Just when you were thinking things could not get any bigger after the Odebrecht/Braskem Foreign Corrupt Practices Act (FCPA) enforcement action, the Department of Justice (DOJ) and Securities and Exchange Commission (SEC) announced the fourth largest enforcement action of all-time involving Teva Pharmaceuticals Industries Ltd., (Teva) coming in at $519MM, consisting of a criminal fine of $283MM and profit disgorgement of $236MM. The disgorgement amount is the second largest ever. The company entered into a three-year Deferred Prosecution Agreement (DPA) that requires an independent compliance monitor. The company also agreed to a Criminal Information, issued by the DOJ, and a Complaint filed by the SEC.

According to the DOJ Press Release, “Teva Russia has signed a plea agreement in which it has agreed to plead guilty to a one-count criminal information, also filed today in the Southern District of Florida, charging the company with conspiring to violate the anti-bribery provisions of the FCPA. The plea agreement is subject to court approval. The case was assigned to U.S. District Judge Kathleen M. Williams of the Southern District of Florida and Teva Russia’s initial court appearance has been scheduled for January 12, 2017.”

The enforcement action involved multiple bribery schemes in several countries, using a variety of techniques to make illegal payments. The largest bribery scheme was in Russia but there were additional bribery schemes in Mexico and Ukraine. I will begin a multi-part series to look at the matter and provide lessons to be learned by the compliance practitioner going forward.

The amount of the fine is significantly higher than any other previous FCPA enforcement action involving a pharmaceutical company. The prior highest amount was Johnson & Johnson (J&J) at $70MM back in April 2011. This matter even eclipses the (approximately) $498MM penalty levied on the British pharmaceutical giant GlaxoSmithKline PLC (GSK) by Chinese authorities for violations of Chinese domestic bribery laws in the summer of 2014.

What could have led Teva to face such a large penalty? Quite simply it was the breadth and depth of their multiple bribery schemes. In Russia, there was a bribery scheme that metamorphosed during the pendency of the events. The overall bribery program ran from 2006 through 2012. It involved payments of bribes through a local Russian wholesale company which was owned by a Russian government official, up through 2009. At that time the scheme morphed when the Russian government modified some health care priorities such that Teva’s drug Copaxone would receive priority for use in the country.

This change led Teva to institute a new arrangement with the Russian company to become the exclusive wholesaler and re-packager for Copaxone. At this point the principal of the Russian company was under investigation for allegations of corruption. There were other red flags raised internally by Teva employees about the use of the Russian wholesale company and by business partners of Teva as well. However, none of these red flags were investigated or cleared.

The reason these red flags were not cleared was articulated by a Teva Russia employee, “We suggest to cooperate [sic] with [Russian Distributor] to launch Copaxone local production. Russian Distributor is headed by [Russian Official] a representative from [a region in Russia] to Council of Federation of Russian Federation. He is a Deputy Chairman of [a Federation Council Committee] and he has a position of Chairman of [another government committee]. . . . [Russian Official]’s political network makes him a strong partner from market access stand point. The plan is to utilize his contacts to secure our shares and minimize generics risks.” Clearly the company was on notice as to the Russian government official connection.

The bribery scheme was effected by giving discounts to the Russian wholesaler who then resold the drug to the Russian government. The amount of the discount was not reported. However, in Russia, from 2010 to 2012 alone, Teva received business valued at “approximately $197,530,681.”

There is one point which bears mention here as it is a first in FCPA enforcement actions. At some point between October 2008 and January 2009, Teva’s business risk insurer decided to stop insuring transactions with the Russian wholesaler. While it is not entirely clear from the resolution documents, it appears it was because of allegations against the company for corruption. Take a minute to ponder on this point because if a business insurer is so uncomfortable in doing third party business in the form of writing insurance, that is one very massive red flag. Even if the articulate business reason for declining to extend coverage was some other reason, it still bore investigation by Teva.

In Ukraine, the bribery scheme ran from 2002 through 2011 and involved payments of cash to a Ukrainian government official of more than $200,000 and payment for trips to Israel. The travel was business class and at least once include the government official’s wife. Interestingly, the payments were made by Teva until the end of 2009 and at that time the payments to the Ukrainian government official were made by Teva’s Ukrainian subsidiary. As noted in the Complaint, “although some of the compensation Ukrainian Official received from Teva was in cash, at least seven payments were wired through U.S. correspondent banks.”

Finally, were the bribery schemes in Mexico. After reading the resolution documents about the only thing one can conclude was that Teva’s Mexico business unit was definitely old school as they believed in bribery in the old fashioned way, cold hard cash paid out to doctors directly to prescribe their drugs. Teva also routinely entertained the same government officials. Perhaps most interestingly was that back in 2007, the company uncovered the bribery scheme in Mexico, after having been alerted to it by an anonymous whistleblower. This led to the termination of 11 Mexico business unit employees but with no corresponding enhancement in internal controls.

Partly in response to this scrutiny from the business unit’s past sins, it then moved payments from Teva Mexico to its distributors system. As stated in the Complaint, “Shortly thereafter, the Teva Mexico manager told a subordinate, another manager, that the money that the doctors had been previously receiving as part of the promotions budget would now be paid in cash by Teva Mexico’s Copaxone distributor in Mexico.”

Thereafter, “the Teva Mexico manager then gave the same subordinate a list of doctors, their phone numbers, and the amounts of money that they should be paid. The Teva Mexico manager then directed the same subordinate to call the doctors who had been receiving money from Teva and inform them that they would continue to be paid. Consistent with those assurances, Teva Mexico continued to pay Mexican doctors in 2012.” The payments made to Mexican officials were “between $9,600 and $30,000 each per year to influence their Copaxone prescription decisions. In 2012, Teva paid Mexican officials approximately $159,000.” The company generated over $16MM from sales of the drug in 2011 and 2012.

The DOJ Press Release noted the assistance of the Mexican Attorney General’s Office (Procuradura General de la República or PGR). There was no mention of assistance from either Russian or Ukrainian officials. Interestingly, the SEC Press Release cited the assistance of Financial Services Commission of the British Virgin Islands in developing the case. It was not apparent from the resolution documents as to the connection of the British Virgin Islands in this case. It may well be from a money-laundering angle.

 

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

john-glennLast week, I paid tribute to Greg Lake. It turned out that the first full week of December was the final week for several important, if not seminal, figures. So this week I will pay homage to those who have left us, today I begin with John Glenn.

Glenn may have been the closest actual person (as opposed to movie star John Wayne) to have personified the American hero in the last century. He achieved some of greatest feats and successes one could have accomplished, all the while serving his country. He was a fighter pilot in two wars, flying 149 combat missions in World War II and Korea; one of the original seven Mercury astronauts; the first American to orbit the globe in Friendship 7 in 1962; became a US Senator in 1974; ran for President in 1984 and, at aged 77, became the oldest person to go into space when he flew in the space shuttle Discovery. 

Tom Wolfe, writing in his book The Right Stuff, said Glenn was the only astronaut who brought people to tears, his three orbits around the earth restored our faith that American technology could not only match but eventually overtake the Soviet Union in the space race. In that flight the heat shield became dislodged and it was unknown if the spaceship could make it through re-entry but the heat shield held and Glenn splashed down and announced to the world, “My condition is good, but that was a real fireball, boy.” Glenn certainly had the ‘right stuff.’

Even at age 5, we were all glued to the television or radio, listening to Walter Cronkite’s commentary and Glenn communicating to Mission Control. Only a very few times in my life was this country rapt together in one event and that was one of them. I can only add Godspeed John Glenn. 

Also last week, as reported in the Wall Street Journal, (WSJ) the Brazilian affiliate of Deloitte Touche Tohmatsu Ltd., a private UK company, was fined a record $8 million for falsifying audit reports, altering documents and then providing false testimony, under oath to the regulatory oversight board. The PCAOB sanctioned 12 former partners in the firm. In a statement by Claudius Modesti, the Director of Enforcement at the PCAOB said, “This is most serious misconduct we’ve uncovered. Its cover up after cover up after cover up.” Separately, the PCAOB fined Deloitte’s Mexico affiliate $750,000 to settle allegations it had not taken proper steps in documenting its audits.

Brooke Masters, writing in her Top Line column for the Financial Times (FT), in a piece entitled “Big Four auditors can no longer hide behind local models”, took a look at the matter through the lens of the business model of the Big Four accounting firms. She wrote, “In reality, though, they are networks of national firms, legally distinct from one another. That is partly because each one has to comply with local rules and standards, but it has also proved to be reputationally handy: if one far-flung branch happened to get into trouble, the rest of the network could distance itself from the problems.”

Yet the fine by the PCAOB belies this business model. Masters wrote, “Accountancy experts say the Deloitte cases show how regulators are starting to catch up with the international footprint of the Big Four. More than 50 national accounting watchdogs now belong to the International Forum of Independent Audit Regulators, which sets global standards and seeks to co-ordinate cross-border investigations.”

She quoted, Paul Hodgkinson, an executive director of the Institute of Chartered Accountants in England and Wales, who said, “We have been building a system that aligns regulators with the realities of globalisation and these cases are examples of that.” He went on to add, “The system has responded in a way that reinforces the message that we have to do better.”

Francine McKenna, writing in online site Market Watch, in a piece entitled “At Deloitte, the problems with audit quality and professionalism start at the top”, reviewed the leadership failures which led to the Deloitte penalty. She wrote, “The PCAOB’s [Enforcement Director Claudius] Modesti told an audience [last] Tuesday at the American Institute of Certified Public Accountants conference that policies and procedures promoting integrity or PowerPoint presentations about a culture of integrity are not enough. Firms must make a “thorough self-examination and a daily commitment” to focus on integrity and honesty in all aspects of their work and especially when dealing with regulators.”

For the Chief Compliance Officer (CCO) or compliance practitioner, the Deloitte PCAOB enforcement action brings up several issues for reflection. The first is the business model, discussed by both Masters and McKenna. This decentralized business model was developed largely because of (1) disparate country regulations and accreditations and (2) non-organic growth through mergers. If your company uses this strategy, the risk management process you employ must be designed to evaluate and respond to such risks. This requires robust pre-acquisition due diligence, active post-acquisition integration, testing and, if needed, remediation and then continued monitoring going forward.

Masters ended her piece with the following, “Deloitte says that its network “has adopted policies and protocols to be followed by all member firms in an effort to establish a consistently high level of quality, professional conduct and service”. That is all very well. It seems to me it would be a lot more efficient and responsible to actually manage the local offices instead.”

McKenna, as you might expect with her Big Four auditing professional background noted, “In 1990, the judge writing the opinion in a court case related to the failure of Continental Illinois National Bank expressed the common belief, and the frequent legal defense of firms and partners today, that an audit firm and its partners will, above all, think about the firm’s reputation and their own reputations when faced with the temptation to conspire with clients and others in frauds or to cover up the frauds of others. “An accountant’s greatest asset is his reputation for honesty, followed closely by his reputation for careful work. … [C]overing up fraud and imposing large damages on the partnership will bring a halt to the most promising career,” the judge wrote.”

Misrepresenting the financial health of a company as its internal auditor is certainly bad. Lying about it to the PCAOB is very bad. One can only hope the newly installed Deloitte leadership will learn the appropriate lessons and institute appropriate global oversight. Any other way to say it is that your company must actually do compliance rather than just put a paper program in place.

 

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

yellow-submarineAl Brodax died in late November. If that name does not conjure up images of Apple Bonkers, Snapping Turks, the dreaded Flying Glove and Blue Meanies, let me explain why it should. Brodax was the producer of the film version of Yellow Submarine. The reason he was the producer was somewhat odd. The Beatles had made two films, A Hard Day’s Night and Help, for United Artists but after these two cinematic efforts they had lost interest in this genre. Brodax presented the final film as an option to them to fulfill their contractual obligation, in a manner that would require virtually no participation from the lads from Liverpool. For this stroke of insight, we are all enriched.

Enrichment is the theme for today’s post as it is personal and illegal enrichment which seems to be the continuing message from the 1MDB scandal involving the disgraced Malaysian sovereign wealth fund. In an article in the Wall Street Journal (WSJ), entitled “Abu Dhabi Sovereign-Wealth Fund Gets Entangled in 1MDB Scandal”, Bradley Hope and Nicolas Parasie reported on how the 1MDB scandal continues to expand across the globe and ensnare more people and entities.

Recently, the International Business Times reported that the Monetary Authority of Singapore (MAS) has issued a proposed ban on the former top dealmaker for Goldman Sachs in Southeast Asia, Tim Leissner, for his role in the scandal. Leissner was the Goldman Sachs client relationship manager for 1MDB and headed up three major bond issuances raising over $6bn for the wealth fund. However, it was not these activities that caused MAS to act to ban Leissner. It was his issuance of an unauthorized letter, sent on Goldman Sachs letterhead, providing a reference to a financial institution in Luxemburg for a person who has become associated with the scandal, Mr. Jho Low. The letter attested that Goldman Sachs had performed due diligence on Low and no red flags appeared in his background. According to the MAS, “These statements were untrue and were made by Mr Leissner with Goldman’s knowledge or consent.”

The WSJ piece reported on how the Abu Dhabi sovereign wealth fund, IPIC, was involved in transferring monies out of 1MDB to various shell companies across the globe. It all began in 2009 “the emirate would invest $1 billion in Malaysia’s real-estate, hospitality and energy businesses via the 1MDB state fund. Abu Dhabi handed the energy part of this plan to IPIC. Instead of contributing money, however, IPIC supplied a guarantee on $3.5 billion of 1MDB bonds, making them easier to sell.” In exchange for its guarantee, “1MDB agreed to pay $1.4 billion of what was called “collateral” to IPIC’s Aabar unit.” According to sources familiar with the transaction, it was done without IPIC Board approval.

You might see where this is going as the WSJ reported, “The $1.4 billion of 1MDB money never reached Aabar, the Justice Department said, but instead was paid to a firm with a name nearly identical to Aabar’s that Mr. Al Qubaisi and Aabar’s CEO, an American named Mohamed Badawy Al Husseiny, had set up in the British Virgin Islands. From that offshore firm, the Justice Department alleged in its July lawsuits, the diverted 1MDB cash was distributed to intermediaries, which sent it on to still other intermediaries, until hundreds of millions of dollars reached Mr. Najib, his stepson and others.”

Also most interesting was the flow of the money, as illustrated below:

From Blackstone Asia Real Estate Partners, the US “Justice Department alleged in its July lawsuits, the diverted 1MDB cash was distributed to intermediaries, which sent it on to still other intermediaries, until hundreds of millions of dollars reached Mr. Najib, his stepson and others.

One of the others cited by the Justice Department was Jho Low, a Najib confidant who had helped to set up 1MDB. U.S. prosecutors have described Mr. Low as in the thick of the alleged fraud, helping orchestrate schemes to siphon away money.”

Just as Yellow Submarine was described by film critic Roger Ebert as “a music-based animation film for the ages” and “a freedom of color and invention that never tires” I agree with the WSJ that “Far from just a Malaysian affair, the 1MDB scandal is unfolding as potentially one of the largest international financial swindles ever.” Equally important, the 1MDB continues to provide many significant lessons for the anti-corruption and anti-money laundering (AML) compliance practitioners.

From the Leissner affair and Goldman Sachs the critical element is that any self-certification is circumspect and must be tested. Simply because someone from a reputable company uses a third party or has a relationship with a customer does not mean you can accept their word on either due diligence or a lack of red flags around the individual or third party.

The adventures of IPIC and its representatives in the 1MDB scandal provide another yet equally important lesson. That involves names of entities. You simply cannot take an entity’s name at face value, even if that name is so similar to an entity you are very familiar with in business. If you ask most US businessmen about Blackstone they would immediately think of Blackstone Group LP, a well-known US private equity firm. This is even if there is an entity named something close which is called Blackstone Asia Real Estate Partners.

These new wrinkles to the 1MDB matter also make clear that it is more than simply performing due diligence once or obtaining some type of certification on a one-time basis. The stepson of the Malaysian Prime Minister who is at the center of the 1MDB scandal, Riza Aziz, was one of the producers of the hit film, The Wolf of Wall Street. With this new information available it would appear any entity connected to this production and more importantly profits from it may come under government scrutiny. The key is to demonstrate not only compliance with relevance due diligence but that the effort is ongoing and those efforts are documented.

So as my two favorite podcasters, John Champion and Key Ray, might say, the 1MDB scandal, with an assist from Al Brodax, continues to provide “bonk bonk on the head” lessons for the compliance practitioner. If you do not understand the reference, go watch Yellow Submarine.

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

qtq80-MJIxJgEarlier this week a most interesting non-Foreign Corrupt Practices Act (FCPA) bribery and corruption enforcement, actions was announced by the Securities and Exchange Commission (SEC). It involved a clear quid pro quo benefit was provided by United Airlines to David Samson, the former Chairman of the Board of Directors of the Port Authority of New York and New Jersey, the public government entity which has authority over, among other things, United Airlines operations at the company’s huge east coast hub at Newark, NJ.

The reason that it is so interesting from an enforcement prospective is that it is not foreign corruption but domestic corruption, therefore not subject to the FCPA. However, the actions of United’s former Chief Executive Officer (CEO), Jeff Smisek, in personally approving the benefit granted to favor Samson violated the company’s internal controls around gifts to government officials. That sounds suspiciously like a books and records violation of the FCPA. The $2.4 million penalty levied on United was a civil violation, added to this summer’s Non-Prosecution Agreement (NPA) settlement with the Department of Justice (DOJ), which resulted in a penalty of $2.25 million. Chairman Samson has also pled guilty in July for putting pressure on United to reinstitute a flight service which was near his weekend residence.

The scandal also cost the resignation of Smisek and two high-level executives from United. In a Press Release at the time of the resignations, the company stated, “The departures announced today are in connection with the company’s previously disclosed internal investigation related to the federal investigation associated with the Port Authority of New York and New Jersey. The investigations are ongoing and the company continues to cooperate with the government.”

The affair involved a flight from Newark to Columbia, South Carolina. The flight was reported to be a money-losing route, yet it was reinstated by United at either the request of the Chairman of the Port Authority of New York and New Jersey, Samson, or was reinstated by United to obtain a benefit from Samson. Samson had a weekend home at Aiken, which is near Columbia, SC and was not happy there was no direct flight service from Newark. So he got a direct flight. The flight was money loser it was derisively named “the chairman’s flight.” The SEC Cease and Order (Order) said that United lost some $945,000 on the flight.

However, at the time United was in the midst of trying to renegotiate its lease at Newark airport with the Port Authority. The flight from Newark to Columbia was cancelled after Samson resigned his post as Chairman.

According to the Order, “In the summer and fall of 2011, representatives of United and the Port Authority’s Aviation Department (which manages Newark Liberty) negotiated a proposed agreement that the Port Authority would lease approximately three acres of land at Newark Liberty to United for the construction and operation of a wide-body aircraft maintenance hangar (the “Hangar”). The Hangar would facilitate United’s ability to perform maintenance on its incoming fleet of wide-body aircraft at Newark Liberty, rather than having to perform such maintenance at a suitable United facility at another airport. Based on preliminary assessments and using information available at the time, United estimated that the Hangar would result in efficient routings that would drive $47.5 million in value to the United network on an annual basis post-construction.”

During this time period, Samson was communicating through a third party his desire that United reinstate the Chairman’s Flight. This culminated in a dinner meeting between Smisek, his senior team and Samson. Samson once again pressured for a reinstitution of the route, “Samson stated that Continental Airlines used to have a non-stop route between Newark Liberty and Columbia, South Carolina and asked the CEO to consider re-establishing that non-stop route.”

United’s “Network Planning Group analyzed the projected financial performance of the South Carolina Route… United’s standard process for initiating new routes generally included: the preparation and consideration of financial forecasts and other market data of how the route could be expected to perform, review and approval by several levels of United’s Network Planning Group, including approval by the Chief Revenue Officer (“CRO”) or his staff, and thereafter presentation of the route and its details to a group of senior United executives at a regularly scheduled marketing meeting.”

This review determined that the Chairman’s Flight would likely be a money loser and, indeed, when it was previously operated by Continental Airlines, prior to its merger with United, the route “was continually one of the hubs poorest performing markets”. (Recall the Order reflected the flight did lose United $945K.)However, after United declined to reinstitute the Chairman’s Flight, Samson pulled the proposal from consideration by the full Board, effecting scuttling the arrangement. Shortly after this development, “the CEO (Smisek) approved the establishment of the [Chairman’s]route.” On the same day, United’s contract for the new hangars was approved by the Port Authority.

At the time United’s Code of Conduct prohibited “United employees from directly or indirectly making bribes, kickbacks or other improper payments to government officials, civil servants or anyone else to influence their acts or decisions” and that “[n]o gift may be offered or accepted if it will create a feeling of obligation, compromise judgment or appear to improperly influence the recipient.” Only the United Board of Director’s could grant a waiver to the Code and none was sought or obtained by Smisek. The Order concluded, “The [Chairman’s] Route was initiated in violation of United’s Policies.”

Mike Volkov has often worried that if that companies  create internal controls and then do not follow those internal controls, will be prosecuted for such action (or perhaps inaction). This is the situation which led to the SEC enforcement action against United. The company had a Code of Conduct, it was not followed but was violated by the CEO and this caused the company to violate Section 13 of the Securities Exchange Act of 1934. It would be easy enough to see this resolution in the FCPA context but this was all domestic conduct and jurisdiction. This may be the first time the violation of a Code of Conduct resulted in an enforcement action by the SEC around domestic bribery and corruption.

Yet the company was also sanctioned for not having internal controls in place to prevent such actions as those taken by Smisek, with the SEC also finding this was a violation of Section 13. This was in the face of detailing the protocol for United instituting or reinstituting a route. The Order stated, “In particular, United had insufficient internal accounting controls in place to prevent approval of the South Carolina Route in derogation of United’s Policies.”

Also interesting was the remedial action engaged in by United. It included the following actions:

  1. Termination of the culpable employees;
  2. Improving the company’s compliance function and creation of “new senior legal position focusing on global corruption risk”;
  3. Enhancing the company’s Code of Conduct and anti-corruption policies;
  4. Conducting anti-corruption training; and
  5. Developing a third-party due diligence process and anti-corruption compliance audit capability.

All of the underlying facts, enforcement theories and remediation points towards the use of failure of internal controls when domestic bribery corruption occurs. This might well be a new enforcement theory to use inside the United States, for domestic bribery allegations. Imagine if United’s profit estimates of $47.5 million had been used as the basis of a profit disgorgement order.

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

st-marks-basilicaI conclude my travel themed posts from Venice by considering the revelations seen in the renovations to St. Mark’s Basilica on St. Mark’s Square. On my previous trips to Venice, the front face of the church was covered in scaffolding for renovations which were under way. On this trip, the scaffolds were gone and the front face of the Basilica revealed glorious frescos across the top of the church, immediately under the eaves. They shimmered as the fleeting sunlight popped through the clouds from time-to-time to reveal gold inlays which literally shined in the wonderful, but all too brief, sunshine. It was truly awe-inspiring to see the church with the grime and soot cleaned away to show some of its true glory.

This week I am exploring the JP Morgan Chase (JPM)  and its subsidiary, JPMorgan Securities (Asia Pacific) Limited (JPM-APAC), (collectively ‘the company’) Foreign Corrupt Practices Act (FCPA) enforcement action which resulted in a Non-Prosecution Agreement (NPA) together with a penalty of $72MM from the Department of Justice (DOJ), a Cease and Desist Order (Order) from the Securities and Exchange Commission (SEC), consisting of profit disgorgement and interest of $135MM, and an agreement with the Federal Reserve Bank (Fed) for a Consent Cease and Desist Order (Fed Order) to put in place a best practices compliance program and pay a penalty of $61MM. The total fines and penalties paid by JPM for its violations of the FCPA was $268MM. Today I want to end this consideration with an exploration of what has been revealed and the lessons to be drawn for the Chief Compliance Officer (CCO) and compliance practitioner.

Pilot Program Cause and Effect

As I laid out in some detail yesterday, the FCPA Pilot Program is not only functioning but doing so clearly to the benefit of companies which comply with its requirements. Before the Pilot Program, the reasons such companies such as Hewlett-Packard (HP) and Parker Drilling received penalties below the low end of the minimum range of the US Sentencing
Guidelines was not clear from the resolution documents. That deficiency has been largely cleared up since the implementation of the Pilot Program. On top of the lower overall DOJ assessed penalty is the stunning result of a NPA achieved by JPM. While they admitted to the criminal conduct, as set out in the NPA, they skated on receiving even a Deferred Prosecution Agreement (DPA). Of course, this matter arose long before the Pilot Program came into existence which demonstrates the non-stratified approach of the DOJ in using the tools available to it, to reward companies which engage in such behavior. The Pilot Program is certainly changing the calculus for many companies and this enforcement action will be one more piece of tangible evidence the Pilot Program is working to create an incentive for greater compliance.

Hiring of Family Members of Foreign Official

One thing that this FCPA resolution decidedly does not stand for is the proposition that a company can never hire a family member of a foreign government official or employee of a state owned enterprise. Indeed, it was one JPM-APAC compliance officer (albeit a new one) in 2013 who stopped the entire Sons and Daughters program with the following reason for denying a family member a position at the company, writing, “I’m afraid from an anti bribery [sic] and corruption standpoint, we cannot create positions to accommodate client requests….”. This statement clearly shows that when an official refers a family member for hire, a red flag should go up. It also demonstrates why compliance should be involved in any FCPA high risk endeavor. If there is no position which the candidate can fill based upon their own qualifications at your company, that should be the end of the discussion, full stop (or mike drop for more dramatic effect).

Matthew C. Stephenson, in a blog post entitled “Does an FCPA Violation Require a Quid Pro Quo? Further Developments in the JP Morgan “Sons & Daughters” Case”, analyzed the question of whether there should be prosecutions under the FCPA for the hiring of family members of foreign government officials and employees of state owned enterprises. He wrote, “The three key considerations, to my mind, ought to be (1) the degree of connection between the job offer and a particular official decision, or set of decisions (as distinct from general goodwill and connections); (2) the degree to which the official indicated that he very much hoped the firm would hire the relative (even if there was not enough evidence of agreement to establish a quid pro quo); and (3) the degree to which the firm relaxed its ordinary standards to hire the official’s relative.”

I adapted this approach for Human Resources (HR) and the compliance practitioner with three questions to analyze re the hiring of a family member of foreign official or employee of a state owned enterprise. They can also be installed as internal controls. I would phrase the three questions in the following order and manner:

  1. Does the candidate meet your firm’s hiring criteria?
  2. Did the foreign official whose family member you are considering for hire demand or even suggest your company hire the candidate?
  3. Has the foreign official made or will make a decision that will benefit your company?

If the answer to the first question is No and the second two inquiries YES, you may well be in a high-risk area of violating the FCPA. You should investigate the matter quite thoroughly and carefully. Finally, whatever you do, Document, Document, and Document your investigation, both the findings and the conclusions.

As I mentioned they can be set up as internal controls. This is another example of how a company can operationalize compliance and burn it into the fabric and DNA of an organization. Further, it provides another level of oversight or “a second set of eyes” on the hiring process around hires that are high-risk under the FCPA or other anti-bribery/anti-corruption regime such as the UK Bribery Act.

More to Come?

There has now been three FCPA enforcement actions involving the hiring of family members of government officials or employees of state owned enterprises, Qualcomm Inc. and The Bank of New York Mellon, the reported JPM resolution amount will dwarf those settlements. But there may be others in the works as regulatory files indicate that other banks are under FCPA scrutiny, including Citigroup Inc., Credit Suisse Group AG, Deutsche Bank AG, Goldman Sachs Group Inc., HSBC Holdings PLC, Morgan Stanley and UBS Group AG. So watch this space.

A Happy Thanksgiving to All!

 

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© Thomas R. Fox, 2016