Richard L. Cassin Publisher and Editor

Andy Spalding Senior Editor

Jessica Tillipman Senior Editor

Elizabeth K. Spahn Editor Emeritus

Cody Worthington Contributing Editor

Julie DiMauro Contributing Editor

Thomas Fox Contributing Editor

Marc Alain Bohn Contributing Editor

Bill Waite Contributing Editor

Shruti J. Shah Contributing Editor

Russell A. Stamets Contributing Editor

Richard Bistrong Contributing Editor 

Eric Carlson Contributing Editor

Bill Steinman Contributing Editor

Aarti Maharaj Contributing Editor

FCPA Blog Daily News


The Company Line

It's not hard to find reasons why the DOJ and SEC would rather prosecute corporations instead of individuals.

Here are a few:

Corporations can't defend themselves. They're strictly liable under respondeat superior for crimes committed by employees in the scope of their jobs. That's why no company has fought against FCPA charges in court for more than two decades. Individuals, on the hand, can and do fight in court and sometimes win. Recent examples of tough trials with mixed results include Frederick Bourke and William Jefferson

Corporations cooperate. No all companies self-disclose their FCPA offenses, but most do. They hire outsiders to conduct in-depth internal investigations and hand the results over to the government. That makes life easier for prosecutors and in theory benefits the company. Individuals can also plead guilty, of course, and many do. But they usually first try to defend themselves, which increases the government's burden.

Corporations can't run or hide. Domestic companies are all registered in their home states and can be brought to court there. Foreign corporations that are issuers under the FCPA have also submitted to the jurisdiction of U.S. courts. But individuals of any nationality can run. If they make it to another country, they have to be extradited back to the U.S. to face trial, a complicated process that can take years and may not be successful. Some examples include Viktor Kozeny and Jeffrey Tesler.

Corporate cases make headlines. For years, journalists have known that FCPA cases don't generate much buzz with the general public, and cases involving individuals hardly make a ripple (the Bourke and Jefferson cases were exceptions because of the defendants' fame). But giant penalties assessed against well-known global corporations are widely reported. Recent examples are Siemens, KBR, Daimler, and BAE. If the DOJ and SEC want to spread the word about the FCPA, chasing big companies is a good way to do it.

Corporate prosecutions are cost effective. They don't require long and expensive trials, so there's less drain on agency resources. And the payday for the U.S. government can be a quarter or even a half billion dollars per case, swamping the top fines for individuals.

How do any of the above influence prosecutorial decisions, if at all? The DOJ and SEC would say they don't. In other posts, we'll look at the recent enforcement track record, and we'll try to see things from the perspective of the prosecutors.


GE In $23 Million SEC Settlement

General Electric Company, whose compliance program is among the most respected and admired in the world, has settled civil violations of the Foreign Corrupt Practices Act with the Securities and Exchange Commission.

The company today agreed to pay $23.4 million to resolve claims that arose from a $3.6 million kickback scheme by four GE subsidiaries -- two of which were acquired after the offenses occurred. The kickbacks were paid under the United Nation's oil-for-food program. The GE subsidiaries were selling medical and water purification equipment to the Iraqi government.

The SEC charged GE and two subsidiaries -- Ionics Inc. and Amersham plc -- with civil violations of the books and records and internal controls provisions of the FCPA.

The kickbacks were paid from 2000 to 2003 and were not properly accounted for. They consisted of cash, computer equipment, medical supplies, and services to the Iraqi Health Ministry or the Oil Ministry. GE acquired two of the subsidiaries in 2004 and 2005 and became liable for their securities law violations, including FCPA offenses.

Cheryl J. Scarboro, the head of the SEC's FCPA unit, said: "GE failed to maintain adequate internal controls to detect and prevent these illicit payments by its two subsidiaries to win oil for food contracts, and it failed to properly record the true nature of the payments in its accounting records. Furthermore, corporate acquisitions do not provide GE immunity from FCPA enforcement of the other two subsidiaries involved."

In the SEC settlement, GE was ordered to disgorge $18,397,949 of profits and pay $4,080,665 in prejudgment interest and a penalty of $1 million. GE and subsidiaries Ionics Inc. and Amersham plc agreed not to violate Sections 13(b)(2)(A) and 13(b)(2)(B) of the Securities Exchange Act of 1934.

The SEC said it has taken 15 FCPA enforcement actions against companies involved in the now discredited U.N. oil for food program and has recovered more than $204 million. The program was intended to provide humanitarian relief for the Iraqi population, which faced hardship under international trade sanctions. It allowed the Iraqi government to purchase humanitarian goods through a U.N. escrow account. The Iraqi government instructed vendors to use middlemen and to inflate prices to fund the kickbacks.

In addition to GE, other companies charged under the oil-for-food program include Chevron, Total SA, AB Volvo, Innospec, Ingersoll-Rand, Akzo-Nobel, and Fiat.

The DOJ did not join the enforcement action against GE or the subsidiaries. It usually prosecutes criminal antibribery offenses under the FCPA, which require payments to foreign officials. In GE's case, the kickbacks apparently went directly to Iraqi ministries and not to government officials.

The SEC said that in settling the case, it "considered remedial acts promptly undertaken by GE and the cooperation the company afforded the Commission staff in its investigation."

View the SEC's July 27, 2010 press release here.

View the SEC's Litigation Release No. 21602 and Accounting and Auditing Enforcement Release No. 3159 (both dated July 27, 2010) in Securities and Exchange Commission v. General Electric Company; Ionics, Inc.; and Amersham plc, Civil Action No. 1:10-CV-01258 (D.D.C.)(RWR) here.

View the SEC civil complaint against GE, Ionics, and Amersham here.


Medical Ghosting And The FCPA

The debate about medical ghosting has focused on the U.S. market. But could the DOJ and SEC now be looking at the practice overseas, where it might violate the FCPA?

Main Justice reported that in April, the DOJ and SEC sent letters to AstraZeneca PLC, Baxter International Inc., Eli Lilly & Co., and Bristol-Myers Squibb Co. The letters asked about business practices in Brazil, China, Germany, Greece, Italy, Poland, Russia, and Saudi Arabia.

Medical ghosting works like this. Drug companies hire outside firms to draft articles touting a drug, then retain a doctor or scientist to sign off as the author. The drug company then finds a publisher, who doesn't know the article was written by someone other than the person who signed it.

Doctors and scientists eagerly participate because publication credit increases their prestige and professional standing. And the drug-companies use the medical journal articles as "independent" proof that their drugs are safe and effective.

A Senate report released last month and quoted in the New York Times said: “Manipulation of medical literature could lead physicians to prescribe drugs that are more costly or may even harm patients."

The FCPA's antibribery provisions prohibit among other things (1) the giving of anything of value (2) to a foreign official (3) to obtain or retain business. See, e.g., 15 U.S.C. §78dd-1(a) [Section 30A of the Securities & Exchange Act of 1934].

Ghosting has those elements. Giving a doctor or scientist an unsigned manuscript for publication has real value. Doctors and scientists working in government-owned or managed hospitals overseas are "foreign officials" under the FCPA. And articles appearing to independently endorse a drug help its manufacturer obtain or retain business.

We don't know if medical ghosting will figure in any FCPA-related investigations of the drug companies. But it could.


James Giffen's Legal Legacy

Judge Denny ChinThe prosecution of James Giffen for violating the FCPA is a ghostlike case. As David Glovin of Bloomberg wrote earlier this month: "Oil consultant Jim Giffen was told by a U.S. judge six months after his 2003 arrest in an international bribery scheme that he would go on trial in the fall of 2004. He’s still waiting."

His trial may be on hold, but his case made legal history years ago. Professor Elizabeth Spahn, a friend of the FCPA Blog and an occasional contributor here, has published a great article on U.S. v. Giffen and the act of state doctrine -- the notion that sovereign nations engaged in domestic actions cannot be questioned in the courts of another nation.

She says:

The act of state doctrine is not typical fare for most prosecutors or judges in U.S. criminal proceedings. The first opinion addressing the act of state doctrine in a U.S. bribery case was issued in 2002 in the Giffen prosecution [when it was still before a grand jury] by Judge Denny Chin (more recently famous for sentencing white collar criminal, Ponzi scheme architect Bernie Madoff). The 2002 Chin opinion is a landmark case of first impression. It provides helpful precedent for future decisions on the most significant legal hurdle facing prosecutors developing a case—discovering the facts of complicated bribery schemes where the documents are ostensibly protected by foreign law. [footnotes omitted]

Prof Spahn describes the Giffen case as "a gripping story of alleged grand corruption bribery suitable for a Hollywood movie." What's remarkable, she says, is that despite the best efforts of powerful U.S. lobbyists and law firms in an FCPA case allegedly involving $105 million in bribes in Kazakhstan, during one of the darkest periods in the history of the U.S. Department of Justice, the case still "demonstrates the rule of law operating even handedly, even when major oil interests are at stake."

The article can be downloaded from SSRN here. The citation is Discovering Secrets: Act of State Defenses to Bribery Cases (2009), Hofstra Law Review, Vol. 38, p. 163, 2009.

*   *   *

And more from Prof Spahn. We'd like to thank her for mentioning the FCPA Blog during her talk at the June 30 ABA ROLI Anti-Corruption Mini-Seminar. She referred to us as a clearinghouse serving the FCPA / compliance community. We'll do our best to live up to that role. During the last segment of her talk, Prof Spahn suggested topics for future compliance-related research. We often hear from students and others looking for ideas, so check out what she had to say here.


Microfinance Meets The FCPA

Photo courtesy of World Vision CanadaThe Justice Department has published its second FCPA Opinion Procedure Release of 2010.

The Requestor in Release 10-02 is a U.S. non-governmental organization and a “domestic concern” under the FCPA. It's a non-profit microfinance institution operating globally, providing loans and other basic financial services to the world’s lowest-income entrepreneurs. Funding comes from grants and donations by governments, NGOs, public and private organizations, and individuals.

The Requestor has a wholly-owned, self-sufficient subsidiary organized as a limited liability company in "a Eurasian country." The so-called Eurasian Subsidiary wanted to contribute $1.42 million to a local microfinance institution through a grant.

The Requestor has been converting all of its local operations, including the Eurasian Subsidiary, to commercial entities licensed as financial institutions. The conversion will help the local entities attract capital and offer new services such as savings accounts, microinsurance, and remittances. The Eurasian Subsidiary's $1.42 million grant to the local microfinance organization is required for the subsidiary's license conversion.

During due diligence, the Requestor discovered that one of the board members of the local microfinance institution and its parent "is a sitting government official in the Eurasian country and that other board members are former government officials."

Despite the presence of at least one foreign official on the target's board, the DOJ gave the Requestor a green light for its subsidiary's investment. The sitting foreign official has and will have no government role in the Requestor's activities. And, under the law of the Eurasian country, sitting government officials can't be paid for this type of board service.

Additional controls in the grant included staggered payments, ongoing monitoring and auditing, earmarking of funds to be spent, further prohibitions on compensating board members, and anti-corruption compliance provisions in the grant documents.

The Release said the purpose of the proposed grant is to obtain or retain business. The DOJ reasoned that the Eurasian Subsidiary's nonprofit business is to be followed by for-profit business activity in the Eurasian country, and the proposed grant would be made as a condition precedent to obtaining a license to operate as a profit-making financial institution.

So, the DOJ said, the issue is whether the proposed grant would amount to the corrupt giving of anything of value to any officials of the Eurasian country in return for obtaining or retaining business. "Based on the due diligence that has been done and with the benefit of the controls that will be put into place, it appears unlikely that the payment will result in the corrupt giving of anything of value to such officials."

Release 10-02 also includes a helpful discussion about charitable giving and the FCPA.

Download a copy of the DOJ's FCPA Opinion Procedure Release No. 10-02 dated July 16, 2010 here.

All DOJ Opinion Procedure Releases can be found here.


The British Question

This week's news that the newly elected U.K. government cracked under pressure from the business lobby and delayed implementing the Bribery Act until April 2011 was a setback for lots of reasons.

Opponents claimed they needed more guidance to help them comply with the new scheme. What will happen to the Bribery Act between now and next April is anyone's guess. Many think the government is likely to water down its provisions if not kill the act altogether.

The new law was supposed to clarify a century-old patchwork of statutes and common law and extend compliance obligations in a way similar to the Foreign Corrupt Practices Act.

All new laws raise questions. "Don't spit on the sidewalk" can induce the same sort of panic as the Bribery Act. What's the definition of spit, do both feet need to be on the sidewalk, what about medically induced spitting, how about unconscious drooling? But very quickly judges, defendents, and lawyers figure out what laws mean, as happened with the FCPA and countless other decrees through the ages, and life and business go on.

The U.K. knee buckling means that 33 years after enactment of the FCPA, the U.S. is still nearly alone in the battle against global graft. But for the battle to be won, and for American companies to ever enjoy a level playing field, the U.S. needs allies. The U.K. was about to become the first full-fledged partner.

Meanwhile, the U.K.'s Serious Fraud Office -- the agency responsible for prosecuting major cases of overseas corruption -- is struggling against its own domestic opposition. The SFO's ability to join the U.S. Justice Department in forging global settlements with global defendants in global anti-corruption prosecutions is up in the air.

In March this year, Britain's second-ranking criminal judge said the $12.7 million fine the SFO agreed with a U.K. division of Innospec Inc. went beyond the SFO's authority. Delaware-based Innospec had reached what it believed was a $40 million global settlement with U.S. prosecutors and the SFO. At Innospec's hearing, however, Lord Justice Thomas, the deputy head of criminal justice in the U.K. courts, said: “I have concluded that the director of the SFO had no power to enter into the arrangements made and no such arrangements should be made again.” 

A few weeks ago, the SFO's director, Richard Alderman, tried to reassure the world that global settlements are still on the table. But he didn't sound too sure himself. He said:

The question here is whether the SFO remains committed to taking part in global resolutions in cases where a corporate is subject to the jurisdiction of the authorities in a number of different countries. The answer to that emphatically is yes. We are very committed to this. Clearly we are feeling our way. Global resolutions in cases of concurrent jurisdiction are new and, until recently, our Judges have not had to consider the issues that arise in these cases. Innospec was our first global resolution and we obtained guidance on some of the issues from the Judge in that case.

As Trace has reported, of 515 outbound, or foreign enforcement actions, more than 75 percent are U.S. matters. The remaining 25 percent are the result of the combined efforts of 21 other nations. The United Kingdom ranks a distant second in the number of outbound bribery cases with 4.3 percent of the total.

Some help is better than none. But without real partners, America's anti-corruption effort won't be effective and over time will look more and more like legal bullying. It's not a one-country fight but a global fight. Whether the U.K. is really part of that fight is now an open question.


But Is It Right?

Something big, very big, is happening in FCPA enforcement. The top ten FCPA settlements of all time involve penalties of $2.8 billion. The top six happened in just the past 20 months and account for 95% of that, or $2.67 billion.

So far this summer, Snamprogetti / ENI of Italy and Technip of France each paid more than a third of a billion dollars to resolve FCPA offenses. Just three years ago, the biggest settlement on record was Baker Hughes' $44.1 million payment, and that amount electrified the FCPA world. Who could have guessed that only a few years later, settlements that size would hardly get a glance, and payouts eight times bigger would become the norm.

As we ride this hockey stick toward heaven, we need to ask some questions. Like, are mega-settlements good for compliance or do they simply put a price tag on non-compliance? What about shareholders? They're innocent of the corruption but ultimately pay the tab. Why do five of the top six settlements involve non-U.S. corporations? Do giant penalties punish wrongdoers or shield top executives from criminal prosecution? And do they distort enforcement decisions in ways we don't yet understand?

Those are some of the questions. Ruminations to follow.


The FCPA's Top Ten

Here are the top ten FCPA settlements of all time. If our math is right, the financial penalties (criminal fines, civil disgorgement, and prejudgment interest) add up to $2.8 billion, with almost 50% of that coming from the top two settlements. Five of the top six involve non-U.S. companies. The oldest case on the list is Titan Corporation's from 2005; the newest is Snamprogetti / ENI's from July 7, 2010.

They are:

1. Siemens: $800 million in 2008.

2. KBR / Halliburton: $579 million in 2009.

3. BAE: $400 million in 2010.

4. Snamprogetti Netherlands B.V. / ENI S.p.A: $365 million in 2010.

5. Technip S.A.: $338 million in 2010.

6. Daimler AG: $185 million in 2010.

7. Baker Hughes: $44.1 million in 2007.

8. Willbros: $32.3 million in 2008.

9. Chevron: $30 million in 2007.

10. Titan Corporation: $28.5 million in 2005.

Editor's note: This post was updated here.


Financial Reform School

Two parts of the Financial Reform Bill passed last week by the Senate and which the President has said he'll sign concern us. The first is the whistleblower bounty for securities-law recoveries, including FCPA-related settlements, that exceed $1 million.

The bounty program will result in more FCPA cases against corporations. It won't matter if they have robust compliance programs. Organizations are strictly liable for crimes committed by employees who are doing their jobs. So even if a company has an effective compliance program and has done everything possible to prevent violations, that's no defense under respondeat superior.

When the DOJ and SEC find an employee's FCPA violation, the company is presumed guilty and forced to settle the case, usually by paying a big penalty.

Companies trying to settle are also forced to help the government make cases against employees and other individuals. The companies might have to disclose information to prosecutors that the employees thought was privileged. So the rules of privilege and the right against self incrimination are short-circuited.

Before so-called financial reform creates whistleblower bounties for FCPA-related recoveries, the law of respondeat superior needs to be reformed. Corporations should be given the chance to defend themselves by showing good-faith efforts at compliance. 

The second part of the financial reform bill that concerns us is Section 1504, "Disclosure of Payments by Resource Extraction Issuers." It requires public companies involved in oil and gas and mineral development to disclose in their annual reports all extraction-related payments they or their controlled subsidiaries make to foreign governments.

The FCPA already covers illegal payments to foreign government officials. This new law covers legal payments to governments themselves.

We'll stipulate that some natural resource companies do business with corrupt overseas governments. That's because not all hydrocarbons and minerals are found under land controlled by saintly regimes. But what will happen when the payments are disclosed? Will governments and private groups mount PR campaigns against companies doing business with unpopular overseas governments? Will "extraction issuers" lose their freedom to go where the natural resources are? Will doing business with regimes that can't pass someone's smell test trigger political attacks that punish companies for legal activities that bring needed products to the rest of the world?

There's always tension between big oil and the U.S government. That's natural. They both control vast resources that can be used to influence domestic and foreign policy. But the government shouldn't impose disclosure requirements on businesses that the government itself isn't willing or able to meet.

For more on Section 1504, see Mike Koehler's excellent discussion here


A Web Of Corruption

Responding to our post The Billion Dollar Man, a reader sent this intriguing comment:

Dear FCPA Blog,

There’s another important fact not mentioned in today’s post. In addition to the revenue generated from TSKJ (which is 3/4ths complete), there may be yet more to come.

You’ll recall that Jack Stanley apparently received at least $10.8 million in kickbacks for his efforts to win work for KBR. This $10.8 million is now officially part of his “restitution” with the DOJ. What is interesting to note is the apparent breakdown of the $10.8 million.

Stanley allegedly received $1.95 million for Bonny Island Trains 1 and 2, $4.75 million from a Lebanese Consulting Company controlled by Jeffrey Tesler for the Malaysia Dua LNG project, and $4.1 million from a BVI Consulting Company controlled by Tesler for the Malaysia Tiga LNG project.

This speaks of corruption not just in the TSKJ consortium, but of a sophisticated web of corruption in other consortia as well.

So while he may already be worth a billion plus dollars to U.S. enforcement agencies, based on the origin of the $10.8 million, the overall penalties may be just getting started.

The citation for the above is Paragraph 22, Sections M, N, and O of Stanley's September 3, 2008 plea agreement.


Tidewater's Cool Deal

Tidewater Inc., one of about a dozen oil-and-gas-services companies dragged into FCPA compliance problems a few years ago by Swiss logistics giant Panalpina, said in its latest annual report that it expects a settlement soon with the SEC and possibly the DOJ.

The company said its SEC settlement would require a total payment of about $11.4 million, consisting of $8.4 million in disgorgement and prejudgment interest, and a contingent civil penalty of $3 million. The disgorgement would be payable right away, while the contingent civil penalty would be due within 18 months, but only to the extent Tidewater has not paid a penalty to the DOJ for the same FCPA offenses.

So whatever Tidewater pays to the DOJ in penalties will be deducted from the SEC's penalties (that's why it's a contingent civil penalty). That doesn't mean Tidewater won't pay more than $3 million in penalties to the DOJ. But it does mean it might pay the SEC $3 million less, depending on how things work out with the DOJ.

Why the special deal?

Usually the DOJ and SEC walk hand-in-hand in FCPA settlements with issuers. For some reason -- maybe the DOJ's limited FCPA bandwidth these days because of the shot-show prosecutions, or the backlog caused by this summer's time-consuming OECD review -- the SEC has taken the lead with Tidewater while the DOJ, according to the company's disclosure, isn't yet ready to settle. But to help Tidewater out, the SEC is giving the company a way to budget for a settlement, reserve the money, and partly limit its financial exposure.

The process of making financial arrangements for FCPA-related settlements among defendants, the DOJ, and SEC is usually completely opaque. This time, however, we're glimpsing the work in progress. The only similar deal we've seen involved ABB in 2004. The company was hit with an SEC disgorgement and interest payment of about $6 million and a civil penalty of $10.5 million. That civil penalty, however, was to be "deemed paid" by amounts ABB later paid in criminal fines to the DOJ (it eventually paid about $5.2 million in criminal fines).

Back to today's news, Panalpina itself has reserved about $110 million for an expected FCPA settlement with the DOJ and SEC, and a separate antitrust resolution. In April it said the settlements should happen "in the near future."

The DOJ and SEC since 2007 have been investigating whether Pananlpina, on behalf of several customers including Tidewater, paid bribes in Nigeria for customs clearance and licensing. About a dozen leading oil and gas-related companies received letters from the DOJ and SEC asking them to "detail their relationship with Panalpina." Shell, Schlumberger, Nabors Industries, Transocean, GlobalSantaFe Corp., Noble Corp. and Pride International were also involved.

Pride said in February this year it has set aside $56.2 million for an expected FCPA settlement with the DOJ and SEC. The Houston-based oil rig operator first disclosed potential FCPA compliance issues in 2006.

Tidewater said its tolling agreement with the SEC expired on June 15 this year. It hasn't said if the settlement deadline was extended.

The company's disclosure was reported yesterday by Main Justice.


Here's the complete FCPA discussion in Tidewater Inc.'s Form 10-K for the year ended March 31, 2010:

Foreign Corrupt Practices Internal Investigation

The company has previously reported that special counsel engaged by the company’s Audit Committee had completed an internal investigation into certain FCPA matters and reported its findings to the Audit Committee. The substantive areas of the internal investigation have been reported publicly by the company in prior filings.

Special counsel has reported to the Department of Justice (DOJ) and the Securities and Exchange Commission (SEC) the results of the investigation, and has engaged in a series of cooperative discussions with the two federal agencies as to the potential legal ramifications of those findings. The following reflects the status of those discussions:

Securities and Exchange Commission

The company has reached an agreement in principle with the staff of the SEC to resolve its previously disclosed investigation of possible violations of the FCPA. Under the proposed resolution, the company would consent to the filing in federal district court of a complaint (“Complaint”) by the SEC, without admitting or denying the allegations in the Complaint, and to the imposition by the court of a final judgment against the company, including a permanent injunction against us. The Complaint would allege civil violations of the FCPA’s anti-bribery and accounting provisions with respect to certain previously discussed conduct involving tax authorities in Azerbaijan, and the FCPA’s accounting provisions with respect to amounts paid by a subsidiary of the company to a third party customs broker to procure certain permits necessary for the company’s vessels to operate in Nigeria. The final judgment would not take effect until it is confirmed by the court, and would permanently enjoin the company from future violations of those provisions.

The agreement in principle would require the company to pay a total of approximately $11.4 million, consisting of the sum of $8.4 million (principally representing disgorgement of profits and prejudgment interest) payable at the time of settlement and a contingent civil penalty of $3.0 million. The contingent civil penalty would be payable to the SEC in 18 months, to the extent that the company had not agreed to pay fines or penalties of at least that amount to another government authority (or authorities) in connection with the matters covered by the internal investigation. The financial charge associated with the proposed settlement with the SEC was recorded in the fourth quarter of fiscal 2010 and is included in general and administrative expenses.

The agreement in principle is contingent upon the parties’ agreement on the terms of the relevant documents, approval by the Securities and Exchange Commission, and confirmation by a federal district
court. There can be no assurance that this settlement will be finalized, or finalized on the terms set forth above. If the settlement is not finalized, the SEC may bring an enforcement action against the company. The company’s current tolling arrangements with the SEC extend through June 15, 2010.

Department of Justice

To date, the company has not reached any agreement with the DOJ regarding a negotiated resolution of the previously disclosed internal investigation. Based on discussions with the DOJ regarding the possible disposition of this matter, it appears likely that any negotiated disposition would involve charges and sanctions imposed by the DOJ, although the company is unable to predict at this time the nature and scope of such charges and sanctions and upon whom they would be imposed. The timeframe for resolution of these matters is also uncertain. Given these uncertainties, the company is unable at this time to estimate the range of any monetary exposure that might arise from such a settlement. As a result, no accrual for potential additional liabilities associated with a negotiated resolution with the DOJ has been recorded as of March 31, 2010. Any fines or penalties paid to the DOJ would reduce the balance of the SEC contingent penalty referenced above under the company’s agreement in principle with the SEC. Should additional information be obtained that any potential liability in connection with the resolution of these matters with the DOJ is probable and reasonably estimable, the company will record such liability at that time. While uncertain, ultimate resolution with the DOJ could have a material adverse effect on the company’s results of operations or cash flows. It is possible that if agreement is not reached, the DOJ may bring enforcement action against the company.


A Failure To Escalate

By Thomas Fox

At the recent Corporate Counsel Institute – Europe put on by the Georgetown University Law CLE program in London, participant Matthew King, Group Head of Internal Audit at HSBC, was interviewed by Project Counsel founder Gregory  Bufithis. They talked about the most important elements of a successful compliance program. Mr. King said the one key feature is “escalation.

He meant that in almost every compliance issue he's been involved with, there was a point when an employee did not report a sensitive payment or situation up the ladder for additional review. Because the issue never reached the right people in the company for review, action, and resolution, it later became more difficult and more expensive to deal with.

Culture, Mr. King emphasized, has to be in place, not only to allow escalation but to actively encourage it. And while whistleblower hotlines are necessary, these should not be viewed as the only way for an employee to escalate a concern.

The HP matter, which I wrote about previously in this space, is an example of a failure of escalate. It involves HP's German subsidiary and allegations of bribery connected with a contract for the sale of hardware into Russia. The Wall Street Journal reported that at least one witness said the transactions in question were internally approved by HP through its then-existing contract approval process.

Mr. Dieter Brunner, a bookkeeper who is a witness in the probe, said in an interview he was surprised when, as a temporary employee of HP, he first saw an invoice from an agent in 2004.

"It didn't make sense" because there was no apparent reason for HP to pay such big sums to accounts controlled by small businesses, Mr. Brunner said. But he processed the transactions anyway because he was the most junior employee handling the file. “I assumed the deal was OK," he said, "because senior officials also signed off on the paperwork."

Think how different HP's situation might be today if this temporary employee had escalated his concern.

So is your company encouraging its employees to escalate their compliance concerns? Or does everyone simply approve a payment or transaction because others have already done so?

The YouTube video of Gregory P. Bufithis' interview of Matthew King is here.

Thomas Fox is an attorney in Houston, Texas, specializing in FCPA compliance, risk management and international transactions. His blog can be found here and he can be reached at