1000Yes, indeed the Grateful Dead can and does inform your compliance regime as today is my 1000th blog posting on the FCPA Compliance and Ethics Blog. To say that I ever thought I would see this day or this many blog posts, would portend a level of clairvoyance that even Carnac the Great could not conceive of pontificating upon. I had struggled with a theme for this momentous accomplishment but my sublimely-grounded English wife brought me down from the ethereal clouds with the following suggestion, “Even an old dog can learn new tricks.” Nothing like being married to a younger woman.

So today, I want to write about some of the things I have learned on this 4+ year journey, which began in late 2009/early 2010 after a serious automobile/bicycle event (Box Score: Hummer-1 Tom-0) where about the only thing I had on my hands was time while I was at home convalescing. I started to explore the world of social media, engaging on Twitter, webinaring from my home office and blogging. I was so un-savvy in this arena that about the only positive thing my teenaged daughter could say about me was “Dad, you are so unhip, you are retro. But that is cool too.” The first thing I learned was that even a complete computer misfit and social media idiot could set up a blog on WordPress. It is not only easy but free. I cannot say with any pride that some of my early blogs were very good but I can say that for a lawyer, whose only skill was to be able to perform word processing in Microsoft Word, I could type and then upload a blog post into WordPress. At that point in my blogging career, that was a major accomplishment.

Although it did take some time, I learned how to stop writing like a lawyer, with full citations in each blog, coupled with as much lawyerese as I could manage, by finally adjusting to a blogging format. I also relearned an old lesson, which says that if you really want to learn about a subject, write on it. I remember one of the first things I learned when researching the Travel Act was that this Kennedy era law, passed largely through the efforts of Bobby Kennedy, was designed to help in the fight against organized crime. So who would say a 60 year old law cannot be used for a 21st century purpose? Or maybe even a Watergate-era like the Foreign Corrupt Practices Act (FCPA) could not have an expansive use, beyond that for which it was passed in 1977? I also learned that if you put out solid content people will read and listen to what you have to say.

I learned there are some great people out there blogging in the ethics and compliance space. I have met some fabulous colleagues through my blogging who have not only been incredibly supportive but whom I now cherish as good friends. Some of them include Mike Koehler, the FCPA Professor, for his scholarly rigor and continued intellectual challenges. Dick Cassin, the Dean of FCPA bloggers, for his unflinching support to myself and so many others. Mike Volkov, former prosecutor and DC-insider, who is always around to bounce a tough question off. Howard Sklar, who was my This Week in FCPA podcast partner, until we lost him to the corporate world. Francine McKenna, a great and generous mentor for myself and many others and the go-to person all issues in and around the accounting world. Jim McGrath, the internal investigations guy, who brings a former state prosecutor’s perspective to how investigations should be handled and critiqued. Matt Ellis, whose focus on and insights into South America (as in – it’s not a country) continue to shine a light on anti-corruption issues south of the border. Matt Kelly, Editor of Compliance Week, who saves some great witticisms for his weekly blog posts. These are but a very few of the folks I am now privileged to call friends because of my blogging.

I learned that there is way too much white noise in the FCPA space. The FCPA Professor calls them FCPA Inc. and Mike Volkov derides them as the FCPA paparazzi. Whatever you might call them, they put out reams and reams of information, sometimes useful but many times not. What I have tried to do is synthesize some of the most useful for the Chief Compliance Officer (CCO), compliance practitioner or anyone else who does the day-to-day work of anti-bribery/anti-corruption compliance. There are many, many things you can know but a far smaller subset of what you need to know. I try to bring to the compliance practitioner what they need to know. That is why the subtitle of my blog is ‘The Nuts and Bolts of FCPA Compliance’. I have tried to write about things which the compliance professional can use in the everyday practice of compliance.

I have learned that blog posts, which I thought were the most important, may turn out to be the least viewed blogs. Conversely, posts I did not think would be of great interest turned out to have the largest number of one-day hits. For instance, the largest single number of one-day hits I had was an article from two years ago about the SNC-Lavalin corruption investigation in Canada. [For a blog about FCPA compliance-go figure.] The second largest number was a recent blog post using the GM internal investigation as an exploration in the differences between a corporate legal function and its compliance function.

I have learned that by committing to something, you become much better at it. My first year of blogging, I tried to put out 2-3 blogs per week but beginning in 2011, I committed to a daily blog post. Once I made that commitment, blogging became a part of my workday. Once it became a part of my workday, it was like any other project or assignment. I had to set aside the time to work on it. It has made me a much more efficient and better writer to know that I need write something, during my workday. Yes there have been times I was up at 5 AM to write a post or stayed up way past my school-night bedtime trying to crank something out but those situations have become few and far between as I became more disciplined about my blogging.

But most of all I have learned that blogging is fun. It is fun because it is a challenge to write about something in an informative and engaging manner. It is fun to tie a Shakespeare play to a compliance and ethics theme. It is fun to read a week’s worth of Sherlock Holmes’ stories and tie a compliance topic to a story each day for one week. It is fun to find out what happened this day in history and use it as a hook to grab your readers’ attention. It is fun to engage in a debate with the FCPA Professor on a topic of mutual interest, where we look at the same thing, yet see it from different perspectives. And it is fun when you meet someone for the first time and after you introduce yourself, they say to you “When is a rose, not a rose? When it’s a FCPA violation”.

Where will the next 1000 blogs posts take me? I have no clue but if they are as much fun as the first 1000 posts have been I hope that you will continue to join my on This Long Strange Trip.

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, 2014

One of the best things about the Foreign Corrupt Practices Act (FCPA), UK Bribery Act and other anti-corruption practice areas is the top notch quality of commentators. While Mike Volkov regularly derides the FCPA paparazzi for being scare mongers and the FCPA Professor chastises FCPA Inc. for attempts to paint FCPA enforcement in the worst possible light so as to draw clients to their collective resources; there is also a great set of bloggers, writers and pundits who put out solid, useful and well-reasoned pieces on FCPA and Bribery Act issues. In this blog post, I would like to highlight some of my favorite posts from some of my favorite commentators over the past year.

From the Dean

If you do not know who the Dean of FCPA bloggers is you have not been looking too long or too hard. It’s Dick Cassin, who is the Founder, Editor and Publisher of the FCPA Blog, which consistently reports on all things compliance around the globe. But for me, it is when Dick writes from the heart, he is able to articulate what many of us are feeling but cannot seem to put into words. My favorite post from Dick this year was his tribute to President Kennedy on the occasion of the 50th anniversary of the President’s assassination, entitled “And So The Legend of Camelot Was Born”. Dick ended his post with the following quote from Teddy White, “He advanced the cause of America at home and abroad. But he also posed for the first time the great question of the sixties and seventies: What kind of people are we Americans? What do we want to become?” The question still stands.

From the FCPA Professor

If you have never debated the FCPA Professor, live or via email, you should. But be prepared to bring your A-Game and your authority. He posts daily and has become a great resource for guest posts over the years which challenge the status quo on a variety of legal and compliance issues. Each morning I cannot wait to see what the Professor has to say that day. However, what I have really come to appreciate is his Friday Round-Ups. Each Friday, the Professor gives us a round-up of recent FCPA and related news, articles and developments not otherwise covered by him in his Monday – Thursday posts. I should also say he saves some of his best witticism for these posts. My favorite post from the Professor this year was the milestone of his 100th Friday Round Up, appropriately entitled “The 100th Edition of the Friday Round-Up”. Tune in each Friday for another edition of this great resource.

From Jim McGrath

I continually bemoan to Jim McGrath that he needs to post blogs more often than his twice or thrice weekly output. The reason being they are so good and I want to see more of his stuff. As you might guess from the title of his blog, Internal Investigations Blog, he tends to focus on investigations; some criminal, some civil, some internal and some external. McGrath is an ex-prosecutor and tends to view things through that prism and give us a different perspective of law enforcement. He writes about investigations inside and outside the realm of anti-corruption but his insights are certainly applicable to any FCPA or Bribery Act investigation.

My favorite post from McGrath this year was his piece on 7-Eleven, entitled “Human Trafficking Concerns for 7-Eleven in Wake of Payroll Scam”. In this article he detailed the federal investigation into allegations that 7-Eleven franchisees in New York and Virginia had engaged in human trafficking and possible involvement by the franchisor through its payroll system. His piece was a cautionary tale for the compliance practitioner about the need for internal controls, internal monitoring and internal investigations. McGrath ended his post with the following, “Further, its future due diligence efforts as regards suppliers and franchisees should include a review for human rights abuses such as those suggested here. Otherwise, it will have to sell a helluva lot of Slurpees to pay the fines, costs, and disgorgements that a failure to do so will no doubt entail.” In other words, trust but verify.

From Mike Volkov

Mike Volkov has worked at the Department of Justice (DOJ) on Capitol Hill and for Big Law. He now has founded his own firm, the Volkov Law Group and writes the Corruption, Crime & Compliance blog. Mike primarily writes about anti-corruption but he also writes about health care fraud, anti-trust compliance and enforcement and many other topics. While I cannot determine if he set out to have a theme this year, Volkov has written many articles this year which focus on the role and position of the Chief Compliance Officer (CCO), the need for independence and resources required for the position.

My favorite post from Volkov was entitled “The Only Thing [In-House Counsel and CCOs] Have to Fear, Is Fear Itself”. His title is a play-off of what I believe to be the most inspiring FDR speech so that alone is worth the price of admission. He also tells one of the great stories about his days from Big Law. Volkov related that he wrote his views on the UK Bribery Act and the length of time it would take for any meaningful enforcement to take place, “I received a call from the firm’s London partners and was chastised for undermining their entire “marketing” program. (In stark contrast, many clients wrote me and thanked me for my “honesty.)” As my 16 year old daughter might say, ‘Sometimes you just have to keep it real’.

From Across the Pond

If you do not subscribe to thebriberyact.com, you are missing out on the best site for all things UK Bribery. thebriberyact.com guys, Barry Vitou and Richard Kovalevsky QC, consistently give their readers both practical insight and in-depth analysis. Their interviews of the relevant players allow all compliance practitioners to develop insight into what the top UK regulatory officials are thinking about on the Bribery Act. They also write from the very British perspective of understatement and skewering satire, which is more than a ton of fun for us Americans to read.

My favorite post which illustrated all of the above traits was from March and is entitled “Parliament report calls for Bribery Act review: Our opinion – Junk in. Junk Out.” In this post, they took on the call for the urgent scrutiny of the UK Bribery Act by a parliamentary select committee claiming that the Act has met with “confusion and uncertainty.” To this rather inane claim, the guys responded “We cannot think of a piece of legislation which has sparked much more commentary, advisory, much of it on line and completely free, including our own eponymous website.” But my favorite line was their dénouement to the British MP who brought up the need for clarification of the UK Bribery Act, “And, Tony from Alderly PLC, if you’re reading feel free to give us a call.  We can help you.”

My Favorite from 2013 (Think Big)

My favorite blog post of the year was actually posted on December 28, 2012 by Matt Ellis, Founder and Editor of the FCPAméricas blog, which was entitled “Wal-Mart, Go Big on FCPA Compliance”. The reason that it is my favorite of 2013 is because it is the one post that I have thought the most about, talked the most about, read the most about and it even inspired me to write on the issue myself. In his post Ellis challenged Wal-Mart to “go big” on compliance in the wake of its world-wide FCPA investigation and policy implementation. He wrote, “Wal-Mart should instead use the FCPA investigation, and the attention it has generated, as an opportunity. It is an opportunity to go big on compliance.” Ellis went on to detail some specific suggestions that Wal-Mart could implement to help the fight against bribery and corruption that, due to its size and market share, would be in a unique opportunity to put in place.

Within the anti-corruption compliance community there was a noted buzz about Ellis’ piece and his suggestions. I was inspired to write a blog post, entitled “Wal-Mart-Be a Leader in Compliance”, due to the ideas articulated by Ellis. Seemingly inspired by Ellis’ example, Michael Scher, writing in the FCPA Blog, in a piece entitled “Michael Scher talks to the feds”, used the Wal-Mart investigation as a jumping off point to ask the DOJ to resolve several open issues on compliance as he saw them. In others words, Ellis piece (hopefully) got not only Wal-Mart to thinking but several others of us. That is why it is my favorite blog post of 2013.

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, 2013

Most fortunately, the final week of the baseball season is here. This means that I no longer have to contend with living in the same city as the joke of an alleged major league team – the Houston Astros, at least when the regular season ends next week, the Astros stop playing and the play-offs begin. To say that the Astros season has been ridiculous for masquerading as a Major League Baseball (MLB) team would be a compliment but it moved to the absurd last week as one play summed it up better than anything that I could have made up – the butt-slide play. In this play, Astros shortstop, Jonathan Villar, slid face first into the butt-cheek of Reds second baseman Brandon Phillips. (For a video clip of the play, click here.)

The butt-slide play sums up the Astros 2013 season of futility. From the start of the season, with a team made up of largely AAA players, to the end of a season made up mostly of A-AA players. In between we’ve been treated to the Astros ending a 23 year relationship with the Astros wives charity, via a terse one-line email (i.e. you’re fired); to the interview of owner Jim Crane who informed us that he had made $100MM in the trucking business so he must be the smartest guy in the room; to a current 105 losses while on their way to yet another record-loss season; let’s not forget their TV contract with Comcast and the fabulous viewing figures recorded on Sunday by the Nielsen rating service, which racked up a fantastic score of 0.00, with an average audience of zero households viewing the game and, finally, all of this while being the most profitable team in the history of MLB. But, still, the ‘butt-slide’ says it all. When your slide into second base becomes not only a metaphor for the team’s entire season but fodder for an entire nation’s laughingstock, it really is time to cash it in.

Yesterday in the FCPA Blog, in a post entitled “Who Speaks for the Compliance Officers?”, Michael Scher said “The [International] Chamber [of Commerce] apparently will not be satisfied until there is little or no enforcement.” Scher’s statement was based on the letter that the International Chamber of Commerce (ICC) sent to the Department of Justice (DOJ) and Securities and Exchange Commission (SEC) complaining about the FCPA Guidance, issued last year, which as Scher stated, “The letter has been correctly criticized for off-target “belly-aching.”” Scher’s criticism follows that of Michael Volkov,  see his blog post “FCPA “Reform”: Another Shot in the Dark” in Corruption,  Crime and Compliance and Jessica Tillipman’s blog post “Let’s Just Be Honest for a Moment” also in the FCPA Blog.

Instead of whining and belly-aching there might be another way for corporate America, and indeed the ICC, to approach the Foreign Corrupt Practices Act (FCPA) compliance. That path was laid about by Leslie Dach, in an article in the October issue of the Harvard Business Review (HBR), entitled “Don’t Spin a Better, Story. Be a Better Company”. The article was quite interesting for the following information which appeared with the author’s credentials, “Leslie Dach wrote this column shortly before stepping down as the executive vice president of corporate affairs at Walmart. He previously served as vice chairman of Edelman, a global communications firm.” While this statement certainly does not make clear why Dach left Wal-Mart, (i.e. did he ‘resign to pursue other opportunities’?) it does give one pause for some reflection.

Nevertheless, I found Dach’s thesis quite interesting. Dach’s bottom line is that he believes “it is a huge mistake to assume that once you’ve explained your perspective, the public will embrace you…I know what doesn’t work: thinking you can tell a better story without actually becoming a better company.” Ultimately Dach advises, “If a drumbeat of criticism starts up against your company, don’t rush to raise your voice above it. Stop to listen. And commit to getting better.” Dach detailed several areas inside the company where goals such as sustainability, women’s economic empowerment and more-healthful food were “compatible with building a stronger business.” He cited Wal-Mart’s increased efficiency of its trucking fleet and turning its waste stream into recycling income as examples of sustainability. He said that buying from local, women-owned businesses strengthened the company’s ties with local communities. He said that offering more healthful food meant more relevant products for the company’s consumers.

I thought about Dach’s ideas in the context of Wal-Mart and other companies which are going through very public FCPA-based or other corruption investigations. Publicly released information indicates that Wal-Mart may be spending over $1MM per day on their ongoing internal investigation and getting their compliance program up to speed. But what if the company took it a step further and applied Dach’s ideas to compliance. In his article he wrote about the company’s efforts to source $20bn of products from women-owned businesses. This took a concerted effort to identify which merchandising areas had the potential to produce such an amount of product, which the company could sell in its stores. This was coupled with incentives for the company’s buyers to show progress in purchasing goods from women-owned enterprises. But even more the company “took a 360-degree approach to the work, engaging our entire supply chain and our customers, communities, and employees.” Here is the part I liked best about Dach’s piece,  while the tone was set by Chief Executive Officer (CEO) Mike Duke “ultimately, the challenge isn’t the CEO’s job, or one person’s job; it is everyone’s job.”

Last December Matt Ellis wrote a great piece on his blog site, FCPAméricas, entitled “Wal-Mart, Go Big on FCPA Compliance”, where he challenged the company to innovate in compliance “by playing to its strengths.”  He cited examples of work in the company’s supply chain; its opportunities to “educate foreign audiences on [anti-corruption] compliance” through teaching persons in the communities where it has locations on “how to identify and avoid risks of petty corruption.” Ellis ended his piece with the following, “Wal-Mart has the spotlight. Time will tell if it chooses to use it.”

I think that Dach’s challenge to create a better company, coupled with Ellis’ specific challenge for Wal-Mart to go big for compliance, present an excellent juxtaposition to the whining and belly-aching of the ICC. Rather than claim that the FCPA is (1) too difficult to understand; (2) too hard to follow; and (3) unfair, they could advocate Dach’s approach to use the law as a basis to become better businesses. I cannot think of any non-criminal enterprises which aver that they want to do business unethically and corruptly. Companies faced with intense FCPA or other anti-corruption law scrutiny, such as GlaxoSmithKline PLC (GSK), might well take this opportunity to move outside the ordinary and become better companies by doing compliance right and better. Such actions would not only put them in better stead with the regulators but make them better companies. In other words, don’t simply whine like the ICC and butt-slide into second base.

Also, as it appears Leslie Dach is no longer working for Wal-Mart, they may want to give him a call to help them figure out how to do so.

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Episode 6 of the FCPA Compliance and Ethics Report is up. In this episode, I talk about the role of senior management in a compliance program. To watch or listen, click here.

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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, 2013

The Harvest Moon is generally considered to be the full moon closest to the Autumn Equinox; the day in the fall when night and day are most equal in length. In folklore, the Harvest Moon was a symbol of fruitfulness allowing farmhands light to work on harvesting through the night or having a long roll in the hay, if one believes in the fertility enhancing properties of such events.

While I cannot speak directly to the latter, I can delineate some compliance related news on the former. As many of you might remember, I was privileged to have been part of the This Week in FCPA podcasts with Howard Sklar. Howard went off to the wide world of corporate compliance. This week I started a new compliance related podcasts series, The FCPA Compliance and Ethics Report, which can be found here. In this podcast series I will bring you the latest compliance, Foreign Corrupt Practices Act (FCPA), Bribery Act or any news related to other laws or topics regarding anti-corruption and anti-bribery. I will also be interviewing many of the leading compliance practitioners, compliance and ethics thought leaders, compliance product and service providers and others who impact the growing field of anti-corruption and anti-compliance. So if you are interested in being interviewed, give me a shout.

My first two podcasts are up. In Episode 1, I review the compliance related news of the summer, beginning with the GlaxoSmithKline PLC (GSK) matter and up through the revelations that JPMorgan Chase is being investigated for possible FCPA violations in regards to its hiring of the sons and daughters of Chinese government officials. In Episode 2, I interview Matt Ellis, founder of FCPAméricas blog. Matt discusses the new Brazilian anti-corruption law and relates how it may play out for US and other western companies in the upcoming rollout to the world’s grandest sporting events in the next three years, the World Cup in 2014 and the Summer Olympics in 2016.

Speaking of Matt Ellis, he has recently begun a site which is long overdue for the Spanish and Portuguese speaking compliance practitioner. Matt has added two well-known compliance practitioners as contributors to this new site. They are Carlos Ayres who specializes in anti-corruption and compliance issues, with a particular focus on Brazil and other regions of Latin America. He is an attorney with the law firm Trench, Rossi e Watanabe Advogados and co-chair of the Anti-Corruption and Compliance Committee of IBRADEMP (The Brazilian Institute of Business Law) in São Paulo. The second is Matthew Fowler, a seasoned FCPA attorney with over 12 years of experience as both outside counsel in leading law firms and internal counsel at a major defense company. He currently covers anti-corruption issues for the Inter-American Development Bank in Washington, D.C.

Beginning this month, the FCPAméricas Blog will regularly offer its new posts in Spanish and Portuguese. Matt’s translation partner for this new fabulous resource is the international translation company Merrill Brink. To get the ball rolling Matt has gone back and translated some of the most popular posts from his archives. So go over and check out the site. If your company has operations in Portuguese or Spanish speaking companies you might have your compliance team in those venues subscribe to this new resource.

If you are interested in how to manage your third parties in the FCPA context, please listen in on a webinar in which I am participating next week, entitled “Engaging With Confidence: Mitigating the Risk of Third-Party Relationships”. It is sponsored by Compliance Week and Datacert. This webinar will explore best practices for mitigating third-party risk, informed by latest government guidance and enforcement actions. Attendees will learn how technology can help prioritize and target due diligence efforts and facilitate ongoing monitoring to support a sustained state of compliance. The webinar is complimentary and will be held next Tuesday, September 10 at 1 PM CDT. Information and registration is available by clicking here.

Lastly, I am extremely pleased to announce that my most recent book, Best Practices Under the FCPA and Bribery Act, is now available on Kindle. The price is only $9.99 and is available at amazon.com. If you have not picked up the hard copy version, this is your chance for the electronic version. You can purchase the book by clicking here.

And last, but not least, pro-football is back…proving once again…there is a God.

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, 2013

Ed. Note-David Simon is a partner at Foley and Lardner and Bill Athanas is a partner at Waller Lansden Dortch & Davis, LLP. Both have practices which include FCPA compliance.  After my recent post on distributors under the FCPA, David and I had a dialogue on how distributors should be reviewed and analyzed under the FCPA. Bill also had some thoughts on the subject. I asked them if they would contribute guest posts with their ideas.

As this is the first time that I have had a dialogue with two other FCPA practitioners based on a post, this week we will have 3 days of discussion and dialogue on distributors. Today, I provide my suggestions on how to risk rank and the manage distributors. Tomorrow, Daivd will contribute his thoughts on a different approach. On Wednesday, Bill will lay out his ideas on the topic. Finally on Thursday I will try to wrap up and weave together our three articles. I hope that you will find this series instructive and useful. I know I certainly have in my dialogues with these two other excellent FCPA compliance practitioners.

In today’s post, I advocate that distributors should be treated as any other third party representative in the sales chain; IE., agents and resellers.

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In 2012, there were three enforcement actions which I believe made clear that there were no distinctions between agents and distributors. They were, the Smith & Nephew, Inc., (S&N) Deferred Prosecution Agreement (DPA) for criminal FCPA violations, the Oracle SEC Complaint for books and records violations and the Eli Lilly and Company (Lilly) SEC Compliant for books and records violations.

These enforcement actions involved three separate bribery schemes which I believe call for three different but overlapping responses. In the case with Lilly, the SEC Complaint noted the following “Lilly-Brazil’s pricing committee approved the discounts without further inquiry. The policies and procedures in place to flag unusual distributor discounts were deficient.” Lastly, as stated by Matt Ellis, the enforcement action “noted that the company relied on representations of the sales and marketing manager without adequate verification and analysis of the surrounding circumstances of the transactions.”

The Lilly enforcement action also makes clear the need for internal audit to follow up with ongoing monitoring and auditing. Internal audit can be used to help determine the reasonableness of a commission rate outside the accepted corporate norm. As stated by Jon Rydberg, of Orchid Advisors, in an article entitled “Eli Lilly’s Remedial Efforts for FCPA Compliance – After the Fact”, the company should be “implementing compliance monitoring and corporate auditing specifically tailored to anti-corruption” for the distributor sales model.

The Oracle enforcement action demonstrates that Oracle needed to institute the proper controls to prevent its employees at Oracle India from creating and misusing the parked funds in the distributor’s account. The Company needed to audit and compare the distributor’s margin against the end user price to ensure excess margins were not being built into the pricing structure. Oracle should have sought to either (1) seek transparency in its dealing with the distributor or (2) audit third party payments made by the distributors on Oracle’s behalf, both of which would have enabled the Company to check that payments were made to appropriate recipients.

What are some of the factors that demonstrate the distributors used by S&N were fraudulent and did not have a legitimate business purpose? It was clear that S&N did not perform sufficient due diligence on these distributors nor did they document any. I would note that the distributor was domiciled in a location separate and apart, the UK, from the sole location it was designed to deliver products or services into, Greece. This clearly demonstrated that the entities were used for a purpose that the company wished to hide from Greek authorities. While it is true that a distributor might sell products into a country different than its domicile, if the products are going into a single country, this should have raised several Red Flags.

However, the biggest indicium of corruption was the amount of the commission paid. The traditional sales model for a distributor has been to purchase a product, take the title, and therefore the risk, and then sell it to an end user. Based upon this sales model, there has been a commission structure more generous than those usually accorded a reseller or sales agent, who is usually only a negotiator between the Original Equipment Manufacturer (OEM) and the end user. This difference in taking title, and risk of loss, have led to a cost structure which has provided a deeper discount of pricing for distributors than commission rates paid to resellers or sales agents. The sales structure used by S&N had pricing discounts of between 26-40% off the list price. Further, this money was used precisely to pay bribes to Greek Doctors to use S&N products.

These three enforcement actions make clear that distributors will be treated like any other representative in the sales chain. This means that distributors need to go through the same rigorous due diligence and review, contracts and management going forward as agents or resellers.

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, 2013