This article was reprinted with permission
from FCPA Professor
There is a need for a Foreign Corrupt Practices
Act lingua franca. The absence of a lingua franca has all sorts
of negative effects, including an impact on the quality of FCPA
enforcement and related statistics. I previously wrote about this issue here ("What
is an FCPA Enforcement Action"), here
("The Need For a Consensus 'Declination' Definition") and here
("Further to the Definition of 'Declination'").
Several recent events have put into sharper focus the
need for an FCPA lingua franca - both as to what is an FCPA enforcement
action and what is a declination.
What is an FCPA Enforcement Action?
Last week, a guest
post on the FCPA Blog by Marc Alain Bohn (Miller &
Chevalier) contained the headline "Year's First FCPA Enforcement Action Flies
Under the Radar." The post concerned this February
28th SEC enforcement action against Keyuan Petrochemicals, Inc. and
Aichun Li (the company's CFO). To be sure, it was a nice find
by Bohn and I agree with his statement that the action, regardless of what it
is called, is significant because it was an SEC enforcement action against a
China-based company whose stock is registered with the SEC and traded in the
The enforcement action was principally based on
Keyuan's systematic failure "to disclose in its SEC filings numerous
material related party transactions between the company and its CEO and
controlling shareholders, entities controlled by or affiliated with these
persons, and entities controlled by Kenyuan's management or their family
members." As alleged by the SEC, "the related party transactions took the
form of sales of products, purchases of raw materials, loan guarantees and
short term cash transfers for financing purposes."
The enforcement action also included
allegations that Kenyuan "operated an off-balance sheet cash account that was
kept off the company books." According to the SEC, "the account was used
to pay for various items, including cash bonuses for senior officers, fees to
consultants who provided technical services to the company, and reimbursements
to the CEO for business expenses, including travel, entertainment, and rent for
an apartment." Later in the complaint, the SEC alleges as follows
regarding the "off-balance sheet cash account."
"From at least July 2008 and continuing until March 2011,
Keyuan maintained an off-balance sheet cash account. Total amounts funded
to and disbursed from the account were approximately $1 million. As a
consequence of the use of the off-balance sheet cash account, the company's
reported balances in its financial statements for cash, receivables,
construction-in progress, interest income, other income, and general and
administrative expenses were misstated. Cash disbursements from the
off-balance sheet account were used to pay for various expenses. For instance,
cash bonuses were paid to senior officers, including Individual A, in 2010 from
the off-balance sheet cash account; Keyuan did not withhold any taxes on
these bonus payments. Keyuan also paid various technical experts that
provided consulting services from this account; no provision was made by Keyuan
to pay local taxes in connection with these payments. The company's CEO also
received cash disbursements from the off-balance sheet cash account, including
funds to cover business expenses (such as travel and entertainment) and to
cover the costs of an apartment near the plant facilities."
As detailed in this prior
post, the FCPA of course is a law much broader than its
name suggests. The FCPA's books and records and internal control
provisions are among the most generic substantive legal provisions one can find
and the SEC often brings what I've called "non-FCPA FCPA enforcement actions."
In the Keyuan enforcement action it is thus not
surprising that the SEC charged violations of the FCPA's books and records and
internal control provisions based on the above conduct.
Yet, as Bohn correctly points out in his FCPA
Blog post, the SEC complaint also did made passing reference, in detailing
the off-balance sheet cash account, that it "was also used to fund gifts - both
cash and non-cash - for Chinese government officials." Specifically, in
paragraph 42 of the complaint the SEC alleges as follows.
"The off-balance sheet cash account was also used, in
part, to fund gifts to Chinese government officials, typically around the
Chinese New Year. Among the recipients of the gifts were officials
from the local environment, port, police, and fire departments. Gifts
ranged from household goods (such as beddings and linens) to 'red
envelope' gifts in which cash was directly gifted to the recipients"
Of note, in the SEC's summary paragraphs (paras. 45 and
46) titled "False Books and Records and Inadequate Internal Controls," the SEC
makes explicit reference to certain conduct, but not the above paragraph
related to Chinese government officials.
So the issue becomes what to make of this one paragraph
of the 18 page SEC complaint and what to call the Keyuan Petrochemicals
Is it an FCPA enforcement action?
In this prior
post, I set forth my criteria for an FCPA enforcement action, in pertinent
part, as follows.
(1) An FCPA enforcement action is an instance in
which an enforcement agency (whether DOJ or SEC) charges or finds that the FCPA
(whether its anti-bribery, books and records, or internal controls provisions)
has been violated.
(2) As to FCPA books and records or internal control
charges or findings, such actions are only FCPA enforcement actions to the
extent categorized as such by either the DOJ or SEC on its FCPA websites.
In the Keyuan Petrochemicals enforcement action, the
SEC did indeed charge (as it charges in many
non-FCPA FCPA enforcement actions) violations of the books and
records and internal controls provisions. However, my criteria (2) is
that such charges should only be considered FCPA enforcement actions
to the extent categorized as such by either the DOJ or SEC or its
FCPA website. The SEC's FCPA website (here) does not
include the Keyuan Petrochemicals action. On that basis, and
consistent with my criteria, I am not going to call it an FCPA enforcement
In many respects, the Keyuan Petrochemicals
enforcement action is similar to the SEC's 2012 enforcement action against
former Digi International CFO Subramanian Krishnan (see here for
the prior post). That action, like the Keyuan Petrochemical action,
is also not listed on the SEC's FCPA website.
In short, what one calls an action matters. Just
using the Kenyuan example, FCPA enforcement thus far in 2013 is
either 1 action with $1,025,000 collected (Keyuan agreed to pay a $1,000,000
civil penalty and Li agreed to pay a $25,000 civil penalty) or 0
actions, $0 collected.
"What is a Declination?
The good-faith debate as to the "d" word continues.
In addition, to the declination posts highlighted above in the first paragraph,
see this recent
FCPA Blog guest post, also by Marc Alain Bohn.
In recent weeks, the FCPA Blog (and others - there
is a certain herd mentality when it comes to such things) have called the end
of FCPA scrutiny for Nabors Industries, Zimmer Holdings, and
3M - declinations. "Nabors
Wins Declination" - "Double
Declination for Zimmer" - "Declination
I again respectfully disagree and ask why
are some calling these instances of FCPA scrutiny declinations?
In doing so, I am guided by my definition of a declination as
being an instance in which an enforcement agency has concluded that it
could bring a case, consistent with its burden of proof as to all necessary
elements, yet decides not to pursue the action. (Others have offered the
same definition - see here
for a Wilmer Hale Client Alert -"the concept of a declination is supposed to be
reserved for instances in which the offense is chargeable but the government
declines in its own discretion to bring a case").
The FCPA scrutiny of both Nabors and
Zimmer can be analyzed together because both companies were the subject of
FCPA scrutiny because of an industry sweep.
In its February
20th SEC filing, Nabors stated, in pertinent part, as follows.
"We previously disclosed that on July 5, 2007, we
received an inquiry from the U.S. Department of Justice relating to its
investigation of one of our vendors [Panalpina] and compliance with
the Foreign Corrupt Practices Act. The inquiry related to transactions with and
involving Panalpina, which provided freight forwarding and customs clearance
services to some of our affiliates. In 2012, the SEC advised us that it had
concluded its review of the matter and did not intend to recommend any
enforcement action against us. On February 15, 2013, the Department of Justice
likewise advised us that it has concluded its inquiry, also without
recommending any enforcement action against us."
In its February
27th SEC filing, Zimmer stated, in pertinent part, as follows.
"In September 2007, the Staff of the U.S. Securities and
Exchange Commission (SEC) informed us that it was conducting an investigation
regarding potential violations of the Foreign Corrupt Practices Act (FCPA) in
the sale of medical devices in a number of foreign countries by companies in
the medical device industry. In November 2007, we received a letter from the
U.S. Department of Justice (DOJ) requesting that any information provided to
the SEC also be provided to the DOJ on a voluntary basis. In the first quarter
of 2011, we received a subpoena from the SEC seeking documents and other
records pertaining to our business activities in substantially all countries in
the Asia Pacific region where we operate. We produced documents responsive
to the subpoena and reported to the government concerning the results of our
own reviews regarding FCPA compliance. During a meeting in December 2012,
representatives from the agencies informed us that the SEC and the DOJ planned
to close their investigation without pursuing any enforcement action against
us. The DOJ and SEC formally notified us through letters of declination dated
December 19, 2012 and February 1, 2013, respectively, that the agencies have
closed their inquiries into this matter. While we are pleased with the
government's declination decision in this matter, we are committed to
continuing to enhance our global anti-corruption compliance program."
Using the above definition of declinations, I
previously stated that anything less ought not be termed a "declination"
and noted that it is really no different that saying a police officer
"declined" to issue a speeding ticket in an instance in which the driver was
not speeding. This is not a declination, it is what the law commands, and
such reasoning applies in the FCPA context as well.
Sticking with the law enforcement analogy, calling an
instance of FCPA scrutiny resulting from an industry sweep that does not
result in an enforcement action a declination, is like saying the police
"declined" to charge one with drunk driving if a sober driver successfully
passes through a law enforcement sobriety checkpoint. That is not a
declination, it is what the law commands, and such reasoning applies in the
FCPA context as well.
In its February
14th SEC filing, 3M stated, in pertinent part, as follows.
"In November 2009, the Company contacted the Department
of Justice (DOJ) and Securities and Exchange Commission (SEC) to voluntarily
disclose that the Company was conducting an internal investigation as a result
of reports it received about its subsidiary in Turkey, alleging bid rigging and
bribery and other inappropriate conduct in connection with the supply of
certain reflective and other materials and related services to Turkish
government entities. The Company also contacted certain affected government
agencies in Turkey. In September 2012, the Turkish Competition Authority issued
its decision finding that there was insufficient evidence obtained in the
investigation to find that 3M Turkey or the other companies investigated
violated the Turkish competition law. The Company retained outside
counsel to conduct an assessment of its policies, practices, and controls and
to evaluate its overall compliance with the Foreign Corrupt Practices Act
(FCPA), including a review of its practices in certain other countries and
acquired entities. As part of its review, the Company has also reported to the
DOJ and SEC issues arising from transactions in other countries. In January
2013, the DOJ and SEC each notified the Company that they are terminating their
investigations into possible violations of the FCPA without taking any action
or imposing any fines against the Company. Among the reasons cited by the DOJ
for closing its investigation included the Company's voluntary disclosure and
cooperation, the Company's thorough investigation, and the steps the Company
has taken to enhance its anti-corruption compliance program."
There is nothing in this disclosure to suggest that the
definition of declination has been met. Indeed, given that Turkish
authorities concluded that there was "insufficient evidence" as to certain of
the disclosed conduct, speaks to perhaps the quality of information 3M
initially received as to its subsidiary.
Of course, if my declination proposal (see here from
August 2010) were to be adopted, we would likely know the answer as to why
the DOJ and SEC did not bring an enforcement action as a result of 3M's
Further to declination issues, I could not help but
notice in the U.S.'s recent ((Jan. 28, 2013) "Final
Follow-Up to Phase 3 Report and Recommendations" (a document that, to my
knowledge has yet to be covered elsewhere) the U.S. acknowledged that
it "has declined to bring criminal charges in some cases, in part due to lack
of admissible evidence obtained prior to the statute of limitations."
This reason for "declining" is self-obvious, but there was no mention of it in
the November 2012 FCPA Guidance section
on declinations, likely because it did not advance the enforcement agencies'
Finally, if you have not yet read "Legal
Limbo - Seeking Clarity In How and When The Department of Justice Declines to
Prosecute" by George
Terwilliger and Matthew
Miner, put it on your reading stack. Like my 2010 declination
proposal and the policy rationales behind it, Legal Limbo states, in pertinent
part, as follows.
"While the cases DOJ elects to prosecute are well known,
better understanding of the parameters of its decisions to forego prosecution
can add significantly to the body of guidance available to the business
community. In addition, fundamental fairness dictates that decisions not to
prosecute be communicated to affected parties as soon as possible."
"Legal Limbo" notes that a "little bit of daylight on the
declination process could help light corporations' way to improved compliance
with legal requirements and enforcement expectations within their operations"
and it proposes as follows.
"First [...], notice of declinations be issued
presumptively, rather than permissively following a declination decision.
This practice could be subject to clearly-stated and narrowly defined
exceptions that are necessary to protect the Department's interests in ongoing
Second [...], the Department publish an annual
report summarizing the circumstances or key factors underlying major
declination decisions. Such a report should be drafted with the goal of
providing maximum guidance as to the factors underlying the Department's
declination determinations by case category, while also protecting the
identities of those who had been investigated. Such a reform could be presented
in a categorical fashion so that companies facing investigations are provided a
better understanding of the types of conduct leading to a declination
Read more articles on the FCPA by Mike
Koehler at FCPA
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