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Tag: FCPA

Buy Assets From a Foreign Bank Without Violating the FCPA

A quirky feature of the Foreign Corrupt Practices Act is that you can ask the Department of Justice to opine on whether your proposed action would violate the FCPA. Generally, one or two of these FCPA opinions pop up each year. It’s been a six-year drought since the last one.

Some of the FCPA opinions have provided great insight into how the DOJ thinks about FCPA compliance. This latest is not one of those. I scratch my head wondering why the Requestor even bothered.

The Requestor planned to buy some assets from a state-owned foreign bank. Another subsidiary of that state-owned foreign bank helped with the transaction and wanted to get paid a fee. The opinion was on whether it was okay to pay that fee.

Sure, the parties are state-owned and the people working at them should be treated as government officials under the FCPA for compliance purposes. The FCPA doesn’t prevent US firms from entering into transactions with foreign companies, even if the company is state-owned. You just can’t pay a bribe to the people involved.

There is nothing in the facts that says any individual is getting paid a fee. The money is all going to a company. The opinion includes a statement that the Requestor has no belief that any of the money will be diverted to an individual.

The Requestor received legitimate services from the company, the payment is commensurate with the services and there is no indicia of corrupt offers.

The latest release notes that three prior releases all addressed this topic: 09-01, 97-02, and 87-01. They each had a declination when the payment was going to the government entity and not to an individual.

The fee to be paid was only $237,500. I would guess that the Requestor paid almost as much in legal fees to get the FCPA opinion.

Whatever uncertainty the Requestor had in making the payment I guess has been erased. We can pile this fact pattern into the stack of things that are okay to do.

Sources:

Revised FCPA Corporate Enforcement Policy

The case for self-reporting failures has always been a nebulous promise from the government that the enforcement will be more lenient than if not self-reported. There has been limited proof that this has been true. That may be largely because we don’t hear about the self-reported problems because there is little to no government action in those instances.

The Department of Justice is stepping up its treatment of self-reporting bribery violations under the Foreign Corrupt Practices Act. In April, the DOJ had started a new program that it would provide a 50% discount on fines under the FCPA along with generally more leaner prosecution settlement terms.

On Wednesday, the DOJ that it was going further with the program.

Deputy Attorney General Rod J. Rosenstein said in a speech Wednesday that the DOJ is changing the policy again to increase the number of companies voluntarily disclosing their bribery misconduct. That would allow the DOJ to allocate resources to pursue the individuals responsible for the bribery.

First, the updated FCPA Corporate Enforcement Policy states that when a company satisfies the standards of voluntary self-disclosure, including full cooperation and appropriate remediation, there will be a presumption that the DOJ will resolve the corporate case through a declination. Of course, that presumption is swiped away if there are aggravating circumstances related to the nature and seriousness of the offense, or if this is not the offender’s first time.

Second, if a company voluntarily discloses wrongdoing and satisfies all other requirements, but aggravating circumstances compel an enforcement action, the Department will recommend a 50% reduction off the low end of the Sentencing Guidelines fine range. Once again, recidivists may not be eligible. (The DOJ does not like repeat business.)

Third, the updated FCPA Corporate Enforcement provides details about how the Department evaluates an appropriate compliance program, which will vary depending on the size and resources of a business.

That third point will likely set some new standards in the compliance community in defining a good compliance program.

“Implementation of an effective compliance and ethics program, the criteria for which will be periodically updated and which may vary based on the size and resources of the organization, but may include:

  • The company’s culture of compliance, including awareness among employees that any criminal conduct, including the conduct underlying the investigation, will not be tolerated;
  • The resources the company has dedicated to compliance;
  • The quality and experience of the personnel involved in compliance, such that they can understand and identify the transactions and activities that pose a potential risk;
  • The authority and independence of the compliance function and the availability of compliance expertise to the board;
  • The effectiveness of the company’s risk assessment and the manner in which the company’s compliance program has been tailored based on that risk assessment;
  • The compensation and promotion of the personnel involved in compliance, in view of their role, responsibilities, performance, and other appropriate factors;
  • The auditing of the compliance program to assure its effectiveness; and
  • The reporting structure of any compliance personnel employed or contracted by the company. “

This new policy now moves the promises of leniency to something much more tangible. I expect it will also be more effective at causing companies to shake the skeletons out of their closets and disclose FCPA violations.

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Excessive Travel as a Bribe Under the FCPA

The recent PTC Case caught my attention for a few reasons. First, the company is based near my house and I biked past it’s headquarters this past weekend. Second, the actions stated in the headline were not good, but seemed to be at the extreme of what I thought would be considered bribery.

ptc

According to the SEC’s press release, an SEC investigation found that two Chinese subsidiaries of PTC Inc. provided non-business related travel and other improper payments to various Chinese government officials in an effort to win business. From 2006 to 2011, two PTC China-based subsidiaries provided improper travel, gifts, and entertainment totaling nearly $1.5 million to Chinese government officials who were employed by state-owned entities that were PTC customers.

The travel was sightseeing trip in the US in connection with visiting the corporate headquarters in Massachusetts.

That does not sound so bad. Not great. But not a $28 million fine bad.

There is obviously the red flag of PTC selling to a China-based company. Most would start with the assumption that the company is state owned and therefore the employees could be considered government officials. If they are government officials you have to be worried about the FCPA.

The SEC order states that the employees are government officials and does not spend any time addressing this.

Were the trips meant to generate business for PTC? The SEC order only mentions a small connection, stating that the officials who went on the trips were “often” signatories on the purchase agreements.

It’s a settlement order and not a pleading, so we have to just agree that the individuals were government officials and that the things given to them were meant to influence their purchasing decision.

I’ve said it before and I stand behind the statement:

“If your are trying to figure out whether a company is a private company or an “instrumentality” of a foreign government under the Foreign Corrupt Practices Act you are already in trouble.”

At first blush this PTC case caused me to question the statement.

Combining business activities with some pleasure activities is a common practice. The presence of government officials should not change this practice. The concern is whether the pleasure activities are excessive compared to the business activities.

The SEC and the DOJ have made it clear that bribery is not limited to cash in an envelope. Excessive gifts and travel can be considered an illicit bribe.

That was the case here.

The officials would visit the PTC office in Massachusetts for one day and then spend ten days touring the sights of New York City, Los Angeles, the Grand Canyon and Honolulu. That’s a ten to one ratio of business to pleasure.

That does sound excessive.

It sounded excessive to PTC who had a policy prohibiting excessive gifts and entertainment. PTC’s policy required pre-clearance for expenses over $500 with documentation of the business purpose.

The costs of the overseas travel were hidden in the contracts. The funds budgeted for the overseas travel were disguised as expenses related to success fees or subcontracting payments for business partners. The cover-up made the trips more illicit. If the employees involved thought the trips were legitimate there would have been no reason to hide them.

I do have a problem with the SEC order including “tours of MIT, Harvard, and Faneuil Hall” in the list of what the SEC considers excessive leisure activities. Showing prospective business partners the area, amenities and source of corporate talent should be a legitimate leisure activity connected with the business. PTC is headquartered in a suburban office park. The Charles River is lovely in that area, but it’s legitimate to show the Greater Boston.

The rest of the activities sound excessive to me. Excessive enough, that I would not expect to pay those expenses for a business partner, whether it was a private individual or a government official.

Sources:

Hiring Relatives Could Be An Illegal Bribe

In the case of BNY Mellon, it was an illegal bribe in violation of the Foreign Corrupt Practices Act. The Securities and Exchange Commission charged BNY Mellon that it violated the Foreign Corrupt Practices Act by providing internships to family members of foreign government officials affiliated with a Middle Eastern sovereign wealth fund.

compliance and bribery

The unnamed Middle Eastern sovereign wealth fund was a client of BNY Mellon for custody and asset management. Unnamed officials at the sovereign wealth fund asked BNY Mellon to provide their family members with internships. One of those officials was a “key decision maker” who could award more business to BNY Mellon.

The SEC investigation found that BNY Mellon did not evaluate or hire the family members in accordance with its hiring standards and require a minimum grade point average and multiple interviews. The family members did not meet the criteria yet were hired with the knowledge and approval of senior BNY Mellon employees in order to corruptly influence foreign officials and win or retain contracts to manage and service the assets of the sovereign wealth fund.

The SEC found smoking gun emails that it made it clear that the internships were made to influence the government official.

A Boutique account manager wrote in a February 2010 e-mail concerning the internship request for Interns A and B that 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].”

In June 2010, an employee of BNY Mellon with primary responsibility for the Asset Management relationship with the Middle Eastern Sovereign Wealth Fund wrote of the internships for Interns A and B: “I want more money for this. I expect more for this. . . . We’re doing [Official X] a favor.”

In a separate e-mail to a different BNY Mellon colleague, the same employee stated “I am working on an expensive ‘favor’ for [Official X] – an internship for his son and cousin (don’t mention to him as this is not official).”

The same employee advised a colleague in human resources: “[W]e have to be careful about this. This is more of a personal request . . . [Official X] doesn’t want [the Middle Eastern Sovereign Wealth Fund] to know about it.” The same employee later directed his administrative assistant to refrain from sending e-mail correspondence concerning Official X’s internship request “because it was a personal favor.”

Hiring practices have been an area more subtle bribery. More typically we’ve seen this with government contracting where the government official will award the contract then go to work for the company.

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What is an “Instrumentality” under the FCPA?

compliance and bribery

If your are trying to figure out whether a company is a private company or an “instrumentality” of a foreign government under the Foreign Corrupt Practices Act you are already in trouble. To reach that point in the FCPA analysis you’ve already paid a bribe, or are thinking of paying a bribe. (If you’re just thinking about it; Don’t do it.) Otherwise you’ll end up in the position of Joel Esquenazi and Carlos Rodriguez.

The two owned a Florida telecommunications company that was doing business with Telecommunications D’Haiti, S.A.M. (“Teleco”), a company closely linked to the Haitian government. They were paying bribes to officials of Teleco. They were hiding these payments, so they were also involved in money-laundering. The bribery scheme was uncovered by the Internal Revenue Service. Esquenazi and Rodriguez were convicted of FCPA violations and money-laundering.

They appealed their convictions arguing that Teleco was not an “instrumentality” of a foreign government under the FCPA. Instrumentality is not defined in the FCPA and this is the first appellate decision to tackle the definition.

The Court started with the premise that “an instrumentality must perform a government function at the government’s behest…. What the defendants and the government disagree about, however, is what functions count as the government’s business.”

Esquenazi and Rodriguez had a losing hand. The Court looked to the “grease payment” exception under the FCPA. That allow facilitation payments of a “routine government action.” That provision goes on to list phone service as a type of routine government action. At this point, it’s clear they are losing the case.

The Court did not stop there, but decided to use its stature as the first case deciding this issue to provide a list of factors to help future courts decide if the government controls an entity:

  • the foreign government’s formal designation of that entity;
  • whether the government has a majority interest in the entity;
  • the government’s ability to hire and fire the entity’s principals;
  • the extent to which the entity’s profits, if any, go directly into the governmental fisc,
  • the extent to which the government funds the entity if it fails to break even; and
  • the length of time these indicia have existed.

Again, I don’t think any company should be looking at these factors to decide whether or not to pay a bribe. If you pay it, your attorneys are going to be looking at this list to see if they can keep you from going to jail.  Esquenazi and  Rodriguez were sentenced to lengthy jail terms: Esquenazi receiving 15 years and Rodriguez receiving 7 years.

References:

Best Practices Under the FCPA and Bribery Act

FCPA Compliance

Tom Fox is prolific writer on the Foreign Corrupt Practices Act. He publishes the excellent FCPA Compliance and Ethics Blog. One of the downsides to a blog is that it’s a running commentary and not a narrative guide. Blogs are great for sharing ideas among practitioners. But a blog does not come together as a nuts and bolts tool.

Tom took action and organized some of his best posts into Best Practices Under the FCPA and Bribery Act. Now you can pull a comprehensive collection off your shelf to help you create and manage a world class compliance program for bribery and corruption.

The book is a “best of” collection, but organized topically, making it a great resource for the FCPA practitioner.

I was not an unbiased reader of the book. I’ve spoken with Tom many times and spent some time with him at the Compliance Week conference in 2010. Tom kindly mentioned me in the acknowledgements and sent me a copy of the book.

My only demerit on the book is that there is little new material that did not appear on his blog.

Follow-Up Purchase of a Business from a Foreign Official

compliance and bribery

There are obstacles when trying to buy a business from a foreign official. The Foreign Corrupt Practices Act prohibits giving or offering anything of value to any foreign official with a corrupt intent to assist in obtaining or retaining business. It is not a flat prohibition on business relationships. But all of the recent FCPA enforcement has made businesses skittish when dealing with a foreign official in a business relationship.

The latest Department of Justice’s Foreign Corrupt Practices Act Opinion Procedure Release is evidence of the overly-cautionary approach.

A US investment banking/wealth management firm bought a majority interest in a foreign financial firm. The seller retained a minority interest in the foreign firm and was locked-out from selling for five years. The seller ends up getting appointed as a high-level government official, responsible for financial industry regulation. Suddenly, the firm’s minority shareholder is a government official.

The US firm wants to buy the remaining minority interest, but the red alarm of the FCPA is flashing. Even worse, the contractual formula for calculating the sales price for the minority interest no longer works. It results in a zero value when there is significant value. There would be litigation if the US firm tried to enforce that zero dollar purchase price.

The US firm and foreign official do the right thing for a conflict situation. They hire a third party to value the asset and base the sales price on that value. The parties even use a “leading, highly regarded, global accounting firm” to determine the value.

As for the official acts, the foreign official has recused himself from any actions that would involve the firm and has notified his agency of his relationship with the firm.

The firm received assurances from the foreign country that the sale of the minority interest would not violate local law.

Shouldn’t that have been enough? The parties documented the transaction price, walled the regulatory agency, and got a legal opinion that the transaction did not violate local law. That should have been enough to eliminate any signs of corrupt intent that would result in violation of the FCPA. Even more, buying the minority interest would remove the ongoing conflict that the foreign official had with owning an interest in a regulated entity.

But one or both sides decided they wanted more and used the Department of Justice’s FCPA opinion procedure. It’s one of the funky features of the FCPA that you can ask the government if it’s okay to do something. This is the DOJ’s first Opinion Procedure Release of 2014 and only the second release since October 2012.

The firm then went through an 8 month process with the Department of Justice to get this Opinion Procedure Release. It seems like overkill.

I would suspect the parties thought the transaction was high profile enough that it would attract the attention of the Department of Justice. Then the firm would need to sit through a Department of Justice investigation on the transaction and possibly print a press release about the investigation. It seems from the steps that the firm took, it could tell a good story and provide all the right documentation. You would think that the DOJ would quickly see that there was no story and go away quickly.

The Opinion Release acts a preventive measure. There are clearly red flags associated with the transaction. The firm and foreign official appeared to have done a great job addressing the concerns.

References:

The New Resource Guide to the FCPA

The Securities and Exchange Commission and the Department of Justice jointly released A Resource Guide to the U.S. Foreign Corrupt Practices Act (.pdf). The 120-page guide provides a detailed analysis of the U.S. Foreign Corrupt Practices Act and closely examines the SEC and DOJ approach to FCPA enforcement.

The guide addresses a wide variety of topics including who and what is covered by the FCPA’s anti-bribery and accounting provisions; the definition of a “foreign official”; what constitute proper and improper gifts, travel, and entertainment expenses; facilitating payments; how successor liability applies in the mergers and acquisitions context; the hallmarks of an effective corporate compliance program; and the different types of civil and criminal resolutions available in the FCPA context. On these and other topics, the guide takes a multi-faceted approach toward setting forth the statute’s requirements and providing insights into SEC and DOJ enforcement practices. It uses hypotheticals, examples of enforcement actions and matters that the SEC and DOJ have declined to pursue, and summaries of applicable case law and DOJ opinion releases.

The Resource Guide is a  response to the Phase 3 review by the OECD Working Group on Bribery. That report from that review recommended that the US anti-bribery efforts could be enhanced by consolidating publicly available information on the application of the FCPA. This Resource Guide is that consolidation.

Adoption and the FCPA

The latest Opinion Procedure Release from the Department of Justice comes from a group of non-profit adoption agencies. Based on the stories I’ve heard from friends who have adopted from overseas, I’m not surprised that adoption agencies are concerned about the Foreign Corrupt Practices Act. Opinion Release No. 12-02 is focused on an event hosted by the agencies and not the actual adoption practices. This is the second opinion release focused on adoption agencies.

Nineteen adoption agencies want to host 18 officials involved in the adoption process. The event sounds like a typical business/entertainment gathering:

  • Business class airfare on international portions and coach airfare for domestic portions of flights;
  •  Two or three nights hotel stay at a business-class hotel;
  • Meals; and
  • Transportation.

To minimize the concerns of concerns of corruption, the agencies put a few protections in place:

  1. Entertainment events will be of nominal value
  2. The agencies will not pick the attendees, but leave it up to the government agency.
  3. Souvenirs will have a business logo and be of nominal value.
  4. No stipend or spending money.

This sounds familiar because the Department of Justice dealt with very similar issues last year in Release 11-01. This year’s request sounds like there will be a bit more entertainment involved, but nothing extravagant.

The fact pattern does reflect anything new. I think it’s how most businesses would treat the situation. I suppose that’s helpful. But it also reflects a paranoia about the FCPA. It’s not a violation for merely giving something of value to a foreign official, there needs to be corrupt intent for a violation of the bribery sections of the FCPA. Obviously, a company should be anxious when a government official is involved and there should be heightened scrutiny. There was nothing about this release that has not been covered in other releases.

Sources:

FBI and FCPA

In addition to learning about the FBI’s compliance program, understanding white collar criminals, and a visit to the FBI Academy, the FBI Corporate Compliance Officer Outreach Event included a very frank discussion of the Foreign Corrupt Practices Act. The program brought in attorneys from the Department of Justice to discuss their approach to bringing FCPA cases.

Anyone who has read the FCPA Opinion releases may be surprised to hear the practical approach spoken by the presenters. The opinion releases paint a vary minimal threshold for ordinary business entertainment expenses to not be outside the boundaries of a bribe.

The presenters started off with four types of payments that are not bribes:

  1. Facilitation payments (still suspect)
  2. reasonable and bona fide gifts and entertainment
  3. duress payments, when there is a threat of physical harm
  4. Extortion

They pointed out that the key to a bribery case is the corrupt intent. They painted a picture that the DOJ has a hard time finding proof of corrupt intent and an even harder time convincing a jury that there was corrupt intent. In my view, that leaves a lot of grey areas between the de minimis standard in the opinion releases and the much larger payments in prosecuted cases.

They pointed to the Morgan Stanley case as one where the firm’s compliance program stopped the DOJ from seeking further prosecution. As to the compliance defense and credits under the sentencing guidelines for effective compliance programs, the speakers admitted that you rarely see those in cases. However, that is because the DOJ rarely brings cases when they see an effective compliance program.

The last piece of news was to be on the lookout for some substantial guidance on the FCPA. The guidance is not coming out  as a response to the Chamber of Commerce or other critics of the FCPA. It’s a response to the OECD’s review of the US corruption laws in 2010. The Phase III report recommended consolidation and summarization of available information on the application of the FCPA. This guidance will be that consolidation. To meet the deadline of the OECD report, we should expect the guidance to come out in October.

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