Show Notes for Episode 6, the Rolls-Royce Global Corruption Enforcement Action

This episode is dedicated exclusively to the Rolls-Royce global corruption enforcement action.

  1. Jonathan Armstrong leads a discussion the UK side of the enforcement action.

For the Cordery Compliance client alert on Rolls-Royce, see Rolls-Royce case sends a strong signal

  1. Jay Rosen considers what companies which did business with RR should do now or even companies in the same or similar industries should consider in the face of the enforcement action.

For Jay’s post on Rolls-Royce, see Rolls-Royce Takes Global Anti-Corruption to New International Heights + Potential Next Steps for a CCO Whose Company has Bid/Worked with Rolls-Royce

  1. Mike Volkov talks about the types of resolution documents used in anti-compliance enforcement and some of the key strategy used by RR during the process to achieve their positive result.

For Mike Volkov’s post on Rolls-Royce, see Serious Fraud Office Makes Big Splash with UK Bribery Act Resolution with Rolls Royce

  1. Matt Kelly brings it all home and ties it together by walking us through the global implications of this settlement.

For Tom Fox’s posts on these topics see the following:

  1. Part I
  2. Part II
  3. Part III

Rants will return next week.

The members of the Everything Compliance panel include:

  • Jay Rosen (Mr. Translations) – Jay is Vice President of Legal & Corporate Language Solutions at United Language Group. Rosen can be reached at rosen@ulgroup.com.
  • Mike Volkov – One of the top FCPA commentators and practitioners around and is the Chief Executive Officer (CEO) and owner of The Volkov Law Group, LLC. Volkov can be reached at mvolkov@volkovlawgroup.com.
  • Matt Kelly – Founder and CEO of Radical Compliance, is the former Editor of the noted Compliance Week Kelly can be reached at mkelly@radicalcompliance.com
  • Jonathan Armstrong – Rounding out is our UK colleague, who is an experienced lawyer with Cordery in London. Armstrong can be reached at armstrong@corderycompliance.com.

Today I conclude my series on the Rolls-Royce global anti-corruption enforcement action by taking a look what it all means going forward. The resolution is more than simply the stunning fines and penalties of £671 million (more than $800 million) and three agreements: Deferred Prosecution Agreement (UK DPA);  a criminal penalty under a DPA (US DPA) with the US Department of Justice (DOJ) and a criminal penalty under a leniency agreement with the Ministério Público Federal (MPF). This case continues the trend established in 2016 for not only global cooperation in anti-corruption investigations abut also global enforcement.

This case brings up the need to now look at anti-corruption enforcement at a level broader than simply a US-centric Foreign Corrupt Practices Act (FCPA) outlook but truly across the globe. To that end, I debut today the Global Anti-Corruption Enforcement Top Ten Settlements which includes enforcement actions from around the global.

Top Ten International Anti-Corruption Enforcement Actions

  1. Odebrecht/Braskem – $4.5bn-US, Switzerland and Brazil
  2. Siemens – $1.6bn-in Germany and US
  3. Rolls-Royce – $800MM in the UK, US and Brazil
  4. VimpelCom – $795MM in US and The Netherlands
  5. Alstom – $772MM in US
  6. Halliburton – $604MM in US and Nigeria
  7. Teva Pharmaceutical – $519MM in US
  8. GlaxoSmithKline – $498MM in China
  9. Och-Ziff – $412MM in US
  10. BAE – $400MM in US

The first thing that should jump out at the reader is that three of the top four resolutions have occurred in the past 12 months: VimpelCom in February 2016 and Odebrecht and Rolls-Royce, both in December 2016. The next clear trend is the uptick in fines over the past several years. While Siemens and Halliburton are from the past decade, the remainder of the matters are all from this decade. Indeed, half of all the cases from the top 10 have been announced in the past 12 months. This is clearly the demonstration of what Kara Brockmeyer, Chief, FCPA Unit at US Securities & Exchange Commission, has called “going global” in anti-corruption enforcement. If you had her other phrase of “one pie” for fines and penalties, you clearly see regulatory thinking and international businesses must be ready to respond to this global cooperation, not just in investigatory cooperation but also in enforcement.

This will put much more pressure on companies around the issue of self-disclosure. As Brockmeyer made clear, in her ACI 2016 National FCPA Conference remarks, for the Securities and Exchange Commission (SEC) to give credit for fines and penalties in other countries, a party must self-disclose to the SEC (and presumably to the DOJ) and cooperate fully throughout the investigation. This puts much more pressure on a company to take internal reports seriously and perform thorough investigations. One only need to consider GlaxoSmithKline plc (GSK) and their inept response to substantive whistleblower allegations of corruption in their Chinese business unit. GSK apparently put more time into trying to determine the identity of the whistleblower than in any detailed investigation of the claims brought forward.

Another key point from the Rolls-Royce resolution is that it confirms not only the providence of the UK Bribery Act but should also put to rest all those (UK Prime Minister Theresa May I hope you are reading this) who wanted to eviscerate the UK Serious Fraud Office (SFO). The work of the SFO can only be called a first rate example of what a committed agency, with limited funds and resources, can accomplish. SFO Director David Green and his entire team earned a well-deserved tip of the cap for this resolution. Bill Waite, writing in a FCPA Blog post entitled “Rolls-Royce is the tipping point for UK anti-bribery enforcement”, reported that Green had told him “there were deferred prosecution agreements (DPAs) in negotiation which were of “an entirely different magnitude” to SFO v Standard Bank plc and SFO v XYZ Ltd and that they would demonstrate the agency’s ability, intent and effectiveness. Rolls-Royce is the first of those DPAs and marks the tipping point for anti-bribery enforcement in the UK.”” I agree.

The process also confirms not only the importance of DPAs to prosecutors but also to companies and wider societal interests. Waite laid out how the UK DPA process protects all of these interests. He noted, “in identifying the features that justified both the DPA and the sanction, Sir Brian Leveson removed doubt or ambiguity over the circumstance in which a DPA would be sanctioned by the court…The English position enshrines open justice and requires sanction by the court. In the absence of guidance it was difficult for corporations to measure the risk that the court may refuse a DPA. This judgment provides guidance from the President of the Queen’s Bench Division to all judges. As a consequence, corporations can be more confident about how they will be treated if they choose to disclose to the SFO.”

It fell to the Editorial Column of the Financial Times (FT), in a piece entitled “The Rolls-Royce scandal has not run its course”, to lay out why a DPA is such a useful societal tool. They wrote, “The key arguments against prosecution, then, are that it would cause excessive economic damage, and that a settlement could by itself provide sufficient deterrent to future crimes. On the first point, Rolls is an important company for Britain and the world. To permanently weaken or destroy it would have serious economic consequences for innocent people and reduce competition in already concentrated markets. And a conviction could well prove fatal to Rolls by making it illegal for key clients in the UK and US to contract with it. On the second point, half a billion pounds in fines will not be dismissed as a cost of business at a company that has been generating $1bn-$2bn dollars in cash flow a year.” In other words, DPAs will remain as they are both a powerful and useful tool.

Finally, for the compliance practitioner is the sum of these messages. Global enforcement is here to stay, no matter who sits in the White House or how much it is believed corruption is simply a part of doing business in locales across the globe. The price for such myopic thinking will be an enforcement action   somewhere in globe. If an allegation of corruption is made, either through an anonymous source or through monitoring or auditing, it must be aggressively investigated and remediated. If it turns out the conduct is not simply a one-off or is in any way systemic, you will need to seriously consider how many regulatory bodies to self-disclose to going forward. The only response should be to actually be doing compliance by not simply putting a best practices compliance program in place but operationalizing it into the fabric of your company.

That may be the final and most important lesson for you from Rolls-Royce.

 

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

Today I continue my exploration of the Rolls-Royce global corruption enforcement action by considering the company’s resolution in the US under the Foreign Corrupt Practices Act (FCPA).

Before we dive into that, I first want to honor Jeff Bagwell for his election into the baseball Hall of Fame (HOF). Bagwell is the second Astro to make the HOF following fellow original Killer-B, Craig Biggio, who entered two years ago. He was Rookie of the Year in 1991. He was 1994 National League MVP and a four-time All-Star. Bagwell is Houston’s all-time leader in home runs (449), RBI (1,529) and walks (1,401). Unfortunately for Bagwell, the Astros and Astros fan, his career was cut short by chronic arthritic right shoulder.

He was also the subject of probably the most one-sided trade in baseb all history as the Astros got him for journeyman Larry Anderson from the Boston Red Sox. Anderson played one-half season for Boston. Bagwell spent his entire 18-year career with the Astros. So thank you to the Boston Red Sox for sending a native New Englander to star for the Astros and lead us to our first and only World Series appearance.

According to the Department of Justice (DOJ) Press Release, Rolls-Royce entered into a Deferred Prosecution Agreement (DPA) in connection with a Criminal Information, filed on December 20, 2016, in the Southern District of Ohio, charging the company with conspiring to violate the anti-bribery provisions of the FCPA. Pursuant to the DPA, Rolls-Royce agreed to pay a criminal penalty of $195,496,880, subject to a credit. This amount was 25% below the suggested bottom range of the US Sentencing Guidelines.

As I have previously blogged, Rolls-Royce also settled with the UK’s Serious Fraud Office (SFO) and the Brazilian Ministério Público Federal (MPF). In addition to the UK fine, Rolls-Royce also agreed to pay a penalty of approximately $25,579,170 for the company’s role in a conspiracy to bribe foreign officials in Brazil between 2005 and 2008. Because the conduct underlying the MPF resolution overlaps with the conduct underlying part of the department’s resolution, the department credited the $25,579,170 that Rolls-Royce agreed to pay in Brazil against the total US fine. Therefore, the total amount to be paid to the US is $169,917,710, and the total amount of penalties that Rolls-Royce has agreed to pay is more than $800 million.

As set out in the Criminal Information, Rolls-Royce admitted that between 2000 and 2013, the company conspired to violate the FCPA by paying more than $35 million in bribes through third parties to foreign officials in various countries in exchange for their assistance in providing confidential information and awarding contracts to Rolls-Royce, RRESI and affiliated entities (collectively, Rolls-Royce):

In Thailand, Rolls-Royce admitted to using intermediaries to pay approximately $11 million in bribes to officials at Thai state-owned and state-controlled oil and gas companies that awarded approximately seven contracts to Rolls-Royce during the same time period.

In Brazil, Rolls-Royce used intermediaries to pay approximately $9.3 million in bribes to bribe foreign officials at a state-owned petroleum corporation that awarded multiple contracts to Rolls-Royce during the same time period.

In Kazakhstan, between approximately 2009 and 2012, Rolls-Royce paid commissions of approximately $5.4 million to multiple advisors, knowing that at least a portion of the commission payments would be used to bribe foreign officials with influence over a joint venture owned and controlled by the Kazakh and Chinese governments that was developing a gas pipeline between the countries.  In 2012, the company also hired a local Kazakh distributor, knowing it was beneficially owned by a high-ranking Kazakh government official with decision-making authority over Rolls-Royce’s ability to continue operating in the Kazakh market.  During this time, the state-owned joint venture awarded multiple contracts to Rolls-Royce.

In Azerbaijan, between approximately 2000 and 2009, Rolls-Royce used intermediaries to pay approximately $7.8 million in bribes to foreign officials at the state-owned and state-controlled oil company, which awarded multiple contracts to Rolls-Royce during the same time period.

In Angola, between approximately 2008 and 2012, Rolls-Royce used an intermediary to pay approximately $2.4 million in bribes to officials at a state-owned and state-controlled oil company, which awarded three contracts to Rolls-Royce during this time period.

In Iraq, from approximately 2006 to 2009, Rolls-Royce supplied turbines to a state-owned and state-controlled oil company.  Certain Iraqi foreign officials expressed concerns about the turbines and subsequently threatened to blacklist Rolls-Royce from doing future business in Iraq.  In response, Rolls-Royce’s intermediary paid bribes to Iraqi officials to persuade them to accept the turbines and not blacklist the company.

Even with this conduct Rolls-Royce was able to obtain the aforementioned 25% credit under the US Sentencing Guidelines. This credit was obtained through cooperation and remediation. The cooperation included conducting a thorough investigation, making factual presentations to the DOJ, facilitating witness interviews and document production, “collecting, analyzing, and organizing voluminous evidence and information” for the DOJ and providing facts learned during witness interviews conducted by the company. From the prior description laid out in the UK Approved Judgment, the UK court found the level of cooperation to be extraordinary.

Equally instructive was the extensive remediation engaged in by the company. While it was laid out in much greater detail in the UK Approved Judgment, the DOJ noted they terminated all 17 employees implicated in the corruption scheme who were still employed by Rolls-Royce. All corrupt third parties were terminated as well. The company implemented enhanced procedures to review and approve third parties while shifting its sales strategy away from a third party focus. The company engaged Lord Gold to serve as a compliance oversight advisor. Lord Gold also made compliance program and policy recommendations to the Board of Director’s Safety and Ethics Committee. Finally, the company implemented “new enhanced internal controls to address and mitigate corruption and compliance risks.”

One can only conclude that at some point the company got that old-time (compliance) religion and realized if it was to crawl out of the criminal hole it found itself in then cooperation and remediation was the only way forward. Bringing in Lord Gold, who was the DOJ approved Compliance Monitor for BAE Systems after its FCPA settlement, was widely lauded and turned out to be a propitious move by the company. One can only conclude from reading Justice Leveson’s Judgment, that bribery was part of the business plan of the company, with approval from the highest levels of the organization, for over 20 years. However, all three settlements make clear that a company can reduce the penalty through extensive cooperation and remediation.

Next week, I will conclude with what it all means.

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

qtq80-fhg0fgToday I continue my exploration of the recently announced Department of Justice (DOJ) and Securities and Exchange Commission (SEC) Foreign Corrupt Practices Act (FCPA) enforcement action with the announcement of the resolution of the Embraer SA (Embraer) matter. The resolution documents included a Deferred Prosecution Agreement (DPA), with a three-year term and Criminal Information (Information) with the DOJ and a Compliant with the SEC. Today I want to consider the rather stunning comeback the company made in the face of the damning facts it admitted to in the above documents.

I. The Penalties

Embraer agreed to a fine totaling $205MM; of which $107MM goes to the DOJ as a criminal penalty and $98MM goes to the SEC as disgorgement, however as previously noted, the FCPA Blog stated, “Embraer could receive up to a $20 million credit from the SEC depending on the amount of disgorgement it will pay to Brazilian authorities in a separate enforcement action there. Even with a $20 million credit, the disgorgement is one of the biggest in an FCPA enforcement action. In a statement Monday, Embraer said it has reached a settlement with authorities in Brazil for about $20 million. Of that, about $18.5 million is disgorgement.” Even with the credit given for the Brazilian fine, the correct amount for the total penalty assessed against Embraer is the full $205MM figure.

Yet it could have been much greater. According to the DPA, the base DOJ fine was calculated at $83MM. This was multiplied by the size of the organization and the involvement of high-level company personnel but reduced by Embraer’s full “cooperation in the investigation, and clearly demonstrated recognition and affirmative acceptance of responsibility for its criminal conduct.” Note there was no discount given for self-disclosure or extensive remediation. All of this led to a DOJ fine range of between $134MM to $268MM.

Nevertheless, Embraer was able to obtain a DOJ penalty of only $107MM. This is a 20% discount “from the low end of the United States Sentencing Guidelines range”. The factors, which led to this discount, included:

  • the Company had no prior criminal history;
  • that the Company agreed to continue to cooperate with the Section as set forth in this Agreement in any investigation of the Company and its officers, directors, employees agents, business partners, and consultants relating to violations of the FCPA;
  • the Company agreed to disgorge the profits from the misconduct described in the attached Statement of Facts to the SEC and to Brazilian authorities; and Embraer engaged in partial remediation: it has disciplined a number of Company employees and executives engaged in the misconduct described in the attached Statement of Facts, but did not discipline a senior executive who was aware of bribery discussions in emails in 2004 and had oversight responsibility for the employees engaged in those discussions; and
  • the Company agreed to institute a best practices compliance program, under the auspices of an outside monitor.

If there was any doubts about the credit which can be garnered under the FCPA Pilot Program, the Embraer enforcement action should end them all, as in now.

II.  Best Practices Compliance Program

The DPA laid out the compliance program that Embraer currently is using and must implement to successfully complete its three-year DPA. While it most generally it follows the accepted Ten Hallmarks of an Effective Compliance Program from the 2012 FCPA Guidance, it does rearrange things, which bear laying the requirements out in full.

  1. High-level commitment. Embraer “will ensure that its directors and senior management provide strong, explicit, and visible support and commitment to its corporate policy against violations of the anti-corruption laws and its compliance code.”
  2. The company will develop policies against further FCPA violations and violations of other country’s anti-corruption laws. It shall create procedures to implement these policies.
  3. These policies and procedures will apply to all officers, directors, employees relevant third parties and shall address the following issues: (a) gifts, travel & entertainment; (b) political contributions; (c) charitable donations; (d) facilitation payments and (e) solicitation and extortion.
  4. There shall be effective internal controls.
  5. The company must engage periodic risk assessments.
  6. The company must review and updates its policies and procedures.
  7. The CCO shall have appropriate responsibility, oversight and autonomy.
  8. The company shall implement effective training for employees, officers, directors and appropriate third parties.
  9. The company shall provide ongoing guidance on anti-corruption compliance.
  10. The company shall implement an effective system of internal and where possible, confidential reporting for employees and where appropriate third parties.
  11. The company “will maintain, or where necessary establish, an effective and reliable process with sufficient resources for responding to, investigating, and documenting allegations of violations of the anti-corruption laws or the Company’s anticorruption compliance code, policies, and procedures.”
  12. The company will implement effective “mechanisms designed to effectively enforce its compliance code, policies, and procedures, including appropriately incentivizing compliance and disciplining violations.”
  13. The company will institute appropriate disciplinary procedures. Moreover, “Such procedures should be applied consistently and fairly, regardless of the position held by, or perceived importance of, the director, officer, or employee. The Company shall implement procedures to ensure that where misconduct is discovered, reasonable steps are taken to remedy the harm resulting from such misconduct, and to ensure that appropriate steps are taken to prevent further similar misconduct including assessing the internal controls, compliance code, policies, and procedures and making modifications necessary to ensure the overall anticorruption compliance program is effective.”
  14. The company will institute an appropriate and effective risk-based due diligence process relating to the hiring and oversight of agents, business partners and other third parties.
  15. The company will incorporate standard compliance terms and conditions into its contract with third parties.
  16. Embraer will “develop and implement policies and procedures for mergers and acquisitions requiring that the Company conduct appropriate risk-based due diligence on potential new business entities, including appropriate FCPA and anti-corruption due diligence by legal, accounting, and compliance personnel.”
  17. If an acquisition is successful, the company integrates the newly acquired entity into Embraer’s compliance regime as quickly as possible. Embraer will also “train the directors, officers, employees, agents, and business partners consistent with Paragraph 8 above on the anti-corruption laws and the Company’s compliance code, policies, and procedures regarding anti-corruption laws; and where warranted, conduct an FCPA-specific audit of the newly acquired or merged businesses as quickly as practicable.”
  18. Finally, “The Company will conduct periodic reviews and testing of its anti-corruption compliance code, policies, and procedures designed to evaluate and improve their effectiveness in preventing and detecting violations of anti-corruption laws and the Company’s anticorruption code, policies, and procedures, taking into account relevant developments in the field and evolving international and industry standards.”

III. The Monitor

Together with the recent Och-Ziff FCPA resolution, the Embraer DPA requires an external corporate monitor. While most FCPA enforcement actions are now usually resolved without an external monitor; the presence of the monitor requirement shows the DOJ thinks the company still needs external oversight to fulfill its DPA obligations. The DPA lays out the Monitor’s responsibility as follows: “The Monitor’s primary responsibility is to assess and monitor the Company’s compliance with the terms of the Agreement, including the Corporate Compliance Program in Attachment C, so as to specifically address and reduce the risk of any recurrence of the Company’s misconduct. During the Term of the Monitorship, the Monitor will evaluate, in the manner set forth below, the effectiveness of the internal accounting controls, record-keeping, and financial reporting policies and procedures of the Company as they relate to the Company’s current and ongoing compliance with the FCPA and other applicable anti-corruption laws (collectively, the “anti-corruption laws”) and take such reasonable steps as, in his or her view, may be necessary to fulfill the foregoing mandate (“the Mandate”). This Mandate shall include an assessment of the Board of Directors’ and senior management’s commitment to, and effective implementation of, the corporate compliance program described in Attachment C of the Agreement.”

Tomorrow I will give my take on the lessons to be garnered from the Embraer FCPA miasma.

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

 

 

The year 2016 may well be one for the books in the enforcement of the Foreign Corrupt Practices Act (FCPA). In February there were nearly as many FCPA enforcement actions as there were in all of 2015. Yet the summer of 2016 brought some significant enforcement actions which may well portend long-term changes in FCPA enforcement. In my new eBook,  I explore these enforcement actions, discuss the underlying facts of each and provide the lessons for the compliance practitioner. I will also look at the enforcement actions in the context of the Yates Memo and recently announced change in the way the Department of Justice (DOJ) will assess damages in its prosecutions based upon the FCPA Pilot Program, announced in April, 2016.

My latest eBook is published by Corporate Compliance Insights and joins a list of books which I have partner with CCI to publish. You can download this eBook for free by clicking here. At the 2016 FCPA enforcement year moves towards conclusion, it may well be one for the books. The summer of 2016 may prove to be as significant a three month period of FCPA as we have seen in some time.

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 Not Your Father’s FCPA-Summer 2016, the New Era of Enforcement