Show Notes for Episode 24, week ending September 30, 2016-the SCCE Edition

  1. Misonix discloses possible FCPA violations, as reported in the FCPA Blog:
  2. The Anheuser-Busch InBev SEC FCPA enforcement action, click for the SEC Order;
  3. Och-Ziff SEC FCPA enforcement action, click for the SEC Order,
  4. HMT LLC and NCH Corp receive Declinations yet are required to disgorge profits, for the HMT Declination letter, click here and for the NCH Declination letter click here;
  5. Final thoughts by Tom and Jay on the recently concluded SCCE 2016 Compliance and Ethics Institute; and
  6. Jay previews his Weekend Report.

joint-ventureJust in time for National Beverage Day comes the Foreign Corrupt Practices Act (FCPA) enforcement action involving Anheuser-Busch InBev (ABI), where the company paid $6 million to settle charges that it violated the FCPA and impeded a whistleblower who reported the misconduct. Given the information provided in the Securities and Exchange Commission (SEC) Cease and Desist Order (Order), one might reasonably wonder how the company got off so lightly. ABI agreed to “pay disgorgement of $2,712,955, prejudgment interest of $292,381, and a civil penalty of $3,002,955, for a total payment of $6,008,291” to the SEC.

The illegal conduct occurred in the company’s wholly owned Indian subsidiary, Crown Beers India Private Limited (Crown). ABI owned a 49% interest in the joint venture (JV) InBev India International Private Limited (IIIPL) which managed the marketing and distribution of Crown beer. The Order notes, “IIIPL used third-party sales promoters to make improper payments to Indian government officials to obtain beer orders and to increase brewery hours for Crown in 2011. IIIPL invoiced Crown for reimbursement for certain of these expenses, and Crown paid or accrued them. In doing so, Crown recorded certain of these expenses in its books as legitimate promotional costs. During this period, Crown had inadequate internal accounting controls to detect and prevent these improper payments and to ensure that transactions involving these promoters were recorded properly in its books.”

ABI made about every mistake possible in this matter and this case is therefore a very useful teaching tool for the FCPA compliance practitioner. As noted, the nefarious entity, IIILP was 49% owned by ABI (or its predecessor). The governance structure of the JV provided that ABI and its Indian partner “each had the right to appoint four IIIPL directors, with RJ Corp having the right to appoint the Chairman, who cast the tie-breaking vote on all but certain specified matters. RJ Corp appointed the IIIPL CEO, who had the power to appoint the other members of the IIIPL management team, except for the CFO, whom AB InBev appointed. Throughout the relevant period, the top financial officer at Crown acted as the top financial officer at IIIPL. From mid-2011 through early 2014, Crown’s in-house counsel also acted as IIIPL’s in-house counsel.”

The Order reports that in early 2009, the JV concocted a scheme to pay bribes to increase sales. It hired Promoter Company A, who had no industry experience, who charged excessive commissions and sought reimbursement for questionable promotions. There was no contract in place with Promoter A and no due diligence was obtained prior to the commercial relationship commencing. Later in 2009, an internal whistleblower brought forward information on the illegal activities of Promoter Company A.

In December 2009, ABI received an internal report on potential illegal activities at the JV and ABI expedited a previously scheduled audit of the JV. While “audit did not scrutinize Promoter Company A’s activities or expenses. Still, the 2010 audit identified various deficiencies at IIIPL, including (a) a lack of documented business policies and procedures for significant functions such as procurement, vendor selection, and expense reimbursement; (b) a lack of awareness about FCPA compliance; and (c) inadequate information technology controls regarding financial processes and expense payments. AB InBev did not rectify many of the issues identified in the audit until 2011 or early 2012.”

In 2011, IIILP began to work with Promoter Company B, which was owned by the son-in-law of the Provincial Excise Minister. Promoter Company B was the conduit through which bribes were paid to the Minister to allow the JV to brew after hours and later bribes were paid to generate sales. The was no due diligence performed on Promoter Company B and there was no written contract in place, although one was later surreptitiously created and magically back-dated to give the appearance of following the law.

As you might well guess, for his (or her) trouble the internal whistleblower was terminated. In settling his (or her) claim, the Separation Agreement claimed to prevent the whistleblower from reporting the illegal conduct. It is not clear if ABI attempted to enforce this provision but the Order did note the whistleblower, who had been cooperating with the SEC, ceased doing so and only resumed such cooperation, “Only after the Commission issued an administrative subpoena for testimony and documents did the Crown Employee resume communicating directly with the Commission staff.”

In addition to not self-disclosing the clear FCPA violations, ABI not only did not cooperate but actively resisted the SEC’s investigation. The Order reported, “During the investigation, AB InBev did not respond to subpoenas in a timely manner, and made broad assertions of privilege that required significant resources from the Commission staff to address and delayed the production of responsive, non-privileged documents.”

Worse, the JV engaged in plans to destroy or hide documents. Here the Order reflected, “In or about May 2013, Commission staff learned of IIIPL’s plans to destroy or hide documents. The Commission staff informed AB InBev immediately thereafter, but the company took no immediate corrective action. In September 2013, AB InBev notified the Commission staff of a meeting in which several IIIPL managers instructed top IIIPL employees to remove potentially inculpatory data from their offices and computers. Crown and IIIPL’s in-house counsel attended the meeting, but never alerted AB InBev management to the document removal instructions. Other IIIPL employees reported that they had helped or observed IIIPL managers take several binders out of the building to destroy or move to a “secret location.””

ABI did make some efforts at remediation, most notably shutting down the JV and operating directly out of India now. It also conducted “extensive FCPA training for Crown’s staff, and implemented improved compliance policies and controls at Crown, including policies and controls relating to third-party due diligence and contracts. AB InBev also has hired a dedicated India compliance manager who reports to a new India Legal Counsel and Head of Compliance.”

ABI was found to have violated the FCPA and the Dodd-Frank Whistleblower provisions in the Order. The FCPA violations included violations of both prongs of the Accounting Provisions; books and records and internal controls. The Dodd-Frank violations centered on not only trying to illegally muzzle the un-named whistleblower but indeed all employees terminated when the JV was dissolved. It was not spelled out in the Order which part of the penalty of $3MM+ related to the FCPA violations and which part related to the Dodd-Frank violations.

This enforcement action drives home several points on basic FCPA compliance. The first centers around JVs. Companies must take their FCPA and Dodd-Frank obligations seriously as they apply to foreign JVs. ABI clearly did not. Not only did it put forward a less than rigorous audit of the JV after having been put on notice, it did not follow through to ensure that audit recommendations were followed. ABI allowed the illegal conduct to continue long after it was put on notice.

Next, the role of the in-house counsel must be raised as the lawyers for the company have not come out of this looking too good. Not only were the Indian subsidiary, Crown’s in-house counsel, the counsel for the JV involved, they were a large part of the problem. The Order specifically called out these lawyers for being in attendance at meetings where document destruction and hiding was discussed but did not inform the corporate parent or anyone else. Someone in the legal department had to have drafted or at least approved the illegal language of the Separation Agreement. I hope that ABI sent its in-house counsel to some strong legal ethics training. Some FCPA training would also seem appropriate.

 

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

 

In this episode, I sit down with 4 top compliance commentators to discuss the SCCE 2016 Compliance and Ethics Institute conference. The panelists include Jay Rosen, Jonathan Armstrong, Mike Volkov, Matt Kelly and myself. We discuss our presentations and observations on the  attendees.

arnold-palmerThe golfing world and the world of beverages lost one of their giants earlier this week. I, of course, refer to golfing and beverage legend Arnold Palmer. The legend around the beverage is that at dinner one evening Palmer ordered his favorite concoction, which was one-half iced tea and one lemonade. His dinner companion then said he would have what Palmer was having or simply ‘The Palmer’. The name stuck and history was made. And, of course, who else has their own Army named after them?

Yet Palmer did more than inspire a new form of refresh, as he was one of the first major sports entrepreneurs. He truly revolutionized sports marketing. He developed a business empire which was a far and wide as the sports management agency IMG to the original Golf Channel to real estate development. In his piece in the Wall Street Journal (WSJ), entitled “How Arnold Palmer Revolutionized the Business of Sports, Matthew Futterman wrote, “Palmer provided the blueprint for generations of athletes, many of whom now make exponentially more through their business ventures away from the field than they do for their sporting accomplishments.”

Coming home from the Society of Corporate Compliance and Ethics (SCCE) 2016 Compliance and Ethics Institute, I thought about Palmer and what he meant for not only the beverage world and golf but the greater sports business world. I have been thinking quite a bit about compliance and how it fits into the greater business world. I have been intrigued since the first time I attended the dinner announcing Ethisphere’s World’s Most Ethical Corporation Awards and learned about the superior financial returns posted by companies which were honored with the designation.

Palmer, the Compliance and Ethics Institute and Ethisphere all intersect to help explain why I am so passionate about compliance. I am passionate about the compliance profession, which is the greatest profession, because it is the only corporate discipline that impacts every corporate function. As Diana Urelius, Assistant Secretary and Senior Compliance Manager at Mitsubishi Caterpillar Forklift America Inc., said at a recent Greater Houston Business and Ethics Roundtable (GHBER) event that “The compliance profession is where the magic happens in a corporation.” Whether it be specific tasks of making sales, vetting relationships or the spade work of creating policies and procedures, it is compliance that drives the discussion of how we should do business. The corporate compliance profession fulfills the business obligation in doing things the right way for, at the end, it will be the compliance profession which implements the requirements of compliance whether those requirements are anti-corruption laws such as the US Foreign Corrupt Practices Act (FCPA), the UK Bribery Act, Anti-Money Laundering (AML), export control, anti-trust regulations, or any other regulation that you can name.

The compliance profession is revolutionizing how corporations do business by teaching corporations how to measure, evaluate and manage risks. It is the compliance profession that is leading that discussion in the corporate world. It is the compliance profession that is the most innovative in not only protecting corporations, but actually helping corporations do business, do business more efficiently, and do business more profitably. When you can put all those in one profession, that is something which will move the ball forward with a business solution.

A great example of this was one of the keynote speeches at SCCE given by Kristy Grant-Hart, the author of How to be a Wildly Effective Compliance Officer, who brought not only her passion for compliance to the role of a Chief Compliance Officer (CCO) but also discussed specific steps which a CCO can take, from a wide variety of disciplines, to help make businesses run better. Her talk encapsulated for me the evolution of the compliance profession, from someone inside a legal department or simply with legal training to using a much wider skill set, to help a company be run in a superior manner. While lawyers certainly can help to protect a company one thing we do not do is make businesses run better.

These changes will also require academia to change the manner in which it trains compliance practitioners. If your role is to work with an organization to measure, evaluate and manage risk; you will need to know far more than simply the law. You will need a basic understanding of a wide variety of corporate disciplines which requires a multi-disciplinary approach to education. Nor will simply one business ethics course be sufficient. Moving beyond simply doing the right thing business wise to making a company’s internal controls more efficient to prevent, find and fix problems will require an understanding of business processes and how controls fit into this structure. Simply hoping internal audit will pick up something is too far back a retrospective application of a discipline which must be more forward looking; moving from preventative to prescriptive.

The Department of Justice (DOJ) and Securities and Exchange Commission (SEC) have consistently led this discussion by articulating that compliance programs must evolve. Certainly the static paper program based compliance defense has long gone by the wayside in favor of well-thought out programs, specifically tailored to fit the risks of the individual companies.

Just as Arnold Palmer revolutionized how sports figures can market themselves; the SCCE is leading the revolution in the growth and widening of the compliance profession through a variety of ongoing education, certification and support. This year’s Compliance and Ethics Institute was a great example of how far the profession has evolved and in many ways presaged where it is going. I am thrilled to a part of this journey and look forward to seeing what might be explored at the 2017 Compliance and Ethics Institute in Las Vegas. I hope you will plan to join me there.

 

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

© Thomas R. Fox, 2016

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

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

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