FCPAméricas

Reflections on BizJet: When Shoes Keep Dropping

matthewfowler — Wed, 19 Jun 2013 14:20:21 +0000

Today’s guest post is from anti-corruption attorney Matthew Fowler who formerly worked as a compliance officer at a multinational defense company.

April, two executives of BizJet pled guilty to FCPA violations related to bribing foreign officials in Mexico, Panama, and Brazil. BizJet is an aircraft maintenance, repair, and overhaul company based in Tulsa, Oklahoma. The DOJ also made public charges against two other BizJet executives who, according to the DOJ press release, are “believed to remain abroad.” (FCPAméricas has previously discussed the BizJet action here. Ed.)

FCPA enforcement actions against executives are always eye-catching. But, in this case, the charges were actually the second shoe to drop. The first fell in March 2012, when the DOJ announced that it had entered into agreements halting FCPA prosecutions against BizJet and its corporate parent, Lufthansa Technick AG. An additional (third?) shoe dropped in the form of an enforcement action against the NORDAM Group, an unrelated aircraft maintenance, repair and overhaul company also based in Tulsa. There may be more developments to come.

The First Shoe, Corporate Cooperation: In 2012, BizJet resolved a criminal information through a deferred prosecution agreement, and payment of an $11.8 million criminal penalty. On the same day, BizJet’s German parent company, Lufthansa Technik AG, resolved its potential FCPA liability through a non-prosecution agreement. In their agreements with the DOJ, both BizJet and Lufthansa Technik AG agreed to cooperate with the DOJ’s ongoing investigations, as well as implement enhanced compliance programs and robust internal controls.

But both companies had already been cooperating – the DOJ press release noted that the FCPA violations had been voluntarily disclosed, and that both companies had provided “extraordinary cooperation.” That cooperation included conducting an extensive internal investigation, making available documents and employees, and taking remedial steps that included terminating the officers and employees responsible for the violations.

The fruit of this cooperation can be seen in the significantly reduced penalties for BizJet. The fine range for BizJet without cooperation was from $17.1 million and $34.2 million. But its “extraordinary cooperation”, voluntary disclosure and extensive remediation resulted in a fine of $11.8 million.

The Second Shoe, Individual Cooperation: It is evident from the April announcement that individuals have also cooperated with the DOJ. As reported by the FCPA Professor, this cooperation included working undercover and secretly recording conversations with former BizJet executives and other subjects of the DOJ’s investigation.

This cooperation again resulted in reduced penalties. While significant jail time was possible for the crimes admitted by the two executives, they were not sentenced to any.

It is interesting that the DOJ included conspiracy among the reduced charges. This may have been to lay the groundwork for conspiracy charges against the remaining executives – admissions by two conspirators will be significant evidence against the other conspirators. (FCPAméricas has discussed conspiracy here. Ed.)

A Third Shoe? The cooperation of BizJet executives resulted in a separate FCPA prosecution against NORDAM Group. As reported by the FCPA Professor, the 2012 FCPA enforcement action against that company “had its origins in the BizJet enforcement action.”

Anything else to come? Is there more to come from this investigation? There might be several possibilities:

- Industry sweep? Given the prosecutions of two companies in the same industry, this might expand to a broader sweep of the industry – particularly given the cooperation provided by both companies and individuals.

- Travel Act violations? The 2012 criminal information suggests that commercial bribes were also paid. Those bribes were apparently wired via a dummy account in California, which prohibits commercial bribery. This raises the question: why were no charges brought for Travel Act violations? (FCPAméricas discussed here how the Travel Act “federalizes” state commercial bribery laws. Ed.)

- Extradition proceedings? The two executives who did not plead guilty – Bernd Kowalewski and Jald Jensen – are not under arrest, and are presumed by the DOJ to be out of the country. Mr. Kowalewski, however, appears to be working in Germany. Will the DOJ consider these two to be fugitives and seek their extradition?

The evolution of the BizJet matter is interesting, but what can we learn it? First, corporations have much to gain from cooperating with authorities. Second, individuals also have a lot to gain from cooperation, though recording conversations with friends and colleagues and then testifying against them sounds like a terrible experience. Third, individuals who engaged in a conspiracy have a motive to come forward early – before the others do.

Finally, the slow evolution of this matter is a lesson in itself. When companies and individuals cooperate with an investigation, it makes it much more likely that the investigation will spread to other individuals and companies.

The FCPAméricas blog is not intended to provide legal advice to its readers. The blog entries and posts include only the thoughts, ideas, and impressions of its authors and contributors, and should be considered general information only about the Americas, anti-corruption laws including the U.S. Foreign Corrupt Practices Act, issues related to anti-corruption compliance, and any other matters addressed. Nothing in this publication should be interpreted to constitute legal advice or services of any kind. Furthermore, information found on this blog should not be used as the basis for decisions or actions that may affect your business; instead, companies and businesspeople should seek legal counsel from qualified lawyers regarding anti-corruption laws or any other legal issue. The Editor and the contributors to this blog shall not be responsible for any losses incurred by a reader or a company as a result of information provided in this publication. For more information, please contact Info@MattesonEllisLaw.com.

The author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author.

@2013 Matteson Ellis Law, PLLC

The “Don’t Forgets” of FCPA Training

Matt Ellis — Thu, 13 Jun 2013 11:45:33 +0000

Most experienced FCPA practitioners are familiar with the basics of FCPA training. Lessons should cover enforcement trends, the elements of the bribery and books and records/internal controls offenses, common forms of FCPA-prohibited activity, the consequences of non-compliance, industries and sectors under the enforcement microscope, and the specifics of the company’s own compliance program. Trainers should tell sensational bribery stories from prior enforcement actions to capture the audience’s attention. For foreign audiences, trainings should be conducted in local languages. Trainers should seek to make trainings fun (FCPAméricas has previously suggested strategies for how to do this).

But other issues often get missed in FCPA trainings. These can be some of the most impactful for encouraging an audience’s adherence to compliance. Here is a list of “don’t forgets” for your FCPA training program:

1. Explain how violations are discovered. When learning about the FCPA, trainees often think that the chances of bribery being discovered by enforcement officials, even if it is occurring within their company, are minimal. It is important to make clear that there are numerous ways that these issues can come to light. Here is a list of them.

2. Describe how individuals are liable. Attendees of trainings tend to pay more attention when they realize that they can be individually liable for FCPA violations. They can even go to jail. This is the case for foreigners too. Indeed, U.S. enforcement officials have not shied away from spreading the jurisdictional net widely. FCPAméricas has provided insights into ways that FCPA enforcement can reach non-U.S. persons here.

3. Show how various company actors have a role to play in compliance. Compliance is not just about the General Counsel or Chief Compliance Officer. Individuals throughout the company have important roles to play. The more the trainee understands these multiple responsibilities, the more he or she begins to appreciate them. FCPAméricas has listed them here.

4. Remind audiences that corruption exists in the United States too. Foreign audiences are known sometimes to take offense at the fact that the FCPA targets only corruption outside of the United States. During trainings, they often make the point that corruption exists in our country too. They are right. Because of this, it is helpful for trainers to confront the issue head on at the beginning of the training. Explain that there are other laws in the United States addressing domestic corruption. Show pictures of U.S. officials being carried away in handcuffs for domestic bribery. Talk about how some forms of “lobbying” in the United States are perceived by many as institutionalized corruption. And then explain that the purpose of the FCPA training is to focus specifically on compliance with one particular type of corruption law, a law that addresses foreign bribery.

5. Inform audiences that the FCPA is not alone. To show the reality that compliance is not just about the FCPA, it is helpful to describe the web of international anti-corruption laws, treaties, and enforcement agencies currently in place and at work. By summarizing the local anti-bribery laws in the jurisdictions where the company operates, the trainer sends the message that compliance is relevant, not only to U.S. authorities, but throughout the world. It underscores the fact that enforcement threats can come from many different directions, not just the U.S. Department of Justice or the U.S. Securities and Exchange Commission.

The author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author.

@2013 Matteson Ellis Law, PLLC

How State-Owned Enterprises Are Just Like You

Matt Ellis — Fri, 07 Jun 2013 16:26:40 +0000

Usually when FCPA lawyers talk about state-owned or controlled enterprises (SOEs), like many state power utilities, public hospitals, or national oil companies, they discuss them in the context of whether or not they constitute government instrumentalities for purposes of improper payments. In fact, SOEs can present much more complicated issues than this. In some ways, they might be just like your own (non-government owned) company. And this can have significant implications for FCPA compliance.

To be sure, determinations of state instrumentality are no doubt important. If the company is an instrument of the state, its officials are “foreign officials” for purposes of the FCPA. Improper payments to them create liability. Compliance programs must focus on a company’s dealings with them. A number of courts in the United States have concluded that the status determination of instrumentality is a fact-specific analysis that considers a wide variety of issues like the state’s level of ownership and degree of control, whether the state appoints its officers and directors, how the state itself characterizes the entity, and the entity’s purpose. For a more thorough list of factors, see page 20 of the FCPA Guidance. Examples of FCPA enforcement actions based on payments to SOE officials are numerous. In Latin America, they include the Orthofix case involving Mexico’s state-owned healthcare and social services institution and the Aon case involving Costa-Rica’s state-owned insurance company.

But there are other ways to look at state-owned companies as well. First, one should remember that SOEs do not represent one monolithic concept. There is an enormous variety of types, from independent, commercial outfits to enterprises packed with government officials pursuing government policy. Some compete for work in the marketplace and feel the pressures of the bottom line. Others are no more than arms of the state. FCPAméricas has discussed the effects of political interference at SOEs based on first-hand experience.

Interestingly enough, for SOEs that experience real market pressures as independent actors, this can sometimes include the pressures to pay bribes themselves to others for business. Take Statoil for example. The state-owned Norwegian company was subject to an FCPA enforcement action in 2006 for bribing an Iranian official through an offshore intermediary to secure oil and gas contracts. It settled the matter with the DOJ and SEC for $21 million, which at the time was the largest fine against a foreign company.

Moreover, like private sector companies, SOEs can be victims of fraud, embezzlement, and other abuse by their own employees. When large public dollars are at stake, employees might choose to bypass company policy to benefit themselves. Such a case was recently revealed in the U.S. Government’s action against Wall Street traders and a top official of Venezuela’s economic development bank, BANDES. The bank official hatched a corrupt scheme that involved channeling business to the traders and receiving millions of dollars in kickbacks in return through offshore accounts. FCPAméricas described the case in detail here.

SOEs might see themselves as victims in other ways. Some have even brought suits based on bribes that others have paid to their own officials. In 2011, the Costa Rican electricity utility unsuccessfully sued to obtain restitution for harm suffered when Alcatel bribed its officials. The action grew out of information that came to light in the 2010 FCPA action against Alcatel. A federal court denied the petition, as described in this review. In another case, last month, Mexico’s PEMEX amended a lawsuit in U.S. federal court seeking $160 million from Siemens and SK Engineering & Construction Co. for bribes the companies allegedly paid to win contracts with PEMEX to modernize a refinery. The case is ongoing.

The lesson here is that, if your company interacts with SOEs in high-risk markets, perhaps as its customer, supplier, or business partner, it is helpful to keep these dynamics in mind. By considering the context of your business in a nuanced way, you enhance your own ability to assess risk, design controls, and obtain compliance cooperation with the SOE. In fact, some SOEs are starting to develop their own internal compliance measures comparable to those of non-government owned companies. This fact facilitates your ability to get compliance commitments from them. One day, an SOE might even be asking you to certify anti-corruption compliance or complete a due diligence questionnaire. Perhaps it already has.

The author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author.

@2013 Matteson Ellis Law, PLLC

SNC-Lavalin Got You Down? What to do when a business partner is accused of corruption

Matt Ellis — Thu, 30 May 2013 15:09:21 +0000

For those monitoring foreign bribery cases, 2013 is starting to get busy. In the United States, the last couple of months have included the unsealing of FCPA actions against BizJet executives and Wall Street traders. Just yesterday, authorities announced the fourth most expensive FCPA settlement to date. In Canada, the country’s largest engineering company, SNC-Lavalin, recently received the longest World Bank debarment in history, ten years, for payments related to a Bangladeshi bridge project. Canadian officials have charged its executives for their involvement.

What should a company do when it learns that a joint venture partner, supplier, or other third party has been charged with, or simply accused of, corruption?

From the perspective of enforcement, ongoing monitoring of business partners and third party relationships is a basic expectation. This might mean updating due diligence periodically, exercising audit rights, conducting periodic training, or requesting annual certifications by the entity. Monitoring should be risk based and applied consistently. When a red flag calls into question the third party’s integrity, it is standard for a company to act accordingly.

Compliance teams are responding to reports of partners’ corrupt acts in various ways. Many are pursuing a “kick the tires” approach. This might include any of the following:

- Reviewing agreements in place with the partner to make sure appropriate compliance language is included. If language is not there, they will determine how and when it can be incorporated, perhaps when the agreement is up next for renewal.

- Speaking with the business personnel who manage the relationship to understand the foreign corruption risks associated with the relationship. Does the partner interact with foreign officials on the company’s behalf? Does it use third parties to do so?

- Speaking with business personnel to get a sense of whether other red flags are present in the relationship. Has the partner been complying with the provisions of its agreement with the company? How is it being compensated for its work? Are services and costs well defined in the agreement?

- Requesting information about the partner’s anti-corruption compliance program, especially when there are foreign bribery risks at play.

Accusations of corrupt acts by a business partner do not automatically mean that a company must cease all business activities with that entity. This is especially the case when the reports of corruption have to do with a completely different country or business unit. Moreover, the fact that the entity might now be subject to an enforcement action probably means that it will start embracing robust compliance practices. For example, SNC-Lavalin just announced that it is following Siemens’ compliance lead by offering an amnesty program to encourage whistleblowers to come forward with more information about unethical practices at the company. Such enhanced compliance measures have the effect of making a company’s business relationship with that entity more secure.

At the same time, knowledge of wrongdoing by a partner should cause a company to take some proactive actions to ensure that similar risks do not extend to its own operations. As always, all such compliance steps should be properly tracked and recorded.

The author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author.

@2013 Matteson Ellis Law, PLLC

Mexican Senator to Give Keynote at ACI Latin America Summit on Anti-Corruption

Matt Ellis — Wed, 29 May 2013 14:40:13 +0000

Senator Roberto Gill Zuarth, a member of Mexico’s Anti-Corruption Commission, will give the Keynote Address at the 3^rd Latin America Summit on Anti-Corruption, hosted by American Conference Institute (ACI). The conference will be held in São Paulo, Brazil, on June 24-25, with special compliance workshops held on June 26^th.

Senator Zuarth’s participation is notable given the significant anti-corruption advancements made by Mexico and priority next steps on the country’s agenda. Mexico has ratified the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions. Last year, its Congress passed legislation to bolster anti-corruption rules in public procurements, described here. President Enrique Peña Nieto is promoting the establishment of a National Anti-Corruption Commission, described here. Going forward, the international community awaits to see the extent to which Mexico chooses to enforce its new anti-bribery laws.

At the conference, FCPA attorney Matteson Ellis will lead a three-hour workshop covering the “Hallmarks of Effective Compliance Programs,” as discussed in the DOJ and SEC’s FCPA Guidance. Participants will gain insights into how to ensure that a company’s Latin American operations are meeting U.S. anti-corruption standards.

The summit will also feature other leading anti-corruption practitioners from throughout the region. Companies represented include Philips, Pfizer, Oracle, Volkswagen, Siemens, and Weatherford. Topics include how to minimize third party corruption risks, a discussion of Brazilian anti-corruption laws, compliance strategies for World Cup 2014 and Olympics 2016, effective risk assessments in Latin America, and M&A due diligence in Latin America.

For more information, or to register, visit this site.

How the U.S. Government Criminally Charges a Latin American Public Official

Matt Ellis — Tue, 28 May 2013 14:29:49 +0000

Last November, then Assistant Attorney General for the Criminal Division of the U.S. Department of Justice (DOJ), Lanny Breuer, told an audience at an FCPA conference: “If you are a foreign official, corrupt, and living in the United States, the U.S. Government will prosecute you.” This month the DOJ made public its criminal charges against a Venezuelan public official for bribery-related offenses. The official’s connection to the United States was even more tenuous than the hypothetical provided by Mr. Breuer. María de Los Ángeles González de Hernandez was not even living in the United States.

Mrs. González was the Vice President of Finance at Venezuela’s state economic development bank, Banco de Desarrollo Económico y Social de Venezuela (BANDES). BANDES operates under the direction of Venezuela’s Ministry of Finance. She headed the bank’s overseas trading activity. The U.S. Government charged her with corruption-related offenses. Mrs. González, 58 years old, was arrested this month in Miami and remains in custody. Criminal charges were also brought against the U.S. traders involved in the scheme.

The scheme. The Complaint and press release tell how, over the span of fourteen months, Mrs. González is alleged to have received at least $5 million in bribes in exchange for steering BANDES’s financial trading business to a U.S. broker-dealer firm. The broker-dealer would charge the bank a mark-up fee on purchases and a mark-down fee on sales. The traders would split the resulting revenue with Mrs. González in the form of monthly kickbacks that were often in six-figure amounts. Remarkably, at least two trades had no apparent business purpose at all. On the same day, the broker-dealer conducted two “round-trip” trades where it bought BANDES bonds and then immediately sold them back, making approximately $10.5 million from the bank in mark-ups while the bank was left with the same holdings. To transfer funds back to Mrs. González, the traders used an intermediary Panamanian corporation set up by Mrs. González as well as Swiss bank accounts.

Interestingly enough, the traders even falsified the size of their firm’s fees in their reports to Mrs. González to decrease the amount of kickbacks and retain more of the profit themselves. Mrs. González seems to be a criminal who was hoodwinked by other criminals. One DOJ official stated: “Their return on investment now comes in the form of criminal charges carrying the prospect of prison time.” An official of the FBI, who participated in the investigation, stated, “the defendants conspired to use Venezuela’s economic development bank as their personal piggy bank.”

Proceeding against a foreign official. How is such an action against a foreign official possible? For starters, doesn’t the FCPA deal with the bribe payer, not the bribe receiver? Mrs. González was actually charged with FCPA-related offenses like conspiracy to violate the Travel Act, substantive Travel Act violations, conspiracy to commit money laundering, and substantive money laundering violations. Unlike the FCPA, these laws can reach non-U.S. officials who are receiving bribes. The FCPA Professor has discussed other examples of where the U.S. Government proceeded against foreign officials for non-FCPA offenses, like the Haiti Teleco case.

Don’t basic notions of state sovereignty suggest that one country should not put another country’s public officials in jail? Wouldn’t sovereign immunity apply? The U.S. Government is unlikely to recognize sovereign immunity in situations where the foreign official is acting in her own personal capacity. In the BANDES case, it does not appear that Mrs. González was acting on behalf of the state. Instead, she was making decisions that padded her own bank account. Some of these actions brought greater costs to the Venezuelan state. As such, she does not appear to have been acting within the scope of her public sector job. Nor does she appear to have been following orders from any government superiors. In addition, such corrupt activity was most likely in violation of local Venezuelan law.

The BANDES case serves as a wake-up call to Latin American executives working at state-owned enterprises throughout the region. Like it or not, the U.S. Government has made its position clear. It will proceed against you if it has cause to do so. The DOJ is even building stronger infrastructure to do so – the DOJ recently launched the Kleptocracy Asset Recovery Initiative to seize assets of corrupt foreign officials. We are beginning a new chapter of international anti-corruption enforcement.

The author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author.

@2013 Matteson Ellis Law, PLLC

More Latin American Data for your FCPA Compliance Program: Gauging levels of petty corruption

Matt Ellis — Wed, 22 May 2013 16:09:58 +0000

Companies operating in Latin America with robust anti-corruption compliance programs regularly welcome new data to help them better understand the landscapes in which they operate. Risk assessments are a fundamental component of FCPA compliance, as discussed by enforcement agencies in the FCPA Guidance and Attachment Cs to Deferred Prosecution Agreements. Quantitative measures help bolster the accuracy of such assessments. The Transparency International Corruption Perceptions Index and the 2012 Latin American Corruption Survey are two such sources available to companies for Latin America. FCPAméricas has discussed other empirics here.

Now there is yet another source, the 2012 Americas Barometer Study, conducted by the Latin American Public Opinion Project. The project involved the support of USAID, Vanderbilt University, the University of Miami, and others.

Three things make this survey unique. First, the expansiveness of the survey makes the validity of its results hard to question. The project polled over 40,000 people in 26 countries throughout the region. Each country involved a minimum of 1,500 polling interviews. Project organizers trained a small army of individuals from local organizations, universities, and research institutions to carry hand-held computers to all corners of the region, rural and urban, populated and remote, to ask a series of questions of all sorts of citizens. Surveys were conducted in numerous languages, including indigenous languages.

Second, this survey asks about people’s experiences with corruption. Usually, surveys ask only for people’s perceptions of corruption. Rather that capturing views on corruption, this survey appears to capture actual victimization.

Third, the data is highly relevant specifically to gauging petty corruption risks. Many of the questions are designed to measure corruption victimization by police officers, municipal permitting officials, hospitals and clinics, school officials, and others. These are the types of everyday bribe requests that affect the average citizen in Latin America. They are not necessarily of direct relevance to the types of grand corruption that can touch elite business activity, like large-scale public procurement processes, dealings with customs officials, or interactions with executive branch officials. Those types of activities generally involve only a small segment of a population. Nonetheless, the responses are quite relevant to companies insofar as petty corruption affects operations on the ground. The corrupt police officer who demands bribes from company employees on highways. The low level bureaucrat who asks for payments to connect the company’s telephone line.

Overall, an eye-opening 57% of respondents throughout the entire region say they have experienced one instance of low-level corruption in the last year. Forty-three percent (43%) are repeat victims. Those with more wealth, better education, and more urban presence are more likely to be victimized. Bribe requests are also more common for self-employed business owners rather than private sector employees.

Percentage of respondents who report being asked for a bribe one or more times in the last twelve months by a police officer, government employee, municipal government, at work, in the courts, at a hospital or clinic, and/or at school (tiered risk categories prepared by FCPAméricas):

Tier One Risk

Haiti (67.0%)

Bolivia (44.8%)

Ecuador (40.9%)

Tier Two Risk

Mexico (31.2%)

Peru (28.5%)

Honduras (25.8%)

Guatemala (24.1%)

Dominican Republic (21.7%)

Paraguay (21.0%)

Costa Rica (20.7%)

Argentina (19.6%)

Guyana (19.4%)

Tier Three Risk

Colombia (16.1%)

Venezuela (15.3%)

Trinidad & Tobago (14.8%)

Tier Four Risk

Suriname (11.9%)

Belize (11.9%)

Brazil (11.5%)

Nicaragua (11.4%)

El Salvador (11.3%)

Tier Five Risk

Panama (9.0%)

Uruguay (8.2%)

Jamaica (7.5%)

Chile (5.8%)

United States (5.3%)

Canada (3.4%)

Raw data from the survey is available on the project’s website, but the project has not yet published all of its analysis. The survey organizers are careful to note that the extensive data can allow for review of specific risk variations at sub-national levels. Such information could be extremely useful in helping companies enhance their compliance efforts in specific parts of the region. One of the survey partners, Dr. Ariel Armony, the Director of the University of Miami’s Center for Latin American Studies, has offered to assist companies that might wish to use the data for private sector compliance. Mr. Armony can be reached at: armony@miami.edu.

The author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author.

@2013 Matteson Ellis Law, PLLC

“Every Dollar Has a Name”: Avoiding sham contracts in Latin America

Matt Ellis — Fri, 17 May 2013 12:02:11 +0000

Personal finance guru and motivational speaker Dave Ramsey is known to say that “every dollar has a name” when advising audiences on how best to manage their money. This maxim holds true for companies seeking to comply with the FCPA as well. By implementing controls that help ensure that each company dollar is assigned a name, that its destination is recorded with a degree of specificity, companies reduce foreign bribery risks.

Take the problem of sham third party contracts for example. Like the problem of phantom vendors (discussed previously by FCPAméricas), sham contracts present perpetual FCPA risk for companies in Latin America. How do they work? Companies, or their employees, create phony written agreements with third parties, perhaps a consultant or outside vendor. The company makes payments to the third party for purported goods or services. In reality, the entity provides no legitimate services, or not at the level to justify the compensation. The rest of the money is used to bribe foreign officials on the company’s behalf to achieve some business advantage, thereby violating the FCPA. Schemes like these were seen in cases like Siemens Argentina, where the company’s consulting contract with the Argentine Consulting Group involved no legitimate services and lay at the root of the bribery scheme.

What kind of controls can companies implement to minimize the risk that their employees will set up sham contracts to facilitate bribery? We asked anti-corruption forensic accountant David Wolfe to provide his insights:

Set Up Systems. Pre-set processes, like vendor approval mechanisms, help reduce the possibility that a third party will be paid based on a sham contract. Vendor approvals require a second, and sometimes a third, set of eyes to review the agreement and assess its legitimacy before the relationship begins. By requiring computer databases to be populated with this information, companies ensure that various aspects of the arrangement have been vetted. Pre-approved vendor lists give businesses a degree of comfort that relationships are legitimate. Similarly, purchase order systems force companies to consider with whom they are dealing and what they are purchasing.

Moreover, when companies create budgets up-front that anticipate expenses, and when they pre-approve these expenses, they establish more control over dollars spent. Contracts that arise outside of the pre-approved plan can be scrutinized more closely.

Key to such controls is segregation of duties and transparency. When various actors are involved, and when contract formation is done openly, it is harder to execute illicit arrangements. The level of detail of controls will depend on the size of the company – it is often difficult for smaller companies to achieve the same standards as those of large multinationals. But the fundamental principles can be the same.

Verify. Companies should verify that third parties are doing what they say they are doing pursuant to their contracts. This means ensuring they provide backup documentation with their invoices, and reviewing the documentation. It means keeping an eye out for fraudulent documentation, such as fake invoices or bogus line items. These are the types of problems seen in cases like Ralph Lauren Corporation in Argentina and Willbros International in Bolivia.

Track and Monitor. Payments made pursuant to third party contracts must be closely archived in a company’s books and records with specific budget codes that signify the types of goods and services at issue. Records should be made and updated in real time, while the expenses are occurring. Accurate books and records position the company to monitor contracts for potential problems. They can review contracts based on amounts paid to vendors, the location of the vendors, and what they are doing. Testing might pay particular attention to contracts for periodic services, where it is sometimes easier for fraud to hide. They might look closely at contracts that deal with intangibles, as opposed to physical goods. Such contracts might be subject to fewer pre-existing controls, like inventory logs.

In all, the keys to addressing sham contracts are controls, transparency, and accountability.

The author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author.

@2013 Matteson Ellis Law, PLLC

Beyond the FCPA: Commercial Bribery, the Travel Act, and Compliance

matthewfowler — Tue, 14 May 2013 13:41:44 +0000

Today’s guest post is from anti-corruption attorney Matthew Fowler who formerly worked as a compliance officer at a multinational defense company.

When I was an in-house compliance officer, the issues that kept me up at night were not the ones covered by our compliance program. They were the unknown unknowns – the issues I feared were lurking just off radar. Commercial bribery fits the profile of that kind of issue, since it is not prohibited by the FCPA. But it is an issue that belongs squarely on the radars of compliance officers.

Commercial bribery – bribes paid to people working in the private sector – is not addressed by the FCPA, which criminalizes promises or payments made to “foreign government officials.” Similarly, U.S. federal law does not prohibit bribery in private commercial activity. However, many states do prohibit commercial bribery, and the Travel Act “federalizes” such state law prohibitions. Failing to properly record commercial bribes could also result in violations of the books and records provisions of the FCPA.

The Travel Act

The Travel Act prohibits the use of means of interstate or foreign commerce if the underlying activity is prohibited by state law. It specifically makes bribery in violation of state law a federal offense.

The relationship between the FCPA and the Travel Act was evident in the prosecution of Control Components, Inc. In 2009, Control Components pleaded guilty to charges that it violated both the FCPA and the Travel Act. The FCPA violations related to corrupt payments to officials and employees of foreign state-owned companies, and the Travel Act related to similar payments to employees of foreign and domestic private companies. These charges were based on California law, which prohibits commercial bribery.

Foreign Commercial Bribery Prohibitions

Commercial bribery may also violate foreign laws. The UK Bribery Act specifically covers bribery in both the public and private sectors. The bribery offences established in the UK Bribery Act relate to payments made or accepted to bring about “improper performance” of a relevant function or activity. According to Guidance published by the UK Ministry of Justice, “improper performance” relates to any function “connected with a business, performed in the course of a person’s employment or performed on behalf of a company or another body of persons… [Bribery] in both the public and private sectors is covered.”

Note that the UK Bribery Act also prohibits both the payment and the acceptance of bribes – including private sector bribes. This is significantly broader than the FCPA, which addresses only the payment of bribes, and then only when paid to foreign government officials. In fact, outside the U.S. there are signs of a trend toward broadening corruption prohibitions to include commercial bribery and acceptance of bribes. A 2003 EU Council decision required all states of the European Union to criminalize both the payment and acceptance of bribes in the private sector. Beyond Europe, the United Nations Convention Against Corruption requires States Parties to “consider” the criminalization of both the payment and acceptance of commercial bribes.

Signs of this trend can also be seen in the Americas. Revisions to the Brazilian criminal code are expected to include criminalization of the payment or acceptance of commercial bribes. The current draft of the revised criminal code would establish that it is a crime to “… demand, request, accept or receive improper advantage, as a representative of the company or private institution, to himself or to third parties, directly or indirectly, or accepts promise of improper advantage, to perform or nor perform an act inherent in their assignments.”

Effects on Compliance Programs

Addressing commercial bribery risk in compliance programs has significant implications for compliance officers, including the following:

1. Compliance officers need to be aware of state and foreign commercial bribery prohibitions. The Travel Act has the effect of “federalizing” state commercial bribery laws, and the DOJ has shown its willingness to prosecute such matters when the recipient is overseas. U.S. companies could also find themselves facing sanctions in foreign jurisdictions for such payments. Compliance officers should know whether the states and countries in which they do business have commercial bribery prohibitions, and they should address those risks in their compliance programs.

2. When conducting risk assessments, compliance officers should take a more expansive view of corruption risks. Corruption risk assessments are often focused on interactions with foreign government officials, but the risk of commercial bribery arises in purely commercial settings. Similarly, corruption risk is not limited to international operations, since the Travel Act applies to both foreign and domestic bribes.

3. Compliance officers should consider addressing the acceptance of commercial bribes in their compliance programs. Gift and hospitality rules may need to be expanded to scrutinize benefits received by company personnel as well as those that they provide.

4. Companies should properly record and report commercial hospitality and similar payments. Failure to report such payments, whether commercial bribes or not, could result in a violation of the FCPA’s books and records provisions.

Making such changes could mean significant changes for compliance officers, but it is better to have such issues on your radar than off. It might even help you sleep.

The author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author.

@2013 Matteson Ellis Law, PLLC

Preaching to the Choir, and the Sinners: FCPA compliance training in Latin America

Matt Ellis — Fri, 10 May 2013 15:08:10 +0000

On Mexican highways, there are official government signs that read, “Conduce con precaución. Tu familia te espera” (Drive carefully, your family is waiting for you), and “Después de un accidente, ya nada es igual” (After an accident, nothing is the same). On some routes, the government might leave wreckage from car accidents with signs that read, “In January 2013, six people died here.”

It seems that the Mexican government has identified various ways of convincing people to drive safely. Some drivers follow speed limit signs. Others respond only to speed traps and bumps in the road. As it appears, some are affected by emotional appeals.

How might these lessons be relevant to FCPA compliance training in Latin America?

TRACE President Alexandra Wrage has categorized the various audiences of FCPA compliance training into different groups. There are the “bottom-liners,” also known as “box-checkers.” They are interested in knowing the rules, and focus on adhering to them. They care less about good corporate citizenship and more about being on the right side of company policy and the law. There is the “ethical majority,” those who are driven by a desire to protect the company’s reputation. They respond to messages regarding how compliance can increase a corporation’s standing in the market as well as shareholder value. There are the “idealists.” Unlike the other groups, the idealists’ attitudes toward compliance are driven by the larger picture. They are concerned about the global implications of their company’s business strategies. They are moved to action by the “social, health, and security problems that bribery spawns.” And there are the “criminals.” These are people inclined to break the rules for their own ends.

Each group responds to different types of training strategies. The bottom-liners respond to rules-based compliance approaches. The ethical majority and idealists tend to respond best to values-based approaches. For the criminals, trainers need to stress controls and consequences for violations.

As the Mexico example highlights, some could be affected by appeals to emotion too. For example, a compliance officer of a multi-national commercial real estate development company recently told me that she always begins her trainings by discussing the group’s own country, what type of leadership her audience wishes to have, the pride they feel when their leaders do the right thing, and the shame that results when they do not. A compliance lawyer at an energy company similarly told me that he likes to talk about the participants’ families and children when rolling out compliance procedures. He asks the audience: “Is a corrupt business environment the type of place we really want to leave to our kids?”

Invoking emotion plays off of values, like family and pride. While some values-based approaches promote attitudes like “our company does things honestly” and “if you bribe, you harm markets and democracies and you aid criminals,” an emotional approach takes values a step further. It considers how people ultimately relate to one another. It motivates people at the core. This is often how the most fundamental change in corporate behavior occurs.

I agree with Mrs. Wrage that training strategies need to incorporate several different approaches to reach different audiences. All strategies working together can help generate a culture of compliance. Strategies based on rules and values are essential. But emotional appeals have an important place as well.

The author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author.

@2013 Matteson Ellis Law, PLLC