1. Art and Diseño

 The Alstom and Avon FCPA Enforcement Actions By Thomas Fox 2014 The final month of 2014 ended with about as big a bang as it could for the world of Foreign Corrupt Practices Act (FCPA) enforcement. You had the conclusion of the Alstom FCPA enforcement action, which resulted in the largest FCPA criminal fine in history and the final resolution of the Avon enforcement action, which will always be remembered as the most costly enforcement action (at least until Wal-­‐Mart is resolved) and for the fact that $8 million in bribes cost the company as much as $750 million. This article will delve into these two seminal cases, review the underlying facts and enforcement theories and look at the lessons learned for the compliance practitioner. ALSTOM Background How did Alstom find itself in the position that it now occupies as #2 on the all-­‐time hit parade of FCPA enforcement actions? Particularly – as noted by the FCPA Professor in his post, entitled “All About the Alstom Enforcement Action,” – that “Alstom employed approximately 110,000 employees in over 70 countries. The information contains specific allegations as to nine individuals associated with Alstom and nine consultants associated with Alstom.” Usually, when someone comes in at #2, the ranking comes with some ignominy, though for Alstom it isn’t because they didn’t win, but because they now have the second highest total of FCPA monetary fines in the history of the world at a stunning $772,290,000. I say total because the current front-­‐runner, Siemens, is at $800 million and included both a Department of Justice (DOJ) component of $450 million and Securities and Exchange Commission (SEC) component of $350 million. However, with the Alstom fine, the entire amount was paid to DOJ as a fine and no 1 monies were paid to the SEC because at the time of the resolution, Alstom was not an “issuer” under the FCPA and the SEC had no jurisdiction. This makes Alstom the largest criminal FCPA fine of all time. One interesting note is that two other French companies, Total SA and Technip SA, join Alstom on the all-­‐time top 10 list. Somewhere I am sure Mr. French is shaking his very well coiffured head in shame in the great TV Land in the sky. I would say the amounts paid out and benefits received by Alstom were stunning, but it might do a disservice to the word stunning. So below I have laid out information below. Alstom Bribery Box Score Country Bribe Amount Paid Benefit Received Indonesia (not listed) $378 million Saudi Arabia $51.2 million $3 billion Egypt “Millions and millions” $175 million Bahamas $1 million (not listed) Taiwan (not listed) $15 million Total $75 million $4 billion in contracts, with $296 million in profits The FCPA Professor also noted, “at its core, the Alstom enforcement action involved inadequate controls concerning the engagement, monitoring and supervision of the consultants.” However, it is most difficult to believe that Alstom suffered from a corporate culture which was at best, “make your numbers” and at worst, something much more nefarious. The amounts paid were simply so large and the bribery schemes so pervasive that there had to be much more than simply nine persons lying, cheating and stealing all while merrily skipping home to Grandmother’s house in the woods. Indeed, as noted by Wall Street Journal reporters Joel Schechtman and Brent Kendall, in their article entitled “Alstom to Pay $772 Million to Settle Bribery Charges,” “The record criminal bribery penalty comes after more than six years of investigations into Alstom from law enforcement in 10 countries. The company and its subsidiaries’ schemes lasted for more than a decade, into at least 2011.” Also of note is that the Alstom enforcement action was the first in 2014 where the fine was not at either the low range or even lower than calculations the Sentencing Guidelines would have suggested. The range for the fine was calculated to be between $592 million and $1.184 billion. This range was a direct result of the failure of Alstom to take the investigation seriously, to cooperate with the DOJ or to even put anything like a positive step forward in the way of remedial actions during a large part of the investigative process. The DOJ Press Release quoted Assistant 2 Attorney General Leslie R. Caldwell, who said, “This case is emblematic of how the Department of Justice will investigate and prosecute FCPA cases – and other corporate crimes. 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. With cooperation or without it, the department will identify criminal activity at corporations and investigate the conduct ourselves, using all of our resources, employing every law enforcement tool and considering all possible actions, including charges against both corporations and individuals.” Finally, from a big picture perspective was the international scope of the investigation. In the DOJ Press Release, FBI Executive Assistant Director Robert Anderson, Jr. said, “This investigation spanned years and crossed continents, as agents from the FBI Washington and New Haven field offices conducted interviews and collected evidence in every corner of the globe.” Further, the DOJ acknowledged significant cooperation from “the law enforcement colleagues in Indonesia at the Komisi Pemberantasan Korupsi (Corruption Eradication Commission), the Office of the Attorney General in Switzerland, the Serious Fraud Office in the United Kingdom, as well as authorities in Germany, Italy, Singapore, Saudi Arabia, Cyprus and Taiwan.” Truly worldwide in scope. Compliance Obligations Going Forward For the CCO or compliance practitioner, one of the first stops in reviewing any DPA is always Attachment C, which lays out the corporate compliance program that each settling party agrees to in any FCPA enforcement action. It provides the DOJ’s most current thinking on what constitutes a minimum best practices compliance program, which is generally described as “(a) a system of internal accounting controls designed to ensure that the company makes and keeps fair and accurate books, records and accounts; and (b) a rigorous anti-­‐corruption compliance program that includes policies and procedures designed to detect and deter violations of the FCPA and other relevant anti-­‐corruption laws.” The Alstom DPAs set the following requirements: 1. High-­‐level commitment. A company must ensure that its directors and senior management provide strong, explicit and visible commitment to its corporate compliance policy. Stated differently, and again, “tone from the top.” 2. Code of Conduct, Policies and Procedures and Internal Controls. A company should have a clearly articulated and visible corporate compliance policy memorialized in a written compliance code. The policies and procedures will address the following areas: (a) gifts; (b) hospitality, entertainment and expenses; (c) customer travel; (d) political contributions; (e) charitable donations and sponsorships; (f) facilitation payments; and (g) solicitation and extortion payments. Finally, there should be a system of financial and accounting procedures, “designed to provide reasonable assurance that: (a) transactions are 3 executed with management’s general or specific authorization;” (b) transactions are “recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principals” and to maintain accountability for the assets; (c) access to company assets is permitted only with management general or specific authorization; and (d) there is testing of assets at regular intervals. 3. Periodic Risk-­‐Based Reviews. The company should periodically evaluate (no less than annually), these compliance codes on the basis of a risk assessment addressing the individual circumstances of the company, including “geographic organization, interactions with various types and levels of government officials, industrial sectors of operation, involvement in joint venture arrangements, importance of licenses and permits in the company’s operations, degree of government oversight and inspection and volume and importance of goods and personnel clearing through customs and immigration. It also requires the company to update its compliance program, “taking into account relevant developments in the field and evolving international and industry standards.” 4. Proper Oversight and Independence. The company should assign responsibility to senior executives for the implementation and oversight of the compliance program. Those executives should have the authority to report directly to independent monitoring bodies, including internal audit and the Board of Directors, and should have autonomy from management. Compliance programs needed to be fund; they need to have an appropriate level of resources. 5. Training and Guidance. The company should implement mechanisms designed to ensure that its compliance code is effectively communicated to all directors, officers and employees. This means repeated communication, frequent and effective training and an ability to provide guidance when issues arise. 6. Internal Reporting and Investigation. Alstom should have an effective system for confidential, internal reporting of compliance violations. It must also establish an effective process with sufficient resources for responding to, investigating and documenting allegations of violations. 7. Enforcement and Discipline. The company should implement mechanisms designed to enforce its compliance code, including appropriately incentivizing compliance and disciplining violations. The prong also includes the requirement that Alstom remedy the misconduct and take steps to ensure no recidivism. 8. Third-­‐Party Relationships. Alstom should institute compliance requirements pertaining to the oversight of all agents and business partners. This includes the full five steps in the lifecycle management of third parties going forward. 9. Mergers and Acquisitions. Under this requirement, Alstom must perform pre-­‐
acquisition due diligence on any target companies it is looking at and engage in an appropriate risk assessment and due diligence by its legal, compliance and accounting functions. If an acquisition is made, the company must integrate its compliance program into the newly acquired entity as soon as is practicable, put 4 on an appropriate level of training and “when warranted, conduct an FCPA-­‐
specific audit of newly acquired or merged businesses.” 10. Monitoring and Testing. A company should conduct periodic reviews and testing of its compliance code to improve its effectiveness in preventing and detecting violations. Kick the tires regularly. As I said, compliance programs must evolve with changes in the law, business practices, technology and culture. The company also has an ongoing reporting requirement that it promptly report to the DOJ any “possible corrupt payments or possible corrupt transfers of property or interests…for any person or entity working directly for the Company (including its affiliates and any agent) or that related false books and records have been maintained.” Finally, Alstom will report to the DOJ annually and for a period of three years “regarding the remediation and implementation of the compliance program and internal controls, policies and procedures.” However, in a twist we have not seen previously, as long as Alstom “satisfies the monitoring requirements contained in the Negotiated Resolution Agreement between the company and the World Bank Group,” it will not be required to sustain an external monitor. If Alstom fails to meet this burden, then “it will be required to retain an independent monitor.” What does this mean for the compliance practitioner? I think the key is to do as Mats Hummels suggested and play your game for the full match. The DOJ has laid out what it expects to see in a best practices compliance program going forward. Although clearly related to the 10 Hallmarks of an Effective Compliance Program, found in the FPCA Guidance, there are some subtle differences and perhaps even shifts in emphasis. I think the two keys ones are found in number three, where the DOJ lays out not only the specific areas you need to assess your risk around, but also mandates that evolving technological and industry standards be taken into account when upgrading or enhancing your compliance regime. Finally, in number seven, I think the DOJ comes as close as it can to mandating that the CCO position and compliance function be separate and apart from the General Counsel (GC) and company’s legal function. Enforcement Theories The FCPA Professor noted in his second blog post on this matter, entitled “Issues to Consider from the Alstom Action,” “The charges against Alstom SA are a real head-­‐
scratcher. The conventional wisdom for why the Alstom action involved only a DOJ (and not SEC) component is that Alstom ceased being an issuer in 2004 (in other words, 10 years prior to the enforcement action). Yet the actual criminal charges Alstom pleaded guilty to – violations of the FCPA’s books and records and internal controls provisions – were based on Alstom’s status as an issuer (as only issuers are subject to these substantive provisions). In other words, Alstom pleaded guilty to substantive legal provisions in 2014 that last applied to the company in 2004.” 5 The Professor had also raised this issue in his first blog post on the resolution, entitled “All About the Alstom Enforcement Action.” After considering his thoughts on this issue, I decided to look into it a bit more deeply. Alstom SA was charged with several different FCPA violations including the following: 15 U.S.C. 78m(b)(2)(A), 15 USC §78m(b)(2)(B) and 78m(b)(5), which read in whole, 15 U.S.C. § 78m [Section 13 of the Securities Exchange Act of 1934] (b) Form of report; books, records and internal accounting; directives … (2) Every issuer which has a class of securities registered pursuant to section 78l of this title and every issuer which is required to file reports pursuant to section 78o(d) of this title shall— (A) make and keep books, records and accounts, which, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the issuer; (B) devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that—… (5) No person shall knowingly circumvent or knowingly fail to implement a system of internal accounting controls or knowingly falsify any book, record or account described in paragraph (2). These provisions are generally referred to as the “accounting provisions” of the FCPA. As stated in the FCPA Guidance, “In addition to the anti-­‐bribery provisions, the FCPA contains accounting provisions applicable to public companies. The FCPA’s accounting provisions operate in tandem with the anti-­‐bribery provisions and prohibit off-­‐the-­‐books accounting. Company management and investors rely on a company’s financial statements and internal accounting controls to ensure transparency in the financial health of the business, the risks undertaken and the transactions between the company and its customers and business partners. The accounting provisions are designed to ‘strengthen the accuracy of the corporate books and records and the reliability of the audit process which constitute the foundations of our system of corporate disclosure.’” Moreover, these accounting provisions, including both the books and records and internal control provisions, are defined to apply to “issuers.” As set out in the FCPA Guidance, “The FCPA’s accounting provisions apply to every issuer that has a class of securities registered pursuant to Section 12 of the Exchange Act or that is required to file annual or other periodic reports pursuant to Section 15(d) of the Exchange Act.244. These provisions apply to any issuer whose securities trade on a national securities exchange in the United States, including foreign issuers with exchange traded American Depository Receipts. They also apply to companies whose stock trades in the over-­‐the-­‐counter market in the United States and which file periodic reports with the Commission, such as annual and quarterly reports. Unlike the 6 FCPA’s anti-­‐bribery provisions, the accounting provisions do not apply to private companies.” Charging Box Score Alstom Charges Time of Criminal Issuer Status Entity Conduct Alstom 15 USC §78m(b)(2)(A) 1998-­‐2004 Issuer until 2004 SA 15 USC §78m(b)(2)(B) 15 USC §78m(b)(5) 15 USC §78ff(a) 18 USC §2 Alstom 18 USC §371-­‐conspiracy 2002-­‐2009 Subsidiary of Issuer until 2004 Power to violate the FCPA Inc. Alstom 18 USC §371-­‐conspiracy 2000-­‐2010 Subsidiary of Issuer until 2004 Grid Inc. to violate the FCPA Alstom 18 USC §371-­‐conspiracy 2000-­‐2011 Subsidiary of Issuer until 2004 Network to violate the FCPA Schweiz AG While I agree with the above, I do disagree with the Professor’s final statement that “This free-­‐for-­‐all, anything goes, as-­‐long-­‐as-­‐the-­‐enforcement-­‐agencies-­‐collect-­‐the-­‐
money nature of FCPA enforcement undermines the legitimacy and credibility of FCPA enforcement.” The reason I disagree is that this was a negotiated settlement, not a dictat or court proceeding. With no doubt excellent FCPA defense counsel involved, Alstom must have had its own reasons for agreeing to such a settlement. Without any further comment by the company, we will have to speculate as to some of the reasons for this component of the resolution. First and foremost, clearly Alstom did engage in conduct which substantially violated the FCPA. It would further appear that the conduct reached right up into the corporate home offices in France. By agreeing to the books and records and internal control violations, Alstom may have avoided any direct admission of guilt under French law, which we now know from the Total FCPA enforcement action is significant for a French company, because what is illegal bribery and corruption under U.S. law is not necessarily illegal under French law. Other than the anomalous French law issue, there may be another important consideration going on here. Alstom is under acquisition by General Electric (GE). Not only does GE pride itself and very publicly trumpet its anti-­‐corruption compliance program, GE has a large number of contracts with the U.S. and other governments which might look askance at doing business with a business unit that admitted to substantive FCPA violations of bribery and corruption. While I do not think that GE would be in danger of being debarred, it might well be that certain 7 governments might not want to do business with a new subsidiary which made such a court admission. I find this to be more than simply a distinction without a difference. Consider the trouble that Hewlett-­‐Packard (HP) is in north of the border in Canada regarding potential debarment by the Canadian government for its FCPA violations as set forth in its FCPA resolution last April. So perhaps from Alstom’s perspective, the company believed it received benefits from settling based upon accounting violations. But whatever the reason, it is clear that Alstom did engage in substantive FCPA violations. Its settlement is that, a settlement of outstanding issues, in which the company was a willing participant. It may not have been what the company wanted, but I do not find that by charging Alstom for books and records and internal controls violations for the time frame it was clearly liable in any way demeans, degrades or lessens FCPA enforcement going forward. Lessons Learned The Fine At $772 million, Alstom’s fine is the highest criminal fine for FCPA violations in the history of the world. Siemens’ prior fine of a reported $800 million was a combination of DOJ and SEC fines and penalties. Alstom was not subject to the jurisdiction of the SEC, so there was no component of this amount for either civil books and records or internal controls violations. But for those few remaining dunderheads out there who think their private company status insulates them from FCPA liability, wake up and smell the mistletoe, as the DOJ will be looking for you to smack a big one on. The fine brings the 2014 fine totals up to around $1.5 billion, which comes a close second to the record-­‐setting year of 2010, where the total amount of fines was $1.8 billion. Disclosure, Cooperation and Conduct While I am in the middle of lambasting Avon for its conduct that led to its FCPA violations, one really has to step aside and give some credit to Alstom for some of the worst actions a company can engage in when dealing with bribery and corruption. If there was anyone on the naughty list, it was certainly Alstom. First came the company’s failure to self disclose its obvious criminal conduct. Second was the clear foot-­‐dragging in dealing with the DOJ during the pendency of the investigation. Finally, to complete this triumvirate of idiocy, came the company’s refusal to promptly engage in remediation. Dick Cassin, writing in the FCPA Blog, pointed out that Alstom’s conduct included the following: • Alstom’s refusal to fully cooperate with the department’s investigation for several years. • The breadth of the companies’ misconduct, which spanned many years, occurred in countries around the globe and in several business lines and involved sophisticated schemes to bribe high-­‐level government officials. 8 •
•
Alstom’s lack of an effective compliance and ethics program at the time of the conduct. Alstom’s prior criminal misconduct, including conduct that led to resolutions with various other governments and the World Bank. Individual Prosecutions Alstom’s conduct was so bad during the investigation that the DOJ obtained indictments against four company executives during the pendency of the investigation. Three of these executives have pleaded guilty and are awaiting sentencing. Cassin wrote, “Alstom began cooperating only after the DOJ publicly charged several Alstom executives.” The UK Serious Fraud Office (SFO) has also brought charges against individuals. Post Acquisition FCPA Liability This enforcement action reinforces the message the DOJ presented in Opinion Release 14-­‐02, that a company which engages in pre-­‐acquisition due diligence, discloses and then remediates the issues after they acquire the entity, can rest easier about purchasing a FCPA violation. For if GE can purchase a company with the clear attitude about doing business in compliance with anti-­‐corruption laws, such as Alstom, with confidence that it will not be subject to a FCPA enforcement action, it means that any other company can do so as well. The settlement documents have not been released as of yet, but hopefully they will be by the time of the final sentencing hearing before U.S. District Judge Janet B. Arterton in June 2015. AVON The long awaited Avon FCPA enforcement action is on the books. I would say what a long, strange trip it has been, but that does not really seem to capture everything that went on in this case. Before we only knew details – such as a whistleblower contacting the CEO of the company with allegations of bribery in the company’s China business unit; the Head of Internal Audit being caught up directly in the scandal, put on administrative leave and then terminated; a professional fee burn rate on the case which would rival the gross national product of many countries; Grand Jury subpoenas being issued (or threatened to be issued) to corporate executives to secure their testimony in criminal proceedings; and public negotiations with the DOJ and SEC – we all thought this FCPA matter had it all. But it turns out we knew so little about the company’s conduct and just how bad it was in order to result in this settlement, because to say it was “bad” would demean and belittle the word bad. Background For the Record The amount of the total fines and penalties was $135 million. As noted by the FCPA Professor, “the settlement is the third-­‐largest ever against a U.S. company.” The 9 enforcement action included several resolution vehicles, including a criminal information against Avon China resolved via plea agreement and a criminal information against Avon Products resolved via a DPA with an aggregate fine amount of $67.6 million. There was a separate SEC resolution through a civil complaint against Avon Products, which it agreed to resolve without admitting or denying the allegations through payment. The amount of the SEC settlement was $67.4 million. While the company’s internal investigation began in China, it quickly expanded so that it went far beyond China to include Japan, Argentina, Brazil, India and Mexico. How Did We Get Here? It all began back in May 2008, when an employee from Avon’s China business unit sent a letter to the head of the company alleging the China entity had engaged in bribery and corruption. In October 2008, Avon reported, in a statement of voluntary disclosure, that it was investigating an internally reported allegation by an undisclosed whistleblower that corrupt payments had been made in its China operations. These allegations claimed that certain travel, entertainment and other expenses might have been improperly incurred. Although the details of the Avon case have not been disclosed, direct selling was not allowed in China under a law passed in 1998. The National Review reported that Avon was able to secure permission in late 2005 to begin direct selling on a limited basis. Later the Chinese government issued direct-­‐selling regulations and granted Avon a broader license in February 2006 to make such sales. In its 2009 annual report, Avon noted that the internal investigation and compliance reviews, which started in China, had now expanded to its operations in at least 12 other countries and that the company was focusing on reviewing “certain expenses and books and records processes, including, but not limited to, travel, entertainment, gifts and payments to third-­‐party agents and others, in connection with our business dealings, directly or indirectly, with foreign governments and their employees.” The FCPA Professor, citing the WSJ, reported that Avon suspended four employees, including the President, Chief Financial Officer (CFO) and top government affairs executive of Avon's China unit, as well as a senior executive in New York who was Avon's head of Internal Audit. One of the more significant pieces of information to come out of the Avon matter is regarding the related costs. As reported in the 2009 annual report, the following costs were incurred and were anticipated to be incurred in 2010: Investigative Costs, Revenues or Earnings Losses Investigative Cost (2009) $35 million Investigative Cost (anticipated-­‐2010) $95 million Drop in Q1 Earnings $74.8 million Loss in Revenue from China Operations $10 million Total $214.8 million 10 Marketwatch also reported that after these investigations were made public, Avon’s stock prices fell by 8 percent. Lastly, in addition to the above direct and anticipated costs and the drop in stock value, the ratings agency Fitch speculated about the possibility of a drop in Avon’s credit ratings. But as bad as these numbers appear, they only got worse for Avon; by 2012 its spend on professional fees was estimated to be over $247 million. As of this date, the total professional fees are closer to $300 million. Grand Jury Investigation and Terminations The WSJ reported in February 2012 that the DOJ had gone to a grand jury with evidence of FCPA violations against U.S. executives at Avon. Joe Palazzolo and Emily Glazer reported that several company employees were terminated for their role in the scandal. They wrote, “The company said it fired Vice Chairman Charles Cramb on Jan. 29 [2012] in connection with the overseas corruption probe and another investigation into allegedly improper disclosure of financial information to analysts. Mr. Cramb couldn't be reached for comment. In May [2011], Avon said it fired Ian Rossetter, its former head of global internal audit and security and previously Avon's head of finance in Asia. Mr. Rossetter didn't respond to requests for comment and his attorney declined to comment. Bennett Gallina, a senior vice president responsible for the company's operations outside the U.S. and Latin America, left Avon in February 2011, two days after being put on leave in connection with the internal corruption investigation, the company said at the time.” Negotiating in Public I do not know who was advising Avon, but the decision to try and force the government’s hand by making public its negotiating position was one of the most bone-­‐headed moves I have seen a similarly situated company make. Avon initially announced that it had opened negotiations with the U.S. government over the terms of a resolution in August 2012. In mid 2013, the FCPA Blog reported that Avon low-­‐
balled the SEC with an opening offer of $12 million. Later, in 2013, the company reported in an SEC filing that the “Securities and Exchange Commission offered an FCPA settlement last month with monetary penalties that were ‘significantly greater’ than the $12 million the company had offered.” But, not to take such government tactics sitting down, Avon publicly announced in the filing that “Monetary penalties at the level proposed by the SEC staff are not warranted.” That certainly was great information to put out to the public, enforcing that you are taking a hardball approach with the SEC and telling them their fines and penalties are not deserved for a company that has gone through all Avon has during this FCPA journey. The Bribery Scheme and Cover-­‐Up With a sustained plan that one can only say was well thought-­‐out, Avon set out to conquer the Chinese market for door-­‐to-­‐door sales. To do so, Avon had to navigate a bureaucratic maze. This maze began with a test license obtained in 2005 and later a 11 national direct selling license together with approvals from each province and municipality where the company wanted to sell its products. To obtain the required licenses, the company set a bribery scheme which worked at all levels of the company’s China subsidiary, Avon China, and reached back to the home office in the U.S., Avon Products. Both of these entities were the subject of the FCPA enforcement action concluded earlier this month. The bribery scheme itself paid out over $8 million in bribes before it was concluded. To facilitate this process, Avon China set up a business unit called the Corporate Affairs Group and later a more focused sub-­‐group as part of the scheme called the Direct Selling Special Task Force. These two groups led the company’s efforts to bribe its way into the China market. They did so through a variety of means, as set out in the settlement documents. Unless cited otherwise, the quotes below are from the Avon China criminal information. Gifts Avon was fond of giving very high priced gifts to various Chinese government officials. Inevitably, Avon China employees would falsely describe the gift itself in the company’s books and record. To add to this deception, Avon China would omit from the books and records not only who the gift was provided to, but also the purpose of the gift. This part of the bribery scheme allowed the gifts of Louis Vuitton products to be described as a “public relations expense” and “public relations business entertainment,” while the gift of a Gucci bag was described as “business entertainment.” Meals and Entertainment This part of the bribery scheme was a clear favorite of Avon China. The aforementioned Direct Selling Special Task Force was ubiquitous in the meals and entertainment arena, where its members simply used the term “relations” to refer to “things of value provided to government officials or goodwill that had been obtained by giving such things, including non-­‐business meals and entertainment.” Specifically noted in this part of the bribery scheme were payments of approximately $8,100 described as “sales-­‐business entertainment” provided to a government official so he would approve a product that did not meet Chinese government standards. Other false excuses provided were describing such payments as “business entertainment” and “employee ‘accommodation’ expenses.” Non-­‐Business Travel Avon China doled out a huge amount of bribes through the mechanism of phony travel for alleged business purposes. Avon China would claim they were bringing various Chinese government officials (also wives, girlfriends and other family members) to locations for business-­‐related travel, but in reality, the trips were mostly sight-­‐seeing excursions, gambling junkets, a beach vacation and other entertainment which had nothing to do with business purposes. So a trip alleged to be a “site visit/study visit” to the corporate headquarters in New York City and the company’s research and development (R&D) facility in upstate New York became a 12 $90,000, 18-­‐day travel extravaganza to “Vancouver, Montreal, Ottawa, Toronto, Philadelphia, Seattle, Las Vegas, Los Angeles and Washington, D.C.” (Oh, and one half-­‐day at the company’s upstate New York R&D facility.) Other favorite venues for Chinese government officials and their families were the gambling mecca of Macau, Hong Kong, Hainan Island, Guangzhou, Shenzhen and Sanya. Needless to say, none of these locations had any Avon corporate offices, manufacturing or R&D facilities. Cash Always a favorite of bribers everywhere, Avon did not neglect to lay out large amounts of cash. Avon China used a variety of orchestrations to hide these payments, including simply stealing it from an apparently huge petty cash fund, directing Avon China employees to charge for non-­‐existent expenses and keep the reimbursements from corporate, lying in the books and records by calling such bribe payments “management expenses-­‐government relations expenses” and even submitting “a handwritten certificate, purportedly from a Chinese government agency, falsely stating that the official would give the funds to the government bureau.” Payment Through Third Parties Using an entity identified as “Consulting Company A,” Avon China paid a large number of bribes throughout the period in question. Initially, it should be noted that this entity raised numerous red flags that were never investigated or cleared. These began with the fact that it was a Chinese government official who recommended the retention of Consulting Company A to perform “lobbying” services for Avon China. Thereafter, the company performed no background investigation into the ownership structure of the company, did not include any compliance terms and conditions in the contract, did not even communicate to this third party Avon’s code of conduct prohibition against bribery of government officials. Beyond these issues, in large part Consulting Company A never performed any legitimate services for Avon China. What Consulting Company A did provide to Avon China was a way to funnel bribe payments to Chinese government officials. Corporate Connivance in Scheme (aka, The Cover-­‐Up) While all of the above was bad, one thing that catapulted the Avon FCPA bribery scandal into the realm of seriously bad was the company’s discovery of the bribery scheme and resulting cover-­‐up. According to the criminal information for Avon Products, in 2005 a senior auditor in Avon’s internal audit group “reported to Avon’s Compliance Committee, which was comprised of several senior Avon executives, that Avon China executives and employees were not maintaining proper records of entertainment for government officials” and that an Avon China executive had explained the practice “was intentional because information regarding that entertainment was ‘quite sensitive.’” This led to a draft audit report, reviewed at the highest levels of Avon China and Avon in the U.S., which concluded that Avon China’s Corporate Affairs Group’s expenses included: “(1) high-­‐value gifts and meals that were offered to Chinese government officials; (2) the majority of expenses relating to gifts, meals, sponsorship and travel of substantial monetary value was to 13 maintain relationships with government officials; (3) a third party was paid large amounts of money to interact with Chinese government officials but was not contractually required to follow the FCPA, was not monitored by Avon China and was paid for vague and unknown services; and (4) the payments, and the lack of accurate, detailed records may violate the FCPA or other anti-­‐corruption laws.” So what was the company’s response to this information? The internal auditors who prepared the report were required to remove the above language and whitewash the report. Evidence of reviewed misconduct was reduced to two hand-­‐written pages, which were then taken out of China and hand carried to Avon’s corporate headquarters. All copies of the draft audit report were ordered to be retrieved and destroyed. Finally, as noted in the criminal information of Avon China, in January 2007, an Avon executive reported to the Avon Compliance Committee “that the matter reported in 2005 regarding the potential FCPA violations by Avon China executives and employees had been closed as ‘unsubstantiated,’ which terminated Avon’s investigation into Avon China’s corrupt conduct.” Lessons Learned What does it all mean for the compliance practitioner and companies worldwide? And The Money Kept Rolling Out Avon had an opposite problem to Eva Peron and the Eva Peron Foundation: the money never seemed to stop rolling out for Avon. As the FCPA Professor said in his blog post entitled “Issues to Consider from the Avon Enforcement Action”, “Avon’s FCPA scrutiny was also very expensive. For years, the whisper in the FCPA community was how expensive – and dragged out – FCPA’s internal investigation and pre-­‐enforcement professional fees and expenses were. Not all companies disclose pre-­‐enforcement action professional fees and expenses, but Avon did and those figures were approximately $500 million.” Even the DOJ questioned why the company’s investigative costs were so high. In an article in Bloomberg News entitled “Avon Bribe-­‐Probe Clean-­‐Up Neared $500 Million as Sales Cratered,” Tom Schoenberg and David Voreacos reported, “In a 2010 meeting, government officials took the unusual step of questioning why Avon’s legal costs were so high at that point, according to two people familiar with the meeting who weren’t authorized to discuss it publicly. Avon said its legal bills had ballooned in part because the company operated in more than 100 countries without consolidated transaction records, according to one of the people.” The article quoted Matthew Axelrod, former senior Justice Department official, who said, “Though unusual, [the] DOJ may call in company counsel to discuss when an outside law firm is going too far afield from what is necessary.” He added, the “DOJ doesn’t want a company to have to spend unnecessary millions of dollars on an internal investigation any more than the company itself does.” 14 If there is one overriding lesson for all companies to take away from this enforcement action, it is that the cost can quickly spiral far out of control and beyond anything you might budget for. While the events at issue took place from 2003 to 2008, the clear import is that it is much cheaper to spend the money to have a compliance program in place now rather than roll the dice and wait. This may mean you need to look at your internal financial accounting systems to determine if they can be monitored adequately and efficiently, yet in a cost-­‐effective manner. While I have not reviewed the internal controls component of this FCPA enforcement action, it is also clear that internal controls need to be in place to detect, in a timely manner, when something goes askance. Of course, if it is in your corporate culture to lie, cheat and steal, it really does not matter what the standard of your internal controls is, because the powers that be will find a way around them. Will No One Rid Me of This Meddlesome Priest? Henry II and his famous dictum surely seemed to exist at Avon corporate headquarters. If management wants sales accomplished in any way possible, then that is the message that is communicated down the line to the troops in the field. Avon had a code of conduct that prohibited bribery and corruption, yet the company’s own internal investigation revealed that most company employees were not even aware such a document existed. There was no such thing as FCPA training at the time of the events in question. But more than simply the message of “make your numbers, make your numbers, (and then) make your numbers,” Avon had a culture that actively hid criminal acts. For when credible information came to light that Avon China was violating the FCPA, the company went into full cover-­‐up mode, even ordering the destruction of soft and hard copies of the draft audit report. The cover-­‐up was accomplished at the highest levels of the company, with the settlement documents noting the involvement of Avon Executive 1, Avon Executive 2 (believed to be the head of Avon’s Internal Audit function when he left the company), Avon Executive 3, another senior executive in Avon’s Internal Audit function, and two lawyers, Avon Attorney 1, who was identified as “a senior executive in the Office of the General Counsel at Avon” and Avon Attorney 2, who was identified as “an executive in the Office of the General Counsel at Avon.” High Reward = High Risk In their Bloomberg News article, Schoenberg and Voreacos reported that Avon was “among the first companies to obtain a license to sell products directly to consumers – the cornerstone of its business model – after Chinese authorities ended a ban on direct sales in 2006.” Further, “By July 2006, Avon had hired more than 114,000 door-­‐to-­‐door salespeople in China. [Then Avon CEO Andrea] Jung said at the time the company viewed the country as a potential $1 billion market. Sales in China surged 28 percent to $67.2 million in the company’s fourth quarter that year.” This means that in less than one year after receiving its license to do business in China, Avon China had one quarter of sales, in excess of $60 million. That is quite a lot of “ding dong, Avon calling,” and following up that doorbell ringing with some serious sales. 15 Here, the lesson is that if there is a new business opportunity that results in an explosion of sales, it is probably because of some high risk involved. That may be financial risk, it may be political instability risk, it may be weather-­‐related risk, it may be currency fluctuations risk or it may be some other type of risk. When a business is regulated down from the national to the provincial to the municipality level, it probably means multiple government interactions for permits and licenses to do business. The compliance function must be integrated into the business operations of a company well enough to be put on notice when such an opportunity presents itself, perform some type of risk assessment and then plan out and implement a strategy to manage those risks going forward. If the first time compliance hears about something askance from an FCPA perspective is when it’s brought up by internal audit, it is already too late. The Compliance Committee and Geronimo’s Cadillac Just as Michael Murphy’s song, “Geronimo’s Cadillac” was intended to show every irony he could ever think of about American culture in two words, the Avon Compliance Committee was about as ironic, although admittedly, it is three words. For a corporate compliance committee is not simply a vehicle to bring and show off when someone might be around to take pictures. A corporate compliance committee has to function and be involved, actively, in an appropriate level of oversight. If a compliance committee is informed of credible allegations of an FCPA violation, it simply cannot accept information that it is “unsubstantiated” at a later date. A compliance committee must be actively involved in the investigation, it must review the investigation protocol, review information and findings as they become known, direct outside counsel in the investigation and, finally, take charge to remediate the issues involved. It has to have real authority, real power and be taken seriously, not simply have a meaningless title. For bribe payments totaling over $8 million, Avon has or will pay upwards of $750 million to get through the FCPA Professor’s “three buckets” of FCPA enforcement action costs. This staggering cost should be a clear lesson that now is the time to implement or enhance a compliance program. The number of persons affected by the fallout from this case starts with the former head of the company, Andrea Jung, several high ranking executives, the company’s balance sheet and perhaps even some of the lawyers involved in the investigation of this matter. One of the first things that Jung’s replacement did was to bring in new counsel to advise the company. After all, someone had to come up with the low-­‐ball opening bid to the DOJ and SEC of $11 million and then advise Avon to negotiate in public with them using that figure. GOING FORWARD I think these two FCPA enforcement actions will be seen as bellwethers going forward. The staggering costs for both entities will reverberate for a long time to come. Avon’s post-­‐disclosure internal investigation alone will be studied for how NOT to engage outside counsel and let them run wild across the globe to investigate 16 a matter. However, it will also be used as an excellent example of why a company should integrate its financial controls systems so they can at least talk to each other or be analyzed in a relatively straight-­‐forward manner. The Alstom case will speak to a couple of key ideas going forward. First, cooperation is always preferable, particularly if a company has engaged in conduct that violates the FCPA. It also should reverberate in the international context of anti-­‐corruption enforcement actions to show the truly global reach of the FCPA. Finally, it will show companies how to engage in mergers and acquisitions and not purchase an FCPA violation going forward. Thomas Fox has practiced law in Houston for 25 years. He is now assisting companies
with FCPA compliance, risk management and international transactions.
He was most recently the General Counsel at Drilling Controls, Inc., a worldwide oilfield
manufacturing and service company. He was previously Division Counsel with
Halliburton Energy Services, Inc. where he supported Halliburton’s software division
and its downhole division, which included the logging, directional drilling and drill bit
business units.
Tom attended undergraduate school at the University of Texas, graduate school at
Michigan State University and law school at the University of Michigan.
Tom writes and speaks nationally and internationally on a wide variety of topics, ranging
from FCPA compliance, indemnities and other forms of risk management for a
worldwide energy practice, tax issues faced by multi-national US companies, insurance
coverage issues and protection of trade secrets.
Thomas Fox can be contacted via email at [email protected] or through his
website www.tfoxlaw.com.
17