Reducing C-Level Risk In Compliance Land

By David Riker

The CEOs, CFOs, COOs and Chief Compliance Officers we meet with are well aware of the FCPA and are working to put in place compliance programs to keep their companies on the right side of the law, but they are not terribly concerned about their own personal exposures. Their logic: If I’m not physically handing over a bag of money to a corrupt government official, I’m clean.

This, of course, is not true. According to this great analysis from Chadbourne & Parke (in pdf here), 53 of the 61 individuals charged with violating the FCPA over the past six years were senior corporate officers, not bag men. Moreover, 8 of these individuals were charged despite committing no direct action in the corrupt act.

Based on our own analysis of hundreds of FCPA cases, meetings with C-level managers and FCPA screening programs implemented around the world, we’ve come up with a five question reality check for senior execs who don’t think they need to worry about their personal exposure to the FCPA:

Is your company doing business in Mexico, Nigeria, Brazil, China or India?

Operations in countries with less mature corporate governance laws/regulations are more likely to create a compliance breach for a multinational firm. It is critical to segment vendors, suppliers and marketing partners on a continuum of high-to-low risk based on their country of origin. China, for example, has seen a 50% increase in vendor, supplier and procurement fraud between 2010 and 2011 according to our annual Global Fraud Report.

Are you in the energy, manufacturing, pharmaceutical, defense or telecom sectors?

Based on total fines and recent enforcement trends, these are the highest risk industries. Since the FCPA was passed in 1977, companies in the Energy sector have been fined $2 billion; Defense and Aerospace contractors have been fined $443 million; Manufacturing firms have been fined $225 million;and Telecom companies have been fined $218 million. The DOJ has also been vocal about its plans to target more Pharmaceutical companies, which currently account for $84 million in total fines.

Do I know what I need to know about who I know?

The nature of emerging market expansion is such that multinationals typically assemble networks of vendors and agents to rapidly put boots on the ground in these regions. Perhaps not surprisingly, subsidiaries, agents and vendors are often a corporation’s weakest link in foreign corruption cases. These corporate outsiders, most of whom were probably not screened or background-checked like full-time employees, need to be vetted.

How can I standardize the process of compliance-checking everyone everywhere all at once?

As every 21st century CEO knows, good systems make good managers. Unfortunately, the process of vetting compliance measures in fast-moving emerging markets has historically been done in an ad-hoc, incomplete fashion with some regions collecting some data on vendors and partners, others collecting altogether different information and others collecting none. To avoid data overload, it is critical to build a systemic approach to fraud risk analysis.

What do I do when I find a violation?

We see this most commonly in the mergers and acquisition process: due diligence will reveal a series of inappropriate payments or other questionable accounting that raises serious red flags.  What managers do with this information can be the difference between a reputation for courageous leadership and potential personal liability. History has proven again and again that companies who spot a problem early and self-report it are far less likely to find themselves tangled in a long, painful investigation and, if they do, they are much more likely to avoid major sanctions.

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David Riker is Managing Director, Third Party Screening at Kroll. He blogs about corporate compliance risk at www.fcpalert.com. He can be contacted here.

This Would End Graft Everywhere

Two farmers 'fed up with bribery demands dumped three sacks filled with snakes on the floor of a busy tax office in northern India,' the Guardian reported yesterday.

About forty snakes were released, the story said, including at least four cobras.

The farmers needed tax records for their land in Narharpur village, the Guardian said, 'but officials withheld the files for weeks while allegedly demanding bribes.'

The tax office quickly emptied, with 'clerks and villagers climbing onto tables and scurrying out the door to escape.'

There were no injuries and police eventually captured the snakes.

The farmers who dumped them haven't been caught, the story said.

BRIC Companies Rank Low On New TI Index

Transparency International yesterday released its 2011 Bribe Payers Index. It’s the fifth version of the index and the first update since 2008.

It ranks 28 of the world’s largest economies, TI said, ‘according to the perceived likelihood of companies from these countries to pay bribes abroad.’

The report is based on a survey of business executives. The countries ranked, TI said, cover all regions of the world and represent almost 80 percent of the total world outflow of goods, services, and investments.

It includes perceptions of public bribery and for the first time private ('business to business') bribery.

The top-ranked countries are the Netherlands and Switzerland, tied in first place. Belgium, Germany, and Japan round out the top five.

Companies from the BRIC economies are led by Brazil at 14. Russia ranked last overall at 28, India at 19, and China at 27.

The UAE, Indonesia, and Mexico complete the bottom five spots.

TI’s 2011 bribe payers index is here.

Avon Discloses SEC Investigation

Avon Products confirmed Thursday that the SEC has issued a formal order of investigation into possible violations of the Foreign Corrupt Practices Act.

Avon's disclosure appeared in its quarterly report filed with the SEC.

The company, which first disclosed an internal investigation in October 2008, said it has turned over evidence to the SEC and DOJ from 'compliance reviews.'

The investigation, the company said, focused on expenses and accounting for 'travel, entertainment, gifts, use of third party vendors and consultants and related due diligence, joint ventures and acquisitions, and payments to third-party agents and others.'

The Wall Street Journal said in May the internal investigation uncovered millions of dollars of questionable payments to government officials in China, Brazil, Mexico, Argentina, India, and Japan.

The company's legal fees and costs for outside counsel conducting the investigation were $59 million in 2009, $95 million in 2010, and $22.5 for the first quarter of this year.

Last year, Avon reportedly suspended four employees pending its internal bribery investigation -- three in China and one in New York.

China imposed restrictions on direct selling in the late 1990s that forced Avon to market its products through shops and boutiques. But in 2006, the company convinced China's regulators to allow its traditional door-to-door sales model.

Avon appeared on our 2011 watch list.

Avon Products, Inc. trades on the NYSE under the symbol AVP.

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Avon's FCPA disclosure in its Form 10-Q (pdf) filed October 27, 2011 said:

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As previously reported, we have engaged outside counsel to conduct an internal investigation and compliance reviews focused on compliance with the Foreign Corrupt Practices Act (“FCPA”) and related U.S. and foreign laws in China and additional countries. The internal investigation, which is being conducted under the oversight of our Audit Committee, began in June 2008. As we reported in October 2008, we voluntarily contacted the United States Securities and Exchange Commission and the United States Department of Justice to advise both agencies of our internal investigation. We are continuing to cooperate with both agencies and inquiries by them, including but not limited to, signing tolling agreements, translating and producing documents and assisting with interviews.

As previously reported in July 2009, in connection with the internal investigation, we commenced compliance reviews regarding the FCPA and related U.S. and foreign laws in additional countries in order to evaluate our compliance efforts. We are conducting these compliance reviews in a number of other countries selected to represent each of the Company's international geographic segments. The internal investigation and compliance reviews are focused on reviewing certain expenses and books and records processes, including, but not limited to, travel, entertainment, gifts, use of third party vendors and consultants and related due diligence, joint ventures and acquisitions, and payments to third-party agents and others, in connection with our business dealings, directly or indirectly, with foreign governments and their employees. In connection with the ongoing internal investigation and compliance reviews, certain personnel actions have been taken and additional personnel actions may be taken in the future.

For additional information, see Note 5 to our consolidated financial statements contained in our Form 10-Q for the quarter ended March 31, 2011 and “Risk Factors” contained in our Form 10-K for the year ended December 31, 2010. The internal investigation and compliance reviews of these matters are ongoing, and we continue to cooperate with both agencies with respect to these matters. In connection with the internal investigation and compliance reviews, we continue to enhance our ethics and compliance program, including our policies and procedures, FCPA compliance-related training, FCPA third party due diligence program and other compliance-related resources.

On October 26, 2011, the Company received a subpoena from the United States Securities and Exchange Commission (“SEC”) requesting documents and information in connection with a Regulation FD investigation of the Company's contacts and communications with certain financial analysts and other representatives of the financial community during 2010 and 2011. The Company was also advised that a formal order of investigation was issued by the SEC relating to the FCPA matters described above and the Regulation FD matters that are referenced in the subpoena. The Company intends to cooperate fully with the SEC's investigation.

At this point we are unable to predict the duration, scope, developments in, results of, or consequences of the internal investigation and compliance reviews and the SEC's investigation.

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Whistleblowers In India Risk Being Murdered

Bloomberg reporters Mehul Srivastava and Andrew MacAskill published a story today about the recent murders of whistleblowers who tried to expose government corruption in India.

The disturbing report said at least twelve people have been killed since January 2010 after they used India’s Right to Information Act to expose local graft.

At least forty other whistleblowers have been attacked and injured during the past two years, Bloomberg said.

Most of the murder victims lived in small towns or villages, Bloomberg said, and none lived in India’s ten biggest cities.

More than a half million requests were filed under the Right to Information Act through March this year, Bloomberg said. 'While some cases have prompted the resignation of public officials, users risk becoming victims of their success.'

On the importance of the six-year-old Right to Information Act, the story said:

For slum dwellers, filing a request under the law, known as RTI, was almost as effective as paying a bribe in getting a new ration card, according to a 2008 series of field experiments by Leonid Peisakhin and Paul Pinto, who were doctoral candidates at Yale University in New Haven, Connecticut. Those who did nothing never received their card or waited three times as long, the researchers found in a 2009 paper.

“It is a tragedy that these people have died, but it is also a sign of how powerful a tool the law is,” Subhash Agrawal, an anti-corruption campaigner, told Bloomberg. 

Kudos to Bloomberg's Mehul Srivastava and Andrew MacAskill for their outstanding reporting.

The full article is available here.