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Entries in Compliance (34)


Richard Bistrong: The compliance community is shaped by common challenges

At an event last week in London, one of my co-panelists was Brian Saulnier, a partner at K&L Gates. More than ten years ago he was part of an outside team, engaged by my former employer, to look into my illegal conduct, including the United Nations bribery investigation, among other allegations.

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Despite crackdown, Asia firms are slow to comply

Only 40 percent of Asia companies have anti-bribery policies in place, compared with a global average of 81 percent last year.

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Walmart's Move For Mexican Dominance 

By all accounts, Walmart's appetite for growth in Mexico was insatiable. The drive to dominate the retail market there, according to the New York Times, allegedly led the company to pay $24 million in bribes to fast track store permits.

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The Future Of Compliance

A couple of months ago, John Sherman of the Kennedy School at Harvard stopped by. He talked about the OECD's new guidelines which, he said, are a non-binding code of conduct that "strengthens the link between compliance, ethics, and human rights."

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Naked Corporate Defendants

The Second Circuit Court of Appeals has affirmed the decision in U.S. v. Ionia Management, S.A., shooting down attempts to change the way corporations are held liable for the criminal acts of their employees through respondeat superior. As we've said many times, nothing has had a greater impact on enforcement of the Foreign Corrupt Practices Act against corporations than respondeat superior, which leaves companies defenseless once employees are found to have committed violations.

The amicus brief in Ionia had argued that respondeat superior makes it too easy to impute criminal liability to corporations. But the Second Circuit's three-judge panel (Calabresi, Livingston, McLaughlin) didn't buy the argument. In rejecting the idea that a compliance program should be counted in a company's favor, the court said:

We note that this argument is made only by amici curiae and not by Ionia, and so we are not obligated to consider it. But the argument, whoever made it, is unavailing. Adding such an element is contrary to the precedent of our Circuit on this issue. See Twentieth Century Fox Film Corp., 882 F. 2d at 660 (holding that a compliance program, “however extensive, does not immunize the corporation from liability when its employees, acting within the scope of their authority, fail to comply with the law”). And this remains so regardless of asserted new Supreme Court cases in other areas of the law. As the District Court instructed the jury here, a corporate compliance program may be relevant to whether an employee was acting in the scope of his employment, but it is not a separate element.
So for now, at least, organizations will continue to face vicarious liability for nearly all criminal acts of employees -- even low-level personnel "acting against explicit instructions and in the face of the most robust corporate compliance program," as the amicus brief put it.

But here's the problem: respondeat superior does more harm than good. Sure, it produces a 100% corporate "conviction" rate in FCPA cases, which must go down well at the Justice Department. But, it probably doesn't deter illegal behavior or encourage better compliance programs. And it puts overwhelming pressure on organizations to resolve threatened criminal cases. Because of the catastrophic effects of any potential conviction, companies have to settle with the government. So they rush into agreements that may require them to waive the attorney–client privilege, hand over employees' private documents and data, cut off support for their legal defense, and fire those who don't cooperate with government investigations.

In other words, our criminal justice system is robbing corporations of the chance to defend themselves. What's worse, it's trampling the fragile rights and protections of individuals. That's why respondeat superior needs serious fixing, and soon.

Read the Second Circuit's per curiam opinion in U.S. v. Ionia Management S.A. here.


In The Master's Defense

As we've said, nothing magnifies the impact of the Foreign Corrupt Practices Act on corporations more than respondeat superior. Latin for "let the master answer," it's the legal doctrine holding companies vicariously liable for crimes committed by employees acting within the scope of their employment. Under it, once an employee admits to an offense or is found guilty, the company is automatically guilty too. Case closed. That gives prosecutors enormous unchecked leverage over corporate defendants.

And that's why we don't know of anything more important to the FCPA these days than the pending case challenging respondeat superior. United States v. Ionia Management, S.A. was argued Friday in the U.S. Court of Appeals for the Second Circuit. But as the Wall Street Journal reports, the three-judge panel (Calabresi, Livingston, McLaughlin) didn't seem too impressed with the appellant's arguments.

Andrew Weissmann, the former Enron prosecutor and current Jenner & Block partner who co-wrote the excellent amicus brief, told the panel that a misreading of a 99-year old Supreme Court case, New York Central v. U.S., has made it too easy to impute criminal liability to corporations. The Journal reported this exchange:

Judge Guido Calabresi called Weissmann’s argument an “interesting” one, saying it appealed to the judges as academics. “Whether we should do something about this as judges is a different matter,” the judge said.
Other than the Justice Department, who benefits from respondeat superior? As the amicus brief puts it, the law imposes vicarious criminal liability on organizations for nearly all criminal acts of employees -- even low-level personnel "acting against explicit instructions and in the face of the most robust corporate compliance program." That sort of hair-trigger liability probably has no added deterrent effect on companies. And the catastrophic consequences of any potential conviction forces them to resolve threatened criminal litigation, without even the possibility of mounting a defense.

That's not how our criminal justice system is supposed to work. Sure, corporate wrongdoers deserve to be punished. Rogue companies bent on breaking the law have to be stopped. But an accused corporation should always have the chance to show a judge or jury that it acted in good faith -- that its overall intention was to comply with the law and not to break it.

Allowing corporations to defend themselves would bring a needed measure of justice. It would also give organizations the strongest possible incentive to maintain an effective compliance program.

It's time to fix respondeat superior -- either in court or in Congress.


Surveying FCPA Compliance

Eighty percent of U.S. companies have now banned facilitating payments entirely, and nearly four in ten small U.S. companies have walked away from business in countries where the perceived risk of non-compliance was too high.

Those are among the findings of Fulbright & Jaworski's 2008 Litigation Trends Survey. The fifth annual report is based on input from 358 U.S. and U.K. in-house counsel, including 251 U.S. respondents.

Here are some facts from the "Bribery and Foreign Corruption" section of the survey, which is available here:

  • Twenty percent of companies with $1 billion or more in revenues undertook a bribery or corruption investigation during the survey period. For companies with less than $1 billion in revenues, the number was 2%, and for companies under $100 million, it was just 1%.
  • Manufacturers led all other industry segments in corruption investigations at 14%, followed by energy firms at 12%.
  • Seven percent of U.S. companies engaged outside counsel because of possible corruption or bribery charges, including violations of the Foreign Corrupt Practices Act.
  • Eleven percent of the responding companies with international operations hired outside counsel during the survey year to investigate bribery claims, and 20% dealt with potential bribery concerns as part of due diligence in a corporate acquisition.
  • Only 20% of U.S. companies still allow facilitating payments in some countries as a means of expediting business and government functions.
  • In the U.K, 39% of companies still permit facilitating payments.
  • Thirteen percent of the responding companies admit they still allow small direct payments to foreign governments in certain specific situations.
  • One-quarter of energy companies and one-fifth of financial services firms admitted making direct payments to foreign hosts in some cases.
  • Twenty three percent of all U.S. companies said they have made the decision to walk away from doing business in a country based on the perceived degree of local corruption. For companies with under $100 million in revenues, the walk-away rate was 39%, and for billion-dollar companies it was 31%.
A release says the survey was conducted earlier this year (and in the prior four years) by Greenwood Associates, a Houston-based research firm. It canvassed 358 in-house counsel in the U.S. and U.K., more than two-thirds of whom identified themselves as either general counsel or deputy general counsel, with 7% holding the title of senior counsel, 10% associate general counsel, and 15% staff counsel.

The industry groups covered by the survey included financial services, energy, manufacturing, health care, retail, real estate, insurance, education, and technology and telecommunications. By size, 22% of the responding companies report revenues under $100 million, 39% report revenues between $100 million and $999 million, and 39% at $1 billion and above. Just under half the companies are publicly held (a quarter are listed on the NYSE) and 57% maintain at least one foreign office, with 19% having locations in more than 20 countries.



Charting The FCPA

"Cash crunch could result in more corruption cases," says a headline in the current Financial Week (available here.) In the article, Steven Tyrrell, the head of the Justice Department's fraud section, says the credit crisis may produce a crop of additional Foreign Corrupt Practices Act cases. The targets this time would be banks and others that went looking for cash from sovereign wealth funds in exchange for favors rendered to the host-country's rulers.

"Mr. Tyrrell," the article says, "noted the recent boom of sovereign wealth funds is an area at the top of the Justice Department’s hit list, though it has not yet garnered any definitive cases."

We've never seen empirical studies on the subject, but we've noticed that FCPA cases generally spring from industries that deal in scarce commodities -- whatever those happen to be at any moment in history. It could be energy, telecommunications licenses, access to hospital patients, metals, food, cash and so on.

Wherever buyers are scrambling for supply, sellers have opportunities to squeeze them. Rising energy prices over the past decade, for example, increased the leverage corrupt oil-producing countries could exert over foreign buyers. In her excellent book, Bribery and Extortion, Alexandra Wrage talks about corruption in Nigeria's ruling family during the energy and metals boom. The story is grotesque, and the scenario was repeated in resource-rich, governance-poor countries around the globe. The pressures in energy-related markets eventually resulted in many FCPA enforcement actions, culminating in Jack Stanley's shocking guilty plea last month.

These days, a commodity in short supply is cash. Sovereign wealth funds have it and banks need it. Will the financial institutions succumb to market pressures? Will they abandon FCPA compliance to save their balance sheets? Some might, as the DOJ's Steven Tyrrell predicts. And if that happens, pin-striped tragedies are sure to follow.

We don't have empirical evidence for this one either. But we're fairly certain that anyone who has ever occupied a jail cell because of an FCPA offense wishes they'd complied instead.



The FCPA Isn't Fun And Games

Mark Mendelsohn -- the Justice Department official responsible for criminal prosecutions under the Foreign Corrupt Practices Act -- has left no doubt that the government is targeting individuals. Here's what he told an audience at an American Bar Association panel discussion in Washington, D.C. last week:

The number of individual prosecutions has risen – and that’s not an accident. That is quite intentional on the part of the Department. It is our view that to have a credible deterrent effect, people have to go to jail. People have to be prosecuted where appropriate. This is a federal crime. This is not fun and games.
Mendelsohn is the Deputy Chief of the Fraud Section at the DOJ's Criminal Division. He was quoted in the Sept. 16, 2008 edition of the Corporate Crime Reporter.

How much is enforcement increasing? During the past five years, the DOJ has investigated more overseas public bribery cases than in the prior 20 years. In 2007, the DOJ launched 16 prosecutions, double the number from 2006. What about 2008? There are 84 FCPA investigations pending. Press reports indicate the DOJ has a dozen prosecutors assigned to FCPA cases. They're supported by a team of FBI agents willing to use wire-taps and other surveillance techniques to catch offenders.

Executives still weighing the chances of getting caught should listen to this: "Problems in a faraway country," Medelsohn said, "are more likely to be learned by us – sitting here in Washington – than ever before. People in Bangladesh can e-mail me directly with an allegation that a company in Bangladesh is paying bribes to a government official there. Information about our work is now known around the world. The media is paying a great deal of attention to corruption issues. There is a lot more English language media reporting around the world. It’s more difficult to hide. . . .”

Mendelsohn also said new ways to resolve cases -- including non-prosecution agreements, deferred prosecution agreements, and corporate compliance monitors -- are tools that give companies an incentive to investigate, self-disclose and take corrective actions on their own. He didn't say so, but companies trying to settle with the DOJ are likely to cough up individuals responsible for the illegal behavior.

And hiding evidence abroad probably won't work. “Another factor," Mendelsohn said, "is that we have been increasingly effective in gathering evidence overseas through treaties as well as informal arrangements with law enforcement in other countries. That has made our work easier. Foreign law enforcement authorities are beginning to investigate and prosecute their own cases. That has had a positive effect on our efforts.”

Thanks to the excellent Corporate Crime Reporter for this and other recent stories about FCPA enforcement.



Oiling The Wheels Of Government

We somehow remained cheerful this week, despite the gloomy news from Fenway and Tom Brady's knee injury. Knees, by the way, seem oddly under-designed, unless their real purpose is to keep us humble.

Bob Lanier was a knee-injury pioneer during St. Bonaventure's only trip to the Final Four in 1971. Pavel Bure, Serena Williams and David Beckham have followed suit and bounced back. Gov. Arnold Schwarzenegger went gimpy for a while, as did Faith Hill and even Lil' Romeo. Hot-yoga impresario Bikram Choudhury rehabbed injured knees along the way -- his and thousands of others. Pierce Brosnan, a Hollywood James Bond, and Bond-girl Michelle Yeoh, have both been hobbled. When Nicole Kidman hurt her right knee filming Moulin Rouge, insurance companies had to pay $3 million for delays. Tiger Woods' knee has probably cost the PGA Tour about a billion eyeballs so far.

And staying with the subject of human frailties, the scandal du jour isn't an overseas bribery story. It's a spectacular made-in-the-USA compliance failure. We're talking about the fun folks at Uncle Sam's Minerals Management Service (MMS). Among other things, they run the government's royalty-in-kind program, collecting oil and gas as payment for drilling on federally-owned offshore lands. Last year MMS' cash flow was around $11 billion. But cash wasn't the only thing flowing freely.

According to a series of reports by the Interior Department's inspector general (available here), some MMS employees in Denver "frequently consumed alcohol at industry functions, had used cocaine and marijuana, and had sexual relations with oil and gas company representatives." Nineteen of the employees between 2002 and 2006 -- about a third of the program's total staff -- "socialized with and had received a wide array of gifts from oil and gas companies with whom the employees were conducting official business."

Two MMSers accepted dinners, tickets to shows, and golfing trips "on at least 135 occasions from four major oil and gas companies with whom they were doing business," the report said. It named gift-giving companies as Chevron, Shell, Gary-Williams Energy and Hess. Eight people in the royalty-in-kind program accepted golf, ski and paintball outings, meals and drinks, tickets to a Toby Keith concert, a Colorado Rockies baseball game, and a Houston Texans football game (we liked it better when the team was called the Houston Oilers).

An AFP story quoted Congressman Nick Rahall of West Virginia, the Democratic chairman of the House Natural Resources Committee, as saying the report "reads like a script from a television miniseries -- and one that cannot air during family viewing time."

The New York Times said the MMS staffers "did not view socializing with oil company representatives and taking gifts as inappropriate because they said they needed to be part of the marketing culture in order to market the program’s oil and gas." That's right. It's a tough job, but someone's got to do it.

The inspector general's recommended reforms include an explicit prohibition against accepting gifts or gratuities from industry sources, regardless of value; a robust training program with written certification by employees that they know and understand the ethics requirements by which they are bound; and a beefed-up MMS Ethics Office. And yes, random drug testing.

Former MMS official Jimmy W. Mayberry pleaded guilty to a felony conflict-of-interest charge in August and faces up to five years in prison and a $250,000 fine. The DOJ has declined to prosecute two others, which irked the inspector general. Most of the implicated MMS officials, he says, "escaped potential administrative action by departing from federal service, with the usual celebratory send-offs that allegedly highlighted the impeccable service these individuals had given to the Federal Government. Our reports belie this notion."

Enjoy the weekend.



Intent On Complying

The shocking news last week about Jack Stanley's guilty plea teaches again that not all FCPA violations can be prevented. No compliance program or compliance training would have kept Mr. Stanley on the right side of the law. Leaders with bad intentions -- with criminal intent -- can always find a way to cheat, and putting a compliance program in their path won't help.

But Jack Stanley isn't a typical company leader. Unlike him, most want to comply with the FCPA. They want to stay in their jobs and out of jail. They want to protect their companies and the people in them. They want to be proud of the way they do business. For the overwhelming majority of executives, compliance is the goal and compliance training is the tool -- because it works.

That's why regular, repeated training is required for an effective compliance program. The 2005 Federal Sentencing Guidelines say:

The organization shall take reasonable steps to communicate periodically and in a practical manner its standards and procedures, and other aspects of the compliance and ethics program, to the individuals [responsible for compliance] by conducting effective training programs and otherwise disseminating information appropriate to such individuals’ respective roles and responsibilities.
The Sentencing Guidelines don't dictate content or format. That's up to each organization. But the objective is clear: make sure everyone knows what the Foreign Corrupt Practices Act says, requires and prohibits, and do that through training.

Aside from filling heads with knowledge, training sessions sometimes start a dialogue with weird surprises. Schnitzer Steel Industries Inc., the story goes, learned about its public bribery problem after an employee came back from a company-sponsored FCPA training course. He told his supervisors that he and his co-workers were doing all the things the trainers just said were illegal. That triggered Schnitzer's internal investigation, which led finally to a company clean-up and a favorable settlement with the government.

During training sessions, it's best if senior executives are part of the program. They can tell everyone face-to-face that the company really and truly expects 100% compliance. No kidding. And if someone decides on their own not to follow company policy but instead to do something illegal, then they'll likely end up unemployed and facing the full wrath of the law.

Employees working outside the U.S. are especially susceptible to the notion that more sales are always the goal. They need to hear that the first priority is compliance -- and that sales landed illegally aren't wanted. A general counsel told us last month that her CEO often says he isn't interested in being in a market where the company can't operate legally. The CEO has stayed out of at least one rich but dicey African country, sending his compliance message to everyone, loud and clear.

One more thing. FCPA training doesn't need to be elaborate to be effective. In fact, sometimes less formal settings produce the best results. Even the Federal Sentencing Guidelines say organizations, especially smaller ones, can train employees "through informal staff meetings, and monitoring through regular 'walk-arounds' or continuous observation while managing the organization." In other words, effective FCPA training can be woven into the fabric of the organization. That, after all, is the hallmark of a real compliance culture.

We hear from managers, sales people, engineers and others about the daily pressure in the marketplace to win. The temptation to take shortcuts is always huge. Jack Stanley couldn't resist. But most people want to stay straight. They want to avoid hurting themselves, their families, colleagues and companies. Compliance training helps them do that.

View Chapter 8 - PART B - §8B2.1. ("Effective Compliance and Ethics Program") of the 2005 U.S. Federal Sentencing Guidelines here.



A Hair Trigger For Corporate Liability

All the briefs in United States v. Ionia Management, S.A. are now available on the White Collar Crime Prof Blog. The Second Circuit case challenges respondeat superior -- the legal doctrine by which companies are vicariously liable for crimes committed by employees acting within the scope of their employment.

How important is respondeat superior to the Foreign Corrupt Practices Act? Well, think of it as the government's Magic Bullet. With respondeat superior, prosecutors can't lose. But don't take our word for it. Here's what the United States Sentencing Commission said about respondeat superior in its May 2004 release:

Criminal liability can attach to an organization whenever an employee of the organization commits an act within the apparent scope of his or her employment, even if the employee acted directly contrary to company policy and instructions. An entire organization, despite its best efforts to prevent wrongdoing in its ranks, can still be held criminally liable for any of its employees’ illegal actions.
No wonder corporations settle FCPA enforcement actions instead of fighting them in court. But does the law make sense? Should corporations at least be able to present evidence of their compliance efforts in their own defense? Under current law, that evidence may be entirely irrelevant. That's why Ionia -- which is about a ship that released pollutants -- is so important to the FCPA.

We've already posted some excerpts from the excellent amicus brief in support of the defendant-appellant in Ionia. Here's one worth repeating:

A criminal indictment can be a life-or-death matter for a company. Yet, the vast sweep of the district court’s standard for the imposition of vicarious criminal liability makes corporations accountable for almost all criminal acts of any low level employees—even those acting against explicit instructions and in the face of the most robust corporate compliance program. This has caused a tremendous imbalance between the power of a prosecutor and a corporate defendant. Given the hair-trigger for corporate liability even for the most responsible corporate citizen, many corporations forego any defenses in order to resolve threatened prosecution.
And one more:
The potential for inappropriate prosecutorial pressure is particularly heightened in the area of corporate criminal investigations that end in Draconian non-prosecution and deferred prosecution agreements, where no court has oversight authority. There, the prosecutor effectively serves as both judge and jury. Because of the disastrous consequences of a corporate indictment and the ease with which corporations may be liable under the doctrine of respondeat superior, corporations are under immense pressure to agree to almost any terms. The vast majority of these negotiations go on behind closed doors, with little public scrutiny and no judicial review.