Real Estate Firm Reports China Payments

In an SEC filing this week, global real estate services firm CB Richard Ellis (CBRE) disclosed possible FCPA violations in China.

It said payments by employees for entertainment and gifts to Chinese government officials were discovered during an internal investigation. The company didn't say how much may have been improperly paid, but characterized the amount as "minor." The payments may also have violated local law, it said.

The antibribery provisions prohibit the giving or offering to give anything of value to a foreign official to obtain or retain business. See, e.g., 15 U.S.C. §78dd-1(a) [Section 30A of the Securities & Exchange Act of 1934]. So even "minor" payments or gifts can be the basis for a violation. And failing to accurately account for small payments or gifts, especially those that may violate the FCPA and local law, can be a books and records offense. See 15 U.S.C. § 78m and SEC Staff Accounting Bulletin: No. 99 – Materiality.

CBRE self disclosed the payments to the DOJ and SEC in February this year. It has been cooperating with the agencies and has taken other unspecified "remedial measures."

The company said it also started a separate internal investigation during the third quarter of 2010. It involves the "use of a third party agent in connection with a purchase in 2008 of an investment property in China for one of the funds" CBRE manages. The investigation is ongoing, according to the statement, and the results will be reported to the DOJ and SEC.

The China real estate market was also involved in Morgan Stanley's SEC disclosure in February 2009. The bank said in a short statement then that it "uncovered actions initiated by an employee based in China in an overseas real estate subsidiary that appear to have violated the Foreign Corrupt Practices Act. Morgan Stanley terminated the employee, reported the activity to appropriate authorities and is continuing to investigate the matter."

In December 2008, Morgan Stanley's China-based managing director of real estate in Shanghai, Garth Peterson, left the bank. And the firm's global head of property investing, Sonny Kalsi, was placed on administrative leave. Some of Morgan Stanley's property projects involved investments with government-linked Chinese enterprises. Several high-ranking Chinese officials from Shanghai were arrested in 2008 and 2009 for corruption in connection with deals in the property market.

CB Richard Ellis Group, Inc. trades on the NYSE under the symbol CBG.

Download CBRE's October 5, 2010 Form 8-K here.

Measuring Compliance

After a public company finds evidence of illegal payments overseas, there are decisions to make. Should the board launch an internal investigation? Should the company self-report its findings to the DOJ and SEC? What about a public disclosure? Before those decisions are made, though, there's usually a discussion about "materiality." It's a common subject in this setting. But it shouldn't be.

As we've said before, the measure for compliance under the Foreign Corrupt Practices Act's books and records and internal control provisions isn't materiality but reasonableness. Issuers must "make and keep books, records, and accounts, which, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the issuer." They must "devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that transactions are properly executed and recorded."

Reasonableness, not materiality, explains a disclosure this week by Team Inc. The Alvin, Texas-based pipeline and valve repair specialist is investigating what it thinks are $50,000 of illegal payments in Trinidad over a five-year period. Just $10,000 a year. Not much by most measures, and impacting sales equivalent to just one-half of one percent of Team's global revenues.

But lots of small bribes that go undetected for several years (if that's what happened) might mean lapses in accounting standards and gaps in internal controls -- and violations of the FCPA. That can be a big deal.

Here's Team's disclosure from its August 4th Form 8-K:

During a recent internal management review of one of our branch operations in Trinidad, we were informed of allegations of improper payments, made by our local employees, to employees of certain customers, including foreign government owned enterprises. Consequently, the Audit Committee of our Board of Directors initiated an investigation of those allegations with the assistance of independent outside counsel.

The investigation has found evidence suggesting that payments, which may violate the Foreign Corrupt Practices Act (FCPA), were made to employees of foreign government owned enterprises. While the investigation is ongoing, there has been no indication that the improper payments extend beyond the one Trinidad branch. Based upon the evidence obtained to date, we believe that the total of these improper payments over the past five years did not exceed $50,000. The total annual revenues from the impacted Trinidad branch represent approximately one-half of one percent of our annual consolidated revenues.

We have voluntary disclosed information relating to the initial allegations, the investigation and the initial findings to the U.S. Department of Justice and to the Securities and Exchange Commission, and we will cooperate with the DOJ and SEC in connection with their review of this matter. The outcome of this investigation cannot be predicted at this time; however, the FCPA and related statutes and regulations do provide for potential monetary penalties as well as criminal and civil sanctions in connection with FCPA violations.

Team Inc.'s common stock trades on the NASDAQ Global Select Market under the symbol TISI.

Download Team Inc.'s August 4, 2009 Form 8-K here.

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From William Jefferson's Trial. The jury convened for the last time Thursday and decided the former congressman must forfeiture close to $470,000. He was convicted Wednesday on 11 of 16 corruption charges, including conspiracy to violate the Foreign Corrupt Practices Act, soliciting and taking bribes, depriving citizens of honest services, money laundering and racketeering, and conspiracy to solicit bribes. Jefferson was acquitted of a substantive charge of violating the FCPA. He's now free pending his October 30 sentencing, when he faces a maximum penalty of 150 years in prison.
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Let's Be Reasonable

It's a material world -- at least for auditors, public-company executives and securities lawyers. Material losses. Material misstatements and omissions. Material adverse changes. But wait. When it comes to the books and records provisions of the U.S. Foreign Corrupt Practices Act, forget materiality. The standard becomes reasonableness -- a head fake that confounds professionals and produces a steady stream of compliance calamities.

Why reasonableness? Why -- for the FCPA's accounting standards -- should issuers "make and keep books, records, and accounts, which, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the issuer?" Why do issuers have to "devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that transactions are properly executed and recorded?" Why are similar transactions measured at reasonable intervals as a way to sniff out impropriety?

The best explanation comes from former SEC Chairman Harold Williams. His 1981 speech about the FCPA's accounting standards was so illuminating and succinct, it became an official policy statement. And his remark then that "[t]housands of dollars ordinarily should not be spent conserving hundreds" entered the compliance argot that is still with us today. Here's part of what he said:

"But, materiality, while appropriate as a threshold standard to determine the necessity for disclosure to investors, is totally inadequate as a standard for an internal control system. It is too narrow -- and thus too insensitive -- an index. For a particular expenditure to be material in the context of a public corporation's financial statements -- and therefore in the context of the size of the company -- it would need to be, in many instances, in the millions of dollars. Such a threshold, of course, would not be a realistic standard. Procedures designed only to uncover deficiencies in amounts material for financial statement purposes would be useless for internal control purposes. Systems which tolerated omissions or errors of many thousands or even millions of dollars would not represent, by any accepted standard, adequate records and controls. The off-book expenditures, slush funds, and questionable payments that alarmed the public and caused Congress to act, it should be remembered, were in most instances of far lesser magnitude than that which would constitute financial statement materiality.

"Reasonableness, rather than materiality, is the appropriate test. Reasonableness, as a standard, allows flexibility in responding to particular facts and circumstances. Inherent in this concept is a toleration of deviations from the absolute. One measure of the reasonableness of a system relates to whether the expected benefits from improving it would be significantly greater than the anticipated costs of doing so. Thousands of dollars ordinarily should not be spent conserving hundreds. Further, not every procedure which may be individually cost-justifiable need be implemented; the [Foreign Corrupt Practices] Act allows a range of reasonable judgments."

See Foreign Corrupt Practices Act of 1977: Statement of Policy, SEC Release No. 34-17500 (Jan. 29, 1981) [46 FR 11544]. SEC Release No. 34-17500 is the codification of SEC Chairman Harold Williams' speech on January 13, 1981 to the American Institute of Certified Public Accountants Annual Conference.

See also 15 U.S.C. §§ 78m(b)(2)(A) and 78m(b)(2)(B) [Securities Exchange Act of 1934 Section 13(b)(2)(A) 13(b)(2)(B)].

View Chairman Williams' January 29, 1981 Speech Here.

FCPA Defenses That Don't Work

The text of the Foreign Corrupt Practices Act sets out three types of payments to foreign officials that are lawful -- facilitating payments, promotional expenses and payments permitted under the written laws of the host country. In addition to these three defenses, there are others that are repeated often -- but are bogus. They originate not from judges or jurisprudence but from the wishful thinking of companies and people in need of a defense, and fast. Knowing which defenses are real and which are counterfeit is crucial, however, and learning the differences too late can have dire consequences.

Here, then, are some of the most popular FCPA defenses that do not work:

Everyone pays bribes in this country.

Don't look at me. The / joint venture partner / agent / foreign subsidiary / did it.

Only big companies get into FCPA trouble. No one cares about a little fish like us.

My supervisor approved it.

We had no choice -- either pay up or lose the deal. That's extortion, not bribery.

We can't control what our agent does on his own time with his own money.

A hundred tiny bribes do not add up to one big bribe.

We have to pay bribes to do business here. The U.S. Government doesn't really expect us to leave, does it?

I was outside the U.S. and only used foreign bank accounts.

It's not fair. . . . .

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More information is available from Cassin Law LLC.

The Requestor's French Dilemma

Facing a decision to either stay in a joint venture or leave, when staying means violating the Foreign Corrupt Practices Act and leaving means breaching contractual obligations, is a legal disaster. But it's an easy trap to fall into.

One U.S. company (called the “Requestor”) proposed to enter into a joint venture with a French company. There were doubts about how the French company obtained some of its contracts. So the Requestor took various precautions to protect itself against an FCPA violation. Accordingly, if it learned its French partner had breached the compliance warranty, the Requestor could terminate the relationship if the breach had a “material adverse effect” upon the business.

Not good enough, said the U.S. Department of Justice:

Should the Requestor's inability to extricate itself result in the Requestor taking, in the future, acts in furtherance of original acts of bribery by the French company, the Requestor may face liability under the FCPA. Thus, the Department specifically declines to endorse the "materially adverse effect" standard.

The Lesson: Accept no limits or conditions on the right to terminate a joint venture when there is evidence of an FCPA violation.

View DOJ Opinion Procedure Release 2001-01 (May 24, 2001) Here.