2016 FCPA Enforcement Actions Demonstrate Global Reach

Israel, Brazil, United States, Netherlands—companies headquartered in each of these countries settled U.S. Foreign Corrupt Practices Act (FCPA) enforcement actions in 2016. They weren’t alone; 23 other companies in countries around the world faced similar actions, driving the amounts paid to resolve FCPA cases last year to a record-setting $2.48 billion. And that’s not the only record that was shattered. Over the past decade, the average number of enforcement actions per year was 13; 2016 saw more than double the average. In addition, the four above-mentioned companies each paid settlements so large that they each earned a place in the ten largest FCPA cases of all time. Those actions include:

• Teva Pharmaceuticals Industries Ltd. (Israel)—Agreed to pay the U.S. Department of Justice (DOJ) $238 million under a three-year deferred prosecution agreement and an additional disgorgement of $236 million to the U.S. Securities and Exchange Commission (SEC) for a total of $519 million for FCPA offenses in Ukraine, Mexico, and Russia.  
• Odebrecht S.A. and Baskem S.A. (Brazil)—Pleaded guilty to conspiring to violate the FCPA, resulting in a combined total of $419.8 million to be paid in criminal penalties, disgorgement and interest.
• Och-Ziff Capital Management Group (U.S.)—Paid the DOJ and SEC $412 million for criminal and civil FCPA violations as part of a three-year deferred prosecution agreement that charged the venture capital firm with conspiracy to violate anti-bribery provisions in the FCPA, falsifying records and failing to implement internal controls.
• VimpelCom Limited (Netherlands)—The parent company and its subsidiary in Uzbekistan, Unitel LLC, paid $397.6 million to the DOJ and SEC for conspiracy to violate anti-bribery provisions in the FCPA, falsifying records and failing to implement internal controls over bribes paid to an Uzbek government official during a six-year span ending in 2012. 

The message is clear: companies need adequate internal controls, as well as a robust due diligence and monitoring strategy, to effectively mitigate compliance risk.

4 Regulatory Compliance Lessons from 2016

 Of course, compliance experts had already predicted that the extraterritorial reach of the FCPA, as well that of the Office of Foreign Assets Control (OFAC), would spawn similar anti-bribery and corruption (ABC) and anti-money laundering (AML) legislation in other jurisdictions around the world. Then came the release of the Panama Papers, which only strengthened the resolve of government agencies and non-governmental organizations to improve transparency and reduce corruption in the global business community. Global Finance writes, “Today acronyms like FATF (Financial Action Task Force), OFAC (the US Treasury’s Office of Foreign Assets Control), KYC (Know Your Costumer), FCPA (the U.S. Foreign Corrupt Practices Act) and MiFID 2 (the EU directive on markets in financial instruments), among many others, are the stuff of nightmares for compliance professionals everywhere.” How can you stay prepared to maintain compliance in an increasingly complex—and evolving—regulatory landscape?

 Lesson 1—Expect the FCPA’s Extraterritorial Reach to Continue

If nothing else, the 2016 FCPA enforcement actions prove that companies can be held accountable, regardless of where they are located. Of the 27 cases, 16 companies are headquartered in the U.S. The rest of the cases impact two companies in Brazil and two in the U.K., along with one company each in Belgium, Canada, Chile, Germany, Israel, the Netherlands and Switzerland.

 Lesson 2—Any Industry with Global Operations is Vulnerable

Certain industries have earned a reputation for corruption, but it’s not just Financial Services, Construction or Extractives that need to implement robust risk mitigation strategies. The companies subject to FCPA enforcement actions last year represented a range of industries—Aerospace, Banking Beverages, Computer (software, cloud services and hardware), Entertainment, Pharma/BioMed, Transportation and others.

 Lesson 3—Subsidiary Oversight is Critical to Compliance

Several of the FCPA violations addressed in 2016 involved subsidiaries operating in foreign countries.

Regulators cited parent companies for faulty internal controls that failed to spot improper payments and gifts used by subsidiaries to win contracts in their local jurisdictions. The subsidiaries typically were charged with the bribery offences themselves. This risk is particularly high in the Pharma/BioMed industries expanding into China and Russia where doctors and other decision makers at state-run health institutions qualify as government officials.

 Lesson 4—Countries are Coordinating Enforcement Efforts

The VimpelCom Limited DOJ FCPA enforcement action involved law enforcement in at least 11 countries. Likewise, the SEC’s related investigation received assistance from securities regulators in nine countries. The cross-border cooperation was emphasized by the Dutch Public Prosecutors Office—which for the first time published its press release in English—writing, “Corruption is combatted internationally. This international approach signifies that corruption is not tolerated and that high penalties will be imposed.” Because of the joint effort, the OM receives a share of the DOJ’s portion of the fines.

 Focus on Curtailing Corruption Is Truly Global

While the DOJ and SEC stayed busy last year, they aren’t the only enforcement bodies ramping up efforts to eradicate bribery and corruption. Early in 2016, the UK finalized its first Deferred Prosecution Agreement (DPA) related specifically to the corporate offence of failing to prevent bribery by an associated person under the UK Bribery Act 2010, giving companies insight into what to expect in coming years. Just last November, France adopted new anti-corruption legislation intended to “speed up lengthy legal procedures,” says VOA News. Allowing fines up to 30 percent of a company’s annual revenue, the new legislation also requires that settlements be reviewed at a public hearing, elevating the reputational cost as well as financial cost of non-compliance. Both Canada and Brazil introduced anti-bribery and corruption laws with extraterritorial reach in recent years as well—the Fighting Foreign Corruption Act (2013) and Clean Company Act (2014), respectively.  The bottom line for 2017: Companies must ensure that the scope of their due diligence and monitoring is just as global as their business operations to address the growing number of laws and sanctions regimes that impact their compliance efforts.

 3 Ways to Apply This Information Now

1. Get a copy of our eBook to read more about FCPA enforcement.
2. See how LexisNexis solutions complement your due diligence and monitoring workflow.
3.  Share this blog on LinkedIn to keep the dialogue going with your colleagues and contacts.

 

Adjusting Media Strategy at Times of Crisis

When a disaster or bad publicity strikes a company, PR agencies and departments earn their keep. Of course, not every organization will thrive under tough circumstances. These events separate good PR teams that can provide positive return on investment from those that struggle.

The media landscape has changed a great deal in recent years, and becoming a good PR partner for a brand means following these shifts and adjusting along with them. Crisis management tactics must reflect the world as it is now, rather than even a few years ago. If your approach to media outreach during a crisis is current and competent, your value proposition will be clear.

Adjust Strategies to Avoid Gaffes

The nature of crises puts the onus on teams to not make any communication mistakes when scrutiny is at its most. Every error keeps eyes on the company longer, making the negative story linger in public consciousness. There is true value in keeping a steady hand on the wheel until the worst of a crisis has passed.

According to PR Daily contributor Zach Schapira, one of the key ways to avoid unforced errors is to communicate with marketing and ensure that paid media buys don't clash with earned coverage. This means making certain that the crisis management strategy contains provisions about what the marketing department should do to support PR to avoid situations where ads for the company are too prominent or not on crisis messaging during the height of the negative news cycle.

The amount of damage that could be done to a brand by one negative confluence of marketing materials and a measured media response is significant, especially due to the fact that such an event would almost surely extend the fallout of the crisis for another news cycle. This is why Schapira suggests working with every department responsible for advertising and paid marketing. In today's highly developed corporate structures, there can be many sections that fit this description.

Having a Plan Still Matters

One of the unchallenged assumptions of the above approach is that there should be a solid plan in place for when disaster strikes. While some experts have decided this mode of PR preparation doesn't always work in the current high-speed climate, others are adamant that there is palpable value in planning crisis communications well in advance.

PRWeek contributor Giles Read recently came down strongly in favor of planning ahead. He noted that even in a quick and reactive world, there is value in having pre-prepared statements. These can be issued right as a crisis breaks in the media, delivering an opening salvo that will act as a helpful table-setter for the more tailored communications to follow.

Read did acknowledge, however, that a modern crisis management strategy must be in tune with the high speed of the modern environment. If you leave your strategies unexamined for too long, they may become obsolete or fall out of step with what other sections of the company plan to do during negative situations. Every year seems to bring changes in how organizations speak to the public and what the media and general audiences expect from them. Staying aware of those evolving circumstances is a PR must.

For more proactive strategies on how to manage a crisis, check out our ebook The Importance of Negative News Tracking. 

Are You Ready?

When disaster strikes, some companies sink and others float through the storm. If you want to see the latter kind of response, you should be ready to coordinate your efforts with other departments and avoid communication errors that can keep problems in the public eye for an artificially long time.

Having the right tech tools on your side will help you navigate these situations, as it's hard to be at your best if you lack visibility into the many outreach channels and media platforms that are seeing use today. These solutions start with capturing the exact moments that a crisis story breaks. Media monitoring tech can be your best friend who notifies you when the story breaks. Take your knowledge, your crisis management plan and execute it smoothly, your department's value will become clear.

3 Ways to Apply This Information Now

1. Download an ebook on Crisis Management to learn more tips and best practices.
2. Keep up with the media buzz with a media monitoring and analytics solution like LexisNexis Newsdesk®.  
3. Share this blog on LinkedIn to keep the dialogue going with your colleagues and contacts

States Face Revenue And Pension Pitfalls

 

The U.S. economy is entering an eighth year of recovery and the stock market has reached record heights, but at least 24 states face budget shortfalls in 2017 as revenues lag behind projections. Pension issues also continue to bedevil state and local governments.

 

So many shortfalls could be an economic harbinger. “Growth has begun to slow in both the nation and California as the nation nears full employment,” said a report issued this month by Gov. Jerry Brown (D) of California as he unveiled his budget plan for the coming fiscal year. This slowing growth is squeezing revenues from income, sales and corporate taxes in many states. Sales tax revenue has slumped the most, according to John Hicks, executive director of the National Association of State Budget Officers (NASBO). Hicks said this is partly because on-line sales are often not taxed, creating “a gap between consumption and taxability.”

 

In its annual survey of the states in December, NASBO found that almost half the states cut their budgets in 2016 and said the trend was likely to continue this year. This forecast has been ratified as states begin to mark up their budgets for the next fiscal year, which in most states begins on July 1.

 

One of the significant shortfalls has occurred in California, which Gov. Brown said is projected to run a $1.6 billion deficit by next summer, its first since 2012. “The trajectory of revenue growth is declining,” he said in presenting a $179.5 billion budget plan.

 

The Golden State obtains nearly 70 percent of its revenues from the personal income tax and imposes particularly heavy taxes on the wealthy. In 2014, the last year for which complete figures are available, 48 percent of California’s income tax was paid by the wealthiest 1 percent. The top 10 percent of earners, with average incomes of $404,000, paid 79 percent of California’s personal income tax.

 

Relying on a relatively small slice of high earners for so much of state revenue makes for a volatile tax system. When the income of high earners declines even slightly, as happened in 2016, California faces budget deficits even in boom years. Another reason for the shortfall is that wage growth has been spread more evenly toward lower income Californians who pay less in taxes, said Jay Chamberlain, who heads the revenue and taxation section of the state Department of Finance.

 

More evenly distributed wage growth has also reduced revenues in other states such as New York that disproportionately tax high earners, Hicks said.

 

Most states, including California and New York, will be able to manage revenue falloffs in 2017 with spending adjustments. But reduced revenues pose acute problems for energy-producing states that have been struggling ever since oil prices — and state taxes on oil extraction — declined steeply in the second half of 2014. For some states in the oil patch, it’s been even a longer downturn. Oklahoma is entering a fifth consecutive year of revenue decline. Revenues are also down in the oil-producing states of Alaska, Louisiana, New Mexico and North Dakota. Louisiana Gov. John Bel Edwards (D) said he will call a mid-year special session of the legislature if the state deficit reaches $300 million.

 

Even Texas, with a more balanced tax system than other oil-patch states, faces a budget shortfall. Texas Comptroller Glenn Hegar (R) recently downgraded his annual growth forecast from 4.1 percent to 2.5 percent. Growth last year was a miniscule 0.2 percent.

 

Revenues are also slumping in West Virginia and Wyoming, largely because of a continued reduced demand for coal.

The difficulties of other states pale in comparison to Illinois, which has been without a budget since July 1, 2015, the longest budget-less period of any state since World War II. The cause of the problem is a stubborn partisan deadlock between the state’s Republican governor, Bruce Rauner, and his Democratic nemesis, Michael Madigan, who has been speaker of the Illinois House for 32 of the last 34 years.

 

Rauner, elected in 2014, contends that the Prairie State’s businesses are hamstrung by restrictive laws and union requirements and that homeowners are harmed by high property taxes. But Rauner’s attempts to remedy these conditions and win approval of a budget bill that restricts union power have been blocked by Madigan in the House, where Democrats until the last election held a super-majority and still hold control by a large margin. Earlier this month the State Senate, also Democratic controlled, tried to broker a compromise. It sputtered when minority leader Christine Radogno was unable to muster sufficient Republican votes.

 

Political observers in Illinois say that the budget impasse could linger until 2018, when Rauner will seek reelection as governor.

 

Every state has its own story to tell, but all states are shadowed by near-term and long-term fiscal threats. In the near term, states face the potential loss of hundreds of millions of federal dollars if President Trump and the Republican-controlled Congress carry out their promises to repeal the Affordable Care Act, known as Obamacare, and cut allocations for Medicaid, the federal-state plan that provides health care for the poor and disabled. The 31 states that have expanded Medicaid under Obamacare would suffer most.

 

But the fate of Obamacare is shrouded in uncertainty with several members of Congress calling for a gradual phase out. Since states don’t know what’s going to happen, they are not currently budgeting for a loss of federal dollars in Medicaid or any other program. I’ll address this issue in Cannon Perspective next month, when more should be known about a phase-out timetable and possible replacement plan for Obamacare.

 

The longer-term danger, inching ever closer, is the threat posed by under-financed state and local public pension systems. Because of weak performance and insufficient contributions, unfunded liabilities for U.S. public pensions increased 40 percent over the past two years to $1.75 trillion through fiscal 2017, according to Moody’s Investor Services. The unfunded liability is the difference between the amount due to retirees and current employees when they retire and the amount of money on hand to make those payments.

 

Over time, increased payments to pension funds by states and cities take a toll, crowding out spending on education and infrastructure. The five states with the biggest gap liability in percentage terms are Connecticut, Massachusetts, New Jersey, Illinois, and Kentucky, but nearly all states have some unfunded liability.

 

In California the nation’s largest state retirement system — the California Public Employees’ Retirement System or CalPERS — slashed its investment forecast last month for the second time in five years. The CalPERS board cut the investment forecast from 7.5 to 7 percent in phases over three years. Critics such as Dan Pellissier of California Pension Reform, who doubts if CalPERS or any pension system can earn 7 percent over the long haul, said the move did not go far enough.

 

Reducing anticipated income from investment means that the state and the cities and school districts participating in CalPERS will have to increase contributions to the pension system. The first increases will be relatively small but unless investment income soars, this may be only the beginning.

 

“California and other states have promised far more to retired employees than they can deliver,” Joe Nation, a former Democratic legislator from California who heads a pension research project at Stanford, told Los Angeles Times columnist George Skelton. “What we need are honest numbers, to pare back future pensions and pour more money into it. Everyone has to take a haircut.”

 

With state revenues dropping and pension costs rising, there are fiscal hurdles ahead.

 

FY 2017 Revenues Below Projections In Nearly Half Of States

Revenue collections in the first few months of fiscal 2017 were below projections in 24 states, the highest number early in the fiscal year - which for most states begins July 1 - since fiscal 2010, according to the National Association of State Budget Officers’ Fiscal Survey of States. And although collections were on target in 16 states, they were coming in above estimates in only four states.

 

Source: National Association of State Budget Officers

Budgets In Brief - January 23 2017

WY House Passes Internet Sales Tax Bill

The WYOMING House has given final approval to a bill requiring internet retailers located outside the state to collect sales taxes on purchases by state residents. The measure (HB 19) now heads to the Senate. (KGAB 650AM [CHEYENNE])

SD Internet Sales Tax Case Could Soon Go to U.S. Supreme Court

A federal judge in SOUTH DAKOTA ruled last week that a lawsuit requiring out-of-state Internet businesses to remit sales taxes to the state’s Department of Revenue should be heard by a state court. District Court Judge Roberto Lange’s ruling could fast-track the state’s effort to bring the issue before the U.S. Supreme Court, in the hope of overturning the court’s 1992 decision in Quill v. North Dakota barring states from collecting sales taxes from businesses without a physical presence in their states. (ARGUS LEADER)

TN Gov Backs Gas Tax Hike

TENNESSEE Gov. Bill Haslam (R) is backing a 7-cent increase in the state’s gas tax and new fees on electric vehicles and rental cars to help address a $10-billion backlog of road projects. (TENNESSEAN [NASHVILLE])

 

-- Compiled by KOREY CLARK