Show Notes for Week ending August 12

  1. SEC In-House ALJ Program Upheld. Compliance Building and Second Circuit Court of Appeals opinion.
  2. Abbott, sales pressure and suicide. NYT article, “Driven to Suicide by Inhuman Pressure to Sell
  3. Airbus under investigation for allegations of bribery to make airliner sales in emerging markets. FT article Airbus probe poised to shake up Boeing rivalry”.
  4. Lily King, finger wagging and calling out the Russian, ­­­­­Yulia Efimova for her history of doping. Inc. article, “Yes, U.S. Swimmer Lily King Was Absolutely Right to Blast Yulia Efimova for Doping
  5. Jay Rosen appearance on Masters of Disasters
  6. Maurice Gilbert’s list of questions every CCO should ask in an interview.
  7. Link to Red Flag Group registration and information for Webinar 2 of a 4 part series on Supply Chain risk management, click here.

Show notes for Episode 16, for the week ending August 5.

  1. Matthew Stephenson article on the Global Anti-Corruption Blog on JP Morgan sons and daughters FCPA Enforcement Action. My take on this piece on the FCPA Compliance Report.
  2. Financial Times Op-Ed Piece on why the US government must lead the global fight in corruption.
  3. FCPA Blog article on FinCen investigation into beneficial ownership in large real estate transactions involving cash expands.
  4. Bureau van Dijk was made available a replay of its webinar on beneficial ownership issues, featuring Mike Volkov.
  5. From Corporate Counsel – the article “It’s Clear Now That Employees Must Cooperate in Probes”. This details a case where a New York court upheld the termination of two Marsh employees for failure to participate in a company internal investigation.
  6. From Above The Law – Catalyst demonstrates how leveraging eDiscovery tools is an effective harness Data analytics to help companies show a commitment compliance in response to the New DOJ FCPA Pilot Program.
  7. Jay recaps his Weekend Report.
  8. I preview my upcoming blog and video podcast series on the Ten Hallmarks of an Effective Compliance Program.

Three Key QuestionsOne of the top academic commentators in the anti-corruption space is Matthew C. Stephenson, co-founder of the Global Anticorruption Blog. I was intrigued by Stephenson’s piece, entitled “Does an FCPA Violation Require a Quid Pro Quo? Further Developments in the JP Morgan “Sons & Daughters” Case”, where he analyzes whether there should be prosecutions under the Foreign Corrupt Practices Act (FCPA) for the hiring of family members of foreign government officials and employees of state owned enterprises, under the context of the reports that JPMorgan is in settlement discussions with the Department of Justice (DOJ) for its ‘Sons & Daughters’ hiring initiative which alleged targeted children of Chinese officials for employment to obtain favor with their parents.

I wanted to focus on Stephenson’s analysis of what he phrased as ‘three key considerations’ around analyzing the hiring of family members. He wrote, “The three key considerations, to my mind, ought to be (1) the degree of connection between the job offer and a particular official decision, or set of decisions (as distinct from general goodwill and connections); (2) the degree to which the official indicated that he very much hoped the firm would hire the relative (even if there was not enough evidence of agreement to establish a quid pro quo); and (3) the degree to which the firm relaxed its ordinary standards to hire the official’s relative.”

As most compliance practitioners are aware, there are two prior Securities and Exchange Commission (SEC) led FCPA enforcements around the hiring of family members in violation of the FCPA. These actions were involving Bank of New York Mellon (BNY Mellon) and Qualcomm. In both of these enforcement actions, I believed the key factor was No. 3; “the degree to which the firm relaxed its ordinary standards to hire the official’s relative.” I find this analysis to be the most persuasive because if a candidate does not meet your company’s minimum hiring standards, there is some other reason for making the employment offer. If that reason cannot be articulated from the business perspective, there must be some other reason. Moreover, if someone is so unqualified that employing them will negatively impact the company, there must be another very good reason to hire them, such as providing a benefit to their family member, who is a foreign official or other cover person under the FCPA.

In reviewing the enforcement actions it appears the factors Stephenson set forth are present in each Cease and Desist Order (Order). In the Qualcomm SEC enforcement action, involving the hiring of a son of an employee of a state owned enterprise in China, it was revealed in the Order that after the initial employment interview the candidate was rated as a “No Hire” because not only was he not a “skill match” for the company but he did not even “meet the minimum requirements for moving forward with an offer”. Finally, among the Qualcomm team involved in the interview process, “there was an agreement that he would be a drain (not even neutral) on teams he would join.” Yet he was offered a job as a “special favor”.

Further prongs 2 & 3 were met in the Qualcomm enforcement action. As stated in the Order, “As one Qualcomm employee noted, “We received a request from the GM of [the telecom company’s subsidiary] to help find an internship position for her daughter (currently studying in the U.S.) within QC. I discussed this with [high level official] and determined that it would be important for us to support given our cooperation with [the subsidiary].”” Moreover, in addition to the Chinese state owned employee requesting Qualcomm hire his daughter, the company expected he would reciprocate by favoring the company. The Order stated, “Qualcomm employees understood that the daughter’s “parents are [SOE 2 subsidiary] Dept. GM level and gave us great help for Q.C. new business development.””

In the BNY Mellon enforcement action, the Order noted, “Added to all of this was that none of the three individuals met the BNY Mellon requirements for its internship program; they met neither the academic or professional requirement to obtain an internship. BNY Mellon not only waived its own hiring requirements, it did not even go through the pretense of meeting with them or interviewing them. Finally, according to the Order, these three individuals were provided with “bespoke internships” that “were rotational in nature, meaning that Interns A, B and C had the opportunity to work in a number of different BNY Mellon business units, enhancing the value of the work experience beyond that normally provided to BNY Mellon interns.”

Yet in the BNY Mellon case, it was very clear that prongs 1 & 2 of Stephenson’s formulation was met. The Order also specified how the hiring of the relatives led directly to BNY Mellon obtaining and retaining business. One foreign government official, (Official X), “made a personal and discreet request that BNY Mellon provide internships to two of his relatives: his son, Intern A, and nephew, Intern B. As a Middle Eastern Sovereign Wealth Fund department head, Official X had authority over allocations of new assets to existing managers such as the Boutique, and was viewed within BNY Mellon as a “key decision maker” at the Middle Eastern Sovereign Wealth Fund. Official X later persistently inquired of BNY Mellon employees concerning the status of his internship request, asking whether and when BNY Mellon would deliver the internships. At one point, Official X said to his primary contact at BNY Mellon that the request represented an “opportunity” for BNY Mellon, and that the official could secure internships for his family members from a competitor of BNY Mellon if it did not satisfy his personal request.”

There were clear statements by the BNY Mellon official involved that hiring this son and nephew were being done to obtain or retain business. As reported in the Order, “BNY Mellon was “not in a position to reject the request from a commercial point of view” even though it was a “personal request” from Official X. The employee stated: “by not allowing the internships to take place, we potentially jeopardize our mandate with [the Middle Eastern Sovereign Wealth Fund].” Another BNY Mellon employee was quoted as saying, ““I want more money for this. I expect more for this.””

The second foreign government official, (Official Y), “asked through a subordinate European Office employee that BNY Mellon provide an internship to the official’s son, Intern C. As a senior official at the European Office, Official Y had authority to make decisions directly impacting BNY Mellon’s business. Internal BNY Mellon documents reflected Official Y’s importance in this regard, stating that Official Y was “crucial to both retaining and gaining new business” for BNY Mellon. One or more European Office employees acting on Official Y’s behalf later inquired repeatedly about the status and details of the internship, including during discussions of the transfer of European Office assets to BNY Mellon. At the time of Official Y’s initial request, a number of recent client service issues had threatened to weaken the relationship between BNY Mellon and the European Office.”

In addition in laying out an analysis, Stephenson has provided the compliance practitioner with three easy, straightforward questions with which to begin any analysis in the hiring of a family member of foreign official or employee of a state owned enterprise. I would phrase the three questions in the following order and manner:

  1. Does the candidate meet your firm’s hiring criteria?
  2. Did the foreign official whose family member you are considering for hire demand or even suggest your company hire the candidate?
  3. Has the foreign official made or will make a decision that will benefit your company?

If the answer to the first question is No and the second two inquiries YES, you may well be in a high-risk area of violating the FCPA. You should investigate the matter quite thoroughly and carefully. Finally, whatever you do, Document, Document, and Document your investigation, both the findings and the conclusions.

 

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 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