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The 5 Critical Considerations

What to do When an Allegation of a FCPA Violation Is Raised Within Your Company

A GRC WHITEPAPERFROM THE NETWORK

WHAT TO DO WHEN AN ALLEGATION OF A FPCA VIOLATION IS RAISED WITHIN YOUR COMPANY THE NETWORK – page 2

The reaction to corruption by both national enforcement authorities here and abroad, as well as within multi-national corporations throughout the world, has changed dramatically over the past 10 years. In 2004-05, U.S. federal government FCPA investigations were at their infancy, and the DOJ and the FBI were just beginning to focus heavily on significant global corruption and foreign bribery investigations and prosecutions. Similarly, many companies, including a number of multi-nationals, did not have “compliance” departments, and the mere mention of the term “compliance” was often met by a strange look of unfamiliarity.

Back in 2005, on behalf of Former Federal Reserve Chairman Paul Volcker and the Independent Inquiry Committee Investigation Into the Iraqi Oil for Food Programme (OFFP), I was meeting regularly with national authorities from all over the world, Europe, Asia and elsewhere, who were focusing on corruption, including some of my former colleagues at the Fraud Section at Main Justice. The purpose of my efforts at the time was to refer completed OFFP corruption investigations and evidence of bribery and corruption schemes involving the Government of Iraq and thousands of companies, for further enforcement actions, including criminal prosecution and civil forfeiture and asset recovery efforts. The referrals helped lead to an increase in focus by the US Government and others on the topic of foreign bribery.

Corruption investigations elsewhere, especially extraterritorial - focusing on activities beyond a country’s own borders - were virtually non-existent. Likewise, the exchange of a benefit for a government contract, or as a gratuity/expression of appreciation for one, in many parts of the world, was engrained in the society’s culture as well as the government institutions themselves. In a number of regions, a “commission” was expected to be made for a government contract, or as an expression of appreciation. Not only were such payments not punished, in a number of places the practice wasn’t even considered illegal.

In addition, there were, and still are, very few extraterritorial laws addressing corruption that occurred beyond a country’s own borders, and even less efforts to enforce them. As one high level government official in Southeast Asia told me in 2013, “We don’t investigate cases of our citizens bribing foreign officials. Our laws do not address that. It’s only if [the corruption] happens [here].” On several occasions in distant lands, I came across actual tables on how the profits of bribery were to be divided through the government hierarchy, increasing proportionally depending upon the level of seniority of the official. All of this translated into a circumstance where just a fraction of the incidents of bribery and corruption were investigated, let alone successfully prosecuted.

THE 5 CRITICAL CONSIDERATIONS: WHAT TO DO WHEN AN ALLEGATION OF A FCPA VIOLATION IS RAISED WITHIN YOUR COMPANY

A WHITEPAPER BY ROBERT APPLETON, ESQ., DAY PITNEY LLP


Today, circumstances have changed somewhat, albeit not dramatically. They have changed enough to drive a difference in the response to allegations of corruption. Companies engaged in commercial activity beyond their borders, wherever located, must take allegations of corruption and bribery, as well as their compliance efforts to lessen these risks, seriously. To do otherwise, companies risk a fate similar to that which befell Alstom and Siemens, as well as others that have been highly publicized, or worse. Now, the downside risk of punishment and potential consequence for a bribery or corruption finding has increased exponentially, even though only a fraction of contracts tainted by bribery are pursued by enforcement officials. In addition, in order to promote greater accountability, whistleblower reward programs have formed, and some have received the commitment of substantial funding. As a result of enabling legislation and agency programs, there is now at least the potential for significant whistleblower and insider rewards for disclosure of evidence of corruption within corporations.

Similarly, much tougher anti-corruption legislation has been passed in a number of important countries, including Brazil and China, and prosecutions are on the rise. While a paltry number of corruption cases are prosecuted in Asia and Africa, much greater attention is being paid to this issue.

In addition, African countries are now demanding a greater percentage of the fines and penalties being imposed by foreign authorities that prosecute cases in their territory – asserting that their communities are the victims of schemes, and they should therefore join in the spoils of the recoveries.

Further, fine and penalty amounts are increasing substantially, and the SEC and DOJ have publicly announced intentions to hold individual corporate officials personally responsible for undertaking as well as intentionally turning a blind eye to corruption schemes. And last but not least, compliance programs and compliance officers are now an ever increasing subject of enforcement actions. The very recent case of BHP Billiton is a potential paradigm shift - wherein the company agreed to pay a $25 million fine to the SEC for alleged failures in their compliance program and their “Olympic Hospitality Program,” where no there was no actual contract procured, no government involvement, and no quid pro quo was proven to exist. The case represents the trend where the pendulum has swung to a landscape where there is much more scrutiny not only on the acts of corruption, but the instrumentalities of it as well - such as gifts, hospitality, travel and entertainment, and even the hiring of relatives of foreign government officials as a basis for an enforcement action.


While most agree that all companies must now take allegations of corruption, improper benefits, and faulty compliance, seriously, when an allegation is raised, the question what a company should do does not lend itself to an easy answer. The question of if, and when, to disclose the issue to the government haunts many. The goal of this article is to examine some important considerations for corporate leaders when such an issue arises, either through a whistleblower hotline, a direct complaint, a routine audit, a compliance review or some other manner. The first two considerations assume that notice of the allegation has not reached the government, and that a subpoena or notice that the DOJ and/or SEC, or some other enforcement body is investigating, has not been received. The premise is that the issue has arisen entirely internally. If such is not the case, and notice has been achieved through a subpoena, search warrant, or a visit from a government agent, much of the later discussion in this piece nevertheless remains relevant.

If the matter is raised internally, you might consider the following.

What to do first depends upon the size and structure of your company, where it is headquartered, and whether you are publicly traded or privately held. It also depends on the nature of the allegation, and what it encompasses, and to whom it is directed. The first thing not to do though, in any case, is to bury it. Such a course could be potentially catastrophic, and, if it later become known, is a decision that may well be considered “aggravating” by the government when penalty time rolls around. It is axiomatic that enforcement authorities expect companies to address deficiencies in compliance, and remediate weaknesses as well as failures, regardless of whether an enforcement action ensues. If such an action does later arise, the failure to strengthen existing compliance programs, remediate the deficiencies and address the complaint and/or failure(s) will all substantially increase fine amounts at the very least, and may lead to other consequences.

WHAT NOT TO DO - IGNORE


WHAT TO DO

Perhaps the first consideration when an allegation surfaces is the question of whether the claim or complaint possibly has merit – and whether it in fact gives rise to an FCPA or related violation. In other words, is it something to worry about? The answer whether there indeed is a problem largely depends upon the nature of the allegation, the evidence that is presented or discovered to support it, the credibility of the complainant and the claim, and jurisdictional considerations. For purposes of this exercise, the company should treat the allegation has having prima facie merit, and, if on its face a violation is present, (assuming that the allegation is accepted) should be assessed. Much of the time, the complaint should at least be preliminarily investigated.

Depending upon the size of the company and the allegation, the process should begin internally. A smaller company, without an internal audit or compliance function, should consider employing the services of an outside expert (an individual or a firm) that is credible, competent, well-versed and experienced in the art of internal investigation, as well as the relevant laws and regulations at issue. Acting under the direction and supervision of a lawyer or law firm, the results of the investigation or forensic audit would in most cases may be covered by the attorney client privilege. When a law firm drives the process, the report is not subject to disclosure through compulsory process. Privilege has many benefits, not the least of which is that it renders the report secure and while there are exceptions, mostly undiscoverable.

1. Assess Whether You Have a Possible FCPA or Similar Violation

The preliminary inquiry should be thorough, and should not cease simply because no evidence has been provided along with the claim. It is not the complainant’s job to produce evidence, but the reporting system should encourage this. An effort should be made to identify evidence that supports as well as evidence that undercuts the claim, unless the complaint is patently frivolous on its face or includes other indicia of clear untrustworthiness. Unless the complaint is clearly something that cannot or should not be addressed, effort should be made to collect all relevant information, documents and materials. Due consideration needs to be given to confidentiality, and any inquiry, especially a preliminary one, should be conducted with the utmost discretion. Formal interviews should not be conducted at this stage, but should wait until a full investigation is deemed necessary. Likewise, forensic efforts should, for the most part, wait.

ALSTOM 2ND Highest Fine On Record

“We encourage companies to maintain robust compliance programs, to voluntarily disclose and eradicate misconduct when it is detected, and to cooperate in the government’s investigation. But we will not wait for companies to act responsibly.” - Assistant Attorney General Caldwell

Alstom’s failure to report the violations and failure to cooperate until they received subpoenas resulted in driving the penalty up to a $772 million fine – the second highest FCPA enforcement fine on record.


Depending upon the nature of the allegation, and the evidence that supports it, sometimes a full and comprehensive internal investigation, buttressed by forensics, is warranted. While this process should be done expeditiously, it should also be accomplished comprehensively and fairly. When an allegation is raised in a subsidiary or office in a country within a company that has operations in many other countries throughout the world, it is most often not necessary to conduct the internal investigation everywhere – but investigators should follow the natural progression of where the evidence leads and follow the investigation of this complaint through to its logical conclusion. Operations in other countries should be examined to ensure this issue has not arisen elsewhere, but that examination most often can be conducted under a different scale and scope. The investigation of the allegation raised need not be repeated everywhere (unless the focus of the allegation is just that, a claim that the issue(s) is/are company-wide and pervasive).

2. Assess Whether to Undertake a Deeper Internal Investigation

If there is a division of views from experienced professionals on whether to undertake a thorough internal investigation, one should err on the side of caution and conduct it. If done correctly, there is not a lot of downside to the exercise, other than cost. There is potentially substantial benefit, including identifying other deficiencies before they become larger, and more challenging, problems. These exercises as well can be used as an alternative and substitute to deep compliance audits, which should be undertaken regularly nevertheless.

The investigation should also be thorough, using forensic tools, and be done by experienced professionals in this field. Remember, this is not an audit – not a review of processes, but an investigation of the merits of an allegation. An investigation counsel should supervise the effort and analyze the results. An experienced white collar lawyer is best placed to review, analyze and assess the outcome of the investigation and the findings.


A company can get good credit for correcting compliance deficiencies that surface or come to light during an inquiry, and similarly, also be punished for ignoring compliance when a deficiency emerges. Remediation is important, and an opportunity for the company to turn a potential problem into a vehicle for credit.

Behind voluntary disclosure and cooperation, remediation is often cited as the third most important corrective measure a company can undertake to mitigate possible penalties. Failure to remediate is sometimes considered an “aggravating” factor, warranting increased penalties at the time of resolution.

It should be noted that remediation should not delay the engagement with the government, the disclosure of investigation results and the production of the internal investigation report, in order to ensure “timely” cooperation. Remediation is a completely different exercise than investigation, and this distinction is important. The investigation need not be conducted throughout the company unless it is logical to do so and remediation efforts should be well documented as they happen.

An allegation of corruption at a subsidiary, a country office, a merger or acquisition target, or against an official, presents a great opportunity to review the company’s compliance program generally. It’s also a mechanism to test the compliance program across the company’s operations, to ensure that the alleged issue, deficiency or problem has not expanded to other locations or offices, or reached other departments. Based on a number of comments by key government officials recently, such an effort is expected by government enforcers to be undertaken by companies subject to the FCPA and other federal laws.

“Marubeni rolled the dice (by deciding not to self-report) and suffered gambler’s remorse.”

- A top SEC official

MARUBENI Gambler’s Remorse

3. Assess Internal Controls and Compliance – Remediate

In 2012, Marubeni received an $88 million fine, increased partially by the failure to self report. The plea agreement cites Marubeni’s refusal to cooperate with the department’s investigation when given the opportunity to do so, its lack of an effective compliance and ethics program at the time of the offense, and its failure to timely remediate as several of the factors considered by the department in determining the resolution.


4. Assess Whether to Make A Voluntarily Disclosure

The question whether to disclose a potential violation to a previously unaware government agency presents perhaps the greatest challenge for many corporate leaders. To many, disclosure is synonymous with “confession,” an admission of guilt, that may result in a cascading never ending series of punishments, debarments, loss of reputation and business. The decision to disclose a violation is often counter-intuitive, despite the repeated claims by the government of the “benefit” of the practice. Senior government officials routinely and consistently espouse the virtues of disclosure, including limitations on penalties and heavy decreases on fine amounts. “Credit” is often promoted as a reward for early and timely disclosure. Regardless, many still push back and decline.

My analysis of the many cases over the past five years, including those where I have been involved, generally bears out that if cooperation is done correctly, and in good faith, the potential benefits are substantial. Valuable lessons have been learned along the way.

For instance, a couple of very important considerations must be kept in mind – first, the disclosure must be early, before the government becomes aware of the issue, or at least well before you believe the government becomes aware of it. A disclosure is not considered by the government to be “voluntary” if a company willingly responds to subpoenas by producing documents only after being compelled to do so.

The kind of disclosure that is considered “voluntary” is one that it is undertaken close to the time the issue is raised, before the matter is on the radar screen of the enforcement authorities, and well before formal requests are made for the production of documents, witnesses and internal investigation reports.

LAYNE CHRISTENSENSelf-Reporting Pays Off

“In addition to self-reporting the misconduct, Layne cooperated with the SEC’s investigation by providing real time reports of its investigation findings, producing English language translations of documents, and making foreign witnesses available. The company also undertook a significant remediation effort. Layne self reported its violations, cooperated fully with the investigation and revamped FCPA compliance program . . . [all efforts that] were credited in determining the appropriate remedy.”

Layne Christensen paid effectively no fine beyond disgorgement and interest because of the credit received for self-reporting and extraodinary cooperation.


Generally, a study of previous cases reveals that companies receive approximately 20% reduction from the bottom of the sentencing guideline range for early disclosure, sometimes more if coupled with extensive cooperation (as discussed below), sometimes less – if other aggravating factors are present. Voluntary disclosure, coupled with full and timely cooperation, generally results in the greatest benefit, and can produce decreases in fine amounts of 50% or more from the bottom of the guideline range. But companies must go all of the way, disclosure must be complete and unequivocal, and without conditions – meaning that nothing can be held back.

Disclosure includes producing the internal investigation report, witness summaries, documents, emails, names and identification of company personnel. Any limitation imposed will undoubtedly result in lesser mitigation and less of a penalty reduction, and even possibly a finding of “aggravation”. The more that is volunteered and produced, the stronger the government’s view and recommendation of the nature and extent of the disclosure.

As discussed below, the company must be willing to disclose, irrespective of where the evidence leads, including into the higher levels of the company – even executives. No exception can be made. Efforts to protect senior officials, such as in the Avon case, will lead to an increase in penalty, rather than a decrease. It is often better not to disclose, if a company will place significant limitations on what it is willing to turn over. This can actually result in a circumstance worse than saying nothing at all, if it is viewed by the government that the company is trying to protect certain officials, or keep certain embarrassing, problematic or difficult facts from them, or out of the realm of public scrutiny.

Efforts to protect senior officials, such as in the Avon case, will lead to an increase in penalty, rather than a decrease.

AVONA Missed Opportunity

“Avon missed an opportunity to correct potential FCPA problems at its subsidiary, resulting in years of additional misconduct that could have been avoided.”

Avon management learned about potential FCPA problems at the subsidiary through an internal audit report in late 2005, but didn’t follow up until 2008, after the CEO received a letter from a whistleblower.

This issue is often best considered on a case by case basis, but there is a good track record now from which an estimate of the degree of benefit can be assessed. But many factors go into the analysis and an outside review by competent and experienced counsel is a must.

When the decision is made to disclose, to whom should the disclosure be made? If there is jurisdiction in the United States, where there often is, the SEC and the DOJ are the options. The selection depends on the case. The DOJ principally handles criminal matters and the SEC civil and administrative. However, these often overlap, and both have jurisdiction much of the time. Often, disclosure to both is the safest play.


Next to the question whether to disclose, the next most difficult, but also the most important issue, is whether to cooperate with the government investigation that will likely follow notice to enforcement authorities of a possible violation. As with disclosure, the nature and extent of the cooperation drives the amount of the reduction of the fine, or, the benefit for the cooperation. To achieve maximum benefit, and a real and substantial reduction of the penalty amount, cooperation must be “full” and complete. Meaning, nothing can be withheld. Not the internal investigation report, not summaries of internal witness interviews, not the identification of lists of all responsible individuals, nor emails, hard drives or files. All records, employees, including senior officials and third party agents and intermediaries, must be made available and produced. Even delays will result in a reduction in the amount of benefit that will be offered.

However, coupled with disclosure, full cooperation can drive a penalty substantially downward. It can make the difference between a requirement to enter a guilty plea, or the ability to secure a Deferred Prosecution Agreement (DPA) or Non-Prosecution Agreement (NPA) with the government. It can result, if full and considered “extraordinary” in more than a 50% reduction in the guidelines fine – see Alcoa, Goodyear Tire, HP and a number of others. One need only compare and contrast the Alcoa resolution with Alstom fine, the Goodyear Tire and HP resolutions with the fines in the Weatherford and Avon cases, to get a sense of the difference in penalty between full cooperation and early disclosure, as against no disclosure and what may be perceived as “tardy” cooperation. In the Alcoa/Alstom cases, it meant a difference of many hundreds of millions of dollars - down for Alcoa, and up for Alstom.

We have tested all of the resolutions over the past three years, and generally this trend holds, with some exceptions that can be explained. Any reservation, or withholding, translates directly in limits on the decrease of the fine amounts. Generally, the greater the cooperation and the earlier and more complete the disclosure, the greater the benefit.

However, these decisions must be made with the advice and counsel of legal counsel that is well versed in these issues, with a deep understanding of how such penalties are fashioned. A misstep could literally result in a difference of hundreds of millions of dollars - or the company being criminally charged.

Again, the only thing possibly worse – is to ignore the issue and pray that it goes away. Such a gamble is the ultimate roll of the dice, and a choice where the odds get worse with every day that passes.

BIO-RADExtraordinary Cooperation

“This enforcement action, which reflects credit for Bio-Rad’s cooperation in our investigation, reiterates the importance of all companies ensuring they have proper internal controls to prevent FCPA violations.”

Bio-Rad received a non-prosecution agreement from the DOJ after self-disclosing and fully cooperating with the agency.

5. Assess Whether to Fully Cooperate with a Government Investigation


Robert Appleton is a Partner in the law office of Day Pitney LLP, where he concentrates on white collar matters, government investigations, compliance, broker/dealer securities issues and asset recovery. Robert provides strategic counsel to broker/dealers, companies and individuals facing state, federal, DOJ or SEC investigations and prosecutions or financial losses; advice and defense on FCPA matters, export control-sanctions and enforcement advice; and compliance-including compliance assessments and preparation of individual tailored compliance programs in the areas of export control, FCPA and securities law.

Mr. Appleton has served in many senior positions, both in the US and abroad, and led and managed hundreds of international cross border financial fraud, securities and financial misuse investigations over his career as a US federal prosecutor, high profile international investigator and senior global compliance attorney.

Robert has prosecuted numerous high profile international fraud, money laundering, weapons trafficking and terrorism cases, and twice won the prestigious Director’s Award – the second highest accolade in the Department of Justice, for exemplary service in key cases. He has successfully tried more than 20 cases before juries and briefed and argued more than 20 appeals before the Second Circuit of Appeals in New York.

In 2006, Robert Appleton was appointed by the UN Secretary General as the first ever Chairman of the UN Anti-Corruption Task Force (PTF), where he led corruption investigations throughout the world body between 2006 and 2009. In 2005, Mr. Appleton was appointed by Former US Federal Reserve Chairman Paul Volcker as his Special Counsel and then Chief Investigative Counsel to the Independent Inquiry Committee investigation into the Iraqi Oil for Food Scandal. He was also appointed to lead the sensitive investigation of the Secretary General and, with Reserve Chairman Volcker, deposed the Secretary General twice. In 2010 he was selected to serve as Senior Legal and Compliance Counsel and Director of Investigations at the Geneva based Global Fund to Fight AIDS, Tuberculosis and Malaria, where he supervised more than 300 forensic financial investigations throughout the world, and handled many Patriot Act, FCPA and AML matters throughout the world. Mr. Appleton served as a federal prosecutor and then a Supervisory AUSA for more than 13 years in the US Attorneys Office in the District of Connecticut and at the DOJ.

You can reach him via email at [email protected] or find him on Twitter @BobAppletonFCPA.

ABOUT THE AUTHOR

Robert Appleton, Partner at Day Pitney LLP

mailto:rappleton%40daypitney.com?subject=

https://twitter.com/BobAppletonFCPA

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