Monday's FCPA Blog post wrote about what it called a "compliance
donnybrook" inside the company China Northeast Petroleum. The facts of this
melee are straight-forward, in July, the head of the Board of Director's Audit
Committee Robert Bruce, communicated to his fellow directors that he believed
the company needed an investigation to make sure it had not violated the
Foreign Corrupt Practices Act's (FCPA) anti-bribery provisions and did so in a
letter detailing his reasons for making this request. As reported by the FCPA
Blog, Mr. Bruce stated, in part "I strongly believe that substantial additional
investigation is required in order for the Company and/or the members of the
board to be confident that . . . the Company has not made payments to
government officials as proscribed by the U.S. Foreign Corrupt Practices Act."
The Chairman of the Board of Directors of China Northeast
Petroleum, Mr. Edward Rule, responded declining this request for a FCPA
investigation, which Mr. Bruce had suggested be led by an outside law firm with
a strong FCPA background. Mr. Rule noted that such an investigation "could last
as long as a full year and cost the Company as much as several millions of
dollars" and could even lead to the delisting the company from the NYSE AMEX.
Mr. Rule ended his letter by noting "the course of action you recommend that
the Board pursue seems at odds with the prudent discharge of
duties to the shareholders".
This final sentence caught the attention of the FCPA
Compliance and Ethics Blog. What are the obligations of a Board member
regarding the FCPA? Are the obligations of the Audit Committee under the FCPA
at odds with a director's "prudent discharge of duties to shareholders"?
Do the words prudent discharge even appear anywhere in the FCPA? My
search into answers for the first two questions began with a recent ethics•point webinar,
entitled "Reporting to the Board on Your Compliance Program: New Guidance
and Good Practices", where attorneys Rebecca Walker and Jeffery Kaplan, of
the law firm of Kaplan and
Walker, explored these and other issues.
Ms. Walker pointed to the US Sentencing Guidelines
and Department of Justice (DOJ) Prosecution Standards for guidance as to the
obligations of a company's Board regarding FCPA compliance. Under the US
Sentencing Guidelines, Ms. Walker said that the Board must exercise reasonable
oversight on the effectiveness of a company's compliance program. Ms. Walker
said that the DOJ Prosecution Standards posed the following queries: (1) Do the
Directors exercise independent review of a company's compliance program? and
(2) Are Directors provided information sufficient to enable the exercise of independent
judgment?
As to the specific role of 'Best Practices' in the area
of general compliance and ethics, Ms. Walker looked to Delaware corporate law
for guidance. She cited to the case of Stone v. Ritter for the
proposition that "a duty to attempt in good faith to assure that a corporate
information and reporting system, which the board concludes is adequate
exists." From the case of In re Walt Disney Company Derivative Litigation,
she drew the principle that directors should follow the best practices in the
area of ethics and compliance.
In a recent Compliance
Week article, Melissa Aguilar examined the duties of Board members
regarding FCPA compliance. The conclusions of several of the FCPA experts that
Ms. Aguilar interviewed for the article were that companies which have not yet
had any FCPA issues rise up to the Board level are usually the ones which are
the most at risk. Albert Vondra, a partner with PricewaterhouseCoopers
stated that such companies "don't have the incentive to spend the resources or
take the rigorous approach to their anti-compliance programs. Their attitude
is, 'We've got it covered,' but they don't". Richard Cassin, managing partner
of Cassin Law, stated
that there must be written records demonstrating that the audit committee and
that the board members asked questions and received answers regarding FCPA
compliance issues. Such documentation demonstrates the Board members have
"fulfilled their fiduciary obligations," Cassin says.
Board failure to head this warning can lead to serious
consequences. David Stuart, a senior attorney with Cravath Swaine & Moore,
noted that FCPA compliance issues can lead to personal liability for directors,
as both the Securities and Exchange Commission (SEC) and DOJ have been "very
vocal about their interest in identifying the highest-level individuals within
the organization who are responsible for the tone, culture, or weak internal
controls that may contribute to, or at least fail to prevent, bribery and
corruption". He added that based upon the SEC's enforcement action against two
senior executives at Nature's Sunshine, "Under certain circumstances, I could
see the SEC invoking the same provisions against audit committee members-for
instance, for failing to oversee implementation of a compliance program to
mitigate risk of bribery".
What does all of this mean for Messers Bruce, Rule and
the rest of the Board members of China Northeast Petroleum? It should mean
quite a bit. The DOJ has made it clear that it expects 'best practices' when it
comes to FCPA compliance. In the case of China Northeast Petroleum, the head of
the Board's Audit Committee has requested an independent FCPA compliance
investigation, to be effected by an outside firm. The Chairman of the Board of
Directors has rejected this request because (1) it might take up to a year and
(2) it might cost too much money AND fulfilling its FCPA obligation
"seems at odds with the prudent discharge of duties to the
shareholders". The head of the Audit Committee resigned over this rejection.
Alas, there is no reference to prudent discharge in the
FCPA itself. However, if I were a remaining member of the Board of China
Northeast Petroleum, I might well think more than twice about my prudent
discharge of duties to the shareholders as both the DOJ and SEC now might
well wish to look into this matter under a Board's prudent discharge of
duties under the FCPA.
Visit the FCPA Compliance and Ethics Blog,
hosted by Thomas Fox, for more commentary on 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.
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© Thomas R. Fox, 2010