as to keep a tally of those persons hired by JPM-APAC and JPM to specific business development. As noted in the NPA, “certain senior executives and employees of (JPM-APAC) conspired to engage in quid pro quo agreements with Chinese officials to obtain investment-banking business, planned and executed a program to provide specific personal benefits to senior Chinese officials in the position to award or influence the award of banking mandates, and repeatedly falsified or caused to be falsified internal compliance documents in place to prevent the specific conduct at issue”. The language quid pro quo is replete throughout the settlement documents because that is the specific language used by JPM-APAC personnel when discussing Sons and Daughters.

These actions led to over $100MM in profit to JPM. While JPM was certainly aware that many of these hires did not meet the companies stringent hiring requirements, there never seemed to be oversight of JPM-APAC over this illegal program or even investigation into the clear red flags presented throughout the conduct at issue. What is more JPM knew the high-risk in hiring family members of government officials as far back as 2001 and indeed, had a written policy prohibiting such conduct. However, in 2006, this program morphed into a targeted program “directly attributable linkage to business opportunity”, and lasted until 2013.

According to the Order, “Over this seven-year period, JPMorgan hired approximately 200 interns and full-time employees at the request of its APAC clients, prospective clients, and foreign government officials. This included nearly 100 candidates referred by foreign government officials at more than twenty different Chinese SOEs. A number of the referral hires resulted in business for JPMorgan APAC…. JPMorgan also hired referrals from more than 10 different government agencies.” Sons and Daughters involved several different hiring programs at JPM, including new hires out of university, summer interns and lateral hires.

As noted above JPM-APAC tracked the metrics of Sons and Daughters, the “employee, whose responsibilities included supervising employees hired under the Client Referral Program, created and then updated a spreadsheet that tracked hires to specific clients, while also tracking revenue attributable to those hires. The spreadsheet included columns for each hire, the referring client, the relationship of the candidate, and the amount of revenue generated attributable to the hire in U.S. dollars. One of the purposes of the spreadsheet was to track deals that resulted from the hires and measure revenue associated with Client Referral Program hires.” So the corruption scheme and the benefits obtained therefrom were fully documented.

Initially, Son and Daughters had five requirements to be considered for hire at JPM-APAC. As set out in the NPA, they were “(1) whether the applicant was qualified for the position; (2) whether the applicant had gone through the normal interviewing process; (3) whether the referring client/potential client was government-related; (4) whether the firm was actively pitching for any business from the client/potential client; and (5) whether there was an “expected benefit to JPMorgan” for hiring the referred candidate.” Written documentation was prepared and submitted to at least JPM-APAC Human Resources (HR) and compliance functions which disguised the true nature of these hires.

Worse, it appears that both the HR and compliance functions were complicit in the scheme because on at least one instance where the JPM-APAC business unit sponsor noted on the form “[t]he hiring of this candidate will place JPMorgan in a more favorable position for securing future

business from the client.” This somehow morphed into the next iteration, which read, “The candidate will be trained by JPMorgan for couple of years and then go to local bank. Thus, will bring more business.” However, JPM-APAC compliance and HR functions “instructed the JPMorgan-APAC employee to remove the offending language, writing, “[h]iring of the candidate should not be for the purposes of securing future business of the firm. Please remove.” Further damning to the JPM-APAC compliance and HR functions was that of the more than 200 candidates hired through the Sons and Daughters program, none were rejected by either HR or compliance.

In 2009 JPM-APAC even went so far as to refine the Sons and Daughters program. Moreover, after approval by the head of investment banking for APAC, JPM-APAC implemented the revised Client Referral Program. According to the Order, it required each potential hire under the program to have “Clear accountability for deal conversion and accountability for abuse of the program.” The Order went on to note that the “revised program was managed by the JRM business support team with input from senior JPMorgan APAC investment bankers. Certain senior bankers were given a “quota” of Referral Hires that could be made each year. Subsequent JRM reports from 2009 through 2012 contained the same language regarding the “revised” referral hiring program with the selection criteria of a “[d]irectly attributable linkage to business opportunity.” These presentations were discussed with the head of investment banking for JPMorgan APAC and other JPMorgan APAC senior executives.”

In addition to the tying of business to the hirings under the Sons and Daughters program, there was the additional problem that these hires did not meet JPM’s basic hiring and retention standards. According to the Order, one JPM-APAC representative described those hired under the program “as a protected species requiring [senior management] input. His reporting line to you is accountable but like national service.” Both the Order and NPA were replete with document evidence that the hires under Sons and Daughters did not meet minimum hiring standards and they often failed to meet minimum standards for retention at the company. Below is a Box Score summary from the NPA of some of the candidates which clearly did not meet JPM hiring standards, yet who were hired and where such hires under the Sons and Daughters program brought benefits to JPM.

Foreign Official or SOE employee Reasons for hire Candidate deficiencies Deficiencies as JPM employee Benefit tied to hire
Client 1 Maintain good relationship with client $4.82MM profit
Client 2 Quid pro quo for business JPM-APAC lead underwriter on IPO
Client 3 Not very impressive, poor GPA Attitude issue. He doesn’t seem to care about work. Don’t need to have an intern doing nothing JPM-APAC lead underwriter on IPO
Client 4 Promised IPO work Not qualified for job at JPM. Tech and quantitative skills ‘light’ Communication skills and interest in work lagged his peers JPM-APAC lead underwriter on IPO. $23.4MM profit
Government Official 1 Father would go the extra mile to help JPM Worst business analyst candidate ever seen Immature, irresponsible and unreliable. Sent out sexually inappropriate emails JPM-APAC lead underwriter on IPO
Government Official 2 Hire would ‘significantly’ influence role of JPM-APAC Unlikely to meet hiring standard New York not comfortable with his work. Recommends he follow a different career path JPM-APAC lead underwriter on IPO

Probably the most amazing thing about this case is the superior result achieved by JPM in its resolution. Not only did it gain a 25% discount off the bottom of the US Sentencing Guidelines fine range but it received a NPA and not even a Deferred Prosecution Agreement (DPA) and no outside monitor was required of the company going forward. While some of this result is due to having excellent defense counsel, a large part is due to the cooperation by JPM and the remediation engaged in by the company. Tomorrow Commissario Guido Brunetti will inform our discussion of how the company’s actions led to this outstanding result.

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

© Thomas R. Fox, 2016