In this episode, I visit with Doreen Edelman, a partner at Baker Donelson on the top FCPA enforcement action of 2017, the Telia Company matter. We discuss the background facts of the case; we explore the amount of the fines and penalties, were they too high or were they too low; we consider the involvement of senior management right up to the CEO and the Board’s role; we explore the multiple lessons for the compliance professional, the CCO, senior management and the Board of Directors. We conclude with what the enforcement action means going forward and the increase in international enforcement, cooperation and investigation in anti-corruption.

Doreen Edelman can be reached at dedelman@bakerdonelson.com.

Doreen blogs on export control and trade issue concerns at Export Control Matters.

In this episode Matt Kelly and I discuss the Treasury Department’s recently released A Financial System That Creates Economic Opportunities-Capital Markets report. The report has multiple proposals, including multiple ideas about rolling back Sarbanes-Oxley compliance, especially for smaller public companies. In this podcast, we discuss the three most significant ones for the compliance practitioner.

  1. Exempt more companies from audits of internal financial control. Companies with market cap below $75 million are currently exempt from the SOX 404(b) requirement that an annual outside audit of internal control over financial reporting. The Trump Administration proposes raising that exemption ceiling to $250 million in market cap.
  2. Doubling the lifespan of Emerging Growth Companies. Congress created a new class of public filers in 2012, “emerging growth companies,” that are exempt from numerous corporate governance and compliance rules for the first five years of their lives; to 10 years.
  3. Ending “social disclosure rules” required under the Dodd-Frank Act. The Dodd-Frank Act imposed several required disclosures such as the Conflict Minerals Rule, the CEO Pay Ratio Rule, and the Mine Safety Rule.

For more on this subject, see Matt’s blog post Treasury Report Eyes SOX Compliance

In this episode, I have back James Koukios, a partner in the law firm of Morrison and Foerster. We review some of the top FCPA and international anti-corruption cases and issues which have occurred over the summer of 2017. The topics are based on the firm’s most excellent monthly newsletter Top Ten International Developments for Anti-Corruption, which is available at no charge on the firm’s website. In this podcast, we discuss topics from the following newsletters:

From the June newsletter 

  1. The Supreme Court decision in Kokesh-what does it mean for prosecutors, what does it mean for compliance practitioners and does it change the calculus around self-disclosure?
  2. DOJ Continues to Pursue “Declinations with Disgorgement.” What does this mean for companies going forward? Should it encourage or discourage self-disclosure?
  3. DOJ Files Forfeiture Complaint in connection with Alleged Malaysia Bribery Scheme. How does this tool relate to anti-corruption enforcement? Why is it such a powerful tool for prosecutors?

From the July newsletter

  1. The Halliburton FCPA enforcement action. What does it mean for the compliance practitioner?
  2. Three Long-Standing Corporate FCPA Investigations End without Charges. What can be learned from these cases about enforcement going forward?
  3. Dimitri Harder was sentenced to Five Years’ Imprisonment for FCPA Violations. What was the basis of the sentence? Do you see anything in this sentencing unusual?
  4. Was the Second Circuit decision in the FOREX trading case a setback for International Law Enforcement Cooperation? What is compelled testimony? What are the implications for international cooperation going forward?

From the August newsletter

  1. Following Undercover Investigation, DOJ Charges Retired U.S. Army Colonel with Conspiring to Bribe Haitian Officials. How do undercover operations work in the FCPA and what they might mean going forward?
  2. UK Financial Reporting Council Announces Plans to Require Increased Anti-Corruption and Bribery Disclosures. What does this mean for US companies doing business in the UK?

Check out the firm’s newsletter or better yet subscribe to it.

If I told you that the last seven batting titles were won by baseball players who were originally from Venezuela, would you immediately run down to ICE and claim that our national pastime had been overrun by Venezuelan immigrants who were taking jobs away from Americans? Might you consider what exists in the Venezuelan water which made their baseball players so much better than US players? Now add to this equation that the last seven AL batting titles were won by two individuals; Houston Astro Jose Altuve and Detroit Tiger Miguel Cabrera. What do those numbers tell you, if anything other than Altuve and Cabrera are pretty good hitters?

I thought about this hitter’s anomaly when late last week we saw the release of the Alere Inc. (Alere) Securities and Exchange Commission (SEC) enforcement action which contained a Foreign Corrupt Practices Act (FCPA) component as well as penalties related to the company’s failures around revenue recognition. Alere comes on the heels of the biggest FCPA enforcement action of all-time for Telia Company AB (Telia). Alere agreed to pay more than $13MM to settle charges that it bribed foreign officials and committed accounting fraud to meet revenue targets. Of that $13MM, the company agreed to disgorge $3.3MM, interest of about $495,000 and pay a penalty of $9.2MM. It was at the opposite end of a spectrum from the Telia settlement of $965MM.

Alere is a Massachusetts-based medical manufacturer. The SEC issued an order finding that the South Korean subsidiary of Alere Inc., which produced and sold diagnostic testing equipment, improperly inflated revenues by prematurely recording sales for products that were still being stored at warehouses or otherwise not yet delivered to the customers or company’s distributors.

According to the SEC’s order, Alere also engaged in improper revenue recognition practices at several other subsidiaries. These actions occurred from 2010 to 2015. The SEC order stated these actions were “intentional”. Further, the company also failed to conform to GAAP from 2013 to 2016 through a practice called “postponement of delivery” where “customers agreed not to take delivery and submitted a “Declaration of Postponement” form” to the company’s Chinese subsidiary. This same type of accounting fraud scheme was used again with the company’s African distributors where “Alere retained title to the product until it was paid in full by the distributor”.

The company miscalculated its taxes due and made material misstatements on its financial returns. This led to a restatement of financials. All of this led the SEC to find there was a lack of effective internal controls over financials at the company. But this lack of effective controls was not simply limited to financial internal controls, it also extended to compliance internal controls.

In Colombia, the company purchased a private distributor, BioSystems, of its products and made it a corporate subsidiary, Alere Colombia. After the purchase, Alere Colombia “made improper payments totaling approximately $275,000 to the Customer EPS Manager in order to obtain and retain business from the Customer EPS. The payments began at least six months before Alere acquired Biosystems. Biosystems disguised these improper payments as payments for purported consulting services from the Customer EPS Manager’s husband, sister-in-law, and friend. In fact, none of the recipients of these improper payments performed legitimate consulting services for Biosystems sufficient to justify the amount of payments received.”

In India, the company’s subsidiary was told by its Indian distributor that it would be required to make a 4% commission payment to government officials to win contracts. This corrupt payment was approved by the company’s Vice President (VP) of Marketing and Sales and the payment was affected. The SEC Press Release stated, “Alere subsidiaries in India and Colombia obtained or retained business by using distributors or consultants to make improper payments to officials of government agencies or entities under government control. Alere failed to maintain adequate internal controls to prevent the payments, and the company inaccurately recorded the payments in its books and records.” Most ominously, when the company discovered the illegal payments, it kept the profits it made.

There are several lessons to be garnered in the Alere FCPA enforcement action. First is the increasing interplay of revenue recognition and compliance programs. There will no doubt be more overlap under the new revenue recognition rules which become effective in December. It is unsurprising that a company which would play fast and loose with such basic revenue recognition rules as payments to distributors and hold backs by customers would also do the same around illegal bribery schemes. Further the lack of effective financial internal controls may well be some indicia of the lack of effective compliance controls. The SEC might do well to investigate such situations more often.

Also, it points up once again the need to perform thorough pre-acquisition due diligence prior to the time a company purchases an entity and then move to integrate, perform a forensic FCPA audit and remediate a target after the purchase. Once again, if a company was engaging in bribery and corruption before you purchase them and they continue to do so after you purchase them, it is now you who are engaging in bribery and corruption, not them.

The Alere FCPA enforcement action also points to an issue I have been considering for some time. It is the type of FCPA enforcement action involved in many cases. There has not yet been a resolution of the Department of Justice (DOJ) investigation into Alere so there may well be criminal charges brought or some other type of DOJ resolution. Yet when you contrast Alere with Telia one is struck by both the quantitative and qualitative difference in the enforcement actions. It is if there is almost a spectrum of FCPA enforcement actions leading down a chain. The SEC resolution with Alere could almost be seen as an administrative resolution which the SEC is well-suited to provide. Perhaps this could be a model for a more regulatory approach to FCPA enforcement going forward.

Of course, that would depend on whether a company was corrupt, literally right up to the very top as was Telia.

 

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

© Thomas R. Fox, 2017

Jay and I return for a wide-ranging discussion on some of the top compliance and ethics related stories, including: 

1. Telia settles massive FCPA enforcement action. See reports by Dick Cassin the FCPA Blog, here and here. The Telia resolution documents include SEC Cease and Desist Order, SEC Press Release, DOJ Information, DOJ Press Release and DOJ DPA. The Coscom settlement documents include the DOJ Information and Plea Agreement.

2. New concerns about money laundering in Venezuela for US commercial entities. See article in the FCPA Blog.

3. Airbus Launches Internal Probe Into Unexplained Payment. See article by David Pegg and Rob Evans in The Guardian.

4. ENI releases new information about allegations of bribery and corruption in Africa. See article by Jaclyn Jaeger in Compliance Week.

5. Compliance Week Editor Bill Coffin interviews Hui Chen. See Bill’s article in Compliance Week.

6. More details on the FCPA probe of Uber. David Ingram reports in Reuters.

7. Astros clinch the AL west.

8. Burner phones, Ole Miss recruiting scandal and compliance. Tom explores in Compliance Lessons from Burner Phones.

9. This month’s podcast series on One Month to a More Effective Compliance Program is in full production. In September, I am reviewing innovations for your compliance program. This week’s topics include superforecasting in your compliance program, OODA feedback loop, real-time v. right-time monitoring in your compliance program, improvisation in compliance and putting compliance at the center of business strategy. Oversight Systems is this month’s sponsor.  It is available on the FCPA Compliance Report, iTunes, Libsyn, YouTube and JDSupra.

10. The Jay Rosen weekend report preview.