Show notes for This Week in FCPA-Episode 15, for the week ending July 29, 2016 include:

1) Miller & Chevalier — FCPA Summer Review 2016 – 7-28-16
http://www.millerchevalier.com/Publications/MillerChevalierPublications?find=176112;

2) NY Law Journal — Does the New FCPA Leniency Program Threaten Due Process? By Nicholas M. De Feis and Philip C. Patterson from De Feis O’Connell & Rose
http://www.newyorklawjournal.com/id=1202763823657/Does-the-New-FCPA-Leniency-Program-Threaten-Due-Process?slreturn=20160629065418;

3) Incentivising companies to self-report: Different approaches in different jurisdictions, but the outcomes are broadly the same — Georgina Jones, Laura Manson and David McCluskey at Taylor Wessing
http://www.lexology.com/library/detail.aspx?g=ada2fc97-57d5-407b-9238-2ee468e7b10c;

4) A video blog from Paul Weiss where A-C & FCPA Pilot Chairs Alex Oh & Farrah Berse look at FCPA Pilot Program – New Guidance for Self-Reporting
https://www.paulweiss.com/practices/litigation/anti-corruption-fcpa/videos/fcpa-pilot-program-new-guidance-for-self-reporting.aspx?id=22271;

5) From the FCPA Blog – Richard Bistrong interviews Frank Brown, from The Center for International Private Enterprise – (CIPE). Frank speaks about going from Newsweek Bureau Chief in Moscow to now fighting A-C supply chain risks;

6) Mike Volkov, furthers a conversation he had with me earlier in the week about The Power of a Justice Department Declnation
http://www.lexology.com/library/detail.aspx?g=e07d7b77-5edf-4a7e-8878-b4fc2985b3d6;

7) And once more in the breech where myself and Roy Snell go Unfair and Unbalanced on the recent US Open and handling of Dustin Johnson being assessed a 1 stroke penalty
http://fcpacompliancereport.com/2016/07/unfair-unbalanced-episode-9-us-open-edition/;

8) Reports on the LATAM FCPA enforcement action. The can be found at http://wp.me/p6DnMo-2FL and http://wp.me/p6DnMo-2FH; and

9) Report on the Petrobras shareholder lawsuit, available at http://wp.me/p6DnMo-2FZ.

ObservationsYesterday I reviewed the underlying facts of the long running Foreign Corrupt Practice Act (FCPA) matter involving the LATAM Airlines Group S.A. (LATAM). The resolution involved criminal charges detailed in an Information resolved via a Deferred Prosecution Agreement (DPA), and a civil settlement with the Securities and Exchange Commission (SEC), resolved through a Cease and Desist Order (Order) outlining the civil violations, which named LATAM’s predecessor-in-interest is LAN Airlines S.A. (LAN) as the respondent party.

The cost to LATAM was not insignificant. As noted in the Department of Justice (DOJ) Press Release, “As part of the DPA, LATAM agreed to pay a $12.75 million criminal penalty” and under the civil settlement with the SEC the company “agreed to pay $6.74 million in disgorgement and $2.7 million in prejudgment interest. Thus, the company paid approximately $22.2 million in combined penalty, disgorgement”.

This week’s settlements bookends the civil settlement with current LATAM President Ignacio Cueto, reached in February 2016. Under the SEC Cease and Desist Order (Cueto Order), Cueto agreed to a civil penalty of $75,000 for both approving an Argentinian official to act as a consultant for the company and approving a payment of $1.15MM to this consultant understanding, at the time, “that it was possible the consultant would pass on some portion of the $1.15 million to union officials in Argentina.” In addition to the aforementioned fine, he agreed to receive anti-corruption training for senior executives of the company.

The company clearly did not take compliance very seriously at the time of the incidents giving rise to this enforcement action, nor did it apparently take seriously any potential FCPA liability. As noted in the DOJ Press Release, “LATAM did not voluntarily disclose the FCPA violations,” and in not self-disclosing compromised certain evidence in the matter. During the pendency of the investigation, they “did not, however, remediate adequately. LATAM failed to discipline in any way the employees responsible for the criminal conduct, including at least one high-level company executive [Cueto listed above], and thus the ability of the compliance program to be effective in practice is compromised.”

At some point the company did see the light and began to “cooperate with the department’s investigation after the press in Argentina uncovered and reported the conduct approximately four years after it had occurred. After LATAM began cooperating, it did so fully and provided all relevant facts known to it, including about individuals involved in the misconduct.” In the DPA, it reflected this lack of cooperation in the paucity of discounting factors, which “As a result, the company paid a penalty within the U.S. Sentencing Guidelines range instead of receiving a discount off the bottom of the range.”

The DOJ clearly did not credit the company for its recalcitrant conduct before and during the investigation. However, as laid out in the DPA, the fine range was $10.2 to $20.4 so the company did obtain a DOJ fine in the lower range of the Sentencing Guidelines. The clear message, yet again from the DOJ, is that the conduct of a company can, will and does lead to receiving credit and such credit can lead to a lower fine or, in the cases of Johnson Controls, Inc., Akamai Technology, Inc., and Nortek Corporation, declinations to prosecute.

I think a couple of other observations are in order for this matter. First in this matter is that the foreign official was paid some amount of money for fraudulent services. The Consultant, a government official at the relevant times, was given money to pay a bribe. From the Cueto Order, it appears the Consultant may well have kept some portion of the $1.15MM destined to bribe the Argentinian labor union officials. How much this Consultant kept and would have constituted his bribe has not been reported.

There is also something else about this case that makes it most interesting and may well portend a new direction of FCPA enforcement. This is one of the rare cases of an agreed criminal charge of the Accounting Provisions of the FCPA. The FCPA itself specifies that violations of the Accounting Provisions become criminal matters under two conditions, found under 15 U.S.C. § 78m [Section 13 of the Securities Exchange Act of 1934].

(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).

 There is nothing in this language which ties it to the foreign official requirement found in sections detailing prohibited practices by issuers (15 U.S.C. § 78dd-1) or domestic concerns (15 U.S.C. § 78dd-2). This might mean that a company, which engages in private or commercial bribery and tried to disguise it through falsification of books and records as the senior management of LATAM did, could be prosecuted for a FCPA violation. So the next time bribes are paid to a union official, but this time not using a foreign government representative to facilitate the bribe payment and does not record the bribe as a bribe, a criminal FCPA violation could result.

Finally, what happens under the FCPA if the SEC changes its definition of issuer to include a class of private companies or even all private companies? Does this sound far-fetched? Consider the Keynote Address at the SEC-Rock Center on Corporate Governance Silicon Valley Initiative by SEC Chairperson Mary Jo White, on March 16, 2016. In this speech White addressed concerns about the disclosures by certain Silicon Valley companies in the pre-IPO stages of fund raising. At this point the SEC is more concerned about the multi-billion dollar unicorns and the information they release to the capital market in capital raising exercises. Yet, if the SEC somehow begins to apply issuer requirements to these private companies for the purposes of access to capital markets, it does not seem to me to be too much of a stretch to move that logic to the FCPA, particularly if the SEC follows this logic of the protection of investors, as laid out by White in her speech.

Fortunately we are not at that bridge as yet. However, the LATAM/LAN enforcement action is instructive for the compliance practitioner. Once again, the DOJ has demonstrated the benefits a company will receive by self-disclosure. One only has to compare this matter with the first four cases resolved after the initiation of the Pilot Program to see the benefits of meeting the four prongs of the Pilot Program. The message could not be clearer.

 

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

Chris FroomeI begin today’s post with a tip of the (cycling) helmet to Englishman Chris Froome who yesterday won his third Tour de France championship. Froome overcame a great many obstacles, not the least of which was being involved a couple of crashes and one very over zealous fan. So here is a nod to Froome and I cannot wait for the 2017 Tour.

Now let us return to the fall of 2013, when New York Times (NYT) reported that JPMorgan Chase (JPMorgan) was under Foreign Corrupt Practices Act (FCPA) scrutiny in China for its hiring practices. In an article entitled “Hiring in China By JPMorgan Under Scrutiny”, Jessica Silver-Greenberg, Ben Protess and David Barboza broke the story that both the Department of Justice (DOJ) and the Securities and Exchange Commission (SEC) were investigating JPMorgan to determine “whether JPMorgan Chase hired the children of powerful Chinese officials to help the bank win lucrative business in the booming nation.”

The article detailed several situations where JPMorgan hired the children of Chinese government officials and sometime thereafter the bank was able to secure work from the business or industry of a parent of a hired employee. The examples included the hiring of a “son of a former Chinese banking regulator who is now the chairman of the China Everbright Group, a state-controlled financial conglomerate, according to the document, reviewed by the NYT, as well as public records. After the chairman’s son came on board, JPMorgan secured multiple coveted assignments from the Chinese conglomerate, including advising a subsidiary of the company on a stock offering, records show.” In another instance, the bank hired the daughter of a Chinese railway official. After hiring the daughter, JPMorgan was hired to assist the company to go public.

Things got worse when Dawn Kopecki, in a Bloomberg article entitled “JPMorgan Bribe Probe Said to Expand in Asia as Spreadsheet Is Found”, reported that there was “an internal spreadsheet that linked appointments to specific deals pursued by the bank”. She noted that the original investigation, which began in Hong Kong, had expanded to other countries in Asia and that JPMorgan “opened an internal investigation that has flagged more than 200 hires for review, said two people with knowledge of the examination, results of which JPMorgan is sharing with regulators.” Kopecki quoted Dan Hurson, a former US prosecutor and SEC lawyer, who said the “SEC will hunt for evidence showing “these weren’t real jobs, that they were only there because their father or mother were important public officials””; and “If the public official requested the job for the child, that would be a strong indication to the company that the official was seeking and receiving something of value.” Perhaps, more damaging was that the spreadsheet had information that apparently linked “some hiring decisions to specific transactions pursued by the bank.”

In a later NYT article, entitled “JPMorgan Hiring Put China’s Elite on an Easy Track”, Jessica Silver-Greenberg and Ben Protess further reported that the JPMorgan hiring program even had its own name, which was ‘Sons & Daughters’. Although the program was originally set up to provide transparency and visibility into the hiring process that might implicate FCPA issues, they reported that it went badly “off track”. Under the Sons & Daughters hiring program, a two-tiered track was created in the hiring process, one for regular applicants and one for children of Chinese officials. However, as time passed the program began to be used to allow for fewer job interviews and relaxed hiring standards for the candidates in the program. This allowed the company to hire some candidates who had “subpar academic records and lacked relevant expertise.”

All of this came home to roost last week, when Christopher M. Matthews, Emily Glazer and Aruna Viswanatha, reporting in a Wall Street Journal (WSJ) article entitled “J.P. Morgan Chase Nearing Settlement With Prosecutors on Asia Hiring Probes”, wrote “J.P. Morgan Chase & Co. is expected to pay around $200 million to settle federal investigations into whether it tried to win business by hiring the sons and daughters of powerful people in Asia”. The settlement was based on FCPA violations for the bank’s “hiring of “princelings,” the kin of high-ranking Chinese government officials and managers of state-owned companies, allegedly to curry favor in getting deals.”

The WSJ piece described a much more detailed hiring scheme than had been previously reported, “In all, J.P. Morgan hired 222 candidates under a program known internally as “Sons and Daughters” that ran from 2004 to 2013. They included those referred by officials at nine of 12 large Chinese companies that the bank took public in Hong Kong.”

The WSJ article detailed several instances of the bank’s hiring of unqualified applicants, who became employees, without the basic skills to operate in a US based multinational organization. The article discussed one of the hires, Gao Jue, who “did poorly on his job interviews at J.P. Morgan, messed up his work visa, accidentally sent a sexually explicit email to a human-resources employee and was described by a senior banker as “immature, irresponsible and unreliable,” according to internal bank emails reviewed by the Journal and people familiar with the matter.”

In an interesting portion of the article, it said “Both sides have agreed that an executive of a state-owned company is considered a government official, but there is dispute over what conduct is considered corrupt from a legal point of view in cultures where it is common to hire well-connected individuals.” This would appear to be an acknowledgment of the four US courts that have considered this question and all have found this interpretation to be correct.

Further, the WSJ article noted, “U.S. government officials have told the banks that hiring someone with connections to a government official with the intent of winning business is, in itself, a violation of law even if there isn’t an explicit quid pro quo”. Apparently lawyers for the bank “have accused the government of overreaching in the hiring cases by threatening to criminalize standard business practices in some countries”. Yet the key to the DOJ position seems to be the hiring with intent to influence an official to do something. It is not much of a stretch to find a FCPA violation in such conduct, particularly given the reported facts in this matter.

While there have been two prior FCPA enforcement actions involving the hiring of family members of government officials or employees of state owned enterprises, Qualcomm Inc. and The Bank of New York Mellon, the reported JPMorgan resolution amount will dwarf those settlements. But there may be others in the works as well as the WSJ also noted that other banks are under FCPA scrutiny, including “Citigroup Inc., Credit Suisse Group AG, Deutsche Bank AG, Goldman Sachs Group Inc., HSBC Holdings PLC, Morgan Stanley and UBS Group AG, according to regulatory filings.”

 

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

 

Show Notes:

Old Way New WayToday, I end my exploration of recent Foreign Corrupt Practices Act (FCPA) enforcement actions (and one UK Bribery Act enforcement issue), which have occurred since the enactment of the Department of Justice (DOJ) Pilot Program in April. These three enforcement actions, which resulted in the companies receiving a Declination to Prosecute from the DOJ. Proving once again that I am never gonna give you up, never gonna let you down; I want to look a these Declinations to see what information they can provide to the compliance practitioner to assist them in guiding their own response should their company find itself embroiled in a FCPA investigation and attendant enforcement action.

The enforcement actions involved Nortek Corporation (Nortek), Akamai Technologies, Inc. (Akamai), and Johnson Controls, Inc. (JCI). Nortek and Akamai received Non-prosecution Agreements (NPAs) from the Securities and Exchange Commission (SEC) and Declinations to Prosecute (Declinations) from the DOJ. JCI received a civil Cease and Desist Order from the SEC and Declination from the DOJ. One other matter was resolved with the DOJ via a NPA, that being Analogic Corporation. I will discuss this matter separately below. 

The Declination Letters

The letters issued by the DOJ did not provide a plethora of detail. The Akamai and Nortek Declination letters were identical with the exception of the different corporate names. In relevant part they stated, “we have reached this conclusion … based on a number of factors, including but not limited to the fact that Nortek’s internal audit function identified the misconduct, Nortek’s prompt voluntary self-disclosure, the thorough investigation undertaken by the Company, its fulsome cooperation in this matter (including by identifying all individuals involved in or responsible for the misconduct and by providing all facts relating to that misconduct to the Department) and its agreement to continue to cooperate in any ongoing investigations of individuals, the steps that the Company has taken to enhance its compliance program and its internal accounting controls, the Company’s full remediation”. It went on to add that the company had agreed to profit disgorgement.

The JCI letter, stated, “We have reached this decision based on a number of factors, including but not limited to: the voluntary self-disclosure of the matter by JCI; the thorough investigation undertaken by the Company; the Company’s full cooperation in this matter (including its provision of all known relevant facts about the individuals involved in or responsible for the misconduct) and its agreement to continue to cooperate in any ongoing investigations of individuals; the steps that the Company has taken and continues to take to enhance its compliance program and its internal accounting controls; the Company’s full remediation”. As with the Nortek and Akamai the JCI letter also noted the company had agreed to disgorge its profits.

About the only difference I can ascertain in the letters is that Nortek and Akamai provide “fulsome” cooperation, and JCI provided “full” cooperation. Yet, the overall point of these Declinations seems to be the cooperation was very substantial.

Contrast the triple declination language with the NPA, which Analogic received, specifically noted the company’s lack of full cooperation. It stated, “the Company did not receive full cooperation credit because, in the view of the Offices, the Company’s cooperation subsequent to its self-disclosure did not include disclosure of all relevant facts that it learned during the course of its internal investigation; specifically, the Company did not disclose information that was known to the Company and Analogic about the identities of a number of the state-owned entity end-users of the Company’s products, and about certain statements given by employees in the course of the internal investigation;”

Box Score Summary of Declinations 

Pilot Program

Factor

Self-Disclosure Cooperation During Investigation Remediation Profit Disgorgement
Akamai Yes – before completing internal investigation 1. Sharing investigation;

2. Identify and present relevant documents;

3. Timely updates;

4. Updates on remedial measures;

5. Translating documents; and

6. Making witnesses available

1. Termination of culpable employees;

2. Revision of internal audit testing and protocol;

3. Strengthening of policies;

4. Creation of Compliance Committee;

5. Institution of mandatory compliance training; and

6. Modify auditing schedule to risk based approach

Yes
Nortek Yes 1. Sharing investigation

2. Timely updates

3. Segregation and organization of documents

4. Translation of documents

5. Making witnesses available

6. Conducting Risk Assessment

1. Due diligence program for 3rd parties;

2. Strengthen compliance policies;

3. Enhance compliance function, name CCO;

4. Institution of mandatory compliance training; and

5. Enhance travel and expense controls in China

 

Yes
JCI Yes – one month after it received a second anonymous complaint 1. Real time updates, interview summaries and all requested documents;

2. Yates binders including hot docs, interview summaries, chronologies and emails;

3. Preservation of evidence.

1. Termination of culpable employees;

2. Suspension of culpable 3rd parties;

3. Incorporation of culpable China office into existing corp structure;

4. Enhanced integrity testing and auditing, including random audits; and

5 Random testing of transactions

Yes

 

 

All parties admitted to facts, which could have formed the basis of a criminal FCPA enforcement action brought by the DOJ, yet they all received Declinations. While it would certainly have been more helpful to have a full release of information by the DOJ, to assist the compliance practitioner in understanding the totality of the facts considered, these three Declinations may well mark a new starting point in criminal FCPA enforcement going forward. Since at least 2014, with the Parker Drilling and Hewlett-Packard FCPA enforcement actions, the DOJ has provided significant credit to companies who thoroughly cooperated and provided extensive remediation during the pendency of their enforcement actions. With the Pilot Program implementation, these shifts are now official DOJ policy.

One other point unrelated to the Pilot Program discussion is the length of time that the Akamai and Nortek matters were concluded. It was less than 18 months for both. This short time frame for a resolution is certainly a welcome development and shows that if a company comes forward quickly, is efficient in its investigation and proactive in its remediation, it can benefit with lower overall investigation and remediation costs as well.

All of the above are most welcome for any compliance practitioner. The DOJ Pilot Program has come out of the box with some solid wins for the companies involved, the DOJ and the greater compliance community. If this pattern continues, it will allow the DOJ to focus its resources in driving home the message that it is doing compliance that will not only work to keep a company out of trouble but will also get a company out of trouble.

 

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