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

Get out of jailIt certainly did not take long for companies to see the benefit of the Department of Justice (DOJ) Foreign Corrupt Practices Act (FCPA) Pilot Program around FCPA enforcement as this week there where two public declinations granted by the DOJ for companies that admitted FCPA violations. New Deputy Chief of the DOJ Criminal Division Fraud Section and head of the FCPA Unit, Daniel Kahn, issued letters to both Akamai Technologies, Inc. (Akamai) and Nortek Inc. (Nortek) this week, declining to prosecute both companies for their admitted FCPA violations. Today, I will begin a three-part series on how the companies sustained these results. Today, I will look at the underlying facts and tomorrow I what actions engaged in by the respondents achieved this result under the new Pilot Program. In Part III, I will conclude with lessons to be learned from these two FCPA enforcement actions.

Also, most interestingly, both parties received Non Prosecution Agreements (NPAs) from the Securities and Exchange Commission (SEC). Akamai agreed to profit disgorgement of in the amount of $652,452, together with prejudgment interest thereon in the amount of $19,433 within 15 days of the signing of the NPA. Nortek agreed to profit disgorgement in the amount of $291,403, together with prejudgment interest thereon in the amount of $30,655 within 15 days.

Akamai

What were the underlying facts involving each entity? As set out in the SEC’s NPA Akamai is a US stock listed company which provides cloud services for delivering, optimizing and seeming online content and business applications over the internet (“internet capacity and services”) and maintains operations in North America, Europe, and China. Akamai (Beijing) Technologies, Co. Ltd (“Akamai-China”) is a wholly owned subsidiary of Akamai located in Beijing, China. Akamai-China provides technical and sales support to its local Chinese channel partners for content delivery services, which are resold by Channel Partners in China.

Akamai-China was required to contract with third-party Channel Partners to deliver its services to end customers. From at least 2013 through 2015, a Regional Sales Manager for Akamai-China (the “Regional Sales Manager”) concocted a scheme with a channel party “to bribe employees of three end customers, two of which were Chinese state owned entities, to obtain and retain business. The bribes were paid to induce the end customers’ employees, including the employees of the Chinese state owned entities (hereinafter the “Chinese government officials”), to contract to purchase up to 100 times more network capacity from the Channel Partner than each company actually needed.” To top it off, the Channel Partner would then purchase this capacity from Akamai-China, add its own markup, and sell the capacity to the end customers. It was a very neat way to fund a bribery scheme.

To induce the end user to contract with Akamai-China, the Channel Partner would pay monies from these bogus sales to the Regional Sales Manager’s accounts. As noted in the NPA, “The Regional Sales Manager then paid a portion of these funds, and also provided expensive gifts, to employees of the three end customers. Overall, the Regional Sales Manager paid approximately $155,500 to employees of end customers, including approximately $38,500 in cash to Chinese government officials.”

Yet the bribery scheme did not stop there as employees of “Akamai-China routinely provided improper gifts and entertainment to employees of its end customers, some of whom were Chinese government officials, to obtain or retain business. The gifts and entertainment given to Chinese government officials totaled approximately $32,000 and were provided in violation of Akamai’s corporate governance and internal accounting controls policies. Akamai-China improperly recorded the gifts and entertainment to Chinese government officials as legitimate business expenses.”

As you might opine from such a systemic failure around its anti-corruption program, there were FCPA Accounting Provisions failures in both internal controls and books and records. There were multiple internal controls failures that allowed the Akamai-China bribery scheme to go undetected. The NPA listed the following, including failure “to provide reasonable assurances, among other things, that transactions were executed in accordance with management’s general or specific authorization and transactions were recorded as necessary to maintain accountability for assets. Akamai’s internal accounting control failures included: the lack of formalized due diligence of China-based channel partners; the failure to proactively exercise audit rights to ensure compliance with anti-bribery policies; failure to monitor or review customer usage in high-risk regions; failure to translate anti-bribery and anti-corruption policies into Mandarin; inadequate employee training on compliance and anti-bribery policies; and the lack of effective procedures for reviewing and approving business entertainment.”

Both Akamai-China’s and the parent company’s books and records were inaccurate because Akamai-China had made improper payments, in the form of gifts and entertainment, which were inaccurately recorded as legitimate business expenses. Akamai-China’s books and records. These inaccurate subsidiary financials were subsequently consolidated with Akamai’s books and records, rendering Akamai’s books and records inaccurate.

Nortek

As set out in its NPA, Nortek is a US stock exchange listed company which manufactures and sells a wide variety of products for residential and commercial constructions and remodeling and the personal and enterprise computer markets, including heaters, range hoods, heating, ventilation and air conditioning systems, and garage door and security systems. Nortek had an indirect subsidiary, Linear Electronics (Shenzhen) Co. Ltd. (“Linear China”), which provided manufacturing services for Nortek in China. Both companies had operations in China where they violated the FCPA.

According to its NPA, from at least 2009 to 2014, the Managing Director of Nortek’s Chinese subsidiary, together with the “accounting manager, customs liaison officer, and other employees made or approved improper payments and gifts to local Chinese officials in order to receive preferential treatment, relaxed regulatory oversight, and/or reduced customs duties, taxes, and fees.” There were over 400 illegal payments made and the totaled approximately $290,000. The payments and gifts “to local Chinese officials included cash payments, gift cards, meals, travel, accommodations, and entertainment. Linear China made the illicit payments to local officials from multiple different governmental departments, including customs, tax, fire, police, labor, health inspection, environmental protection, and telecommunications.”

Further, Nortek had a systemic failure in its internal controls that led to these FCPA violations. Its NPA stated, “Nortek failed to devise and maintain a system of internal accounting controls at Linear China sufficient to provide reasonable assurances that, among other things, transactions were executed in accordance with management’s general or specific authorization, and transactions were recorded as necessary to maintain accountability for assets. Linear China made improper payments from multiple accounts, which Nortek failed to review or test. Nortek failed to notice obvious red flags in Linear China’s financial records, including the number and size of Linear China’s meals and entertainment expenses.” Belying the recent criticism of training, “Nortek failed to establish procedures to ensure its Linear China employees were trained in anti-corruption compliance.” Nortek also failed to accurately record these payments on its books and records.

There was no information presented on the size of any specific or particular payment made by either Akamai or Nortek. While it is not clear from the Nortek NPA whether some of the payments made might fall under the facilitation payment exemption to the FCPA, it was clear that the company did not correctly record the payments in its books and records.

 

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

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

On Monday, June 18, the Department of Justice (DOJ) announced the resolution of a matter involving violations of the Foreign Corrupt Practices Act (FCPA) by Data Systems & Solutions LLC (DS&S), a US entity based in Virginia. The settlement resulted in the company agreeing to a two year and 7 day Deferred Prosecution Agreement (DPA). The case was interesting for a number of reasons and it has some significant lessons which the compliance practitioner can put into place in a corporate compliance program. The charges related to DS&S’s business included the design, installation and maintenance of instrumentation and controls systems at nuclear power plants, fossil fuel power plants and other critical infrastructure facilities. In reading the Criminal Information, I can only say that this was no one-off or rogue employee situation but this was a clear, sustained and well known bribery scheme that went on within the company.

I.                   The Criminal Information

The bribery scheme involved payments made to officials at a state-owned nuclear power facility in Lithuania, named Ignalina Nuclear Power Plant (INPP). The payments were made to allow DS&S to obtain and retain business with INPP. The Information listed contracts awarded to DS&S in the amount of over $30MM from 1999 to 2004. Significantly, DS&S did not self-disclose this matter to the DOJ but only began an investigation after receiving a DOJ Subpoena for records.

The Players Box Score

DS&S Officials INPP Officials Subcontractors
Exec A – VP of Marketing and Business Development (BD) Official 1 – Deputy Head of Instrumentation and Controls Department Subcontractor A – Simulation Technology Products and Services
Official 2 – Head of Instrumentation and Controls Department Subcontractor B – Beneficially owned by Official 1 and which employed INPP Officials
Official 3 – Director General at INPP Subcontractor C – Shell company used a funneling entity to pay bribes
Official 4 – Head of International Projects at INPP
Official 5 – Lead SW Engineer at INPP

The bribery scheme used by DS&S recycled about every known technique there is to pay bribes. The Information listed 51 instances of bribes paid or communications via email about the need to continue to pay bribes. The bribery scheme laid in the Information reflected the following techniques used by:

  •       Payment of bribes by Subcontractors to Officials on behalf of DS&S;
  •       Direct payment of bribes by DS&S into US bank accounts controlled by INPP Officials;
  •       Creation of fictional invoices from the Subcontractors to fund the bribes;
  •      Payment of above-market rates for services allegedly delivered by the Subcontractors so the excess monies could be used to fund bribes;
  •      Payment of salaries to INPP Officials while they were ‘employed’ by Subcontractor B;
  •       Providing travel and entertainment to Officials to Florida, where DS&S has no facilities and which travel and entertainment had no reasonable business purpose; and last but not least…
  •      Purchase of a Cartier watch as a gift.

II.                The Deferred Prosecution Agreement

I set out these details with some specificity for two reasons. The first is that the Information is a must read for anyone in Internal Audit who reviews books and records. It gives you the precise types of Red Flags to look for. But secondly is the fact that DS&S received a discount of 30% off the low end of the penalty range as calculated under the US Sentencing Guidelines. The calculation as listed in the DPA is as follows:

Calculation of Fine Range:

Base Fine $10,500,000

Multipliers 1.20(min)/2.40(max)

Fine Range $12,600,000/$25,200,000

The ultimate fine paid by DS&S was only $8.82MM, which the DPA states is “an approximately thirty-percent reduction off the bottom of the fine range…” So for the compliance practitioner the question is what did DS&S do to get such a dramatic reduction? We know that one thing they did NOT do was self-report as the DPA notes that this case began as a DOJ investigation and DS&S received Subpoenas “in connection with the government’s investigation.” However, after this initial delivery of Subpoenas DS&S engaged a clear pattern of conduct which led directly to this 30% discount of the low end of the fine range. The DPA reports that DS&S took the following steps:

 

  • Internal Investigation. DS&S initiated an internal investigation and provided real-time reports and updates of its investigation into the conduct described in the Information and Statement of Facts.
  • Extraordinary Cooperation. DS&S’s cooperation has been extraordinary, including conducting an extensive, thorough, and swift internal investigation; providing to the Department searchable databases of documents downloaded from servers, computers, laptops, and other electronic devices; collecting, analyzing, and organizing voluminous evidence and information to provide to the DOJ in a comprehensive report; and responding promptly and fully to the DOJ’s requests.
  • Extensive Remediation. The number of steps DS&S took in regard to remediation included the following:
    • Termination of company officials and employees who were engaged in the bribery scheme;
    • Dissolving the joint venture and then reorganizing and integrating the dissolved entity as a subsidiary of DS&S;
    • Instituting a rigorous compliance program in this newly constituted subsidiary;
    • Enhancing the company’s due diligence protocols for third-party agents and subcontractors;
    • Chief Executive Officer (CEO) review and approval of the selection and retention of any third-party agent or subcontractor;
    • Strengthening of company ethics and compliance policies;
    • Appointment of a company Ethics Representative who reports directly to the CEO;
    • The Ethics Representative provides regular reports to the Members Committee (the equivalent of a Board of Directors in a LLC); and
    • A heightened review of most foreign transactions.
    • Enhanced Compliance Program. More on this in the next section.
    • Continued Cooperation with DOJ. The company agreed to continue to cooperate with the Department in any ongoing investigation of the conduct of DS&S and its officers, directors, employees, agents, and subcontractors relating to violations of the FCPA and to fully cooperate with any other domestic or foreign law enforcement authority and investigations by Multilateral Development Banks.

III.             Enhanced Compliance Obligations

One of the interesting aspects of the DS&S DPA is that there are 15 points listed in the Corporate Compliance Program, attached as Schedule C to the DPA, rather than the standard 13 items we have seen in every DPA since at least November 2010. The new additions are found on items 13 & 14 on page C-6 of Schedule C and deal with mergers and acquisitions. They read in full:

13. DS&S will develop and implement policies and procedures for mergers and acquisitions requiring that DS&S 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. If DS&S discovers any corrupt payments or inadequate internal controls as part of its due diligence of newly acquired entities or entities merged with DS&S, it shall report such conduct to the Department as required in Appendix B of this Agreement.

14. DS&S will ensure that DS&S’s policies and procedures regarding the anticorruption laws apply as quickly as is practicable to newly acquired businesses or entities merged with DS&S and will promptly:

a. Train directors, officers, employees, agents, consultants, representatives, distributors, joint venture partners, and relevant employees thereof, who present corruption risk to DS&S, on the anti-corruption laws and DS&S’s policies and procedures regarding anticorruption laws.

b. Conduct an FCPA-specific audit of all newly acquired or merged businesses as quickly as practicable.

This language draws from and builds upon the prior Opinion Release 08-02 regarding Halliburton’s request for guidance during an attempted acquisition and the Johnson and Johnson (J&J) Enhanced Compliance Obligations which were incorporated into its DPA. While the DS&S DPA does note that it is specifically tailored as a solution to DS&S’s FCPA compliance issues, I believe that this is the type of guidance that a compliance practitioner can rely upon when advising his or her clients on what the DOJ expects during Mergers and Acquisitions (M&A). The five keys under these new items, 13 & 14 highlighted above, are: (1) develop policies and procedures for M&A work prior to engaging in such transactions; (2) full FCPA audit of any acquired entities “as quickly as practicable”; (3) report any corrupt payments or inadequate internal controls it discovers in this process to the DOJ; (4) apply DS&S anti-corruption policies and procedures to the newly acquired entities; and (5) train any persons who might “present a corruption risk to DS&S” on the company’s policies and procedures and the law.

IV.              Summary

The DS&S DPA provides some key points for the compliance practitioner. First and foremost, I believe that it demonstrates the reasonableness of the DOJ. The bribery scheme here was about as bad as it can get, short of suitcases of money carried by the CEO to pay bribes. The company did not self-report, yet received a significant reduction on the minimum level of fine. The specificity in the DPA allows a compliance practitioner to understand what type of conduct is required to not only avoid a much more significant monetary penalty but also a corporate monitor. Lastly, is the specific guidance on FCPA compliance in relation to M&A activities, to the extent that if anyone in the compliance arena did not understand what was required in the M&A context; this question would seem to be answered in the DS&S DPA.

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, 2012

As reported by thebriberyact.com, on January 13, 2012, the UK Serious Fraud Office (SFO) announced the final piece of the Mabey & Johnson (M&J) case, in which the company’s sole shareholder Mabey Engineering (Holdings) Limited agreed to pay back dividends gained as a result of corruption of  M&J obtain Iraqi bridge-building contracts. SFO Director Richard Alderman lauded it as “the final act in an exemplary model of corporate self-reporting and co-operative resolution”. I hope that every compliance officer of a private equity company read the report by the Bribery Act guys because this is a remedy which may soon be aimed directly at your company.

To recap this case, as reported in the SFO Press Release, entitled “Shareholder agrees civil recovery by SFO in Mabey & Johnson”, said that M&J has worked with the SFO since the beginning of 2008 when M&J self-reported certain instances of corruption it had identified as a result of an internal investigation. Following the self-disclosure and subsequent co-operation with the SFO’s investigations, the company pled guilty to charges of corruption and breaches of United Nations sanctions and was convicted at Southwark Crown Court in September 2009. Since the self-disclosure, the company has introduced new management, implemented anti-bribery and corruption procedures and appointed an independent monitor. The SFO noted that “the company is viewed by the SFO as having conducted itself in an exemplary way through its self-referral, extensive co-operation with the authorities and the transformation of the company.”

However, there is now one additional remedy that the SFO used against M&J. The sole shareholder of M&J, Mabey Engineering, agreed to pay a penalty of £131,201 under the Proceeds of Crime Act. The sum represents the dividends which the parent company collected from the contracts at the center of the UN Sanctions prosecutions. The company will also pay costs in the amount of £2,440.

Director Alderman is quoted as saying:

“There are two key messages I would like to highlight.  First, shareholders who receive the proceeds of crime can expect civil action against them to recover the money.  The SFO will pursue this approach vigorously.  In this particular case, however, the shareholder was totally unaware of any inappropriate behaviour.  The company and the various stakeholders across the group have worked very constructively with the SFO to resolve the situation, and we are very happy to acknowledge this.

The second, broader point is that shareholders and investors in companies are obliged to satisfy themselves with the business practices of the companies they invest in.  This is very important and we cannot emphasise it enough.  It is particularly so for institutional investors who have the knowledge and expertise to do it. The SFO intends to use the civil recovery process to pursue investors who have benefitted from illegal activity.  Where issues arise, we will be much less sympathetic to institutional investors whose due diligence has clearly been lax in this respect.”

Commenting on these statements, thebriberyact.com said, that with these remarks, Director Alderman “took the opportunity to fire a warning a shot across the bows of institutional shareholders and the higher standards the SFO will expect of them”. I usually do not disagree with thebriberyact.com guys. However, here I think they were way too subtle, because even if a shareholder did not know about illegal conduct, the SFO will go after the proceeds of the criminal activity. This is not the situation where a recalcitrant company agrees to disgorge profits, which is a standard Securities and Exchange Commission (SEC) remedy. This is a situation where a shareholder who received dividends was required to return its money.

Director Alderman goes on to imply that institutional shareholders will be held to a higher standard. The “broader point is that shareholders and investors in companies are obliged to satisfy themselves with the business practices of the companies they invest in. This is very important and we cannot emphasise it enough.” Think about that statement for a minute. If you are a private US equity company, with a UK portfolio company which sustains a Bribery Act violation and prosecution, you may well have to return profits, even where you did not have knowledge of the violative conduct.

More importantly for private US equity companies, how long do you think it will take for the Department of Justice (DOJ) to incorporate this form of remedy into a Foreign Corrupt Practices Act (FCPA) enforcement action? I can give you the answer; NOT LONG. The SEC enforces the books and records component of the FCPA against publicly listed companies. Most equity companies are privately held so profit disgorgement may not be available in an enforcement action against a portfolio company. Nevertheless, based on the Mabey case, the DOJ may well seek return of dividends, profits or other monies which went from a portfolio company to its private equity owner.

Over the past week, there has been intense media discussion regarding private equity due to the GOP primary. These discussions have even reached the FCPA compliance commentariati with an article by Matt Ellis, writing in his blog FCPAméricas, entitled “Mitt Romney, Private Equity, and the FCPA.” The lawyers at the DOJ read the papers like everyone else and they see this increased scrutiny and this scrutiny, coupled with this new development by the SFO, will put this type of enforcement remedy squarely in front of US regulators. If you are a private equity company, you need to heed Director Alderman’s warning that “This is very important and we cannot emphasise it enough”; you will be “obligated to satisfy [yourself] with the business practices of the companies [you] invest in.” It does not get any more straight forward than that.

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, 2012