Three Way IntersectionThe Transparency International-Corruptions Perceptions Index (TI-CPI) is released each year in November. The TI-CPI rates Brazil as 69th out of 175 countries on its index, coming in with a score of 43 out of 100. I wonder if TI might consider an interim report this year on Brazil? As things keep going, more and more corruption is alleged to be a part of the everyday fabric of the country. While the Petrobras and related scandals have been well chronicled, the overall stench of corruption just keeps spreading and spreading.

Recently it was announced yet another set of investigations around corruption has begun. This time it involves the Brazilian Finance Ministry’s Administrative Council for Tax Appeal. In an article in the Wall Street Journal (WSJ), entitled “Brazil Probes New Bribery Allegations”, Paulo Trevisani reported that this is an “arbitration board that hears appeals from taxpayers who dispute how much they owe the [Brazilian] government.” The investigation would appear to be widespread as “Prosecutors said 74 companies and 24 individuals are under investigation.”

Interestingly not only is the Finance Ministry investigating the allegations but also the Brazilian internal revenue service, the Brazilian federal police and the Brazilian federal prosecutors office. In what would seem to indicate the inherent conflict of interest in the Finance Ministry investigating itself, Trevisani reported the “Finance Ministry said the alleged scheme wasn’t systematic but rather, involved “isolated acts” carried out by a small group of government tax officials. When prosecutors announced the investigation on March 26 they said that losses to the nation’s treasury totaled $6.1 billion over 15 years.” Oops.

While the entities and individuals under investigation have not been named, “a leading investigator on the case said companies under investigation include Ford Motor Brazil, a unit of Ford Motor Co.; JBS, the world’s largest meatpacker, the Brazilian unit of the Spanish bank Banco Santander SA; and Brazil’s second largest private-sector bank, Bradesco SA.” You may recall from an earlier blog post I noted that Brazil’s third largest state-owned bank Caixa Econômica Federal (Caixa) is also under investigation for corruption.

However, this new corruption scandal is the first time that non-Brazilian companies have come under investigation outside of the Petrobras scandal. The WSJ article noted, “Brazil’s tax system is among the most onerous and complex in the world. Penalties can be steep. That has fostered an environment where corruption can flourish, [un-named] experts say. “Taxes in Brazil are so high and complicated that it is easy for companies to get in trouble with the taxman,” the leading investigator told The Wall Street Journal. The investigator said frequent tax disputes created opportunities for ill-intentioned public servants to profit by helping firms circumvent red tape. Prosecutors say the probe began in 2013 after they received an anonymous letter describing details of the alleged scheme.”

An article in forbes.com, entitled “Ford On List Of Companies Suspected Of Brazilian Tax Fraud” by Kenneth Rapoza, went further than the WSJ article when it laid out the list of “companies are under investigation for taking part in various tax bribery schemes” and then listed the amounts they allegedly avoided paying. The Top Ten list is:

  • Santander: R$3.3 billion
  • Bradesco: R$2.7 billion
  • Ford: R$1.7 billion
  • Gerdau: R$1.2 billion
  • Light: R$929 million
  • Banco Safra: R$767 million
  • RBS: R$672 million
  • Camargo Correa: R$668 million
  • Mitsubishi: R$505 million
  • Banco Industrial: R$436 million

An article in businessinsider.com, entitled “Brazil uncovers multibillion-dollar tax fraud”, reported that this investigation, dubbed Operation Zeal, had uncovered that “the [tax] body managed to obtain tax appeals board rulings in the companies’ favor by either cutting penalties or waiving them altogether. In return, officials allegedly received bribes from some 70 companies believed to have benefited from the scheme. A written statement issued by Brazilian federal police stated “The investigations, begun in 2013, showed the organization acted within the body sponsoring private interests, seeking to influence and corrupt advisors with a view either to securing the cancellation or reduction of penalties from tax authorities”. Moreover, “Police said the scam could have netted the companies as much as 19 billion reais ($5.9 billion) but evidence uncovered so far amounts to around a third of that amount.” Finally, and perhaps most ominously, the article said, “Federal police organized crime chief Oslain Campos Santan said the total sums could end up being “as much” as that involved in the Petrobras scam”.

This new Brazilian corruption scandal recalls the Foreign Corrupt Practices Act (FCPA) enforcement action against the Houston-based Parker Drilling Company. According to the Department of Justice (DOJ) Press Release issued at the time of the announcement of the conclusion of the matter, the company was issued a tax assessment on its drilling rigs. The Press Release went on to state, “According to court documents, rather than pay the assessed fine, Parker Drilling contracted indirectly with an intermediary agent to resolve its customs issues. From January to May 2004, Parker Drilling transferred $1.25 million to the agent, who reported spending a portion of the money on various things including entertaining government officials. Emails in which the agent requested additional money from Parker Drilling referenced the agent’s interactions with Nigeria’s Ministry of Finance, State Security Service, and a delegation from the president’s office. Two senior executives within Parker Drilling at the time reviewed and approved the agent’s invoices, knowing that the invoices arbitrarily attributed portions of the money that Parker Drilling transferred to the agent to various fees and expenses. The agent succeeded in reducing Parker Drilling’s TI Panel fines from $3.8 million to just $750,000.”

So with all of the above that has been written about in the past few weeks, where do you think Brazil should be on the TI-CPI? While its rating of 43 out of 100 may not seem too low or perhaps more accurately too much perceived corruption, it may be time for a mid-year reassessment. Certainly if you are a Chief Compliance Officer (CCO) or compliance practitioner you may wish to perform your own reassessment. If you have any dealings with the Brazilian Finance Ministry’s Administrative Council for Tax Appeal, you need to perform an internal investigation starting today on all information you can find about the process and results. For if the results were extremely favorable the reason for the achievement may have violated both Brazilian law and the FCPA.

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

Internal ControlsI have intentionally avoided a Top Five or Top Ten prediction list for Foreign Corrupt Practices Act (FCPA) enforcement going forward from 2014 into 2015. However there is one area of FCPA enforcement, which I think underwent a sea change in 2014 and has significant implications for the Chief Compliance Officer (CCO) and compliance practitioner in 2015 and far beyond. That change will be in the enforcement by the Securities and Exchange Commission (SEC) of the internal controls provisions of the FCPA. Last fall we saw three SEC enforcement actions, where there was no corresponding Department of Justice (DOJ) enforcement action yet there was a SEC enforcement action around either the lack or failure of internal controls. Those enforcement actions were Smith & Wesson, Layne Christensen and Bio-Rad.

Coupled with this new found robust enforcement strategy by the SEC, is the implementation of the COSO 2013 Framework, which became effective in December 2014. COSO stands for Committee of Sponsoring Organizations of the Treadway Commission, which originally adopted, in 1992, a framework for basis to design and then test the effectiveness of internal controls. It was deemed necessary to update this more than 20-year old COSO Framework, as modified in 2013, so that it provides a very supportable approach when adversarial third parties challenge whether a company has effective internal controls. While the COSO Framework is designed for financial controls, I believe that the SEC will use the 2013 Framework to review a company’s internal controls around compliance. This means that you need to understand what is required under the 2013 Framework and be able to show adherence to it or justify an exception if you receive a letter from the SEC asking for evidence of your company’s compliance with the internal controls provisions of the FCPA.

Because I believe this single area of FCPA enforcement is so important and will increase so much, I am going to dedicate several posts to an exploration of internal controls, focusing on the COSO 2013 Framework. In Part I, I begin with a review of internal controls under the FCPA.

What are internal controls?

What are internal controls in a FCPA compliance program? The starting point is the law itself. The FCPA itself requires the following:

Section 13(b)(2)(B) of the Exchange Act (15 U.S.C. § 78m(b)(2)(B)), commonly called the “internal controls” provision, requires issuers to:

devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that—

(i) transactions are executed in accordance with management’s general or specific authorization;

(ii) transactions are recorded as necessary (I) to permit preparation of financial statements in conformity with generally accepted accounting principles or any other criteria applicable to such statements, and (II) to maintain accountability for assets;

(iii) access to assets is permitted only in accordance with management’s general or specific authorization; and

(iv) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any

differences ….

The DOJ and SEC, in their jointly released FCPA Guidance, stated, “Internal controls over financial reporting are the processes used by companies to provide reasonable assurances regarding the reliability of financial reporting and the preparation of financial statements. They include various components, such as: a control environment that covers the tone set by the organization regarding integrity and ethics; risk assessments; control activities that cover policies and procedures designed to ensure that management directives are carried out (e.g., approvals, authorizations, reconciliations, and segregation of duties); information and communication; and monitoring.” Moreover, “the design of a company’s internal controls must take into account the operational realities and risks attendant to the company’s business, such as: the nature of its products or services; how the products or services get to market; the nature of its work force; the degree of regulation; the extent of its government interaction; and the degree to which it has operations in countries with a high risk of corruption.”

Aaron Murphy, a partner at Foley and Lardner in San Francisco and the author the most excellent resource entitled “Foreign Corrupt Practices Act”, has said, “Internal controls are policies, procedures, monitoring and training that are designed to ensure that company assets are used properly, with proper approval and that transactions are properly recorded in the books and records. While it is theoretically possible to have good controls but bad books and records (and vice versa), the two generally go hand in hand – where there are record-keeping violations, an internal controls failure is almost presumed because the records would have been accurate had the controls been adequate.”

Well-know internal controls expert Henry Mixon has said that internal controls are systematic measures such as reviews, checks and balances, methods and procedures instituted by an organization that performs several different functions. These functions include allowing a company to conduct its business in an orderly and efficient manner; to safeguard its assets and resources, to detect and deter errors, fraud, and theft; to assist an organization ensuring the accuracy and completeness of its accounting data; to enable a business to produce reliable and timely financial and management information; and to help an entity to ensure there is adherence to its policies and plans by its employees, applicable third parties and others. Mixon adds that internal controls are entity wide; that is, they are not just limited to the accountants and auditors. Mixon also notes that for compliance purposes, controls are those measures specifically to provide reasonable assurance any assets or resources of a company cannot be used to pay a bribe. This definition includes diversion of company assets, such as by unauthorized sales discounts or receivables write-offs as well as the distribution of assets.

The FCPA Guidance goes further to specify that internal controls are a “critical component” of a best practices anti-corruption compliance program. This is because the design of an entity’s “internal controls must take into account the operational realities and risks attendant to the company’s business, such as the nature of its products or services; how the products or services get to market; the nature of its work force; the degree of regulation; the extent of its government interaction; and the degree to which it has operations in countries with a high risk of corruption. A company’s compliance program should be tailored to these differences.” After a company analyzes its own risk, through a risk assessment, it should design its most robust internal controls around its highest risk.

COSO and Internal Controls

Larry Rittenberg, in his book COSO Internal Control-Integrated Framework said that the original COSO framework from 1992 has stood the test of time “because it was built as conceptual framework that could accommodate changes in (a) the environment, (b) globalization, (c) organizational relationship and dependencies, and (d) information processing and analysis.” Moreover, the updated 2013 Framework was based upon four general principles which including the following: (1) the updated Framework should be conceptual which allows for updating as internal controls (and compliance programs) evolve; (2) internal controls are a process which is designed to help businesses achieve their business goals; (3) internal controls applies to more than simply accounting controls, it applies to compliance controls and operational controls; and (4) while it all starts with Tone at the Top, “the responsibility for the implementation of effective internal controls resides with everyone in the organization.” For the compliance practitioner, this final statement is of significant importance because it directly speaks to the need for the compliance practitioner to be involved in the design and implementation of internal controls for compliance and not to simply rely upon a company’s accounting, finance or internal audit function to do so.

So why will all of the above be a sea change for FCPA enforcement since after all, the requirement for internal controls has been around since 1977. The Smith & Wesson case shows the reason. In its Administrative Order, the SEC stated, “Smith & Wesson failed to devise and maintain sufficient internal controls with respect to its international sales operations. While the company had a basic corporate policy prohibiting the payment of bribes, it failed to implement a reasonable system of controls to effectuate that policy.” Additionally, the company did not “devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that transactions are executed in accordance with management’s general or specific authorization; transactions are recorded as necessary to maintain accountability for assets, and that access to assets is permitted only in accordance with management’s general or specific authorization.” All of this was laid out in the face of no evidence of the payment of bribes by Smith & Wesson to obtain or retain business. This means it was as close to strict liability as it can be without using those words. Kara Brockmeyer, chief of the SEC Enforcement Division’s FCPA Unit, was quoted in a SEC Press Release on the matter that “This is a wake-up call for small and medium-size businesses that want to enter into high-risk markets and expand their international sales.” When a company makes the strategic decision to sell its products overseas, it must ensure that the right internal controls are in place and operating.”

In Part II we will begin our exploration of the COSO 2013 Framework and what it requires in the way of internal controls for your FCPA 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, 2015

ByzantiumPorphyry is a type of stone that was much favored in the Roman world. In a review of several books in the New York Review of Books, entitled “The Purple Stone of Emperors”, Peter Brown looked into the history of the lithic in the context of Byzantium as the true heir of the Roman Empire. He theorized that if “porphyry was the blood of ancient empire, then it must be to Constantinople that we should look (and not to Western Europe) if we wish to understand the heritage of Rome in the Middle Ages.” I found that an appropriate way to think about an apparent anomaly in the recent Alstom Foreign Corrupt Practices Act (FCPA) enforcement action. In Part III of my series on the Alstom natter I consider the accounting records violations that the French parent, Alstom SA, agreed to in this enforcement action.

The FCPA Professor noted in his second blog post on this matter, entitled “Issues to Consider from the Alstom Action”, “The charges against Alstom S.A. are a real head-scratcher. The conventional wisdom for why the Alstom action involved only a DOJ (and not SEC) component is that Alstom ceased being an issuer in 2004 (in other words 10 years prior to the enforcement action). Yet, the actual criminal charges Alstom pleaded guilty to – violations of the FCPA’s books and records and internal controls provisions – were based on Alstom’s status as an issuer (as only issuers are subject to these substantive provisions). In other words, Alstom pleaded guilty to substantive legal provisions in 2014 that last applied to the company in 2004.”

The Professor had also raised this issue in his first blog post on the resolution, entitled “All About the Alstom Enforcement Action”. After considering his thoughts on this issue, I decided to look into it a bit more deeply. Alstom SA was charged with several different FCPA violations including the following, 15 U.S.C. 78m(b)(2)(A), 15 USC §78m(b)(2)(B) and 78m(b)(5) which read in whole,

15 U.S.C. § 78m [Section 13 of the Securities Exchange Act of 1934] 

(b) Form of report; books, records, and internal accounting; directives

(2) Every issuer which has a class of securities registered pursuant to section 78l of this title and every issuer which is required to file reports pursuant to section 78o(d) of this title shall—

(A) make and keep books, records, and accounts, which, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the issuer;

(B) devise and maintain a system of internal accounting controls sufficient

to provide reasonable assurances that—

(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).

These provisions are generally referred to as the ‘accounting provisions’ of the FCPA. As stated in the FCPA Guidance, “In addition to the anti-bribery provisions, the FCPA contains accounting provisions applicable to public companies. The FCPA’s accounting provisions operate in tandem with the anti-bribery provisions and prohibit off-the-books accounting. Company management and investors rely on a company’s financial statements and internal accounting controls to ensure transparency in the financial health of the business, the risks undertaken, and the transactions between the company and its customers and business partners. The accounting provisions are designed to “strengthen the accuracy of the corporate books and records and the reliability of the audit process which constitute the foundations of our system of corporate disclosure.””

Moreover, these accounting provisions, including both the books and records and internal control provisions, are defined to apply to “issuers”. As set out in the FCPA Guidance, “The FCPA’s accounting provisions apply to every issuer that has a class of securities registered pursuant to Section 12 of the Exchange Act or that is required to file annual or other periodic reports pursuant to Section 15(d) of the Exchange Act.244 These provisions apply to any issuer whose securities trade on a national securities exchange in the United States, including foreign issuers with exchange traded American Depository Receipts. They also apply to companies whose stock trades in the over-the-counter market in the United States and which file periodic reports with the Commission, such as annual and quarterly reports. Unlike the FCPA’s anti-bribery provisions, the accounting provisions do not apply to private companies.”

Charging Box Score

Alstom Entity Charges Time of Criminal Conduct Issuer Status
Alstom SA 15 USC §78m(b)(2)(A)15 USC §78m(b)(2)(B)15 USC §78m(b)(5)

15 USC §78ff(a)

18 USC §2

1998-2004 Issuer until 2004
Alstom Power Inc. 18 USC §371-conspiracy to violate the FCPA 2002-2009 Subsidiary of Issuer until 2004
Alstom Grid Inc. 18 USC §371-conspiracy to violate the FCPA 2000-2010 Subsidiary of Issuer until 2004
Alstom Network Schweiz AG 18 USC §371-conspiracy to violate the FCPA 2000-2011 Subsidiary of Issuer until 2004

While I agree with the above, I do disagree with the Professor’s final statement that “This free-for-all, anything goes, as long as the enforcement agencies collect the money nature of FCPA enforcement undermines the legitimacy and credibility of FCPA enforcement.” The reason I disagree is that this was a negotiated settlement, not a dictat or court proceeding. With no doubt excellent FCPA defense counsel involved, Alstom must have had its own reasons for agreeing to such a settlement. Without any further comment by the company, we will have to speculate as to some of the reasons for this component of the resolution.

First and foremost is that clearly Alstom did engage in conduct which substantially violated the FCPA. It would further appear that the conduct reached right up into the corporate home offices in France. By agreeing to the books and records and internal control violations, Alstom may have avoided any direct admission of guilt under French law, which we now know from the Total FCPA enforcement action is significant for a French company, because what is illegal bribery and corruption under US law is not necessarily illegal under French law.

Other than the anomalous French law issue, there may be another important consideration going on here. Alstom is under acquisition by General Electric (GE). Not only does GE pride itself and very publicly inform about its anti-corruption compliance program, GE has a large number of contracts with the US and other governments which might looks askance at doing business with a business unit that admitted to substantive FCPA violations of bribery and corruption. While I do not think that GE would be in danger of being debarred, it might well be that certain governments might not want to do business with a new subsidiary which made such a court admission. I find this to be more than simply a distinction without a difference. Consider the trouble that Hewlett-Packard (HP) is in north of the border in Canada regarding potential debarment by the Canadian government for its FCPA violations as set forth in its FCPA resolution of last April. So perhaps from Alstom’s perspective, the company believed it received benefits from settling based upon accounting violations.

But whatever the reason, it is clear that Alstom did engage in substantive FCPA violations. It’s settlement is that, a settlement of outstanding issues, which the company was a willing participant. It may not have been what the company wanted but I do not find that by charging Alstom for books and records and internal controls violations for the time frame it was clearly liable in any way demeans, degrades or lessens FCPA enforcement going forward. But just as we need to look to Byzantium to determine the heritage of Rome through the Middle Ages, by looking at the facts and circumstances around Alstom’s FCPA from the Alstom perspective and what it hoped to obtain in the settlement, we might be able to glean some insights.

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