In this episode Matt Kelly and I take a deep dive into 6 compliance issues you should keep an eye on in 2017. They include the Wal-Mart FCPA resolution, the future of the FCPA Pilot Program, the SEC Whistleblower program, the Next PCAOB Chairman, the future of new overtime rules and finally the Barclay’s trial for mortgage fraud in the context of the 2008 financial crisis. We also take a look at the GOP attempt to denude the Office of Congressional Ethics and their immediate reversal in the face of intense criticism. For additional reading check out Matt’s two blogs on these subjects: Ethics, Politics, and Optics in New Washington and Six Compliance Events to Watch in 2017.

Yesterday I began an exploration of the General Cable Corporation (General Cable) Foreign Corrupt Practices Act (FCPA) enforcement action. It was settled with the DOJ via a Non-Prosecution Agreement (NPA) and the SEC via a Cease and Desist Order ( General Cable Order). There was also the resolution of a civil charge by the SEC against a former General Cable executive, Karl Zimmer, via a Cease and Desist Order (Zimmer Order). The fines and penalties paid by General Cable were not insignificant. The company paid a $20MM fine based upon its criminal conduct and paid another $51MM in profit disgorgement. Finally, based upon the conduct laid out by the SEC in the General Cable Order, the company was assessed another $6.5MM for violations of the FCPA’s accounting provisions. The $20MM figure reflects a 50% discount off the bottom of the US Sentencing Guidelines fine range, demonstrating that as bad as the underlying bribery and corruption may have been, the DOJ will give significant credit when the company meets the requirements under the FCPA Pilot Program.

In Part I, I laid out the bribery scheme in some detail. Today I consider how General Cable was able to obtain such positive result in the light of multiple bribery schemes in multiple jurisdictions and corporate awareness or conscious indifference to them. Clearly the four prongs of the FCPA Pilot Program were met. As stated by Assistant Attorney General Leslie Caldwell in the DOJ Press Release announcing the enforcement action, “General Cable paid bribes to officials in multiple countries in a scheme that involved a high-level executive of the company and resulted in profits of more than $50 million worldwide. But General Cable also voluntarily self-disclosed this misconduct to the government, fully cooperated and remediated. This resolution demonstrates the very real upside to coming in and cooperating with federal prosecutors and investigators. It also reflects our ongoing commitment to transparency.”

Reviewing each of the Pilot Program prongs separately, there was self-disclosure by General Cable. The NPA stated, “the Company received voluntary self-disclosure credit because it voluntarily and timely disclosed to the Fraud Section the conduct described in the Statement of Facts attached hereto as Attachment A (the “Statement of Facts”).” The issue of self-disclosure is one which has bedeviled companies for quite some time. However, the General Cable enforcement action continues to demonstrate the DOJ takes this seriously and will give credit when companies do self-disclose.

In the area of significant cooperation, the NPA stated, “the Company received full credit for its cooperation with the Fraud Section’s investigation”. The parameters of this cooperation included conducting a thorough internal investigation; “making regular factual presentations and proactively providing updates to the DOJ; voluntarily making foreign based employees available for interviews in the United States; producing documents, including translations, to the DOJ from foreign countries in ways that did not implicate foreign data privacy laws; collecting, analyzing, and organizing voluminous evidence and information for the DOJ; and identifying, investigating, and disclosing conduct to the DOJ that was outside the scope of its initial voluntary self-disclosure.”

This is the first time I have seen a specific reference to production of documents in a manner which “did not implicate foreign data privacy laws”. It is not clear from this statement how the implication was avoided, whether through employee consent or having a duplicate document in a more corporate friendly country. This shows the DOJ has some sensitivity to foreign document privacy laws but there are almost always alternative methods of production.

Also note the additional information provided to the DOJ which was “outside the scope of its initial voluntary self-disclosure.” This means the DOJ will accept the results of a less than complete internal investigation if you supplement the information regularly and on a timely basis. The important point was noted to be that by the conclusion of the investigation, General Cable had provided to the DOJ all relevant facts known to the company, “including information about individuals and third parties involved in the misconduct.”

Next was in the area of remediation. The NPA is replete with the steps taken by General Cable. As laid out in the NPA they included:

  • Terminating the employment or accelerating the previously-planned departures and resignations of 13 employees who participated in the misconduct;
  • Causing the resignation of employees and accelerating the previously-planned departure of an additional employee who failed to supervise effectively others who were engaged in the misconduct described in the Statement of Facts;
  • Causing the resignation of an additional employee who failed to take appropriate steps in response to identifying the misconduct;
  • Terminating the business relationships with 47 third-party agents and distributors who participated in the misconduct described in the Statement of Facts;
  • Hiring a Chief Compliance Officer (CCO) who has an executive officer position in the Company and separate reporting lines to the Chief Executive Officer (CEO) and Audit Committee of the Board of Directors;
  • Conducting a global and enterprise-wide risk assessment and evaluation;
  • Developing and implementing a risk mitigation plan for risks identified through the assessment and evaluation;
  • Developing a comprehensive compliance program that integrates business functions into compliance leadership roles, is designed to deliver clear and consistent communications and expectations Company-wide through policies and procedures, and includes frequent leadership communications to all employees;
  • Revamping the ethics and compliance helpline;
  • Delivering tailored face-to-face compliance training, including training on the FCPA, to the Board of Directors and senior executives, Internal Audit personnel, sales leaders, and all salaried employees;
  • Adopting heightened controls on the selection and use of third parties, including building a system for third-party due diligence that assigns ownership to business personnel to shepherd prospective third parties through a comprehensive risk assessment, review, and approval process;
  • Issuing, and providing training on, business amenities policies specific to certain countries; and
  • Conducting on-site global compliance audits to test adherence to enhanced controls and procedures.

These remediation steps can be broken down into three general categories. First was the disciplining of the persons directly involved, those who knew or should have known and recalcitrant third parties. Next was the hiring of a CCO with real authority and power to act and get things accomplished. Finally, was the specifics of the compliance program which was implemented.

While many of these steps have been laid out previously as a part of a best practices compliance program, there is one I want to highlight. It is No. 10, which specifies “Delivering tailored face-to-face compliance training, including training on the FCPA, to the Board of Directors and senior executives, Internal Audit personnel, sales leaders, and all salaried employees.” [emphasis supplied] The word tailored communicates the DOJ’s expectation for training far beyond the standard out of the box compliance training. It means you must put on training which is not only designed for the risk group it is being presented to but you must have some thought into the different risks for each discipline within an organization and their respective role in any compliance program.

There is quite a bit for the compliance practitioner to consider in this NPA. Tomorrow I will present some of the lessons to be garnered by the General Cable FCPA enforcement action.

 

This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at tfox@tfoxlaw.com.

© Thomas R. Fox, 2017

The Department of Justice (DOJ) and Securities and Exchange Commission (SEC) continued their stunning run of 2016 Foreign Corrupt Practices Act (FCPA) enforcement actions right up to the end of the year with the announcement of the resolution of the General Cable Corporation (General Cable) enforcement action. It was settled with the DOJ via a Non-Prosecution Agreement (NPA) and the SEC via a Cease and Desist Order (General Cable Order). There was also the resolution of a civil charge by the SEC against a former General Cable executive, Karl Zimmer, via a Cease and Desist Order (Zimmer Order).

The fines and penalties paid by General Cable were not insignificant. The company paid a $20MM fine based upon its criminal conduct and paid another $51MM in profit disgorgement. Finally, based upon the conduct laid out by the SEC in the General Cable Order, the company was assessed another $6.5MM for violations of the FCPA’s accounting provisions. The $20MM figure reflects a 50% discount off the bottom of the US Sentencing Guidelines fine range, demonstrating that as bad as the underlying bribery and corruption may have been, the DOJ will give significant credit when the company meets the requirements under the FCPA Pilot Program. As Assistant Attorney General Leslie Caldwell stated in the DOJ Press Release, “General Cable paid bribes to officials in multiple countries in a scheme that involved a high-level executive of the company and resulted in profits of more than $50 million worldwide. But General Cable also voluntarily self-disclosed this misconduct to the government, fully cooperated and remediated. This resolution demonstrates the very real upside to coming in and cooperating with federal prosecutors and investigators. It also reflects our ongoing commitment to transparency.”

Today I will begin a multi-part exploration of the enforcement action to review the underlying facts, consider how General Cable was able to obtain such positive result and the lessons to be garnered by the compliance practitioner.

As for the illegal conduct, one can only say it was wide spread and pervasive throughout several business units in the organization. As stated in the NPA, “General Cable knowingly and willfully failed to implement and maintain an adequate system of internal accounting controls designed to detect and prevent corruption or otherwise illegal payments by its agents. In particular, and as relevant here, General Cable had deficient internal accounting controls that did not require and/or ensure, among other things (a) due diligence for the retention of third party agents and distributors; (b) proof that services had been rendered by third parties before payment could be made to them; (c) oversight of the payment process to ensure that payments were made pursuant to contractual terms or that payments were reasonable and legitimate. General Cable knowingly and willfully failed to address these known weaknesses, in relevant part, to allow the conduct to continue.” The fallout from these illegal schemes were more than $13MM in bribes paid out and $51MM in illegal profits. The bribery schemes involved multiple countries.

Angola

Here General Cable’s Angolan subsidiary made illegal payments to customers who worked for state-owned enterprises. The NPA noted, “(i) between 2003 and 2009, General Cable Celcat and General Cable Condel paid more than $450,000 directly to officials at Angolan State-Owned Enterprise 1, Angolan State-Owned Enterprise 2, and Angolan State-Owned Enterprise 3; (ii) between 2009 and 2013, General Cable Condel paid more than $8.7 million to a sales agent in Angola with knowledge that the sales agent would, and did, pass a portion of those payments to officials at Angolan State-Owned Enterprise 1, Angolan State-Owned Enterprise 2, and Angolan State-Owned Enterprise 3; and (iii) General Cable Condel paid more than $150,000 to another agent with knowledge that the payments would be passed on, in part., to two officials of a state-owned customer.”

These payments were well known within these business units as illegal bribes, with one employee writing in an email, “Everyone knew that [an Angolan State-Owned Enterprise 2 official] was being paid (if not there would be no need for the bills that come from there); when the contract was signed, this was what was agreed had to be paid.” These bribes paid in Angola were funneled through third-party agents. As early as 2012, the General Cable internal audit department picked up evidence of these illegal payments finding that “payments made to the third-party sales far exceeded the amounts required under the contract with the agent”. The NPA noted that the employees “knew” payments made to the agent would be passed on as bribes.

Bangladesh

General Cable conducted business in Bangladesh, Thailand and Indonesia through a subsidiary, Phelps Dodge International (Thailand) Ltd. (PDTL). In Bangladesh, the company paid $43,700 to an agent “with the understanding that the agent would use the money, in part, for corrupt purposes. General Cable was aware of red flags in connection with these payments and ultimately became aware of, or at the very least were willfully blind to, certain of the corrupt payments.” There was also evidence of specific knowledge in PDTL that payments to the agent were being “shared by decision makers in customer, concerned higher ups in Ministry and some top executives at bidder.”

 Indonesia

In Indonesia, PDTL paid “more than $2 million to two freight forwarders in Indonesia with the understanding-that the freight forwarders would use the money, in part, for corrupt purposes.” Once again, “General Cable was aware of red flags in connection with these payments and ultimately became aware of, or at the very least were willfully blind to, certain of the corrupt payments.” Indeed, there were emails cited which demonstrated the bribery scheme was well-known within the business unit, when an “employee wrote an e-mail describing the services of a principal of the two freight forwarders in Indonesia, stating “Mike I mention it before, my agent doesn’t ask for any money upfront. He can afford to pay his way in and out of PLN [Perusahaan Listrik Negara, the Indonesia-state-owned electricity company].””

Thailand

In Thailand the illegal bribe payments were made through a distributor who received excessive rebates which were then used to facilitate the corrupt payments. The NPA stated, “more than $1.5 million in rebates to a distributor in Thailand with the understanding that the distributor would use the money, in part, for corrupt purposes in association with PDTL’s sales to state-owned customers in Thailand, including sales to: (i) the Provincial Electricity Authority, a state-owned electricity supplier in Thailand; (ii) the Metropolitan Electricity Authority, a state-owned electricity supplier in Thailand; and (iii) TOT Public Company Limited, a state-owned telecommunications company.”

All this was in the face of clear red flags being raised regarding the distributor. In one reported instance, “In or about 2011, Executive A met with a high-level executive at General Cable with responsibility for overseeing international operations and expressed concerns that payments to the distributor in Thailand were being used for corrupt purposes. Despite this conversation, the corrupt payments did not stop, nor was an investigation conducted.” Even more troubling were the findings made during a tax review in Thailand, which noted “”potential applicability of the US Foreign Corrupt Practices Act (‘FCPA’) for commissions paid to Thai governmental authorities.” Another email from a General Cable employee with responsibility for corporate taxes stated: “[s]ince this is a legal matter rather than tax, no need to do anything further for me. I will leave it up to you as to whether you want to look into any further.” General Cable took no further action and did not take any steps to implement adequate internal accounting controls. The corrupt payments made through intermediary companies in Thailand” continued.

All of this led the DOJ to note wryly in the NPA, “Thus, even if senior employees of General Cable were unaware initially that the payments to the distributor were being used for illegal purposes, employees at PDTL (Phelps Dodge) and General Cable, including Executive A, came to the understanding that money being paid to the distributor was being used for illegal purposes, and closed their eyes to it being used for bribery.”

China

In China the bribery scheme was once again funneled through corrupt distributors. The China business unit, “paid more than $500,000 to China-based agents and distributors, typically in the form of rebates, special discounts, and technical service fees.” Once again, “General Cable China knew that the third-party agents and distributors would use the money, in part, for corrupt purposes.” Emails presented in the NPA noted, “The General Cable China employee emailed the supervisor and justified the corrupt payment, stating that “a few key players at [the state-owned customer] are our internal contacts and charge a certain amount of fees. If we are looking to have long-term cooperation with them, charges for this is rather inevitable.””

The various bribery schemes are summarized in the Bribery Box Score

Country Bribery Scheme Employed

 

Amount of Corrupt Payments Made Actual Knowledge of Scheme
Angola Sales Agents $9.3MM yes
Bangladesh Sales Agent $34,7000 yes
Indonesia Freight Forwarders $2MM Yes
Thailand Distributor $1.5MM yes
China Distributors $500,000 yes

I have laid out these bribery schemes in some detail as they continue to provide significant information to the compliance practitioner about the different ways to fund bribery schemes and how routine oversight can detect them. (Hint – follow the money.) Of course, even if you detect such illegal schemes, there must be a corporate will to stop the illegal conduct and then remediate the conduct. Apparently for some significant period of time, such was not the case at General Cable. Yet as noted early in this blog post, the company made a stunning comeback and actually received a 50% discount off the low range of the suggested penalty under the US Sentencing Guidelines. Tomorrow I will consider what the company did to obtain such a result.

 

This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at tfox@tfoxlaw.com.

© Thomas R. Fox, 2017

Yesterday, I began an exploration of the Foreign Corrupt Practices Act (FCPA) enforcement action involving Teva Pharmaceuticals Industries Ltd. (Teva). It was brought jointly by the Department of Justice (DOJ) and Securities and Exchange Commission (SEC) with total fines and penalties coming in at $519MM, consisting of a criminal fine of $283 MM and profit disgorgement of $236MM. The company entered into a three-year Deferred Prosecution Agreement (DPA) that requires an independent compliance monitor. The SEC issued a Complaint. The company’s Russian subsidiary, Teva LLC, also agreed to a Criminal Information and agreed to enter into a plea agreement pleading guilty to a one-count criminal information, charging the company with conspiring to violate the anti-bribery provisions of the FCPA.

In my previous post, I considered the underlying facts of the bribery schemes used in three separate countries, namely Russia, Ukraine and Mexico. Today I want to consider the penalty range, the corporate monitor, the actions of Teva to obtain the results it secured and what they all mean for the compliance professional going forward.

As laid out in the DPA, the fine range was between $353,971,685 and $707,943,370. Yet Teva paid $283,177,348 for its criminal violation. (The remaining $236MM was assessed by the SEC.) While the underlying facts demonstrated clear business unit involvement in intentional bribery schemes and conscious indifference at best by the Israeli corporate office by burying its head in the sand with the numerous red flags present; the company was still able to obtain a 20% discount from the minimum range of the US Sentencing Guidelines suggested criminal fine.

Loss of Credit

In none of the resolution documents does it reveal how the information about the company’s bribery and corruption was brought to the attention of the US regulators. The DPA specifically notes the company did not self-disclose to the DOJ and “as a result the Company was not eligible for a more significant discount on the fine amount or the form of resolution.” Equally interesting was the comment, “The Company did not receive full credit because of issues that resulted in delays to the early stages of the investigation, including vastly overbroad assertions of attorney-client privilege and not producing documents on a timely basis in response to certain Fraud Section document requests.” If we assume the company lost 25% of the available discount for its lack of self-disclosure, this final line would mean the company lost 5% of the available discount for basically playing games with the DOJ. At $284MM for the total fines, those games cost Teva approximately $14.2MM. I wonder what the additional cost to Teva was in legal fees for the counsel which advised Teva to play such games.

The bottom line from this portion of the DPA emphasizes, yet again, that the DOJ will provide real credit to a company if it follows the simple prescripts of (1) self-disclosure; (2) extensive cooperation; and (3) significant remediation. Even with the fully pervasive corruption schemes, utilized in three countries; Teva was able to receive a significant discount off what was clearly reprehensible and illegal conduct. But even if a company has such sub-optimal counsel which does not advise self-disclosure and then proactively advises on a course of resistance which is based upon bogus legal arguments; the DOJ will still provide a significant credit if the company moves towards a more cooperative stance in the investigation and remediates significantly during the pendency of the investigation.

Credit for Remediation

Next we turn to the positive conduct which did allow the company to obtain its 20% discount. After having changed its tune around cooperation with the DOJ investigation at some point, the company engaged in significant remediation. As laid out in the DPA, the remediation included:

  • removing at least 15 employees who were involved in the conduct at issue from the Company, either through termination, resignation, or they voluntarily departed once the Company’s internal investigation began;
  • enhancing the Company’s compliance function by implementing a number of policies and procedures designed to prevent prohibited conduct, including the establishment of a system to monitor transactions with members of the health care community;
  • adopting an improved anticorruption training program;
  • adopting a standalone third-party due diligence program and terminating business relationships with certain third parties;
  • enhancing the independence of the Company’s control functions and establishing an office charged with addressing reports of misconduct; and
  • establishing a dedicated Global Compliance Audit group and strengthening the Company’s internal audit and investigations teams.

Teva also demonstrated enhancement and commitment to its compliance program and internal controls to meet the requirements of a best practices compliance program.

It is incumbent to recall that Teva did have an anti-corruption compliance program in place at all times during its bribery and corruption scheme. While one might opine that anti-corruption might not have been taken too seriously prior to the investigation, the SEC did note in its Complaint that Teva had investigated allegations of bribery and corruption back in 2007-08 in its Mexico subsidiary. As a result, the company “found credible evidence of illegal payments by Teva Mexico to government officials in Mexico to influence regulatory and formulary approvals, drug purchase decisions, and prescription decisions, and to develop strategic advantages over competitors. Eleven Teva Mexico employees were terminated in connection with the investigation.”

However, even with the specific findings from the investigation and remediation, the Mexico business unit was determined to continue its bribery scheme. Indeed, it went even further than at the senior executive level at Teva to forestall any serious effort at doing compliance. The Compliance stated, “In April 2011, a Teva employee responsible for overseeing the implementation of the anti-corruption compliance program emailed a senior executive responsible for overseeing compliance in Latin America. The email stated that a senior Teva executive had “specifically instructed not to implement a robust system that will enable us to monitor and assure that the same doctor wasn’t invited to a meal more than three times (for example)””.

The Monitorship and Implications

With this type of senior executive (lack of) commitment to compliance it is probably little wonder that the DOJ required a corporate monitor whose “primary responsibility is to assess and monitor the Company’s compliance with the terms of the Agreement, including the Corporate Compliance Program in Attachment C, so as to specifically address and reduce the risk of any recurrence of the Company’s misconduct.” The Monitor, can, but is not required to, rely not only upon the product of Teva’s compliance resources but also use the company’s internal functions such as legal, compliance and internal audit to assist the Monitor in carrying out the mandate in the DPA; provided, however, “that the Monitor has confidence in the quality of those resources.”

Most interestingly, the Monitor’s mandate requires them to use a risk-based approach in review of the company’s compliance program. The DPA specifies the Monitor should consider “risks presented by: (a) the countries and industries in which the Company operates; (b) current and future business opportunities and transactions; (c) current and potential business partners, including third parties and joint ventures, and the business rationale for such relationships; (d) the Company’s gifts, travel, and entertainment interactions with foreign officials; and (e) the Company’s involvement with foreign officials, including the amount of foreign government regulation and oversight of the Company, such as licensing and permitting, and the Company’s exposure to customs and immigration issues in conducting its business affairs.”

It would seem apparent that the hand of DOJ compliance counsel Hui Chen was involved in setting out these obligations. This action also points out another clear import from the DOJ on the importance of compliance programs and the increasing sophistication of the DOJ (and SEC) in understanding what is a best practices compliance program and requiring the same going forward. This push by the compliance counsel will most certainly continue to keep the bar going up and enhance compliance programs into 2017 and beyond.

Much like the Odebrecht/Braskem FCPA resolutions of the same week, the Teva resolution has quite a bit for the compliance practitioner to digest and use in a compliance program going forward. 2016 has been a FCPA year for the ages and with the information communicated by both the DOJ and SEC, the bar for compliance programs will continue to elevate so that compliance will become a more fully functioning corporate discipline.

 

This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at tfox@tfoxlaw.com.

© Thomas R. Fox, 2016

In this episode Mike Volkov and myself take a deep dive into the Odebrecht/Braskem and Teva FCPA enforcement actions. We review the underlying facts, the conduct of the parties, the results obtained and what it all means for the compliance practitioner going forward.