Chief-Compliance-OfficerAt the Opening Session of Compliance Week 2016, Stephen L. Cohen, Associate Director of Enforcement, Securities and Exchange Commission (SEC) and Andrew Weissmann, Chief of the Department of Justice (DOJ) Criminal Division’s Fraud Section, spoke about their views of what constitutes an effective compliance program under the Foreign Corrupt Practices Act (FCPA). Compliance Week’s Editor-in-Chief Bill Coffin moderated the panel. The majority of the discussion was around the Chief Compliance Officer (CCO) position; specifically the independence of the position, the authority the CCO has in an organization and the resources made available to the CCO.

Weissmann related that many presentations are made to the DOJ in the context of Filip Factors presentations, where a company generally presents evidence of the effectiveness of its compliance program at the time of the incident that led to the criminal investigation. He said that one of the things he thinks is important is how a CCO talks about the company’s compliance program.

He began by noting the initial straw poll showed that 65% of those responding to the first poll said their compliance program could probably pass DOJ muster or needs work. Weissmann viewed this as a positive sign because it demonstrated to him the ongoing evolution a company’s compliance program. He said he would often specifically delve into how a risk assessment had been done and then use that information as a springboard to inquire into whether it actually predicted the FCPA violation(s). It was not surprising to hear Weissmann basically say McNulty Maxim No. 3 (what did you do when you found out about it?) when he said that he would inquire into the company’s response and whether the response was then integrated that into the compliance function.

Cohen also said that he encourages CCOs to come and meet with him early in the SEC investigatory process. He did acknowledge that outside counsel usually hated the idea, obviously because they lose complete control, which they seek to maintain. Yet Cohen thinks that it helps him because it gives him a window into whom he is dealing with in the process. Additionally, as the CCO is generally more attuned to remediating problems, rather than simply protecting the company like outside counsel, a different view can often be obtained through such meetings. I would note from the CCO perspective, this is very valuable as it gives you the ability to begin to win an ally for your remediation program early on in the process.

One of the specific areas that Cohen wants to know about is what are the resources that have been made available to the CCO and what is the level of CCO independence? He is concerned about whether the CCO is appropriately valued and supported in the organization. He specifically asks if the CCO is on the Executive Leadership Team (ELT) or other top group of C-Suite executives. He would also inquire into whether the CCO had visibility into the transaction(s) that may have become the problem issue(s). Not necessarily whether there was a bribe authorized but if the transaction warranted someone violating the FCPA to get the deal done, did the compliance function have visibility into the matter? It is all Cohen’s way of trying to ascertain whether the CCO and compliance function have standing in company to get things done.

Weissmann was asked about individual liability for CCOs under the FCPA. I found this question propitious given my blog posts earlier this week. He said that the DOJ not going after CCOs for criminal liability unless they are a part of bribery scheme or some cover-up. He reiterated that the DOJ is trying to reduce the risk of criminality for violations under the FCPA and indeed that was one of their goals in hiring its new Compliance Counsel, Hui Chen. Chen enables the DOJ to be more robust in evaluating compliance programs of companies that come before the DOJ. He also noted that this new position works to heighten the power of CCO within companies as it gives them a specific advocate at the DOJ during enforcement actions.

Cohen took another approach to responding to the inquiry about CCO liability. He said that he believed there had been approximately 8000 SEC enforcement actions over past 10 years in regulated space involving CCOs. Of all of those cases, only five had involved individual liability actions brought against CCOs. These were along the lines of the FINRA action against Linda Busby I detailed yesterday, where the CCO had a clear regulatory responsibility to implement or enhance a compliance program and failed to do so. Cohen also made the point again that these five SEC enforcement actions were all in regulated industries only, not FCPA cases.

On the question of CCO independence, Weissmann believes this is one indicia of an effective compliance program. He reiterated yet again the DOJ’s stated position that it does not concern itself with whether the CCO reports to the General Counsel (GC) or reports independently, but he is more concerned about whether the CCO has the voice to go to the Chief Executive Officer (CEO) or Board of Directors directly, without going through the GC first. Even if the answer were yes, Weissmann would want to know if the CCO has ever exercised that right.

Finally, Weissmann turned to the operationalization of compliance. Echoing the remarks of the DOJ Compliance Counsel last fall, he wants to know if the if business unit of a company is responsible for at least a part of compliance. Put in the manner of Chen, is compliance operationalized within your organization? Weissmann had an interesting angle on the real problem for a CCO if compliance is not embedded into the business; that problem is that the CCO simply becomes a policeman, telling the business unit what it cannot do. Or as I would say, being Dr. No from the Land of No.

Cohen had several questions he would ask to determine the level of CCO independence within an organization. First and foremost, is the CCO a part of the senior management or the C-Suite? Is the CCO part of regular meetings of this group? He also wanted to know who could terminate the CCO so he might inquire to see if it was the CEO, the Audit Committee of the Board or did the CCO termination require approval of the entire Board? Most importantly, could a person under investigation or even scrutiny by the CCO fire the CCO? If the answer is yes, the CCO clearly does not have requisite independence.

In addition to the foregoing, Cohen had some additional questions he would consider. The first was who could over-rule the decision by a CCO within an organization? He would also inquire into who is making the decisions around salary and compensation for the CCO? Is it the CEO, the GC, the Audit Committee of the Board or some other person or group?

The remarks of Weissmann and Cohen demonstrated the continued evolution in the thinking of the DOJ and SEC around the CCO position and the compliance function. Their articulated inquiries can only strengthen the CCO position specifically and the compliance profession more generally. The more the DOJ and SEC talk about the independence of, coupled with resources being made available and authority concomitant with the CCO position, the more corporations will see it is directly in their interest to provide the position in their organizations.

 

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

Quid Pro QuoYesterday on the podcast, the FCPA Compliance and Ethics Report, I posted the full oral argument from the Supreme Court in the case of McDonnell v. US (shout out to Web Hull for sending it to me), which is the appeal of the former governor of Virginia Bob McDonnell of his conviction for public corruption under the Hobbs Act. McDonnell and his wife, Maureen, were convicted in 2014 of public corruption, charges stemming from $177,000 in gifts, luxury vacations and loans they accepted from Jonnie R. Williams Sr. The former Chief Executive Officer (CEO) of Star Scientific Inc., Williams was a wealthy Virginia businessman who wanted the governor and his wife to promote his tobacco-based dietary supplement business.

Many have asked me about this case and whether it might impact enforcement of the Foreign Corrupt Practices Act (FCPA) going forward. For reasons I will lay out in this post, I think both the law and facts are sufficiently different that, whatever the outcome in McDonnell, it will not impact FCPA enforcement going forward.

Dahlia Lithwick, writing in an article for the online publication Slate, entitled “The Everybody Does It Defense, said the former governor is urging that his conviction be overturned because “definition of having done “official actions” in exchange for gifts under the Hobbs Act and the honest services statute be limited to exercising actual governmental power or pressuring others to use government power. The Hobbs Act was established in 1946 and has been used to criminalize acts of robbery or extortion that affect interstate commerce, basically the equivalent of bribery. The honest services statute used to apply to a broad range of fraud, but in 2010 in Skilling v. United States, the Supreme Court limited the statute to bribery or kickbacks.”

The Hobbs Act also reaches acts by public officials acting in their official capacity. A public official commits a crime when he obtains a payment to which he is not entitled knowing that it was made in exchange for official acts. The statute is not limited to federal officials (that is how it was used to convict McDonnell) and unlike the FCPA; the payor is not liable under the law. Basically the government need only prove a public official agreed to take some official action in exchange for payment as opportunities arose to do so to be convicted under the Hobbs Act.

At oral argument in the McDonnell case, the Roberts court focused on the quo of quid pro quo or the action taken by the former government and not the $177,000. In briefing and before the Court in oral argument, the government conceded the amount of the quid was not determinative of a violation of the law. Chief Justice Roberts was probably the most circumspect in oral argument with his questioning to indicate that (1) he believed responding to citizen’s petitions and requests for government action was the basic function of a government official and (2) unless there was a bag of cash paid directly for a decision; there was no violation of the Hobbs Act.

The Justices also were very concerned about the vagueness of the Hobbs Act and the discretion it gave to prosecutors to bring political corruption charges. Lithwick wrote, “Breyer worries the Department of Justice will have too much power in determining what is and isn’t corruption for officials across the country. “As you describe it,” he says, “for better or for worse, it puts at risk behavior that is common, particularly when the quid is a lunch or a baseball ticket …””

Both of these positions are antithetical to an analysis under the FCPA. The FCPA prohibits actions which “(A) (i) influencing any act or decision of such foreign official in his official capacity, (ii) inducing such foreign official to do or omit to do any act in violation of the lawful duty of such official, or (iii) securing any improper advantage; or (B) inducing such foreign official to use his influence with a foreign government or instrumentality thereof to affect or influence any act or decision of such government or instrumentality, in order to assist such issuer in obtaining or retaining business for or with, or directing business to, any person;”.

Clearly the focus of the FCPA is the quid part of defendant’s actions. Even if you applied the Roberts Court discomfort with the vagueness of the FCPA language of “influencing any act or decision” it seems clear that the language “securing an improper advantage” and “in obtaining or retaining business” is sufficiently clear to pass even the scrutiny of this current Supreme Court. Indeed I am not aware of any FCPA criminal enforcement resolution, by the Department of Justice (DOJ), where the standard was not met at trial where a conviction resulted, or not agreed to by the defendant in the settlement resolution such as a criminal plea or Deferred Prosecution Agreement.

Why does all of this matter? As Lithwick notes, “It will be an amazing thing if – in a year when voters across the spectrum are infuriated and sickened by the influence of money in politics – the Supreme Court decides that poor Bob McDonnell should be let off the hook because he only did what every politician does every day: Take a lot of money to open doors for a rich guy. But maybe the line between money and influence is too fuzzy and ubiquitous to even be said in words anymore.”

Yet at the federal level, our rights as citizens to petition our government for redress is enshrined in the 1st Amendment to the US Constitution and reads, “Congress shall make no law respecting an establishment of religion, or prohibiting the free exercise thereof; or abridging the freedom of speech, or of the press; or the right of the people peaceably to assemble, and to petition the Government for a redress of grievances.[emphasis supplied] With the adoption of the 14th Amendment, through the incorporation doctrine, this protection of the right to redress was expanded to cover all state and federal courts and legislatures, and the executive branches of the state governments. In other words, what the Roberts Court seems to be saying is you can pay any amount you want as a gift, as long as the government official does not engage in a official act to award a benefit based upon the payment.

It is good thing that is not what the FCPA states. Moreover, as the Fifth Circuit Court of Appeals, in the decision Kay v. US, 359 F.3d 738, 750-51 (5th Cir. 2004), held “Congress intended for the FCPA to apply broadly to payments intended to assist the payor, either directly or indirectly, in obtaining or retaining business for some person”. The Court also noted, “Congress’s intention to implement the [OECD] Convention, a treaty that indisputably prohibits any bribes that give an advantage to which a business entity is not fully entitled, further supports our determination of the extent of the FCPA’s scope.”[emphasis supplied]

At least one Court got it right.

 

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.

Blackie SherrodBlackie Sherrod died last week. To any reader of sports pages across the nation and most particularly in Texas, Sherrod was about as good as it got. For me, he was right up there with Red Smith, Frank DeFord and Shirley Povich as one of the greatest sports writers of the second half of the 20th Century. His columns on the Dallas Cowboys in the 1960s and 1970s were truly pieces of art to be marveled at when savoring. He also had the good sense to hire Dan Jenkins and Bud Shrake as young sportswriters.

I thought about Sherrod when I read a recent article in the Harvard Business Review (HBR), entitled “Making Exit Interviews Count, authors Everett Spain and Boris Groysberg assert that exit interviews, when conducted with care, can be a very useful tool in two important areas: to increase employee engagement, to reveal what may not be working in the organization. Read More