Gene WilderI am back from a two-week summer study program at Oxford, run by Michigan State University through its Odyssey to Oxford program. It was a great experience. My class was on The Tudors in film and print so not only did I re-watch some decent movies but was able to re-read the sweep of Tudor history, from Henry VII to Elizabeth I. If you have any interest in studying at Oxford or learning more about British culture or history, this program is for you.

One of the sad notes from the past fortnight was the passing of Gene Wilder. He was one of the great comic actors of the late 20th century. Whether it was the doctor who fell in love with an (underage) sheep, the definitive Willy Wonka, Dr. Frankenstein (pronounced FraunkEnSteen), his movie pairings with Richard Pryor, or his hilarious comedy routines with his (now deceased) wife Gilda Radner; they were all top shelf. So I hope when he gets to the great theater in the sky he will be able to say “Put the candle back” to a packed house and roaring audience.

Of note in the Foreign Corrupt Practices Act (FCPA) world, was the AstraZeneca (AZN) enforcement action brought by the Securities and Exchange Commission (SEC). The case had several interesting factors and, more significantly for the C  hief Compliance Officer (CCO) and compliance practitioner, a continuation of several lessons to be learned from enforcement actions over the past several months. While the conduct at issue occurred between 2005-2010 and has been seen in other anti-corruption enforcement actions, it remains useful to review the facts presented so that compliance professionals can test their compliance regime.

The company came to FCPA grief for its actions in its Chinese and Russian subsidiaries. In China, the subsidiary (AZ China) made numerous improper payments to health care providers (HCPs) “in the form of cash, gifts and other items … incentives to purchase or prescribe AZN pharmaceuticals.” Sales and marketing team members, including managers within various business units at AZ China, designed and implemented the improper payment schemes. The HCPs who received the improper incentives worked for various government entities in several regions throughout China. Interestingly, the “AZ China sales staff and their managers maintained written charts and schedules that recorded the amount of forecasted or actual payments of maintenance fees, gifts, entertainment and other expenses that AZ China would make per month or year”.

We also saw the re-emergence of our old Chinese corruption vehicle, the travel agency, which was featured so prominently in the GlaxoSmithKline (GSK) Chinese corruption case. These corrupt travel agencies would submit falsified or inflated invoices which in turn could be used to generate monies from the corporate home office to pay bribes. There were also speaker fees paid for speeches never made, travel bookings reimbursed for travel which never occurred; both of which were purloined through insufficient documentation and failures of internal controls.

In AZ’s Russia subsidiary, (AZ Russia) the “employees provided improper incentives to government-employed HCPs in connection with sales of AZN pharmaceutical products. As was done by AZ China employees, AZ Russia employees created and maintained charts tracking the names of HCPs, the regions in which they practiced, their level of influence in making purchasing decisions for the respective entities where they worked and the manner in which they could be motivated to purchase AZN products through gifts, conference support and other means.”

Further instructiveness comes from the result achieved by AZN. For violations of both prongs of the Accounting Provisions of the FCPA: (1) Books and Records and (2) Internal Controls; the company sustained a civil penalty which was relatively low at $375,000; profit disgorgement of $4,325,000, which represents profits gained as a result of the conduct described in the order, and prejudgment interest of $822,000, for a total of approximately $5.5MM. There was no external monitor required, all of this with no self-disclosure by AZN.

AZN engaged in extensive cooperation during the investigation and significant remediation. For its cooperation during the investigation, the company “immediately took a cooperative posture and ensured that it consistently provided complete information in a timely manner. AZN voluntarily and timely disclosed information obtained during its own internal investigation, provided translations of key documents, and disclosed facts that the Commission would not have been able to readily and independently discover. AZN also kept the staff regularly informed of its ongoing remedial efforts throughout the course of the investigation.”

For the CCO or compliance practitioner, the actions engaged in to remediate its compliance program marked the measure of its result. The Order noted the company:

  • Incorporated information developed in the course of the Commission’s investigation to further enhance its controls and compliance program;
  • Made significant increases to both capital and human resources available to compliance at the corporate level and in the local markets;
  • Developed a centralized compliance program;
  • Revamped its internal controls and procedures;
  • Placed key compliance personnel in high-risk markets;
  • Enhanced anticorruption training and company audits of its compliance program; and
  • Provided targeted training and discipline to company employee involved.

Additional compliance program improvements included:

  1. enhancements to AZN’s policies governing interactions with HCPs and government officials,
  2. gifts, travel and entertainment,
  3. third party engagements,
  4. meetings, congresses, and contributions.

This FCPA enforcement action continues the clear path laid out by the SEC from June, 2016 forward. There will be civil enforcement of the FCPA where the company has not met the standards of the Accounting Provisions. However, even without self-disclosure, a company can receive a relatively low civil penalty if it cooperates during the investigation and engages in extensive remediation of its compliance program. Much like Gene Wilder spinning in the door which led to the secret passageway to his great-grandfather’s laboratory in Young Frankenstein a company can successfully emerge from facts which give rise to a FCPA violation. The problem is if a company wants to go to court and fight the charges it will most probably continue the same conduct which led to the original issue and will not have received credits going forward for its penalty, hence giving it greater liability. Such an attitude would certainly keep a company spinning.

 

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

© Thomas R. Fox, 2016

Show notes for This Week in FCPA-Episode 15, for the week ending July 29, 2016 include:

1) Miller & Chevalier — FCPA Summer Review 2016 – 7-28-16
http://www.millerchevalier.com/Publications/MillerChevalierPublications?find=176112;

2) NY Law Journal — Does the New FCPA Leniency Program Threaten Due Process? By Nicholas M. De Feis and Philip C. Patterson from De Feis O’Connell & Rose
http://www.newyorklawjournal.com/id=1202763823657/Does-the-New-FCPA-Leniency-Program-Threaten-Due-Process?slreturn=20160629065418;

3) Incentivising companies to self-report: Different approaches in different jurisdictions, but the outcomes are broadly the same — Georgina Jones, Laura Manson and David McCluskey at Taylor Wessing
http://www.lexology.com/library/detail.aspx?g=ada2fc97-57d5-407b-9238-2ee468e7b10c;

4) A video blog from Paul Weiss where A-C & FCPA Pilot Chairs Alex Oh & Farrah Berse look at FCPA Pilot Program – New Guidance for Self-Reporting
https://www.paulweiss.com/practices/litigation/anti-corruption-fcpa/videos/fcpa-pilot-program-new-guidance-for-self-reporting.aspx?id=22271;

5) From the FCPA Blog – Richard Bistrong interviews Frank Brown, from The Center for International Private Enterprise – (CIPE). Frank speaks about going from Newsweek Bureau Chief in Moscow to now fighting A-C supply chain risks;

6) Mike Volkov, furthers a conversation he had with me earlier in the week about The Power of a Justice Department Declnation
http://www.lexology.com/library/detail.aspx?g=e07d7b77-5edf-4a7e-8878-b4fc2985b3d6;

7) And once more in the breech where myself and Roy Snell go Unfair and Unbalanced on the recent US Open and handling of Dustin Johnson being assessed a 1 stroke penalty
http://fcpacompliancereport.com/2016/07/unfair-unbalanced-episode-9-us-open-edition/;

8) Reports on the LATAM FCPA enforcement action. The can be found at http://wp.me/p6DnMo-2FL and http://wp.me/p6DnMo-2FH; and

9) Report on the Petrobras shareholder lawsuit, available at http://wp.me/p6DnMo-2FZ.

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

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

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

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

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

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

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

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

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

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

 

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

© Thomas R. Fox, 2016

7K0A0075I continue my review of the Johnson Controls, Inc. (JCI) Foreign Corrupt Practices Act (FCPA) enforcement action today by focusing on the Department of Justice’s (DOJ’s) Declination to Prosecute. Yesterday, I considered the underlying facts reported to review what lessons could be applied by a compliance practitioner to a corporate anti-corruption compliance program. Today, I want to consider the information available on the actions by JCI, beginning with the self-disclosure, which led to the DOJ to grant a Declination.

The commentary on the DOJ Declination has ranged from the FCPA Professor, who argued there was no viable cause of action against JCI for the illegal conduct of its subsidiary, China Marine, and hence the Declination was without substance; to Mike Volkov who called the declination a ‘head scratcher’ and noted “there appears to be plenty of justification to stretch here in this case when you basically have a recidivist continuing to violate the law”, in arguing there were potential criminal charges to pursue. I want to consider the matter from the angle of the new DOJ Pilot Program and see what, if anything, might be gleaned from that perspective.

One of the difficulties in evaluating any Declination is the paucity of facts available to the compliance practitioner to evaluate. In the JCI case we have the Securities and Exchange Commission (SEC) resolution via a Cease and Desist Order (Order) that lays out the facts relevant to that enforcement action. However, this Order is the product of negotiations between the SEC and JCI. This means the company can seek to keep out facts, which would point to criminal liability, reputational damage, embarrassing senior executives or a plethora of other issues the company does not want in the public domain. There is no way to know if the facts laid out in the Order are all the facts in the case that were known to the DOJ or even disclosed to the DOJ so to base an argument on this underlying premise puts you on wobbly ground. The foregoing is one of the reasons I have argued for my information to be made public around Declinations so that compliance practitioners might understand the full underlying facts.

Yet, even if one took the facts presented in the Order as only facts of this matter, there is information that could lead one to reasonably conclude that criminal charges could be considered under the FCPA. The Accounting Provisions, both Books and Records and Internal Controls, are generally thought to be civil side requirements only. However the statute does make violations of the Accounting Provisions under the following:

(4) No criminal liability shall be imposed for failing to comply with the requirements of paragraph (2) of this subsection except as pro­vided in paragraph (5) of this subsection.

(5) No person shall knowingly circumvent or knowingly fail to imple­ment a system of internal accounting controls or knowingly falsify any book, record, or account described in paragraph (2).

Paragraph 2 refers to the Internal Controls requirements of the FCPA. This means someone must knowingly falsify such records or fail to implement a system of internal controls. The facts laid out in the Order would appear to provide at least an argument that this threshold was met. JCI’s internal controls were so poor that the company “did not understand some of the highly customized transactions at China Marine or the projects involving the sham vendors.” Additionally someone at the corporate office had to certify the financial statements were true and correct and who ever did could also have violated the FCPA. Volkov noted the DOJ could “stretch” to bring criminal charges but either through the argument of conscious avoidance or simply on the facts laid out in the Order, I find an argument for criminal liability plausible. Of course, these arguments do not convict JCI of criminal violation of the FCPA, only a trier of fact can do so, yet they make clear that there are credible arguments which could be pursued which makes a Declination an appropriate mechanism for the DOJ to use, in its discretion.

What led the DOJ to exercise its discretion in issuing the Declination? We can find some guidance from the four requirements under the Pilot Program. First, that there be self-disclosure, which was present in this matter. The Order stated that the company self-disclosed within one month after receiving a second anonymous whistleblower compliance. Second is cooperation during the investigation. The Order stated JCI provided “thorough, complete and timely cooperation” which consisted of the following:

  • JCI promptly and routinely provided the staff with the results of its investigation as it progressed, and provided all supporting documentation requested.
  • JCI provided factual chronologies, hot document binders, and interview summaries, as well as English translations of numerous documents and emails.
  • JCI made employees available for interviews.
  • JCI provided “real time” downloads of employee interviews and made other foreign employees available for interview.
  • When the company caught a Chinese employee shredding documents, it quickly secured the office to preserve evidence.
  • JCI’s cooperation assisted the staff’s investigation.
  • JCI’s timely self-report as well as the thorough productions allowed the staff to initiate and complete its investigation quickly.

The next requirement under the Pilot Program is for extensive remediation during the pendency of the investigation. Here the Order laid out some of the steps taken by JCI, including:

  • JCI terminated or separated sixteen employees implicated in or associated with the illegal scheme and placed all suspect vendors on a do-not-use/do-not-pay list.
  • JCI has closed down its China Marine offices and moved all remaining China Marine employees, none of whom perform a sales or procurement function, into existing offices.
  • JCI enhanced its integrity testing and internal audits to reevaluate vendor onboarding for all JCI business worldwide.
  • JCI implemented random site audits to ensure the delivery of goods on purchase orders.

The final requirement under the Pilot Program is that the company disgorges profits it received from its ill-gotten gain. The Order said, “From 2007 to 2013, JCI obtained a benefit of $11.8 million as a result of over $4.9 million in improper payments made to or through approximately eleven problematic vendors for the purpose of foreign and commercial bribery, and embezzlement.” This corresponds to the amount paid as disgorgement.

For any Chief Compliance Officer (CCO) or compliance practitioner reviewing the JCI enforcement action, it does not matter whether you believe JCI committed criminal acts or not. The reality is that the DOJ is once again laying out conduct it will consider to award the lowest sanction possible, a Declination. There have now been three given since the announcement of the Pilot Program in April. You should study each of these and if you find yourself in a FCPA investigation, use each Declination as a roadmap for your actions during the pendency of the investigation.

 

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