qtq80-OqbmVYThe second day of the SCCE Compliance and Ethics Institute (CEI) Conference began with Principal Deputy Associate Attorney General Bill Baer providing remarks. After opening with how aggressively the Department of Justice (DOJ) had prosecuted banks for illegal activity during the 2008 financial crisis, he turned to a more compliance focus subject matter; that being what constitutes extensive cooperation under the DOJ Foreign Corrupt Practices Act (FCPA) Pilot Program and, more broadly, which would allow a company to receive a reduction in a fine or penalty.

Most interestingly he said that DOJ consideration for cooperation credit is only available where an entity has satisfied the requirements of the Yates Memo which he termed the “department’s Individual Accountability policy.” To meet this initial threshold, companies who want credit for their cooperation must disclose all facts relating to the individuals involved in the wrongdoing, no matter where those individuals fall in the corporate hierarchy. He stated, “We will not credit cooperation unless this threshold requirement has been met.”

He went on to give the general disclaimer that while each investigation and defendant will be treated differently, there were some common elements the DOJ has observed. The first is that the cooperation should be proactive; that is, the company should materially assist the DOJ, including by disclosing facts that are relevant to the investigation, even when not specifically asked to do so. This could mean such things as a “company describing its own conduct and pointing us to inculpatory documentary evidence, such as emails and text messages.” It could also mean providing documents or access to witnesses that the department might not have obtained through its subpoena power. Somewhat more troublingly, Baer also said such cooperation could be “providing information that the government did not know about or did not recognize would be significant.”

He provided some examples where cooperation with the DOJ makes case administration easier and more efficient for the DOJ. These Instances included providing summaries of evidence that were designed to specifically to assist the government’s investigation; providing data compilation to the DOJ in a manner which is helpful and that the DOJ could not readily achieve on its own. It also included encouraging individuals with knowledge of the relevant conduct to cooperate with the investigation. Finally he listed providing information that might otherwise not have been discovered in the ordinary course of the investigation.

Baer cautioned that another linchpin is timeliness of the cooperation. If it is in the early stages of an investigation it is substantially more helpful than cooperation after the DOJ has “invested significant time and energy in exposing problematic conduct.” The corollary to this is that “little or no cooperation credit will be afforded in situations where the supposed cooperation occurs after the department has completed the bulk of its investigation.” One can think back to both the Weatherford and Total FCPA enforcement actions, where the companies actively resisted the DOJ’s investigation until at some point they ‘got it’ and began to actively cooperate.

This series of remarks ties into something observed in the Nortek Corporation FCPA enforcement action, where the company self-reported to the government even before completing its internal investigation. Baer said that a company should come in as early as it possibly can, even if it has not completed an internal investigation. He did acknowledge that “A company will not be disqualified from receiving cooperation credit simply because it doesn’t have all the facts lined up on the first day; rather, under those circumstances, we expect that cooperating companies will simply continue to turn over the information to our lawyers as they receive it.”

Turning to the quality of the information provided, Baer said that a company (or individual for that matter) would be considered for credit where it provides information that allows the DOJ to obtain conclusions that are more significant. He explained, “where a cooperator enables the government to pursue conduct that might not otherwise have been addressed. This type of cooperation may involve detailing relevant conduct by a different party (or parties) participating in the same or similar scheme or that enables the department to net greater recoveries.”

He went on to add that a company could take other actions which could lead to a reduced fine or penalty or even a declination to prosecute. They turned on situations where a company acknowledged the responsibility for it negative actions. He also noted a key factor could be a company’s efforts to help assist victims of the illegal conduct. Baer conceded, “These actions are distinct from cooperation, which is focused on helping us uncover and understand the underlying conduct.  But they can be important additional factors in the department’s determination of an appropriate outcome.”

Baer also had some cautionary remarks around cooperation. He stated, “not every interaction between the government and a party under investigation will constitute cooperation.” He then provided an example from the DOJ’s enforcement action against “the RMBS banks, mere compliance with legal requirements such as subpoenas, or one-sided presentations urging the department to decline an enforcement action, do not measure up. Indeed, the department may view some such activities – including the belated provision of information that an entity was legally obligated to produce – as impediments to investigative work rather than genuine examples of cooperation.”

No doubt drawing on his inner Potter Stewart, Baer concluded with the ubiquitous remark, “We know meaningful cooperation when we see it.” He went on to cite a recent matter involving an un-named prescription drug chain that overbilled the government for orders of prescription drugs that were never picked up by customers. He said that the evidence involved handwritten pick-up signature logs kept at the cash registers of thousands of pharmacies and noted, “The company decided to cooperate early and in ways that mattered. In addition to the thousands of pages of the handwritten logs, the defendant produced extensive spreadsheets reflecting the information on the logs. To accomplish this, the defendant had a team enter the information line by line into a format where it could be analyzed. The defendant also shared its analysis using the information from the logs. This effort avoided the need to spend months and significant government resources tabulating the logs.”

From these remarks it is clear that the DOJ expects no adversarial relationship if you self-disclose and want cooperation credit. It was unclear from these remarks if that would also include the negotiations of any proposed fine or penalty. It will be interesting to see what happens to Telia Company AB and Deutsche Bank in their negotiations as they both balked at paying the originally proposed fine, stating they were simply the DOJ’s “opening demand”. If they actively fight the fine amounts, I wonder if it will penalize their cooperation credit.

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

 

qtq80-OzJJ18The Securities and Exchange Commission (SEC) settled a Foreign Corrupt Practices Act (FCPA) enforcement action against an individual earlier this month when it announced the resolution of a matter involving Jun Ping Zhang, via a Cease and Desist Order (Order). The matter involved Harris Corporation (Harris) and its Chinese business unit Hunan CareFX Information Technology, LLC (CareFx China). Ping, a US citizen served as both Harris Corporation’s Vice President of Technology and CareFx China’s Chairman and Chief Executive Officer (CEO) in 2011 and 2012. Harris employed Ping with its acquisition of the US entity CareFX Corporation.

Harris interviewed Ping in its pre-acquisition phase of due diligence of CareFX and its Chinese subsidiary. However, Ping was not asked any questions about engaging in bribery or corruption, failed to disclose he was leading a massive bribery effort or lied to the pre-acquisition due diligence investigators. He continued to lead this bribery and corruption effort after Harris closed the acquisition of CareFX and thus the Chinese subsidiary of Harris made “approximately $200,000 to $1 million in improper gifts to Chinese government officials.” For these illegal gifts, CareFX China was awarded “over $9.6 million in contracts with state-owned enterprises.” Ping agreed to a civil penalty of $46,000.

It was in the post-acquisition integration phase that Harris became aware of its troubles in China. As Jaclyn Jaeger reported in Compliance Week, “Following the closing, the company said it “became aware that certain entertainment, travel and other expenses in connection with the Carefx China operations may have been incurred or recorded improperly.”

“In response, we initiated an internal investigation and learned that certain employees of the Carefx China operations had provided pre-paid gift cards and other gifts and payments to certain customers, potential customers, consultants, and government regulators, after which we took certain remedial actions.”

This matter involved yet another US company which came to FCPA grief because of (1) the corrupt actions of its Chinese subsidiary and (2) where the US had entered the Chinese market through acquisition rather than an organic growth strategy. The bribery scheme was funded by fraudulent expense reimbursements which were created and/or approved by Ping. The Order stated, “With Ping’s knowledge and under his management, CareFx China sales staff submitted bogus expense receipts labeled as “entertainment,” “office expenses,” or “transportation” to CareFx China’s accounting department for cash reimbursement.” The “sales staff used the cash generated from these sham expense reimbursements to pay for gifts to government officials. Ping and the supervisors that he managed authorized the bogus expense claims, knowing that they were fabricated and that the “reimbursed” funds were used to pay for gifts to government officials to influence their decisions to purchase CareFx China’s products and services.”

The Order confirmed Ping knew what he was doing when it said, “Ping knew that these bogus expenses were improperly recorded in CareFx China’s books and records as legitimate sales expenses or consulting fees and that, as a result, their true nature would not be disclosed to Harris.” However, “After the Harris acquisition, it was Ping’s responsibility to review CareFx China’s monthly expense summary reports before they were submitted to Harris. Ping consistently permitted these monthly expense summary reports to be submitted despite knowing that they contained false information. By doing so, Ping enabled CareFx China to cloak its illicit gifts to government officials in the guise of legitimate business expenses and, thereby, hide the practice from Harris.”

This continued reliance on Ping to review and approve the illegal expense reimbursements speaks to a wider and more systemic failure of Harris’s internal controls, particularly around the issue of segregation of duties (SODs). It is a basic rule of any financial control process that there should be a second set of eyes in the reimbursement process. Clearly here, where Ping set up the fraudulent scheme to create the pot of money to fund the bribes, he was also in the position to approve all the fraudulent submissions by his sales team in China. This should be a key point for any Chief Compliance Officer (CCO) or compliance practitioner, whether a Country or Regional Manager has this type of approval which does not have an appropriate level of corporate oversight.

This individual SEC FCPA enforcement action may well portend another enforcement action involving Harris going forward. Whatever happens to Harris, this case makes clear the need for robust pre-acquisition due diligence, followed up by an even more robust post-acquisition forensic audit of the books and records of high-risk business units. China has been on the FCPA radar for many years and since 2010, approximately 20% of all enforcement actions have come out of China. This is not new information and companies are on clear notice that failure to perform these basic steps can lead to some catastrophic results.

The cost for Harris’s failures have not been insignificant even though CareFx’s revenues accounted for less than 1% of Harris’s gross revenues. In December 2011, Harris dissolved CareFx as a separate business entity. According to the order, in 2012 Harris sold all of CareFx China’s “outward facing operations” and in “2015, Harris terminated all employees in CareFx China and no longer has any active China-based business operations.” The inability of companies to do business in compliance with the FCPA has now caused two recent enforcement actions to note that the companies have pulled out of jurisdictions entirely. The first was Key Energy and now we have this same effect with Harris.

Yet all was not negative news for as the SEC announced it would not be pursuing the company for any FCPA violations. A SEC Press Release stated, “The SEC determined not to bring charges against Harris, taking into consideration the company’s efforts at self-policing that led to the discovery of Ping’s misconduct shortly after the acquisition, prompt self-reporting, thorough remediation, and exemplary cooperation with the SEC’s investigation.” This follows on from the May, 2016 Department of Justice (DOJ) decision, also reported by Jaclyn Jaeger in Compliance Week, to decline to pursue criminal charges against the company. These actions led Robert Kent, a partner with law firm Baker & McKenzie, to note in a Client Release that the declinations by both the SEC and DOJ make this a key a case, because it “represents the first time in a ‘pure’ FCPA investigation that a multinational corporation has avoided prosecution entirely, while one of its former employees was sanctioned for FCPA violations that created clear potential FCPA liability for the company.” (Emphasis supplied).

 

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 for Episode 22, week ending September 16, 2016

  • Harris Corp, China-business unit head settles FCPA matter, for the SEC Cease and Desist Order, click here;
  • Wells Fargo fraudulent accounts scandal,

a. articles in Compliance Week by Tom Fox, click here and here;

b. articles in the NYT, click here; and

c. articles in the WSJ, click here.

  • Telia reports $1.4bn demand to settle corruption claims around its subsidiary Vimpelcom, article in the FCPA Blog, click here.
  • FIFA opens formal investigation into reports that Sepp Blatter, two deputies took $81 million in pay and bonuses, from the FCPA Blog.
  • 5-day Blog post series on passion around compliance, see FCPA Compliance Report. Tom’s request to interview those attendees at the SCCE CEI who feel the same passion about working in compliance.
  • Jay previews his Weekend Report.