Class actions – which are progressively becoming part of the legal landscape in France as “actions de groupe” – will probably soon be extended to personal injury claims against health products manufacturers, suppliers or service providers using health products. On March 17, 2015, a new bill proposal was issued, advocating the creation of a class action procedure for the health sector. Plenary discussions at the French National Assembly will commence March 31, 2015, and will more precisely address the issue of compensation for personal injury in the framework of the proposed class action.
Bank Settles Criminal Bank Secrecy Act and Civil Fraud Charges Arising from Its Inadequate Anti-Money Laundering Program
On March 10, 2015, the U.S. Department of Justice (“DOJ”) announced a $4.9 million settlement of criminal and civil charges against CommerceWest Bank (“CommerceWest” or the “Bank”) brought pursuant to the Bank Secrecy Act (“BSA”), the Financial Institutions Reform, Recovery and Enforcement Act (“FIRREA”), and the Fraud Injunction Statute. The government alleged that, between December 2011 and July 2013, the Irvine, California-based Bank willfully facilitated consumer fraud by failing to report the suspicious activities of V Internet Corp. LLC (“V Internet”), a Las Vegas-based, third-party payment processor that maintained accounts with CommerceWest.
The CommerceWest settlement is the second case – and the first criminal action – arising from DOJ’s Operation Choke Point, an initiative first disclosed in March 2013 that aims to prevent fraudsters from accessing consumer bank accounts by choking off their access to the payments system. Under Operation Choke Point, DOJ targets banks’ business relationships with companies believed to be at higher risk for fraud and money laundering, including payment processors and payday lenders. The settlement is also notable for its use of the criminal provisions of the BSA, the civil money penalty provisions of FIRREA, and the injunctive provisions of the Fraud Injunction Statute to extract monetary penalties and impose injunctive relief upon a financial institution whose allegedly lax anti-money laundering program allowed a fraud to flourish.
The BSA requires financial institutions to establish and implement policies to detect and prevent money laundering. One of the BSA’s specific mandates is that banks file Suspicious Activity Reports (“SARs”) regarding, among other things, “any suspicious transaction relevant to a possible violation of law or regulation.” FIRREA authorizes the government to seek civil money penalties against those who have violated certain criminal statutes that affect financial institutions, and the Fraud Injunction Statute authorizes the government to file a civil action to enjoin banking law violations and to freeze assets traceable to those violations.
V Internet processed transactions for merchants that created demand drafts to withdraw money from consumers’ bank accounts without authorization. A demand draft (also called a remotely created check or remotely created payment order) is a check created by a third party using an account holder’s name and bank account information that contains a statement claiming that the account holder has authorized the check in lieu of the account holder’s signature. During the 15 month period addressed in the settlement, CommerceWest accepted more than 1.3 million demand drafts depositing more than $45 million from V Internet.
The government alleged that CommerceWest facilitated V Internet’s fraudulent scheme by failing to file SARs, despite numerous red flags pertaining to the transactions. These red flags included the reversal or “return” of about 50 percent of the demand drafts by the consumers’ banks for a variety of reasons, CommerceWest’s inability to obtain evidence that the processor processed legitimate transactions, and letters and calls from several other banks complaining of fraud and warning CommerceWest that the demand drafts were unauthorized. In response to the consumers’ banks’ communications, CommerceWest blocked demand drafts destined for the complaining banks, but allowed V Internet to continue charging to other banks.
To settle the criminal and civil charges, CommerceWest agreed: (1) to pay a $1 million civil penalty and an additional $1 million in lieu of administrative forfeiture; and (2) not to assert a claim to the approximately $2.9 million seized from V Internet’s accounts at the Bank. In addition, CommerceWest agreed to cooperate with the government’s investigation and consented to the entry of a permanent injunction requiring it to perform due diligence on third-party payment processors, and to implement fraud detection, compliance monitoring and reporting, and recordkeeping programs in compliance with the BSA. This settlement reflects coordination among various components of the DOJ, and this multi-pronged civil and criminal approach may well be used as a template for other enforcement actions.
French Supreme Administrative Court decision significantly broadens the scope of the French Sunshine Act
This post was written by Daniel Kadar.
A decision of the French Supreme Administrative Court (Conseil d’Etat) dated 24 February 2015 has significantly broadened the scope of the French ‘Sunshine Act’:
- Whereas initially health care companies were only obliged to disclose the existence of agreements with health care professionals (HCPs), they will now also be required to disclose the remuneration of French HCPs.
- Companies which manufacture or market non-corrective contact lenses, cosmetic and tattoo products will have their transparency reporting duties aligned with the ones applicable to health care companies.
Further developments from the French authorities on this matter will need to be closely monitored, since they will probably bring significant changes to reporting requirements. In particular, the date of application of this new interpretation is key, since it could have a major impact on disclosure requirements for the remuneration of French HCPs.
Read more on this matter in our client alert.
This post was written by Daniel Kadar.
A significant difference between the French and U.S. and UK legal systems is in the understanding of legal privilege: it does not exist for in-house counsel in France. The French approach is in line with the 2010 Akzo decision, in which the Grand Chamber of the European Court of Justice (ECJ) ruled that the requirement of independence means the absence of any employment relationship between the lawyer and his client, so that legal professional privilege does not cover exchanges within a company or group with in-house lawyers.
Click here to read the full issued Client Alert.
In 2014, there was an increase by 20 percent in open investigations by the UK’s Financial Conduct Authority (FCA). An increase that is speculated to be the result of the FCA’s new stricter regime, in comparison to its supposedly less confrontational predecessor, the FSA. Click here for the Reed Smith Client Alert to lean more about what this could mean for clients in the regulated financial services industry.
As disclosed recently in a bankruptcy court filing, on January 27, 2015, the Financial Crimes Enforcement Network (“FinCEN”) imposed a $10 million civil money penalty pursuant to the Bank Secrecy Act (the “BSA”) on Trump Taj Mahal Associates LLC. Trump Taj Mahal consented to the imposition of the penalty (subject to the bankruptcy court’s approval) and admitted that its conduct violated the BSA. This $10 million penalty, reported to be the largest BSA penalty ever imposed upon a casino, highlights the government’s ongoing focus on the gaming industry.
The BSA requires financial institutions, which include casinos, to establish and implement policies to detect and prevent money laundering. Casinos must implement anti-money laundering (“AML”) programs that require, among other things, the creation of internal controls to ensure compliance with the BSA, independent testing of their AML programs, AML training for personnel, the designation of individuals responsible for AML compliance, and the implementation of procedures to identify suspicious transactions and determine whether records must be made or maintained under the BSA. Trump Taj Mahal admitted that it failed to implement such an AML program.
With respect to these failures, Trump Taj Mahal admitted that its violations were “willful,” as that term is used in civil enforcement of the BSA. Trump Taj Mahal did not admit that it knew that its conduct violated the BSA or that it otherwise acted with an improper motive or bad purpose. Instead, the casino acknowledged that it acted with either reckless disregard or willful blindness.
The settlement proposes to treat the $10 million penalty as an unsecured claim in the Trump Taj Mahal bankruptcy case. Under the Bankruptcy Code, certain penalties assessed by the government are to be accorded “priority,” to be paid before general unsecured creditors. Based on current law, the penalty assessed for a BSA violation does not fall within the priority treatment, and any payment of the penalty would be based on a pro-rata distribution to general unsecured creditors. Notably, a criminal penalty assessed for a violation that occurred during the pendency of a bankruptcy (unlike the civil penalty here) might be treated as having priority by certain courts, but not all courts. Courts that deny priority to a penalty do so to enhance recovery for all creditors.
Recent enforcement actions against others in the gaming industry, as well as FinCEN Director Jennifer Shasky Calvery’s recent speeches cautioning casinos not to let the entertainment component of their business color their view of their AML obligations, suggest that the industry will remain under FinCEN’s scrutiny for the near future. As Director Shasky Calvery noted in June 2014, casinos are “complex financial institutions with intricate operations that extend credit, and that conduct millions of dollars of transactions every day. They cater to millions of customers with their bets, markers, and redemptions. And casinos must continue their progress in thinking more like other financial institutions to identify AML risks.”*
This post was written by Eoin O'Shea.
The prosecution of Smith and Ouzman Ltd. for bribery is winding to a close, with the sentencing of two directors of the company for corruption. See the basics of the story here.
The 43-year-old sales director of the company got three years. The 72-year-old former chairman of the company got 18 months suspended, plus 250 hours unpaid work.
The convictions were for events prior to July 2011 and so the Bribery Act was not engaged. Instead, the Prevention of Corruption Act (which has a lower sentencing maximum) governed.
The most interesting aspect of the case is that the company itself was also convicted. This was even though, unlike the Bribery Act, there is no vicarious liability for companies under the old law. This meant the SFO had to prove that the "directing mind" of the company had the relevant mental state. It will have helped a good deal that Smith and Ouzman was a small-ish enterprise and that the key emails were sent by / copied to members of the board.
The sentencing of the company will take place later. We should see the application of the new sentencing guidelines for economic crimes. It may well be that a very heavy economic penalty will cause serious harm to the business. Will the court take this into account as a mitigating factor? Whichever way it goes it will be a straw in the wind for the much bigger bribery cases yet to come.
The case follows the recent conviction of two other UK businessmen (though not their company) under the Bribery Act. The Bio-Fuels case, as it was known, was really about a Ponzi-scheme, with the bribery charges ancillary. Click here to read more about this case (subscription required).
So these cases, individually, are small steps. But, taken together, they come close to a trend: that the agency is starting to grow in confidence and credibility.
Second Circuit Reverses Major Insider Trading Convictions (or Preet Bharara's Terrible, Horrible, No Good, Very Bad Day)
In a widely anticipated decision, the Second Circuit on Wednesday clarified the standard for insider trading actions against tippees, downstream recipients of inside information who trade on that information. The court overturned the criminal convictions of two hedge fund portfolio managers who were convicted in 2013 as part of a massive sweep by New York federal prosecutors targeting insider trading on Wall Street and beyond. The court held that it is not enough for the government to prove that a tippee knew the corporate insider disclosed confidential information; it must also prove that the tippee knew the tipper did so in exchange for personal benefit. This decision calls into question the multiple insider trading convictions recently secured by the Manhattan U.S. attorney’s office, and may pave the way for other similarly situated defendants, including former SAC Capital Advisors LP manager Michael Steinberg, to seek an acquittal.
Todd Newman and Anthony Chiasson were both charged in 2012 with violations of sections 10(b) and 32 of the 1934 Act, Rule 10b-5, Rule 10b5-2, 18 U.S.C. § 2, and 18 U.S.C. § 371. Newman and Chiasson allegedly received the May and August 2008 earnings numbers of Dell and NVIDIA before public release, and subsequently executed trades capitalizing on this information to a profit of $4 million and $68 million respectively. At trial, the government presented evidence that the two received inside information from financial analysts who were themselves two and three levels removed from the actual corporate insiders at Dell and NVIDIA. The government presented no evidence that either defendant knew he was trading on information obtained from insiders in violation of those insiders’ fiduciary duties to shareholders. Instead, the government argued that as sophisticated traders, Newman and Chiasson must have known that the information was not disclosed for any legitimate corporate purpose. The traders were subsequently convicted of insider trading and sentenced to 54 months’ and 78 months’ imprisonment, respectively.
On appeal, the Second Circuit held that the government and the district court had applied the wrong standard for tippee liability. In doing so, the court relied on the U.S. Supreme Court’s 1983 ruling in Dirks, which held that tippee liability is derivative of the related tipper liability, and that a personal benefit to the tipper is therefore a required element of tippee liability as well. While Dirks did not specifically consider whether a tippee must have knowledge of the tipper’s personal benefit, it did define a tipper’s breach of fiduciary duty as a breach of the duty of confidentiality in exchange for a personal benefit. Because a tippee’s knowledge of a breach of a fiduciary duty is an element of tippee liability, it follows naturally that a tippee must know the tipper disclosed confidential information for personal benefit. As for what constitutes sufficient evidence of a “personal benefit,” the court noted that mere friendship between the tipper and tippee, such as what was presented at the trial of Newman and Chiasson, was not enough. Instead, proof is required of a “meaningfully close personal relationship that generates an exchange that is objective, consequential, and represents at least a potential gain of a pecuniary of similarly valuable nature.”
In its appeal, the government relied on prior Second Circuit decisions that enumerated the elements of tippee liability without mentioning knowledge that the tipper disclosed the information for personal gain. The Second Circuit made short work of that argument, blaming any ambiguity in the law not on its prior decisions but on the “doctrinal novelty” of the government’s recent insider trading prosecutions, “which are increasingly targeted at remote tippees many levels removed from corporate insiders.” The court also noted that while it had been accused of being “somewhat Delphic” with respect to the elements of tippee liability, Judge Sullivan’s opinion in fact was the only district court opinion to hold that tippee knowledge of the tipper’s benefit was not required.
The Second Circuit’s opinion highlights the reality that the wrongfulness of insider trading lies not in the unequal access to market information, but in the knowingly wrongful use of that information. The court noted, “Although the Government might like the law to be different, nothing in the law requires a symmetry of information in the nation’s securities markets.”
This post was written by Eoin O'Shea.
This briefing discusses the new approach of the UK’s regulator, the FCA, to regulatory enforcement of wholesale markets, as revealed by the recent settlements between the agency and five banks relating to FX manipulation. These are the largest regulatory settlements in UK history, a total of £1.1 billion (or $1.72 billion), the largest slice of a $4.3 billion total figure across four international regulators. The size of the penalties, and, perhaps more importantly, the FCA’s methodology in arriving at the final figures, should be of real concern for UK-regulated entities.
Please click here to read the issued Client Alert.
U.S. Supreme Court Upholds Fourth Circuit Victory for Omnicare, Inc. in High-Profile, Precedent-Setting False Claims Act Case
In a decision that has significant repercussions both for the pharmaceutical and health care industries and False Claims Act jurisprudence more broadly, the U.S. Supreme Court denied review of a groundbreaking Fourth Circuit decision affirming the dismissal of a novel False Claims Act suit against Reed Smith client Omnicare, Inc. In its February 2014 decision, the Fourth Circuit rejected the qui tam relator’s claim that Omnicare violated the FCA when it sought reimbursement for drugs that it allegedly packaged in violation of certain federal packaging regulations. The significance of these rulings is especially great as FCA suits proliferate, and settlements and judgments explode. In fiscal year 2012 alone, nearly 800 FCA lawsuits were filed, more than half of which involved the health care industry. And in that same year, according to the U.S. Department of Justice, there were settlements and judgments in FCA cases of nearly $5 billion, more than $3 billion of which involved the health care industry.
Click here to view the full issued Client Alert.
On July 9, within just a few hours of the polls closing in the tightly contested presidential election in the world’s third-largest democracy – the Republic of Indonesia – the only two contestants running had claimed victory. Nearly 200 million people in the world’s fourth-largest country had turned out to vote for either the current Jakarta Governor Joko “Jokowi” Widodo or former military general Prabowo Subianto. Despite seven of the independently run “Quick Count” exit polls indicating that Jokowi had won the election by a margin of roughly 3 percent to 5 percent, Prabowo declared victory of his own citing three Quick Count results that supported his own victory by narrower margins.
Click here to read the full issued Client Alert.
This post was written by Travis P. Nelson.
On June 23, 2014, the U.S. Supreme Court clarified – and arguably expanded – the reach of the federal bank fraud statute. In Loughrin v. U.S., petitioner Kevin Loughrin challenged the lower court’s interpretation of the federal bank fraud statute as not requiring that the government prove that the defendant specifically intended to defraud a bank. The Supreme Court disagreed.
This case originated in the petitioner’s check fraud scheme orchestrated at a Target Store. The petitioner, while pretending to be a Mormon missionary, went door-to-door in a neighborhood in Salt Lake City, where he rifled through residential mailboxes and stole any checks he found. (Why nobody thought it suspicious that a purported Mormon missionary was (1) working a mission project without a partner, and (2) doing so in what is arguably the U.S. city least in need of conversion to the LDS faith, will be left for another day.) The petitioner would then make the checks out to the retailer Target for amounts of up to $250. His modus operandi was to go into a local Target, posing as the account holder, and present the altered check to a cashier to purchase merchandise. After the cashier accepted the check, the petitioner would leave the store and walk back inside to return the goods for cash. In each case, the checks presented to Target were drawn on an account at a federally insured bank.
To read more, please click here.
France has recently adopted the class action system. This system is, however, framed and - temporarily - excludes health- or environment-related litigation. An overhaul is already scheduled in 30 months. Click here to read more on Life Sciences Legal Update.
2013 was a year of unprecedented scrutiny of financial relationships between manufacturers and health care professionals, such as physicians. Both the United States and France imposed sweeping new reporting and disclosure requirements in an effort to provide transparency and, theoretically, to enable the public – including patients – to make informed treatment decisions and assess possible conflicts of interest. Both sets of requirements carry potentially large financial penalties for failure to report and for incorrect reporting. For manufacturers operating globally, compliance with these provisions will be an ongoing challenge.
Click here to view the full issued Client Alert.
For many lawyers, the words "personal jurisdiction" do little more than invoke distant memories of a civil procedure course in law school, or perhaps a tortured essay question on the bar exam. But for global companies with a U.S. presence, those words have often invoked shock and bewilderment at the apparent ability of state and federal courts to issue orders over and render judgments against companies outside of the United States based solely on the presence of an in-state affiliate.
Not so anymore. In Daimler AG v. Bauman [PDF], the U.S. Supreme Court held that a foreign corporation is not amenable to general jurisdiction merely because its affiliate, parent or subsidiary is subject to general jurisdiction in the forum state. Rather, courts may only assert general jurisdiction over a company if that company itself is "at home" there. In so holding, the Supreme Court erased decades of case law from lower federal and state courts, and aligned the United States with its international peers on the limits of jurisdictional power.
Chicago United States Attorneys' Office Halts Health Care Fraud Prosecution After More Than Two Years
This post was written by Steven A. Miller.
Dr. Neelesh Patel, DC through his lawyers, Steven A. Miller and Denise M. Ware of Reed Smith, LLP, announced today that a Deferred Prosecution Agreement has been entered between Dr. Patel and the United States Attorneys’ Office -- effectively ending his criminal prosecution more than two years after charges were brought against him. On August 31, 2011, Dr. Patel was indicted along with chiropractors Brad Mattson and Steven Paul on charges of health care fraud. According to the indictment, Mattson, Paul, and Dr. Patel billed millions to private health care insurance companies by ordering medically unnecessary tests and billing for services not rendered. Mattson entered a guilty plea and was sentenced to 78 months in prison. Paul entered a guilty plea and his Preliminary Sentencing Guideline Range is 63-78 months, subject to any reduction by the district court and resolution of his objections. Dr. Patel, on the other hand, pleaded not guilty and defended the charges. After two years of analysis, Reed Smith made a presentation to the United States Attorneys Office, which shortly thereafter concluded that further efforts to convict Dr. Patel should be discontinued. Assuming his compliance with the terms of the Deferred Prosecution Agreement, all charges will be dismissed in approximately twelve months.
Click here to learn more.
Recently the U.S. Court of Appeals for the Fourth Circuit affirmed the district court’s dismissal of the relator’s False Claims Act (FCA) complaint against Omnicare in United States ex rel. Rostholder v. Omnicare, Inc., a decision having significant repercussions for the pharmaceutical industry and broader FCA jurisprudence. The Fourth Circuit rejected plaintiff’s claim that Omnicare violated the FCA when it sought reimbursement for drugs that it allegedly packaged in violation of the Food and Drug Administration's (FDA) Current Good Manufacturing Practices regulations (cGMP). The decision has several potentially far-reaching impacts, including signaling careful future court reviews of statutes and regulations when relators attempt to use violations of those statutes and regulations to make out an FCA claim, and confirming that once a drug has been approved by the FDA and qualifies for reimbursement under the Medicare and Medicaid statutes, the submission of a reimbursement request for that drug cannot constitute a false claim under the FCA solely due to being processed in violation of the cGMPs.
Click here to read the full issued Client Alert.
The Isle of Man is an unusual place. Constitutionally it is a dependency of the British Crown and depends on Britain in matters of defence and foreign affairs. But it isn’t part of the United Kingdom and has a separate legal system. The island has made the most of its differences by creating an investor-friendly company-law trust and taxation regime similar to that of Jersey or Guernsey. In such places, there is often a tension between conformity with the important international standards and being “investor friendly”. The islands continuously debate how close they should get to the mainland.
When it comes to anti-corruption law, the Isle of Man has now cosied up to the UK. Its new legislation is modelled on “the toughest anti-bribery legislation in the world”, i.e., the UK Bribery Act 2010 (UKBA).
The Isle of Man law has a familiar title: the Bribery Act 2013 (BA 2013). It came into force 16 December 2013, replacing the Corruption Act 2008. While the UK Act’s considerable territorial reach meant that some organisations based in the Isle of Man have already implemented measures to comply with the UKBA, many others will now need to reconsider their anti-corruption efforts.
Mirroring the UKBA, BA 2013 introduces four distinct offences:
- Offering, promising or giving a bribe
- Requesting, agreeing to receive or accepting a bribe
- Bribing a foreign public official
- A corporate offence of failing to prevent bribery
It is the fourth offence, known as the corporate offence, which requires the most attention from the majority of organisations. It applies to all Isle of Man companies, as well as their subsidiaries, intermediaries, joint ventures and agents anywhere in the world. In practice, while continuing to avoid engaging in direct bribery, they will now need to focus on bolstering their anti-bribery procedures and policies.
The biggest concern with the corporate offence is the scope of its application. Section 10 of the BA 2013 (which is a replication of section 7 of the UKBA) specifies that the corporate offence is committed by company “C” when a person associated with C bribes another person to get business for C or an advantage in the conduct of business for C. It is a strict liability offence and C’s knowledge is irrelevant, as is the location of the actual bribery. “Associated person” is defined widely and includes any person who performs services for or on behalf of C.
However, a defence is available to organisations that have adequate anti-bribery procedures in place. The Isle of Man Department of Home Affairs has published guidance on what 'adequate procedures' should include, which reflects the UK’s guidance relating to the UKBA. It sets out six broad principles for organisations to consider:
- Adopting proportionate, clear, practical, accessible, effectively implemented and enforced procedures
- Engagement from top-level management
- Carrying out periodic, informed and documented assessments of the bribery risks
- Carrying out due diligence of “associated persons”
- Communicating and explaining the procedures throughout the organisation
- Monitoring and reviewing the procedures
So the BA 2013 brings the anti-bribery laws of the Isle of Man in line with the UK. The measure is likely to have come about through some gentle pressure from its neighbour. However, as with the FCPA, UKBA and other such laws, the true nature of their effectiveness will be in how they affect corporate conduct and, ultimately, enforcement actions. We can expect the local authorities to liaise closely with the UK and other authorities, and for large investigations to be carried out jointly.
We believe the Isle of Man’s decision to adopt the UK model of anti-corruption legislation is significant. As an independent jurisdiction, it could have chosen the U.S. model, limiting the law to foreign officials and specifically excluding facilitation payments. It could have considered the German model, where corporate penalties are administrative only.
However, improving the Isle of Man’s reputation for financial probity and corporate ethics was clearly an important factor. When it comes to bribery laws, we can expect other offshore territories within the UK’s sphere of influence to edge closer to the homeland in the next few years.
The top story in the UK media today is about alleged corruption in English football. Someone said to be a “fixer” for betting syndicates was secretly recorded boasting that the results of English lower-league matches and even international matches could be bought, once the price was right. Six people, including three players, have been arrested by the UK’s new National Crime Agency. There are lots of details in the Daily Telegraph.Continue Reading...
In a recent speech, David Green, the Director of the Serious Fraud Office (SFO) stated that the agency would adopt a “sweep” approach, focusing on specific industries, to identify businesses which might be breaking the law. The SFO has made it clear that its anti-bribery investigations are focused on the construction and energy industries. Most international energy companies have been preparing to deal with bribery risk due to lengthy exposure to the Foreign Corrupt Practices Act. However, the construction sector is seemingly under-prepared for the risks this new approach will bring, and needs to take action quickly.
Click here to read the issued Client Alert.
This post was written by Eoin O'Shea.
The UK’s Serious Fraud Office is gradually lengthening the role of prosecutions for overseas corruption with an important new prosecution, and clear indications that more are in the pipeline.
The new case involves Smith & Ouzman, a printing company, and four individuals connected with it. The company and some of its officers are accused of complicity in bribery of foreign officials to the tune of more than £400,000 (about US$640,000). At around the same time as the case came to court, the Director of the SFO gave a clear warning to businesses about the future enforcement of anti-corruption law. The speech can be seen here. In essence, the Director re-iterates the more robust stance of the agency, anticipates the use of deferred prosecution agreements, and argues for a more expansive theory of corporate criminal liability. He also makes clear that several more big cases are in prospect.
The SFO is still working through a caseload of corruption cases it began developing four to five years ago, many of which the Bribery Act came too late for. So the Smith & Ouzman charges are under the UK’s Prevention of Corruption Act 1906.
More interesting again is the fact that the company is a defendant alongside individuals. Under current English law, a company can only commit a crime requiring mens rea (i.e., a mental state such as intent) if an individual with the required mental state, such as a director or senior employee, can be identified as the controlling mind of the company at the relevant time. This is known as the identification principle and it has been controversial for many years. Critics say that the principle is at least partly responsible for the rarity with which UK companies have been prosecuted for corruption or other serious crimes.
Section 7 of the Bribery Act was created specifically to avoid the identification principle. It created a strict liability offence for corporates, the offence of failure to prevent bribery. Where an employee has paid a bribe in order to win business, the only defence a corporate will have is that it had adequate anti-bribery procedures in place.
There is no doubt that section 7 will make corporate liability for bribery more likely, mostly through early guilty pleas and/or deferred prosecution agreements. But it is interesting that, with a little more external pressure and a little more self-confidence, the SFO has felt able to bring corporate prosecutions unassisted by section 7. Indeed, this is not the first such case: Mabey & Johnson Ltd was convicted of overseas bribery contrary to the 1906 legislation back in 2009, as were certain of its directors.
These cases reinforce a personal view of the author: that the previous UK corruption laws were not as hopeless as some critics had argued, and that the causes of under-enforcement were to be found in a lack of political or institutional will, rather than in inherent deficiencies in the legislation. This is not to say that the Bribery Act was unimportant. The Act can be seen as a catalyst of much more robust enforcement efforts. The Director of the SFO himself seems to want to extend the principle behind section 7 to all corporate crime, thus relegating the identification principle to history.
It is ironic that one of the apparent effects of the Bribery Act seems to have emboldened prosecutors to be more aggressive in enforcing those laws that it replaced. Given the greater potency of the Act, it is safe to predict that future cases will be larger and more far-reaching than those we have seen up to now. A lot more is to come.
New enforcement actions and media allegations have been brought in China's ongoing regulatory crackdown on the life sciences industry. Reed Smith continues to monitor these developments and has prepared this update on the pharmaceutical and device sectors.
For a detailed summary regarding recent developments, click here.
China has been undergoing a significant regulatory crackdown on its life sciences industry over the past several months, primarily in the pharmaceutical and infant formula sectors. The focus of these enforcement actions may now have spread to the medical device sector. On August 15, 2013, the local Beijing office of the Ministry of Health (MOH) announced that it had begun a three month investigation into the use of medical consumables and medical equipment in Beijing. This appears to be the first recent enforcement action to specifically target the medical device industry.
Click here to read more on our sister blog, Life Sciences Legal Update.
Finally... the Serious Fraud Office (the "SFO") has brought its first charges under the UK Bribery Act and, as feared, it concerns the energy market.
Charges have been brought against four individuals in connection with a £23 million fraud at Sustainable AgroEnergy, whose parent company, Sustainable Growth Group, is in administration. The SFO has been looking at the promotion of bio fuel investment products to UK investors between April 2011 and February 2012. Sustainable AgroEnergy, a £40 million investment scheme, collapsed in 2012 amid concerns that crops either did not exist, or there were not enough to supply investors with returns. The investment products were linked to Jatropha-tree Plantations in South East Asia.
Three of the individuals are directors of the company, including the company’s former chief executive, its former chief commercial officer and a former financial controller. The other individual is an independent financial advisor connected with the company. All are British nationals. Three of the individuals were charged with “offences of making and accepting a financial advantage” contrary to the UK Bribery Act, which came into effect in July 2011. More information about the Bribery Act can be found here.
The next step is that the individuals will appear before court on 23 September. They are not subject to bail or remand, and have not yet had the opportunity to indicate any plea.
If you are interested in finding out more about the UK Bribery Act and insurance coverage, please do attend our teleseminar 10 September 2013.
Virtually Identical Trade Secret Theft Cases Result in Opposite Conclusions: Lessons from the Second Circuit's Attention to Detail
On August 1, 2013, the Second Circuit affirmed Samarth Agrawal’s criminal convictions for violating both the National Stolen Property Act (NSPA) and the Economic Espionage Act (EEA) after he misappropriated SocGen’s high-frequency trading code at the time he was leaving the company. The Second Circuit’s decision in Agrawal is puzzling if not downright shocking to those familiar with the Second Circuit’s decision last April in United States v. Aleynikov. In that case, the Second Circuit held that the NSPA did not cover theft of intangible property, and that the EEA did not prohibit misappropriation of trade secrets unless the secret was designed to enter or pass in commerce. Since the defendant in Aleynikov had misappropriated Goldman Sachs’ code electronically, and since the proprietary code was never intended to pass in commerce, his convictions were overturned and he was released from prison. So what motivated the Second Circuit to leave Agrawal in jail for engaging in nearly identical conduct? The devil is in the detail.
The NSPA is a federal criminal statute that prohibits the transportation of “goods, wares, merchandise, securities or money” knowing the same to have been stolen. Last June, after the Second Circuit heard oral argument in Agrawal, we noted that the court was primed to consider the question left open by Aleynikov: whether a defendant could be convicted of the NSPA simply because he stole his employer’s property in tangible rather than electronic form. In Agrawal, the Second Circuit answered that question with a resounding, “yes.” The Second Circuit noted that, in contrast to Aleynikov who stole Goldman Sachs’ code by uploading and then downloading the code, Agrawal printed SocGen’s code on thousands of sheets of paper. According to the Second Circuit, “[t]his makes all the difference.” Although the court noted that there was little to distinguish Agrawal’s conduct from that of Aleynikov in terms of “moral culpability,” it felt constrained by the language of the NSPA: “it is Congress’s task, not the courts’, to define crimes and prescribe punishments.”
The Second Circuit also upheld Agrawal’s EEA conviction. The EEA in effect at the time of Agrawal’s conviction prohibited the theft of trade secrets “related to or included in a product that is produced for or placed in interstate or foreign commerce.” So, where did Agrawal go wrong with the EEA? Apparently nowhere. The high-frequency trading code he misappropriated from SocGen was no more intended to enter or pass in commerce as Goldman Sachs’ was. Indeed, the prosecution in both cases made “virtually identical” arguments in summation regarding the requirement that the stolen information relate to interstate commerce. The critical difference in Agrawal was simply that the district court presented that requirement to the jury on a “more obvious” theory: that the actual securities traded by SocGen, rather than the code itself, were the products “placed in” interstate commerce that were “related to” the stolen trade secret.
The Second Circuit’s decisions in Aleynikov and Agrawal should be greeted with skepticism by anyone concerned with the uniform application of criminal justice. The fact that Agrawal stands convicted of the NSPA because he printed out the proprietary code rather than having downloaded it is nothing short of absurd. What is worse, however, is the Second Circuit’s decision that Agrawal’s conviction under the EEA should stand based entirely on how the case was “put to the jury” by the district court. Although the EEA was amended in November of last year to address the Second Circuit’s Aleynikov decision, the Second Circuit was obliged to apply the version of the EEA as it existed at the time of Agrawal’s conviction, which was the same as the version of the EEA analyzed in Aleynikov. Indeed, Judge Pooler, who was also on the Aleynikov panel, dissented from the majority’s EEA holding in Agrawal, noting the “nearly identical fact pattern” in both cases.
This post was written by Eoin O'Shea.
For the first time, the UK has proposed a specific and detailed sentencing regime for corporations involved in bribery, fraud and other economic crimes. Of course, individual executives who commit crimes of dishonesty can generally expect prison time. Corporates can’t be locked up, but they can be fined and/or have other penalties applied.
Up to now, some may have thought that the risk of a fine was worth running, given the high rewards of fraud or corruption. The UK Sentencing Council (made up mainly of judges and some lay-people) clearly wants to prevent this sort of cost/benefit approach. Its interim report and consultation paper (which covers sentencing for various economic crimes such as fraud, cheating the revenue and others) can be found here. Those who wish to read it and respond to the consultation questions can do so, the closing date being 4 October 2014.
The Council recommends a system where the fine for a corporate is calculated by establishing the benefit to be gained, or expected to be gained, and then doubling, or tripling or quadrupling that number, depending on the culpability of the company. So if DodgyCo has gained (or stood to gain) £100 million of business from a long-term, organised scheme to pay bribes to public officials, it might have to pay a fine of 300 percent of the gain, i.e., £300 million. It may well also be required to put in place detailed ABAC procedures, subject itself to compliance monitoring, make specific recompense to victims and, worst of all for some, find itself barred from certain types of public tendering.
What if the company can argue that the complexity of the transactions and the uncertainties of pricing or costs mean that the benefits of the wrongdoing cannot be calculated? This will not daunt the court, which can estimate the amount “likely to be achieved in all the circumstances.” If even that is too difficult, the court may be able to take a figure of 10 percent of the worldwide revenue derived from the relevant product or business area during the period of the offending. The 10 percent number seems somewhat arbitrary, and it may change. However, the key message is that the courts do not wish to get bogged down in the finer elements of economic theory and are likely to take a robust approach to calculating fines.
Although a company can’t be locked up, it can be closed down. Very large penalties can have a disastrous effect on cash-flows, balance-sheets and reputations. What if the £300 million fine is likely to sink DodgyCo forthwith? Many innocent employees might lose their jobs and creditors may face big losses. The report says “The Council intends that any fine must be substantial enough to have a real economic impact which will bring home to both management and shareholders the need to operate within the law. Whether the fine would have the effect of putting the offender out of business will be relevant; in some bad cases this may be an acceptable consequence.” It’s hard to argue with this. Many honest companies go to the wall because of factors beyond their control. It would be strange if a court accepted, as a matter of principle, that a dishonest company could never be fined so much that its survival was at risk. That said, it’s clear from the report, and from earlier cases, that the courts will have the wider effects of sentencing in mind.
The Securities and Exchange Commission’s (“SEC”) power to obtain documents from U.S. companies and their auditors is a key component of its mandate to protect the marketplace from fraud. But what happens when the exercise of that power conflicts with the civil and criminal laws of another country? In the case of the SEC seeking documents of Chinese companies listed on U.S. exchanges, the result has been a long standoff between regulators in the two countries, with foreign accounting firms caught in the middle.
To date, nothing has resolved the standoff. Despite a series of diplomatic agreements between the two nations over the years, and despite the more recent administrative action that the SEC initiated against Chinese accounting firms, U.S. regulators still have no access to accounting workpapers and other information located in China. See earlier article.
Enter the Public Company Accounting Oversight Board (“PCAOB” or “Board”). Recently, the PCAOB and the China Securities Regulatory Commission (“CSRC”) signed a new Memorandum of Understanding (the “2013 MOU”), found here, reviving some optimism that the current standoff can be resolved through diplomatic channels. The 2013 MOU is similar to earlier agreements between the United States and China in that – while providing a mechanism for the exchange of documents – it allows assistance to be denied if a request would violate domestic law. The 2013 MOU is unique, however, in its inclusion of confidentiality provisions setting forth how and under what circumstances the PCAOB can share the information it receives. Specifically, the 2013 MOU requires the PCAOB to obtain prior written consent before sharing non-public information generally, but allows the Board to share information with the SEC simply by giving the CSRC advance notice.
Only time will tell whether the 2013 MOU will result in the release of information from China. While the new MOU has been celebrated in some quarters as a possible breakthrough in the standoff between regulators, the agreement on its face does not address the issue at the root of the impasse: auditors in China cannot surrender their work papers to U.S. authorities without potentially violating Chinese law. Until this fundamental problem is addressed, the stalemate is likely to continue.
Research and drafting assistance for this post was provided by Reed Smith Summer Associate Steven Peretz.
The Financial Times has reported that a review of the UK Bribery Act is set to be announced next month as the UK government seeks to reduce the cost of compliance for small- and medium-sized businesses.
The main focus of the review will apparently be facilitation payments. These are small payments given to officials to permit or speed up a service – for example, at a border crossing – and are illegal under the UK Bribery Act. The legislation has been met with uncertainty from businesses that operate in jurisdictions where such payments are a common occurrence.
It is understood that the review will form part of the government’s attempt to reduce red tape for small- and medium-sized businesses generally. However, the proposals stand in stark contrast to the government’s promise to clamp down on bribery offences, and the Serious Fraud Office’s statements that facilitation payments are to be regarded as bribes. It will therefore be interesting to see the extent of any proposals. So far, the Serious Fraud Office has declined to comment beyond stating that it is currently undertaking seven UK Bribery Act investigations.
A Brave New World? The "French Sunshine Act" imposes online disclosure of contracts with HCPs, as well as of payments of "advantages" to HCPs, dating back to 01 January 2012
This post was written by Daniel Kadar.
In probably one the longest-awaited decrees in recent French regulation, the French Ministry of Health published on 22 May 2013, the application decree to the French Sunshine Act (dated 29 December 2011) implementing the specific ways and means that health care companies must disclose agreements with health care practitioners (“HCPs”), a term that includes medical students, as well as so-called “advantages” paid to HCPs. Under French Public Health Law, the term “advantage” encompasses any form of payment or hospitality, including payment of a contractual fee.
The Decree sets forth the threshold for disclosure at 10 euros (VAT included), but also seems to make a distinction between contractual remunerations and any other form of payment to HCPs. For agreements with HCPs, whereby the health care company enters into a consultancy/research agreement or into a contract to finance the HCP to participate in medical congresses/trainings, the Decree does not seem to require the health care company to disclose the amount it is paying.
However, for other payments – including hospitality and meals – every amount at or above 10 euros, rounded up to the nearest euro, must be disclosed.
The industry has shown surprise that the Decree requires disclosure of the amount of an invitation for lunch, but does not require disclosure of a contractual remuneration. It is foreseeable that the French Ministry of Health, given this interpretation, may shortly take position on that point.
A particularly severe measure is that this disclosure obligation applies to every payment and contract issued from 01 January 2012 onward. This seems to mean that health care companies look back into 18 months of activity to comply.
Disclosure is to be made to a unique website that has yet to be implemented. Nonetheless, the decree foresees an eventual transition to this unique website. For now, the French National Medical Association is to receive the relevant data, and the disclosures will also mandatorily have to be posted on the health care company’s website, or a joint website where different health care companies are involved.
Even though it took 18 months for the successive governments to get the application decree published and the unique portal is still not set up, the regulator seems to have concluded that health care companies should be able to comply within … a week. The Decree sets forth that the complete set of information be available to the French National Medical Association by 01 June 2013.
However, as this date is not realistic and different Health Care Industry associations have raised its impracticability, a second date, 01 October 2013, has been recommended for the publication of these disclosures on the National Medical Association and companies’ websites.
Going forward, disclosure of “advantages” to HCPs will have to be made on a semestrial basis, while the disclosure of contracts with HCPs will have to be made, at the latest, two weeks after the signature of the contract.
As mentioned in one of our previous blogs, and still remains true, the cosmetics industry, which is subject to these new disclosure requirements, is concerned by this disclosure obligation even though in a slightly reduced scope.
Last but not least, the Decree recognizes that the disclosure obligation implicates the processing and publishing of HCP personal data, and health care companies have expressed concern about posting this information on their websites. For those reasons, the Decree mandates that the disclosures must be done through appropriate notification to the French Data Protection Authority, the CNIL, and by providing each HCP with adequate information about their access, modification and removal rights.
No doubt that implementation of this regulation will raise a lot of questions and will require further clarification.
Whether to Proffer? Important Change to Pittsburgh Proffer Agreement Makes for a Difficult Decision in the Western District of Pennsylvania
A crucial decision in most federal “white collar” criminal investigations is whether to “proffer” to the government – to engage in an off-the-record, question-and-answer session with the prosecutor and investigating agent in the hopes of getting immunity, a plea deal, or no charge at all. Because of the risks involved, the decision must be carefully weighed with the assistance of knowledgeable criminal defense counsel. Those risks recently increased in the Western District of Pennsylvania. On April 11, 2013, the Pittsburgh U.S. Attorney’s Office added language to its standard proffer agreement – a contract signed between the government and the interviewee setting how the government can use the information gained in the proffer – that broadens a prosecutor’s ability to use proffer statements in subsequent legal proceedings in the Western District of Pennsylvania.
Click here to read the issued Client Alert that describes how the new language changes the proffer calculation for clients and their lawyers.
Following on from our posts in 2012 (UK Ministry of Justice Launches Consultation on Deferred Prosecution Agreements and UK Government unveils deferred prosecution agreements as a new enforcement tool), we can now report that on 25 April 2013, the Crime and Courts Act 2013 (the “Act”) was passed. The Act introduces deferred prosecution agreements into UK law for the first time.
The Act will allow the UK Serious Fraud Office and the Crown Prosecution Service to enter into deferred prosecution agreements to deal with economic crimes such as bribery, fraud and money laundering.
The Act is not expected to come into force before February 2014, and in the meantime, a Code for Prosecutors containing further guidance from the Serious Fraud Office and the Director of Public Prosecutions will be published.
We will keep you posted on any future developments.
On 23 April 2013, Mr Yang Li was the third individual to be convicted under the UK Bribery Act 2010 after he attempted to bribe his tutor.
Mr Li, a student at the University of Bath, offered his tutor £5,000 to amend his dissertation grade, which was 3% short of a pass mark. The tutor rejected the offer, and as Mr Li put his money away, a replica air pistol fell out of his pocket and onto the floor.
Mr Li pleaded guilty in Bristol Crown Court to charges of bribery (under Section 1 of the Bribery Act 2010) and possession of an imitation firearm. He was sentenced to 12 months in prison and ordered to pay £4,880 in costs. Judge Michael Longman stated that “any form of corruption or incitement to a person in any manner amounts to a serious offence which must be taken seriously by the court.”
This is the third conviction under the Bribery Act 2010 in just under two years, so far all involving individuals. There has yet to be any corporate convictions, or any cases offering guidance on the corporate offence under Section 7, in particular on the meaning of “carrying on business” in the United Kingdom.
France: Code of Conduct compliance breach is not automatically a sufficient reason for employee termination - Employers should be cautious of a 'right' local implementation of compliance guidelines
This post was written by Daniel Kadar.
On 19 December 2012, the French Supreme Court (‘Cour de cassation’) ruled over a case that should remind any international organization that the worldwide adoption of compliance guidelines and of a Code of Conduct is not in itself a sufficient protection against compliance breaches: everything depends on how these tools are implemented locally.
The case involved a manager in a French subsidiary to an International health care company who had been dismissed on the grounds of a clear breach of health care compliance obligations set forth in the French Public Health Code. No Code of Conduct was in place when the breach occurred.
Previous breaches had been evidenced and properly documented and the employer’s liability itself had been triggered on these grounds.
Nevertheless, the dismissed employee challenged the termination of her employment contract in front of the French Labour courts. The Industrial Tribunal ruled that the breaches in healthcare compliance justified terminating her for fault. The court of appeal reversed the decision, and was confirmed by the French Supreme Court, which ruled that the dismissal was without real or serious cause, i.e., that no professional fault was implied by the aforementioned compliance breaches. The court’s view was that the breach of health care compliance legal provisions was not enough to qualify a professional fault, even though the company was liable for these compliance breaches.
This decision deserves particular attention: even though a company is acting in a highly regulated environment such as health care, compliance breaches must be integrated in the employer-employee relationship if they are to justify termination in France.
Adopting a worldwide Code of Conduct will not suffice to hold employees liable for compliance violations: according to French labour law, it will be necessary to integrate the provisions of the Code of Conduct into the Company’s internal regulations (“règlement intérieur”) to make them enforceable against employees.
To that end:
- The staff representatives/works council must be informed and consulted on the contents of the Code of Conduct
- The Code of Conduct must be filed with the French Labour Inspector
International organisations should therefore keep in mind that adopting a harmonized Code of Conduct, which is a complex work on its own, will be worthless to prevent risk if it is not adequately implemented locally.
People's Republic of China (PRC) Implements Significant Penalties for Commercial Bribery in Recently Issued Trial Regulations on Centralized Procurement of Medical Consumables
China’s Ministry of Health, along with five other government agencies, issued Trial Regulations on Centralized Procurement of High-Value Consumable Medical Supplies on December 17, 2012. These regulations went into effect immediately upon issuance and contain procedures for the centralized purchasing of a wide range of medical devices. Of particular note are the provisions addressing misconduct, which impose potentially significant penalties for commercial bribery and other misconduct.
Please click here to read the issued Client Alert.
This post was written by Joan Hon.
Australian national Trent Martin agreed not to challenge a U.S. extradition order in Hong Kong’s Eastern Magistrates Court January 4, 2012. This is the second time in more than 10 years that U.S. authorities have extradited someone on insider trading charges.
Please click here to read the issued Client Alert.
This post was written by John Tan.
Yesterday, November 15, the SEC issued its 2012 whistleblower report.
A total of 115 (3.8%) tips were FCPA related. Additionally, 324 tips (10.8% of total) originated from overseas. The top overseas sources of tips were the UK (74, 23%), Canada (46, 14%), India (33, 10%), China (27, 8%), and Australia (21, 6%). No other single country had more than 10.
Domestically, the states with the highest number of whistleblower tips per capita were Nevada, Washington, Kentucky, New York, and California. The states with the lowest rates per capita were Maine, Mississippi, Alabama, Oklahoma, and New Hampshire.
On November 14, the Securities and Exchange Commission and Department of Justice released their long-awaited guidance titled, A Resource Guide to the U.S. Foreign Corrupt Practices Act. According to the government’s press release, the 120-page guide “provides a detailed analysis of the U.S. Foreign Corrupt Practices Act (FCPA) and closely examines the SEC and DOJ approach to FCPA enforcement,” and promises to provide guidance on key topics such as “what constitute proper and improper gifts, travel, and entertainment expenses.” This release will be of interest to public issuers and companies doing business internationally, particularly in China and in other countries with a large number of state-owned enterprises.
A summary of the Resource Guide and substantive comment will follow in a subsequent alert.
The press release is available here.
The resource guide is available here.
This post was written by Matthew Stone.
On 23 October 2012, the UK Ministry of Justice published the Government’s response to the consultation on deferred prosecution agreements (“DPAs”). This confirmed that DPAs will be introduced in England and Wales as an alternative to prosecution of companies for fraud, bribery and money laundering offences. The Government intends to amend the Crime and Courts Bill, which is currently under consideration by Parliament, so that DPAs are introduced from 2014.
A DPA is a written agreement between a prosecutor and a company which allows a prosecution to be deferred and ultimately dismissed if the company abides by the terms of the DPA. The aim of DPAs is to encourage companies to self-report and to give prosecutors another tool by which to hold offending companies to account without the uncertainty, expense and complexity of a criminal trial.
- DPAs available for commercial organisations only – no plan to introduce them for the criminal liability of individuals.
- Available for conduct that predates DPA legislation (provided no proceedings already commenced).
- Director of Public Prosecutions (DPP) or Director of the Serious Fraud Office (DSFO) must personally exercise power to enter into a DPA.
- DPP and DSFO to produce a Code of Practice for Prosecutors on DPAs.
- Preliminary private hearing before a judge to determine whether a DPA would be “in the interests of justice” and whether the proposed terms are “fair, reasonable and proportionate”.
- All DPAs will include a statement of facts and an expiry date upon which the DPA will cease to have effect. Other terms could include a financial penalty, a disgorgement of profits, reparation to victims, and the establishment of monitoring, internal procedures and training.
- Allowance for a reduction in the financial penalty element of the DPA in line with the reductions currently available for a guilty plea on prosecution (up to a third).
- Final DPA to be approved by a judge in open court to ensure transparency. Prosecutor obliged to publish the final agreement as well as details of how the terms of the DPA have been complied with by the commercial organisation at the end of the DPA process, plus details of any breach, variation or termination of a DPA.
- Serious or contested breaches of a DPA will be determined by a judge applying the civil standard of proof. Options on breach include variation or termination of the DPA (i.e. prosecution).
- Admissions made by a company during the DPA process will be admissible in criminal proceedings against that company, but not against individuals. Any material provided by a company during the DPA process could be used against either the company or an individual. The DPA itself and the Statement of Facts will be admissible as hearsay evidence in civil proceedings.
Requiring a judge to determine whether a DPA is appropriate and to confirm the terms of the DPA in open court is intended to ensure full public transparency and to meet criticisms – often based on U.S. DPAs – that DPAs allow prosecutors to circumvent the judicial process by reaching an agreement with a defendant out of court and out of the public eye. DPAs will not be available in every instance. The factors that will determine whether a DPA is appropriate will be set out in a statutory DPA Code of Practice for Prosecutors (the timing of which is not yet confirmed) and are likely to include whether a company self-reported (something the DPAs are intended in encourage), whether remedial action has been taken, the seriousness of the wrongdoing, the extent of the dishonesty, and any impact on third parties.
Incentives for a company to agree to a DPA include: reducing the costs and reputational impact associated with a criminal trial, being subject to a reduced fine, and, perhaps most importantly, not having a criminal conviction, which means that the company would avoid debarment under the EU public procurement rules. However, companies may nonetheless hesitate to self-report and agree to a DPA given that information provided in the DPA process can still serve as evidence in criminal proceedings; that the DPA itself can act as hearsay evidence in civil proceedings; and that the UK Serious Fraud Office has recently signalled a tougher stance by withdrawing its previous guidance on self-reporting in bribery cases. The introduction of DPAs may increase cross-border cooperation by making it easier for prosecutors to coordinate their response to what is often multi-jurisdictional wrongdoing.
How to mitigate Compliance requirements and Code of Conduct obligations with Data Protection regulation: Reed Smith Paris provided some illustrative examples
This post was written by Daniel Kadar.
Reed Smith Paris partner Daniel Kadar and counsel Séverine Martel hosted on 25 October 2012, a new edition of the conference cycle organized by Reed Smith Paris with the European American Chamber of Commerce, dedicated to the mitigation of Compliance obligations, particularly as set forth in Codes of Conduct, with data protection requirements.
After a general presentation of the data protection requirements in France, particularly with respect to notification duties with the French Data Protection Authority, the “Commission Nationale de l’Informatique et des Libertés” (CNIL), the panel, which included compliance directors of French health care giant SANOFI and General Electric Health, brought examples of how to mitigate compliance obligations, in particular as set forth in Codes of Conduct most International organisations have now adopted, with applicable data protection regulation.
The first example was dedicated to the New French Health Care Regulation and its transparency and disclosure requirements as to the existence (and the financial range) of agreements between the health care and cosmetics industry with health care professionals (including Medicine students), showing that the disclosure of financial and private information (such as the home address for the medicine students) had to be managed carefully with respect to the data owner’s information and access rights.
The second set of examples was dedicated to the implementation of whistle blowing hotlines in France, which need to have a restricted scope under French law: the grounds for this limited scope is that the French regulator has worked on the basis of the sole Sarbanes-Oxley (“SOX”) Act obligations limited to accounting and audit, and therefore mainly excluded the other fields of application the Code of Conduct generally also contain.
After having highlighted the major characteristics of the requirements under French law, taking into account specific labor law obligations, the panel concentrated on the ways and means of implementing such hotlines in France:
- Integrating them globally, or based on geographic regions
- Operating through third-party service providers or through in-house “mediators”
- Insisting on the necessity that such hotlines constitute only an alternative to more formal ways of notifications to the hierarchy, and excluding anonymous reports
The panel concluded by stating that there is no “one size fits all” Compliance recipe, and that Compliance remains a place of state-of-the-art mitigation of contradictious regulation.
As we noted previously, there has been increasing attention in False Claims Act (“FCA”) cases to whistleblowers who fail to preserve relevant evidence. Now, in a recent decision in the United States District Court for the District of New Mexico, the government has been sanctioned for its failure to preserve relevant evidence from key officials at the Centers for Medicaid & Medicare (“CMS”). See United States of America, ex rel. Baker v. Community Health Systems, Inc., No. 05-279 WJ/ACT (Oct. 3, 2012).
The court overruled the objections raised by the government to the magistrate’s Report and Recommendation (“R&R”) granting defendants’ motion for sanctions, and agreed with the magistrate’s conclusions that the government had belatedly issued a litigation hold, and that “the ESI and documents which were lost by virtue of the belated litigation hold are critical to one of the Defendants’ theories of defense” – that the government’s knowledge of defendants’ activities negated the scienter requirement of the FCA. The government argued that the missing documents were irrelevant or cumulative, and thus would have no impact on defendants’ ability to defend themselves. The court did not agree and stated that “[w]ithout knowing what is missing, it is impossible to take the Government at its word that the missing or destroyed documents are either irrelevant or cumulative.”
Although the court agreed that the government did not engage in bad faith or intentional conduct, it still found that sanctions were appropriate “to prevent the Government to benefit from its apathetic conduct in preserving documents that were clearly meant to be preserved, when it had ample reason to believe the documents and ESI should have been preserved for some time prior to the litigation hold.” Thus, the court imposed the following sanctions:
- The government must produce all documents being withheld under a claim of work product immunity, attorney client privilege, or deliberative process privilege from or to the two key CMS officials, or discussing the withholding of government reports that purportedly supported the defendants’ government knowledge defense
- The defendants’ reasonable attorneys’ fees and costs associated with the motion for sanctions
- The government must show cause why it should not conduct an additional forensic search for documents of the two key CMS officials
This decision reinforces the often-overlooked notion that discovery is a two-way street in FCA cases, and that the government has its own duties to preserve potentially relevant documents even though they support potential defenses to the government’s cause of action. This decision should embolden companies to explore whether the government is complying with its discovery obligations, but it should also serve as a reminder to companies about the importance of issuing their own document hold notices at the earliest stages of a government investigation to ensure that the company’s documents and ESI are being properly preserved and maintained.
Second Circuit Holds that Proper Measure of FCA Damages for Grant Recipient is the Full Amount of the Grant
In a troubling decision that could have significant implications for grant recipients, the Second Circuit recently held that the proper measure of damages in a False Claims Act (“FCA”) case against a grant recipient is the full amount of the grant, regardless of any benefit that the government may have received. United States ex rel. Feldman v. van Gorp, --- F.3d ----, 2012 WL 3832087 (2d Cir. Sept. 5, 2012). In reaching its decision, the Second Circuit joined the Fifth, Seventh, Ninth, and D.C. Circuits in finding that the proper measure of damages in cases of FCA violations by federal grant recipients is the full amount of the grant because “the government receives nothing of measurable value when the third-party to whom the benefits of a governmental grant flow uses the grant for activities other than those for which funding was approved.”
In Feldman, the relator, a former student in the fellowship grant program at Cornell University, brought the action against Cornell and the psychiatry professor that applied for the grant from the National Institute of Health (“NIH”) for the fellowship research and training program in the neuropsychology of HIV/AIDS. The government declined to intervene and the relator pursued the case. The relator presented evidence at trial that the actual fellowship program deviated in material respects from how it was described in the grant application to NIH, including that faculty identified as “Key personnel” did not participate in the program; core courses identified in the application were not regularly conducted; and much of the research that was performed under the grant program had no relation to HIV or AIDS at all. A jury found the defendants not liable for false statements in the initial grant application and the first renewal application, but found liability based on the renewal applications for the third, fourth and fifth years of the grant. Pursuant to the FCA statute, the district court, in calculating damages, trebled the amounts NIH paid for the last three renewal years of the grant to a total of $855,714, and added attorneys’ fees, costs, and expenses to bring the total damage award to more than $1.5 million.
The defendants argued the court should have applied a “benefit of the bargain” calculation to determine the difference between the value of the training promised and that actually delivered. The court, however, concluded the full amount of the grant was the proper measure of damages because “the government has entirely lost its opportunity to award the grant money to a recipient who would have used the money as the government intended.”
This result should put grant recipients on notice that a failure to deliver the services as promised may result in liability for the full amount of the grant, trebled in accordance with the FCA. Although the government declined to intervene in this case, grant recipients should be aware that the government may use this outcome as a means to enforce grant requirements in the future.
Blunt new statements of policy from the SFO on facilitation payments, gifts and hospitality and self-reporting
This post was written by Rosanne M. Kay.
Following on from our last blog, the SFO has published revised statements of policy on its website dealing with facilitation payments, business expenditure (i.e. hospitality and gifts) and self-reporting which take immediate effect and revoke previous guidance. The new statements of policy are blunt.
Facilitation payments - the SFO has reiterated that these are illegal under the Bribery Act and that the SFO will apply the various established tests and guidance relating to prosecution to determine whether prosecution is appropriate, including whether prosecution is in the public interest. Previous SFO guidance suggested that it would not adopt as rigorous an approach towards facilitation payments as might have been supposed and appeared to recognise that there are circumstances in which an employee has no choice but to make a facilitation payment.
Business expenditure – again, the SFO refers to the various established tests and guidance it will use to determine whether prosecution is appropriate. However, helpfully, it has reiterated that “Bona fide hospitality or promotional or other legitimate business expenditure is recognised as an established and important part of doing business.”
Self-reporting – the SFO has said that there will be no presumption that companies which self-report will face civil, rather than criminal, penalties.
These new statements of policy reflect the change in the SFO Director from Richard Alderman to David Green. Mr Green has specifically said that the SFO is not there to provide guidance, its primary purpose is to investigate and prosecute.
The SFO has removed guidance on both self-reporting and on facilitation payments and corporate hospitality from its website leaving uncertainty behind.
The removal of the guidance on self-reporting is not surprising. It has been on the cards since Glyn Powell (Head of Fraud at the SFO) said at the UK Chapter of the Association of Certified Fraud Examiners conference last year that the SFO were looking to update the self-reporting guidance following the enactment of the Bribery Act. Previous guidance was that companies who self-report were more likely to face civil rather than criminal penalties.
More surprising is the SFO’s removal of the guidance on facilitation payments and corporate hospitality. SFO guidance had been that it would not prosecute companies for facilitation payments if they followed certain procedures, nor for corporate hospitality so long as it was “reasonable and proportionate”. The guidance was on the whole well received, as had unequivocal statements made by the SFO corroborating it – only last month David Green commented that the SFO is not the “serious champagne office”. It was going to target “serious fraud”.
An SFO spokesperson has said that the guidance is under review but did not indicate how long that review would take. Clearly, this uncertainty is unhelpful.
Continuing the recent trend of decisions sanctioning whistleblowers for failing to comply with their discovery obligations (see our previous posts “Whistleblower Precluded from Relying Upon Stolen Records for False Claims Act Case” and “FCA Qui Tam Relator Sanctioned for Destroying Evidence on Company-Issued Laptop”), the United States District Court for the Middle District of Florida recently granted a motion to compel and awarded “reasonable attorneys’ fees” against a qui tam relator for failing to produce a variety of documents requested by defendants, including documents pertaining to the book the relator was purportedly writing about the case, video diaries, and tax returns. See United States ex rel. King v. DSE, Inc., No. 8:08-CV-2416-T-23EAJ, (M.D. Fla. Sept. 10, 2012).
The relator claimed that nondisclosure was justified because, among other reasons, (1) he had recently obtained new counsel, and (2) defendants filed the motions before attempting in good faith to resolve the dispute. The relator also asserted that the requested video diaries had been “tampered with, destroyed, and/or corrupted due to a burglary of his residence.” The court concluded that the relator had failed to provide a “satisfactory explanation for not providing these items” and ordered the production of the requested information. The court further awarded monetary sanctions in the form of defendants’ reasonable attorneys’ fees in filing the motion to compel, but deferred ruling as to the amount of the award and whether to apportion the award between counsel and client. In justifying the award, the court noted that it had previously warned the relator about his obstruction of discovery, and granted defendants’ prior motions compelling the relator to appear for a deposition, and to respond to interrogatories and document requests.
This decision once again reiterates that discovery in FCA or whistleblower actions is a two-way street, and relators may not shirk their discovery obligations. Importantly, the court’s decision contemplates sanctions against relator’s counsel for the client’s failure to comply with discovery obligations. This should embolden companies defending against FCA or whistleblower actions to vigorously pursue discovery from relators who appear to be holding back relevant information, and likewise should encourage relators’ counsel to ensure that their clients are complying with their discovery obligations.
Qui tam relators may have a difficult time in the future when relying upon stolen records or confidential patient information in False Claims Act (“FCA”) whistleblower actions after a recent decent by the United States District Court for the Southern District of Ohio. See Cabotage v. Ohio Hospital for Psychiatry, No. 11-cv-50 (S.D. Ohio July 27, 2012). Our colleagues at the Life Sciences Legal Update blog recently discussed the impact of Cabotage, in which a registered nurse supported her allegations of FCA violations by relying on information that she surreptitiously removed from the hospital where she was employed. The district court issued an order preventing the nurse from using the confidential information in the instant action because the information was confidential. A step in the right direction for defendants facing whistleblowers who have inappropriately used or taken confidential information from their employer. To read the entire posting, please click here.
Fifth Circuit Upholds Ability of Government Employee Whose Job is to Investigate Fraud to Bring Qui Tam False Claims Actions
In a case of first impression in the United States Court of Appeals for the Fifth Circuit, the court held in United States ex rel. Little v. Shell Exploration & Production Co., No. 11-20320 (5th Cir. July 31, 2012) that government employees are entitled to bring qui tam actions under the False Claims Act (“FCA”) – even if their federal job function is to investigate fraud on behalf of the government. Relying primarily on its interpretation of the statutory language of the FCA, the court determined that there was no express exception within the statute prohibiting federal employees from maintaining FCA actions. The Fifth Circuit rejected arguments put forth by the federal government, as amicus curiae, that conflict of interest statutes and regulations prohibit federal government employees from serving as qui tam relators.
The relators in Little were auditors for the Minerals Management Service, an agency within the Department of Interior. As part of their official duties, they obtained and reported information to their superiors regarding allegedly fraudulent conduct by Shell. After reporting this information – and in the absence of any action by MMS or any other federal agency – the relators took it upon themselves to file a qui tam action against Shell. After the Justice Department declined to intervene, the district court granted Shell’s motion for summary judgment on the basis that federal employees were prohibited from maintaining qui tam actions and that the action was barred by the FCA’s public disclosure bar.
While the court’s decision may send a signal to government employees that they are free to proceed with FCA actions, there are some important limitations identified in the decision. First, the appellate court remanded to the district court to re-consider whether there had been a public disclosure in audits or civil proceedings of the allegations contained in the Complaint, which could potentially result in dismissal of the action. Second, the court concluded that if the district court holds that there has been a public disclosure of the Complaint’s allegations, within the meaning of the FCA, the suit will have to be dismissed because the relators would not qualify as original sources.
This case was brought prior to the three recent amendments to the FCA. In the 2009 FERA amendments, Congress eliminated the public disclosure bar as a jurisdictional defense. This means that the dismissal of an action based upon a public disclosure is entirely permissive to the United States. That the Department of Justice will move courts to dismiss cases with government relators that violate the public disclosure bar is not a “sure thing.” In fact, during oral argument in ex rel. Little, the government candidly conceded that it might be “unwilling to incur the political costs associated with dismissing potentially meritorious suits” where the government relator is using information derived from illicit conduct.
In other words, if there is money in it, the federal government may allow a federal employee to personally profit from information derived from his or her employment as a fraud auditor, investigator, or agent.
Criminal fines against companies and individuals convicted of white collar, antitrust, environmental, health care, and other offenses can balloon into the millions or hundreds of millions of dollars. In a recent ruling that protects the Sixth Amendment rights of defendants in these high-stakes cases, the U.S. Supreme Court held in Southern Union Co. v. United States that any fact supporting a "substantial" criminal fine must be found by a jury applying the "beyond a reasonable doubt" standard.
In this Alert, we explain the Court's opinion and discuss the wide impact it will have on criminal actions, from investigation to sentencing.
Where Two Bank Employees Steal Proprietary Trading Code, Could One Stay in Jail Merely Because He Printed it out First?
This post was written by Jennifer L. Achilles.
This past April, the Second Circuit narrowed federal prosecutors’ ability to charge former employees for stealing proprietary information from their companies. United States v. Aleynikov, 676 F.3d 71 (2d Cir. 2012) (overturning Aleynikov’s conviction for violating the National Stolen Property Act and the Economic Espionage Act after misappropriating trading code from Goldman Sachs). Now, the Second Circuit is primed to consider a question left open by Aleynikov: whether a defendant can be convicted of violating the National Stolen Property Act by taking intangible property, such as proprietary source code, in a tangible form, such as on a compact disc, a thumb drive, or on good old-fashioned paper. It remains to be seen whether such an arbitrary distinction could make a difference.
In March 2011, a New York jury convicted Samarth Agrawal of violating the National Stolen Property Act (NSPA) and the Economic Espionage Act (EEA) after allegedly misappropriating Société Générales’ high frequency trading code to help him develop a similar trading system with his new employer. Agrawal appealed his conviction while beginning to serve out his 36-month prison sentence. After the appellate briefing was complete, but before oral argument in Agrawal, the Second Circuit considered the appeal of Sergey Aleynikov, who was convicted of violating the same federal criminal statutes after misappropriating Goldman Sachs’ high frequency trading code.
In United States v. Aleynikov, the Second Circuit held that the NSPA did not cover theft of intangible property, and that the EEA did not prohibit misappropriation of trade secrets unless the secret was designed to enter or pass in commerce. United States v. Aleynikov, 676 F.3d 71 (2d Cir. 2012). See decision here.
Two months later, on June 21, 2012, the Second Circuit heard oral argument in United States v. Agrawal, and not surprisingly, defense counsel for Agrawal urged the court to overturn Agrawal’s conviction based on the holdings set forth in Aleynikov. See article here. Such a conclusion seems to be a no-brainer regarding Agrawal’s EEA conviction: Soc Gen’s high frequency trading code was no more intended to “enter or pass in commerce” as Goldman Sachs’ was. As for Agrawal’s NSPA conviction, however, there is one critical factual distinction: Agrawal printed Soc Gen’s trading code on paper (tangible property) before misappropriating it, rather than simply uploading the code to the clouds as Aleynikov did with Goldman Sachs’ code. Although the Second Circuit punted on that precise issue in Aleynikov because “there was no allegation that he physically seized anything tangible from Goldman,” 676 F.3d at 78, the distinction will likely provide the foundation for affirming Agrawal’s otherwise identical NSPA conviction. With such arbitrary results sending people to jail, one has to hope that either Congress will sit up and take notice, or federal prosecutors will refrain from wielding their power to charge NSPA cases in the future.
A recent Third Circuit opinion undercuts the attorney-client privilege, especially in federal grand Jury investigations of companies and individuals. Under the new precedent, there is no way to immediately challenge a court order invading the protections of the attorney-client privilege without first suffering a judicial contempt citation, thereby risking monetary fines and imprisonment. In this Alert, Reed Smith attorneys Kyle Bahr and Efrem Grail highlight the difficult choices faced by clients in protecting their privileged materials from discovery by the government in federal criminal investigations.
This post was written by Rosanne M. Kay.
I recently spoke at the 6th International Pharmaceutical Compliance Congress in Budapest. Jane de Lozey, Head of Fraud at the Serious Fraud Office (SFO), and Raymond Emson, Head of Policy at the SFO, were also scheduled to speak but unfortunately could not make it at the last minute. We did, however, have the benefit of their slides, which included a number of interesting points about the UK Bribery Act and facilitation payments.
In particular, the slides indicated that the SFO will consider a number of factors when exercising its discretion in relation to facilitation payments. These factors include:
- Whether the company has a clear issued policy regarding such payments
- Whether written guidance is available to relevant employees as to the procedure they should follow when asked to make such payments
- Whether such procedures are being followed by employees
- Whether there is evidence that all such payments are being recorded by the company
- Whether there is evidence that proper action (collective or otherwise) is being taken to inform the appropriate authorities in the countries concerned that such payments are being demanded
- Whether the company is taking what practical steps it can to curtail the making of such payments
The same slide referred to an overarching principle as to whether the company can demonstrate that it is actively working towards "zero tolerance".
Although there was, unfortunately, no accompanying explanation, these statements suggest that the SFO will not adopt as rigorous an approach towards facilitation payments as might have been supposed, and they appear to recognise that there are circumstances in which an employee has no choice but to pay a facilitation payment. It is, however, unclear whether the circumstances envisaged by the SFO encompass a commercial emergency where, for example, a company will incur a significant penalty if it is unable to deliver goods on time, which it is unable to do without making a facilitation payment. The SFO has, however, previously said that, if the answers to the above questions are satisfactory, then the company should be shielded from prosecution.
David Green QC has this month taken over the Directorship of the Serious Fraud Office (“SFO”) from Richard Alderman. Prior to joining the SFO, Mr Green had practised as a barrister specialising in serious crime for more than 25 years.
Between 2004 and 2011, he served as Director of the Revenue and Customs Prosecution Office, and following its merger with the Crown Prosecution Service (“CPS”), as Director of the CPS Central Fraud Group.
Mr Green has stated that it is one of his priorities to ‘rebalance the focus between prosecution and civil settlement’ towards more prosecution, while focussing on prioritising cases that cannot be dealt with by other agencies. However, he has also supported the introduction of Deferred Prosecution Agreements.
The Ministry of Justice (“MOJ”) has launched a Consultation on the introduction of Deferred Prosecution Agreements (“DPAs”) in the UK, as a new enforcement tool in dealing with economic crime.
As with the U.S. model, the proposed DPAs would allow prosecutors to enter into agreements with commercial organisations that the prosecutor will lay, but not immediately proceed with, criminal charges pending successful compliance with agreed terms and conditions stated in the DPA. The agreements would need to be sanctioned by judges, and their terms could include financial penalties, restitution for victims, disgorgement of the profits of wrongdoing, and the implementation of measures to prevent further offences. If the commercial organisation abided by the terms of the DPA, it would not face criminal sanctions.
The MOJ hopes that the introduction of DPAs will encourage organisations to co-operate with the SFO at an early stage, help provide greater certainly as to the possible outcomes of investigations, achieve those outcomes more quickly and enable greater co-operation between UK and foreign authorities.
On March 20, 2012, a New York federal judge ordered Chip Skowron to pay $10 million in restitution to Morgan Stanley as a corporate victim of his insider trading and obstruction of justice schemes. The Skowron decision is a significant victory for corporate victims of insider trading, and provides a roadmap for seeking restitution under the Mandatory Victim Restitution Act. Click here for the full article by Pablo Quiñones and Jennifer Achilles in Bloomberg BNA on the Skowron decision.
When Taking Proprietary Information From Your Employer Is Not a Federal Crime: Recent Lessons From the Ninth and Second Circuits
This post was written by Jennifer L. Achilles.
In two decisions issued last week, the Ninth Circuit and Second Circuit interpreted three different federal statutes – the Computer Fraud and Abuse Act (CFAA), the National Stolen Property Act (NSPA), and the Economic Espionage Act (EEA) – in ways that narrowed federal prosecutors’ ability to charge former employees for stealing proprietary information from their companies.
According to the Ninth Circuit’s decision in United States v. Nosal, --- F.3d ---, 2012 WL 1176119 (9th Cir. Apr. 10, 2012), an employee does not always violate the CFAA by intentionally infringing his company’s computer-use policy. If an employee was authorized to access the information, and did not gain access through internal hacking, there is no criminal violation of the CFAA regardless of whether the employee misappropriated the information for his own use. Nosal creates a circuit split among the Ninth Circuit on one hand, and the 11th, Fifth, Seventh, and First Circuits on the other. The complete decision, and the written dissent, can be found here.
One day after Nosal, the Second Circuit further narrowed the government’s ability to prosecute trade secret theft. In United States v. Aleynikov, --- F.3d ---, 2012 WL 1193611 (2d Cir. Apr. 11, 2012), the Second Circuit held that Aleynikov’s conduct was beyond the scope of the NSPA when he misappropriated Goldman Sachs’ proprietary source code for high frequency trading because the source code consisted of “purely intangible property,” and not “goods, wares, merchandise, securities or money.” The court readily acknowledged that its decision might be different if Aleynikov had copied the code on an inexpensive flash drive or CD when he left Goldman. The court also held that Aleynikov’s theft was not an offense under the EEA because the computer source code “was not designed to enter or pass in commerce, or to make something that does.” Accordingly, Aleynikov’s conviction and eight-year prison sentence were overturned. The complete decision can be found here.
It is widely anticipated that the Supreme Court will soon weigh in on the contours of these criminal statutes, or that Congress will clarify their scope. Until then, the Department of Justice – at least in the Ninth and Second Circuits – will be unable to use the CFAA, the NSPA, and the EEA to prosecute theft of trade secrets unless the information was obtained by hacking, consisted of more than intangible property, or was designed to enter or pass in commerce.
In March 2012, The Financial Services Authority (“FSA”) published the results of its thematic review into the policies and procedures that investment banks have in place to prevent their employees from paying or receiving bribes. Click here for more information on the background to this review.
The FSA’s report revealed that the provisions that many firms have in place for financial crime and anti-money laundering fall short of what is necessary to address the requirements of anti-bribery and corruption compliance.
In summary, the FSA found that:
- The majority of the firms reviewed had not fully considered the FSA’s anti-bribery and corruption rules
- Nearly half of the firms reviewed did not have adequate procedures for risk assessment
- Generally, senior management was not provided with sufficient information on anti-bribery and corruption, and could not provide sufficient oversight
- Only two firms had started internal anti-bribery and corruption audits
- There were significant concerns over the way that the firms dealt with third parties to retain or win business
- Few firms had procedures in place to ensure that the corporate hospitality and entertainment offered to certain clients was not excessive when judged cumulatively
Click here for a copy of the full FSA report.
As a result of its findings, the FSA is holding a consultation on proposed amendments to its "Financial Crime: a guide for firms." Click here for more information on the FSA’s consultation.
The FSA also made it clear that it intends to take enforcement action in relation to shortcomings in firms’ anti-bribery and corruption policies and procedures.
On March 23, 2012, the United States Securities and Exchange Commission (“SEC”) announced that it had entered into cooperation arrangements with the Cayman Islands Monetary Authority (“CIMA”) and the European Securities and Markets Authority (“ESMA”) in its continuing effort to improve global regulation of transnational business entities. The cooperation between the SEC and CIMA is particularly significant because a large number of hedge funds, investment advisers, and investment managers operate in the Cayman Islands and frequently access capital and investors in the United States. ESMA is an independent European Union Authority that regulates credit rating agencies and coordinates with other EU securities regulators. The SEC’s press release announcing the new arrangements is available here.
The new cooperation arrangements between these regulators will allow them to share information about hedge funds, investment advisers, investment fund managers, broker-dealers, and credit rating agencies. The arrangements establish “supervisory cooperation agreements” with the SEC’s foreign counterparts aimed at “establish[ing] mechanisms for continuous and ongoing consultation, cooperation and the exchange of supervisory information related to the oversight of globally active firms and markets.” According to the SEC’s Director of International Affairs, these types of arrangements are intended to build relationships that may help prevent fraud in the long term or lessen the chances of a future financial crisis. Currently, the SEC has cooperative arrangements of various types with approximately 80 jurisdictions around the world.
International securities fraud cases require cooperation among foreign regulators. While regulators are willing to informally share some information, the existence of a formal cooperation arrangement facilitates a full exchange of information. The growing cooperation between the SEC and foreign regulators will no doubt lead to an increasing number of securities enforcement actions as more eyes focus on a single business entity. Hedge funds have been subjected to increased regulatory scrutiny in recent years. The SEC's latest expression of interest in the Cayman Islands underscores that hedge funds continue to be high on the SEC’s agenda.
In yet another reminder about the importance of maintaining evidence on company-issued laptops, BlackBerrys, or other electronic devices, the United States District Court for the Northern District of California recently sanctioned a qui tam relator for destroying more than 10,000 documents on his company-issued laptop. Moore v. Gilead Sciences, Inc., No. C 07-03850 SI, 2012 WL 669531 (N.D. Cal. Feb. 29, 2012).
The relator admitted to “wiping” the hard drive of his laptop multiple times prior to the filing of his qui tam complaint against his former employer, a pharmaceutical company, alleging violations of the Federal False Claims Act, 31 U.S.C. § 3730 – including a week before the qui tam complaint was filed. The relator also admitted to “wiping” his hard drive again at least once after Gilead issued a document preservation/hold memo, and before he brought a retaliation and discrimination claim against his former employer.
The court held that the relator’s actions were “egregious” and constituted “willful and bad faith spoliation of evidence.” The court, however, declined to impose monetary sanctions and instead determined that an adverse inference instruction to the jury was an appropriate sanction.
This decision may assist companies defending against False Claims Act or whistleblower actions, particularly where the whistleblower ignores the company’s attempts to preserve information. Moreover, this decision is a reminder that all companies need to be vigilant with their own employees to ensure that documents are being preserved after the issuance of a document-hold notice.
This post was written by Rosanne M. Kay.
Word on the street is that the UK's Serious Fraud Office ("SFO") has a number of active investigations into potential offences under the Bribery Act 2010. So far, the Bribery Act has only been used in a reasonably minor prosecution of a court clerk who took bribes to erase motoring offences from court records.
Despite rumours about active Bribery Act investigations, there are persistent question marks about the SFO's ability to take on such investigations and prosecutions. The SFO has suffered significant cutbacks and, apparently, only has £2million in its war chest to enforce the Act.
However, the public are highlighting potential issues to the SFO. Apparently, its hotline is receiving around 500 calls a month and the whistle-blowing section of its website has had 200 hits.
The UK Bribery Act 2010 has increased the focus placed on anti-bribery and anti-corruption
not only by the Serious Fraud Office (‘SFO’) but also by the Financial Services Authority (‘FSA’).
Anti-bribery issues fall within the FSA’s statutory objective to reduce financial crime and bribery
continues to be a strategic priority for the FSA. The FSA has imposed fines on two insurance
brokers, Aon and Willis, in relation to weaknesses in their anti-bribery systems and controls.
Many will be quick to point out that the FSA has an easier time than the SFO. Its role is one
of prevention, not prosecution. It does not need to prove that bribes have actually been paid,
merely that the firm’s systems and controls did not properly mitigate the risk of bribes being
So far, the FSA’s enforcement action relating to anti-bribery issues has concerned the insurance
industry although both the Aon and Willis cases are instructive about the types of issues that the
FSA is concerned about. However, in June 2011, the FSA announced its intention to carry out
a thematic investigation of the policies and procedures that investment banks have in place to
prevent their staff and agents from paying or receiving bribes. Whilst thematic reviews are not
enforcement actions in themselves, they may lead to.
For a detailed analysis, please click here to read the issued Client Alert.
In-House Relator? The 2nd Circuit Considers Whether To Put the False Claims Act Between Attorneys and Their Clients.
The Second Circuit Court of Appeals is reviewing a lower court decision disqualifying a former in-house attorney from acting as a False Claims Act qui tam relator against his former employer.
The relator was formerly general counsel to Unilab, a subsidiary of Quest Diagnostics Inc. The qui tam suit alleged that Unilab violated the Federal Health Care Anti-Kickback Act by engaging in a fraudulent scheme to increase medical testing referrals under the Medicare and Medicaid programs. Unilab sought to dismiss the suit, arguing that the relator's participation in the action was unethical under the New York Rules of Professional Conduct. The District Court agreed, stating that his duties included his obligation not to disclose client confidences that would otherwise be protected by the attorney-client privilege.
In an appeal of the District Court's ruling to the Second Circuit, the plaintiff has primarily argued that the relator had no duty to keep client confidences as Unilab was engaged in acts of fraud. In response to that argument, Unilab claimed that failure to disqualify counsel would have a chilling effect on a client's willingness to seek advice of counsel regarding issues that could implicate the False Claims Act.
The case raises significant questions regarding the limits of the attorney-client privilege when the client is potentially engaged in acts of fraud. Typically, communications with counsel that are in furtherance of a crime or fraud are not protected by the attorney-client privilege. But communications regarding a previous crime or act of fraud are protected by the privilege, unless the lawyer believes that disclosure is necessary to prevent a future crime. Whether the privilege applies in this particular case will depend, in part, on the Second Circuit's interpretation of the scope of the crime-fraud exception to the privilege. If the Second Circuit affirms the District Court's decision, companies can at least rest easier knowing that their communications with counsel about False Claims Act issues will, in most instances, remain private.
'Sunshine Act' à la française adopted on 29 December 2011. Healthcare and cosmetics companies will be subject to a tough transparency regulation in France
This post was written by Daniel Kadar.
A new rule, adopted on 29 December 2011 and published on 30 December 2011 after an unusually expedited procedure due to strong government pressure, will heavily modify the regulatory framework in which healthcare companies, but also to some extent cosmetics companies, operate in France.
Besides replacing (next August, but the law has immediately been enforced) the current government healthcare agency (AFSSAPS) with a new ‘National Agency for the Security of Drugs’ / ‘Agence Nationale de Sécurité des Médicaments’ (ANSM) which will have more control powers and will be able to fine non compliant actors, the new law sets out transparency requirements for healthcare and cosmetics companies that are comparable to those provided by the US ‘Sunshine Act’.
The new article L 1453-1 of the French Public Health Code imposes a general disclosure obligation on any company manufacturing or commercializing products with a medical or cosmetic purpose. The obligation concerns all agreements such companies may have with healthcare professionals, students of medicine and other healthcare related studies, clinics and hospitals, foundations, press and communication agencies/companies, software editors of drug prescription related softwares, as well as with educational companies in the healthcare area.
The obligation will require disclosure of any advantages in kind or in payment provided by the companies to such persons mentioned above (the threshold amount triggering this disclosure obligation is to be fixed by decree).
The law provides for fines for infringing the obligation of up to 45,000 Euros in respect of physical persons and up to 225,000 Euros in respect of legal persons.
In addition, the law requires the disclosure by those holding regulatory powers devolved to them by the French Ministry of Health, cabinet members and members of the new ANSM of any conflicts of interests when taking on their functions.
The new law also sets forth new pharmacovigilance requirements and provides more stringent rules concerning the advertisement of drugs as well as – this is new – medical and diagnostics devices.
More details will be provided in follow-up decrees to be made in the coming weeks. In many cases, this new regulation sets very stringent standards which will require all healthcare companies, but also to some extent (in particular in terms of the transparency requirements) all cosmetics companies, to restructure their businesses in France.
For more information, please read the issued Client Alert here.
This post was written by Simon Hart.
The UK’s Serious Fraud Office (SFO) has stepped up its attempts to persuade employees and professional advisors to blow the whistle on fraudulent or corrupt practices within the organisations they serve. The SFO has announced a new “SFO Confidential” service that allows whistleblowers to report concerns either by phone to a dedicated team of SFO operatives, or by using an online service.
The SFO’s Director, Richard Alderman, has said that the SFO operatives are trained in dealing with the anxieties that many whistleblowers have when coming forward to report perceived wrongdoing. The SFO has given assurances that the identities of those who blow the whistle will be protected, and reporting can be done anonymously if desired.
To some degree, the new service is the re-packaging of a service that has always existed. It is not new for the SFO to invite people to call them if they have information relating to fraud or corruption. Whistleblowing has always been one of the main ways that the SFO identifies matters for investigation. However, the current initiative is a clear attempt by the SFO to encourage a greater degree of whistleblowing by recognising the anxieties that whistleblowers may have when picking up the phone.
The strategy of promoting whistleblowing is consistent with the SFO’s attempt over the past 12 months to raise its profile and ram home the anti-corruption message it has developed around the implementation of the Bribery Act 2010. Whether “SFO Confidential” gives rise to more, or more effective, whistleblowing is open to debate. Only the SFO will ever know
This post was written by Michael A. Grant.
- The Wolfsberg Group recently published its Anti-Corruption Guidance, which leads me to assume that someone, somewhere, is drafting Corruption Guidance. Perhaps those old cartoons were on to something?
- More evidence that when it comes to cloud computing, no one knows what to do.
- People do bad things on the internet? Say it 'aint so.
- For those of you who have watched one too many Pirates movie (is there really another one?), and for those of us who have day dreamed about high stakes treasure theft (did I just share too much?), this is your warning.
- Its OK to Laugh.
The first person to be charged under the new UK Bribery Act, a magistrates court clerk, was convicted by Southwark Crown Court on Friday, 14 October 2011.
The court clerk, 22 year old Mr Munir Yakub Patel, was convicted under Section 2 of the Bribery Act for requesting and receiving a bribe intending to improperly perform his functions. The court heard that Mr Patel agreed to use his position at Redbridge magistrates court to prevent a traffic penalty from being entered onto a court database in exchange for £500.
Mr Patel was bailed until 11 November 2011, when he will be sentenced.
The case was brought by the Crown Prosecution Service (‘CPS’) which, like the Serious Fraud Office (‘SFO’), can bring prosecutions under the Bribery Act. It is anticipated that the CPS will focus on more domestic prosecutions whilst the SFO will focus on the more complex overseas corruption cases.
Although this is a minor conviction, it marks the start of the jurisprudence under the new Act. However, it will have little bearing on how complex overseas bribery cases will be dealt with or on how contentious parts of the Act relating to jurisdiction and “associated person” will be interpreted. The Act is not retrospective and will only apply to offences committed since it came into force on 1 July 2011. It may therefore take some time before we see the first SFO prosecution under the Act.
Earlier this month, Richard Alderman, Director of the SFO, was speaking at an international symposium on economic crime in Cambridge and made an interesting point which has been picked up by many UK newspapers.
He referred to the fact that 20 years ago, it was possible for UK companies to get deductions for tax purposes in respect of bribes. Clearly this is no longer the case and, now that the new Bribery Act is in force, may lead to potential prosecutions.
Mr. Alderman was however suggesting that companies should have information to ensure that they are not claiming tax deductions in respect of bribes and the SFO has therefore started to require companies to disclose relevant parts of their tax calculations in the hope that these might provide evidence of bribes and the fact that companies are identifying them.
The SFO is seeking to persuade companies to self-report their own breaches of the Act.
There are several potential situations where companies’ tax calculations may reveal unlawful practices under the Bribery Act:
- Where companies offer or hold offshore accounts – Various tax authorities worldwide are trying to unravel the secrecy surrounding offshore banking. This process involves the exchange of information between worldwide tax authorities on the tax affairs of multinational companies and offshore account holders. This could result in previously undetected bribes coming to light.
- The Act’s impact upon existing disclosure requirements – Section 6 of the Bribery Act (the foreign public official offence), in contrast with Sections 1 and 2, does not require any intention to procure “improper” conduct from the official. The briber need only intend to “influence” the official to act to the briber’s business advantage. The British Bankers’ Association (BBA) has, in the past, expressed concerns that what would normally be considered legitimate promotional expenditure, could now be caught by the Act. This uncertainty over what constitutes an offence under Section 6, may result in banks and financial institutions making more frequent Suspicious Activity Reports (SARs) to the Serious Organised Crime Agency (SOCA). The institutions’ tax calculations are likely to be disclosed and inspected as part of this process, which may expose bribes.
- More stringent monitoring roles for companies relating to bribes – Companies should use internal monitoring to look into all policies and procedures that may shed light on potential bribes. In particular, financial monitoring may well include ensuring that books and records relating to tax are properly kept and will pick up irregularities which indicate that bribes are being paid.
Despite the hype, the likelihood that companies’ tax calculations will reveal bribes seems remote. In particular, it seems unlikely that those preparing tax calculations will be made aware that bribes have been paid. For example, payment of a bribe is usually supported by an invoice for consulting services.
Mr. Alderman was previously the Director of National Teams and Special Civil Investigations in HMRC, where he conducted specialised tax investigations. In his speech, Mr. Alderman explained that, if a tax deduction was sought in the context of a bribe where the expense had not been identified properly, this would create another ‘books and records’ offence and a separate line of prosecution for HMRC, rather than the SFO.
This post was written by Rosanne M. Kay.
The first person to be charged under the new Bribery Act will be a magistrates court clerk who allegedly accepted £500 for fixing a motoring offence.
The Crown Prosecution Service (“CPS”) has decided to prosecute Munir Yakub Patel who faces a charge under Section 2 of the Bribery Act for allegedly requesting and receiving a bribe intending to improperly perform his functions. Mr Patel is due to appear before Southwark Crown Court on 14 October 2011. According to press reports, he is currently being held in custody.
Proceedings for offences under the Bribery Act require the consent of either the Director of Public Prosecutions or the Director of the Serious Fraud Office (“SFO”). The SFO is the lead agency in England and Wales for investigating and prosecuting cases of overseas corruptions whereas the CPS prosecutes bribery offences investigated by the police committed either overseas or in England and Wales (although it is anticipated that the CPS will focus more on domestic cases).
Whilst this may only be a small case which will not touch on key concerns relating to jurisdiction and hospitality, it marks the start of jurisprudence on the Bribery Act. It will also put the SFO under increased pressure to start its own action under the Bribery Act.
The Department of Justice suffered a “stinging” setback to its widely touted FCPA Africa Sting prosecution late last week when the first of four anticipated trials based upon its most aggressive Foreign Corrupt Practices Act investigation to date ended in a mistrial. The jury deadlocked after six weeks of trial and after taking six votes while failing to reach a unanimous verdict in the bribery trial of four arms salesmen alleged to have offered to pay bribes to obtain military contracts.
In January, 2010, DOJ indicted 22 individuals, including citizens of the UK and Israel, claiming violations of the FCPA as a result of the defendants’ alleged payment of bribes to officials of Gabon in order to obtain government contracts to provide that country with armor, weapons and military gear. The indictments were brought following a lengthy FCPA undercover sting operation in which the purported foreign official to whom the defendants allegedly caused bribes to be paid was, in reality, an FBI agent as was a purported middleman to the alleged scheme. This was DOJ’s first large-scale undercover operation in connection with an FCPA investigation. The investigation is another example of the ongoing cooperation between U.S. and UK law enforcement agencies, particularly in the anti-corruption area. In this investigation, the FBI teamed up with the UK’s City of London Police. On January 18, 2010, the two agencies executed a total of 21 search warrants in various locations in the U.S. and in London.
Following the indictments, United States District Court Judge Richard Leon (District of Columbia) rejected DOJ’s request that he try all of the defendants together and broke them up into smaller groups for trial. At the close of the government’s case of four defendants in the first trial, the judge entered judgments of acquittal on some of the counts, with the most significant ruling coming on the motion of defendant Pankesh Patel, a UK citizen and the managing director of a UK company that acts as a sales agent for companies in the law enforcement and military products industries. Patel challenged a substantive FCPA count that rests upon a statutory jurisdictional requirement that a foreign defendant engage in corrupt activities “while in the territory of the United States.” DOJ has become increasingly aggressive in asserting jurisdiction over non-US residents based upon actions taken outside of the US as causing or aiding and abetting a corrupt or improper payment to be made. For example, the government has based FCPA charges against non-US citizens on conduct such as sending wire transfers requests from an account in a foreign country to a financial institution in the United States, and on sending emails and facsimiles from the UK to the US. Here, DOJ claimed jurisdiction over Patel in the count in question based on his sending a DHL courier package containing a purchase agreement in furtherance of the alleged corrupt scheme from the UK to the United States.
Patel moved for acquittal under the relevant count, arguing that he did not engage in any prohibited conduct “while in the territory of the United States” as required by the statute. In granting Patel’s motion, the judge expressed substantial skepticism regarding DOJ’s contention that sending a DHL package from the UK met the jurisdictional requirement, calling the theory a “novel interpretation” of the law. In granting the acquittal motion, Judge Leon said that “the more cautious, conservative interpretation would be that each act has to be while in the territory of the United States.” Judge Leon’s ruling is believed to be the first entered against the government on this jurisdictional ground and should encourage foreign defendants in other FCPA cases to test the limits of DOJ’s aggressive jurisdictional theories.
DOJ has announced that it will refile its case against the four defendants and will proceed with its case against the remaining defendants.
The Financial Services Authority (“FSA”) recently announced its intention to carry out a thematic investigation of the policies and procedures that investment banks have in place to prevent their staff and agents from paying or receiving bribes. Click here for the full speech.
This coincides with the coming into force of the Bribery Act 2010 on 1 July 2011. Click here for more information about the Bribery Act.
Thematic reviews are carried out by the FSA to look into widespread issues affecting a whole industry, market or product and result in the publication of a report of what the FSA discover. Although they may lead to enforcement action against specific firms depending on what the FSA find, the reviews are not enforcement actions in themselves.
A similar review was carried out of the insurance sector which resulted in the publication of a report in June 2010 highlighting a widespread lack of understanding of the risks of corruption and compensation and bonus schemes which increased the risks of bribery.
In their recent announcement, the FSA highlighted the overlap between corruption and money laundering. Indeed, most banks will already have detailed procedures in place to reduce the risk of failing to comply with, for example, anti-money laundering rules as well financial sanctions and FCPA requirements. They may well therefore have most of the relevant procedures in place to deal with bribery risks already
This post was written by Simon D. Hart.
With the coming into force of the UK's Bribery Act 2010 today, companies will be reviewing and revising a wide range of documents, policies and procedures across their organisation. Whilst in-house Counsel will almost certainly have been at the forefront of any internal review to ensure the company's readiness for the Bribery Act, the Human Resources department also has a very significant role to play in that exercise. Reed Smith's Employment group looks at the Act from an employment perspective. To read more click here.
- Of Russians and nuclear energy …
- Line of the Day goes to Sen. Patrick Leahy (D-VT) from this article about the Civilian Extraterritorial Jurisdictions Act: "CEJA will also protect Americans by providing the option of prosecuting them in the United States." Finally, what we have all been waiting for, multiple international jurisdictions chomping at the bit to lock us up. If this goes through, what's going to happen to my favorite show?
- I'm not sure how much traction this will get, but if you are in the bribery business, consider this your warning. The standard search for recording devices 'aint going to cut it anymore. (Fighting the urge to write: "there's an app for that." Oh well.)
- With kids heading off to camp, I'm finding myself a bit nostalgic for summer days spent making up games and then fighting endlessly with friends over the rules. It seems like a few senators share my feelings
- Who doesn't love a top 10? Spoiler alert: contractors who didn't make the list.
- And to think, we all used to complain about the late fees at Blockbuster
- Its OK to Laugh
The Director of the Serious Fraud Office (“SFO”) has recently articulated a robust interpretation of the SFO’s jurisdiction under the UK’s Bribery Act 2010, which comes into force on 1 July 2011. In doing so, the Director has challenged the understanding of many companies and their advisors. Whilst the debate may be seen by many as an academic debate for lawyers, the implications could have a significant impact on whether or not particular operations of a global company fall within the reach of the SFO.
The Director made it very clear that, in his view, if a global company had a UK subsidiary, but there was bribery in another part of the global company, the SFO would have jurisdiction under the Bribery Act. This interpretation is in contrast to statements made in the Guidance issued by the Ministry of Justice in March 2011 which indicated that such foreign companies would not themselves be regarded as “carrying on business in the UK” simply by virtue of having a UK subsidiary or a listing on an exchange. (“Carrying on business” is the test for determining whether an entity can be fixed with criminal liability under the corporate offence in the Act.)
Mr Alderman made it plain that the SFO would be adopting a very wide interpretation of the phrase “carrying on business in the UK”. Mr Alderman has said “What I have said to corporates is that it would be very dangerous for them to use a highly technical interpretation of the law to persuade themselves that they are not within the Bribery Act and that it is permissible for them to carry on using bribery. I have said that they could have a very unpleasant shock…”
Mr Alderman went on to explain “Our view is that if a foreign group has a subsidiary in the UK and in another country and that bribery occurs in that other country then that bribery is within the remit of the SFO.”
Ultimately, the much-debated jurisdictional provisions of the Act will be determined neither by the SFO nor those that the Act purports to cover, but by the English Courts. However, it is clear that the SFO will be looking to promote an anti-corruption agenda by highlighting the risks of engaging in corrupt activities anywhere in the world if the business has any connection with the UK.
To reinforce the message, Mr Alderman has emphasised that surprise arrests of overseas nationals at UK borders could be a possibility if they have engaged in bribery: “You can’t be sure that you won’t be stopped at the airport. We are not going to say, “if you turn up, you will be arrested”. It may or may not happen”.
Mr Alderman has also signalled that the SFO will be interested in prosecuting cases against foreign corporations where there has been bribery that has disadvantaged ethical UK companies. He has suggested that in such a case, there would be a strong UK public interest in bringing that foreign company before the UK courts. Mr Alderman has said that he is keen to test the new law against foreign companies despite the challenges in investigating, prosecuting and punishing a foreign company.
Despite Mr Alderman’s strong words, it remains to be seen whether the SFO will have the resources or the will to investigate and prosecute foreign corporates. Nevertheless, these recent statements highlight the fact that companies can only draw limited comfort from the commentary on jurisdiction in the Ministry of Justice Guidance.
This post was written by George Hoare.
On 6 June 2011, the European Commission (EC) outlined measures to tackle the problem of corruption within the European Union (EU). According to figures quoted in the press release, four out of five EU citizens regard corruption as a major problem in their Member State, with corruption estimated to cost the EU economy €120 billion per year.
The most significant of the new initiatives is the establishment of the EU Anti-Corruption Report (the Report). The Report will be issued by the EC every two years, starting in 2013, and is intended to give a clear picture of anti-corruption efforts and achievements within the EU, as well as pointing out failures and vulnerabilities across the 27 Member States. It is hoped that the Report will stimulate peer learning and exchange of best practices between Member States.
Further initiatives to tackle corruption are expected over the coming years. These include: proposals for modernising rules for confiscating criminal assets; an action plan for how to improve the gathering of crime statistics; and a strategy to improve criminal financial investigations in Member States. In parallel, the EU will put greater emphasis on anti-corruption considerations in its relevant policies. These initiatives are part of a wider agenda to protect Europe’s licit economy, as set out in the EU Internal Security in Action presented by the EC in November 2010.
According to Cecilia Malmström, European Commissioner for Home Affairs, implementation of anti-corruption legislation among Member States is “very uneven”. She considers that there is “not enough determination amongst politicians and decision-makers” to fight corruption and the Report is designed to generate the political will to tackle the problems associated with corruption.
This post was written by Simon D. Hart.
After months of speculation, and rumoured turf wars within the UK government, it has today been confirmed that the UK’s Serious Fraud Office (“SFO”) will not be broken up and will remain independent of the new National Crime Agency (“NCA”). The SFO will retain both its investigative and prosecution powers in relation to major economic fraud and corruption. Crucially for the SFO, this means it retains control of investigations and prosecutions under the new Bribery Act 2010 which comes into force on 1 July.
There had been considerable speculation that the SFO would be broken up with its investigative powers being folded into the new NCA and its prosecution powers being passed to the existing Crown Prosecution Service. Richard Alderman, the director of the SFO, had been arguing strongly that the way to tackle serious fraud and advance the anti-corruption agenda was for there to continue to be a single, specialised unit which had both investigative and prosecution powers. He appears to have won that battle – but perhaps not the war. The sting in the tail of today’s announcement is that the government has left open the prospect of the future of the SFO being reviewed one year after the NCA becomes operational in 2013.
The recent uncertainty over the future of the SFO has given rise to the departures of a significant number of senior personnel from the organisation. Whilst today’s announcement means the SFO will survive in its current form for now, the fact that it may only be a stay of execution is unlikely to assist the SFO in recruiting the investigators and prosecutors it now needs to deal with complex and high value fraud and corruption.
- The US military does the Hokey Pokey in Iraq.
- Edward Siedle of Forbes provides some insight into the failure of effective whistleblower enforcement.
- The Obama Export Initiative is starting to resemble Punxsutawney Phil, whenever either rear their head we are left with several months of the same.
- Ezra Klein is back at it, this time breaking down the stimulus / deficit connection.
- It's OK to Laugh.
This post was written by Sarah R. Wolff.
In a stunning jury verdict following a five-week trial, a California federal jury took just one day to find a privately-held company and two of its senior officers guilty on all counts of violating the Foreign Corrupt Practices Act (“FCPA”). The verdict against Lindsay Manufacturing Company (“Lindsay Manufacturing”), a manufacturer of electrical transmission towers, is the first conviction of a corporation under the FCPA since the law was enacted in 1977. The charges against Lindsay Manufacturing, its President and its CFO, centered on allegations that they engaged in a seven-year scheme to pay bribes to procure contracts with a state-owned Mexican utility, Comisión Federal de Electricidad (CFE), by making payments to employees of the utility through an intermediary that represented companies doing business with CFE.
The trial was preceded by several hotly contested pre-trial rulings in which the court rejected various defense claims of prosecutorial misconduct and an aggressive challenge by Lindsay Manufacturing to a key element in an FCPA prosecution – the meaning of the term “foreign official.” Lindsay Manufacturing argued that the Mexican utility was not an “instrumentality” of the state within the meaning of the FCPA, and therefore, the commission payments made to CFE’s employees were not bribes paid to foreign officials. Although the judge rejected the foreign official challenge, there are several other FCPA cases in other jurisdictions in which that issue is being pursued vigorously by defense counsel and we will continue to monitor those cases.
If the verdicts are upheld, the company faces extensive monetary penalties. As for the individuals, each faces a maximum of five years in prison on each of five FCPA counts and an additional five years on a count of conspiracy to violate the FCPA.
Not surprisingly, the Department of Justice immediately cited the convictions as a harbinger of things to come under its ongoing FCPA enforcement program. Touts and condemnations of the verdict aside – companies both public and private – as well as their officers and employees, should take note of this verdict.
- I never figured the Oracle of Omaha to be much of a Parrot Head -- they do spell their names differently. But in this piece the FCPA Compliance and Ethics Blog breaks down Warren Buffet's Changes in Latitudes, Changes in Attitudes.
- Some anti-trust football analysis that isn't related to the NFL.
- I know people love to complain about how expensive lawyers are. Don't worry, we love to listen. So while I know that my legal services aren't free, at least it's not a 21,000% (thats right) mark-up.
- While we are on the topic of government spending, how about some US debt history?
- Week 2 of Its OK to Laugh.
Expanded Scrutiny of Financial Institutions and Mortgage Lenders Through Expansive Use of the False Claims Act
The Justice Department has once again taken aggressive action against financial institutions and mortgage lenders - this time through a False Claims Act action that seeks more than 1.1 billion dollars in damages. On Tuesday, the government filed a complaint against mortgage lender MortgageIT and Deutsche Bank (which acquired MortgageIT in 2007) claiming the lenders violated the False Claims Act (FCA) by falsely certifying compliance with the requirements of HUD's Direct Endorsement Lender program, and approving FHA loans for unqualified homebuyers.
The use of the FCA against lenders involved with federally-backed loans is nothing new - but the government's approach in this complaint is a departure from past practice and especially troubling because it alleges systemic fraud covering thousands of loans - thereby dramatically expanding the scope of potential exposure for lenders who were involved in the Direct Endorsement Lender program and underwriting for FHA loans. And it appears this is just the tip of the iceberg, since the government has indicated that suits against other lenders likely are on the horizon.
For more information, please see Reed Smith's attached client alert on this latest attempt to recover money from the financial institutions and lenders that the government claims caused the housing meltdown.
After reading this article, I will no longer complain while my family gets ready to go out. Unlike the DoD, which spends approximately $31 Billion/year, I’m pretty sure I can't fund a constant state of preparedness.
Howard Sklar does some thinking out loud about the risk/reward for implementing a private sector bribery compliance program under the UK Bribery Act.
Line of the Day (ok -- I know the post is a couple weeks old) goes to Clif Burns at exportlawblog.com: Irish-American musicians can’t go to the Cuban festival because there will be Irish people there (emphasis in original). Thanks OFAC.
Electric car buying … batteries no longer included?
Presenting a new segment I'm calling: It's OK to Laugh.
- Regular readers of the Round Up (that’s a mouthful) know that we are big fans of the FCPA Professor and his blog of the same name. What you may not know is that he is an actual professor at Butler. While no one here in Round Up headquarters has a horse left in the tournament, we are still amazed at how unproductive March has been. We don’t want to get him in trouble, so keep this between us, but apparently at least one Butler faithful has been able to focus on something other than basketball.
- In case you were wondering what dictators are good for …
- I remember the first time my father gave me the keys to the family car. "Wear your seat belt, drive slowly, and don't leave the car running. It could slip out of park and roll away." Well, I didn't wear my seatbelt until they started making cars with the constant beeping, I didn't slow down until they put up more speed cameras than I could keep track of, and I'll keep the engine warm until we run out of oil. What's that you say? We only have 50 years of oil left? Oh, sorry.
- 1 in 3 DoD weapons programs have cost overruns of as much as 50%; 0 in 3 people are surprised.
The waiting is over! At last the UK Ministry of Justice has published guidance about procedures which commercial organisations can put into place to prevent persons associated with them from bribing. The Act will now come into force on 1 July 2011.
The guidance offers non-prescriptive procedures and commentary on the scope of the Act. As the Lord Chancellor and Secretary of State for Justice, Kenneth Clarke, said this morning in his statement on the publication of the guidance "These are quite tough rules. But what the guidance I am also publishing today underlines – after helpful consultation with businesses, and NGOs – is that combating bribery is about common sense, not bureaucracy."
At the core of the guidance are proportionality and risk assessment which should give comfort to those small and medium sized enterprises worried at the prospect of having to spend a fortune on putting in place complex, burdensome polices and procedures. Of limited comfort is the Secretary of State's indication that there will not be a large number of prosecutions and certainly not for trivial cases but these decisions are not his to make and will be decided by the Director of Public Prosecutions or the Director of the Serious Fraud Office.
Click here for more information about the guidance.
UK Bribery Act - Guidance on Adequate Procedures to be published tomorrow and Act to be implemented in June/July 2011
It is understood that the UK Ministry of Justice will publish its guidance on adequate procedures tomorrow, Wednesday 30th March 2011.
The Act was originally scheduled to be implemented in April of this year, three months after guidance was to be published in January about the “adequate procedures” firms should have in place to prevent bribery. The Act will now apparently come into force in June/July 2011.
- Perhaps I'm not that creative, but I keep thinking that illegally exporting jet engines has to be more difficult than people think. I guess the arrests would lend credence to my belief.
- $ 16.2 Billion … sneak attacks … the cover of darkness. The only thing Robert Creamer's summary of lobbying effort against the Wall Street Reform Law is missing is a reference to Chuck Norris. That's better.
- Following a lot of chest thumping about its new enforcement weapon, the Bribery Act, the UK appears poised to let some air out of its own balloon.
- How many government employees does it take … to conclude that fixed price contracts have built in financial cushions? Apparently just one.
The UK Ministry of Justice (“MoJ”) official with responsibility for managing the implementation of the Bribery Act 2010 (“Act”) provided an update on the status and content of the revised adequate procedures guidance during a speech last Thursday.
The speech covered the following:
- Timeframe- according to the official, the delayed adequate procedures guidance will be published “as soon as possible” but set no specific date. There is still no information about when the Act will come into force but the MoJ has promised a three month gap between publication of the guidance and the coming into force of the Act.
- Principles in the Guidance- the six guiding principles contained in the draft of the guidance released last year will remain but the revised guidance will differ “quite substantially” from the previous version.
The timing of the adequate procedures guidance and the Act remain unclear. The content of the guidance is also apparently in a state of flux. Nevertheless, companies who are waiting for the guidance to implement changes to their policies and procedures may wish to reconsider. It will almost certainly take most companies more than three months to plan and make changes and they may run out of time.
- Pun Alert: Obama's proposal for high speed trains is picking up some speed (ouch), with the help of a couple Mad Men.
- Headline of the Week: If BIS Can't Understand the EAR, How Are You Supposed To?
- In defense of military spending. Colin Clark argues that the passage of a Continuing Resolution, and the failure to pass the annual defense spending bill, could end up costing the military more money that it saves.
- We've had Too Big to Fail; now the FCPA Professor brings us Too Lucrative To Fix (*my words, not his*). Here is the Professor's take on the birth of industry resulting from an increase in FCPA enforcement including: prosecution, legal defense, compliance certification, and insurance.
This post was written by Anne E. Borkovic.
As everyone can cite, the Foreign Corrupt Practices Act (“FCPA”) in part prohibits offering or providing anything of value to a foreign official to obtain or retain business. But what does that mean in practice? Two federal courts are grappling with defining “foreign official” and, in turn, whether the prosecution can establish all the elements of a violation.
In U.S. v. Stuart Carson et al., defendants moved to dismiss and argued that the officers and employees of state-owned companies are not “foreign officials” because the companies are not instrumentalities, departments, or agencies of the foreign government. The FCPA Professor Mike Koehler filed a declaration in support of the motion, detailing the legislative history of the FCPA and the “foreign official” element. A hearing on the motion is set for March 21.
In U.S. v. Enrique Faustino Aguilar, defendants also moved to dismiss under the same argument and have asked the judge to take judicial notice of the Carson declaration.
Of course, we will keep you apprised of developments as the Courts decide this important issue.
- During law school, I sort of liked having to carry a copy of Blacks Law Dictionary, it made me feel extra-smart. The distinct benefit of carrying a dictionary is that is serves as a (heavy) reminder of the importance of defining your terms. Because the FCPA doesn't, we get to read posts like this.
- In breaking news … some government contracts are wasteful.
- I always have a moment of anxiety when my bag has to go through the scanners at the airport. Did I get out my shaving cream? Is there a water bottle left in there? Did I accidentally pack my cigar cutter? I have never once had to worry if the scanners would find the dissembled remains of 60 firearms I was illegally exporting out of the US.
- Free advertising and fishing expeditions are two justifications for why GAO bid protests have reached a 15 year high. This article by Robert Brodsky draws back the curtain in a discussion of the flaws, as well as those taking advantage, of the current system of government contracting.
- I'm a lawyer; so unlike that baby in the cars.com commercial, I have very little experience fighting fires. However, given my stated lack of experience, I feel rather confident that fighting fires with gasoline probably isn't going to settle things down. Please allow Robert Reich to explain.
Former company directors receive prison sentences from UK Court for corrupt payments to Saddam's government
Two former directors of engineering firm Mabey & Johnson received custodial sentences today, having been found guilty earlier this month of inflating the prices paid under humanitarian contracts to provide steel bridges to ensure that kickbacks of over Euros 420,000 could be paid to Saddam Hussein’s government.
The directors, Charles Forsyth and David Mabey, who were respectively the Managing Director and Sales Director of the firm, were found guilty of making the illegal payments in 2001 and 2002. Another employee, Richard Gledhill, had pleaded guilty to offences relating to breaching United Nations sanctions and subsequently gave evidence for the prosecution.Continue Reading...
The Director of the Serious Fraud Office (SFO), Richard Alderman, gave a speech yesterday about the Bribery Act which touched on many practical issues and further guidance to be issued.
The speech covered:
- Prosecution guidance – this should be issued by Mr Alderman and the UK Director of Public Prosecutions at the same time as the “adequate procedures” guidance. The guidance will set out the public interest factors that prosecutors should take into account in deciding whether to prosecute under the Act and should shed light on facilitation payments and hospitality.
- Exclusion from EU public contracts – many have expressed concern about whether the offence of failing to prevent bribery under the Act will result in mandatory exclusion from public works in the EU. Mr Alderman confirmed that this was a point which the UK Government was still considering and he hoped that clarification on this would be given at some point.
- Foreign corporates carrying on business in the UK – there is also a question mark about the SFO’s jurisdiction over foreign corporates which carry on business in the UK and whether a London Stock Exchange listing or the presence of a subsidiary are sufficient to bring a corporate within the SFO’s jurisdiction. The SFO takes a wide view of the scope of its jurisdiction but Mr Alderman acknowledged that the UK courts would need to consider the question.
- Joint ventures – the SFO draws a distinction between current and new joint ventures. With current joint ventures, the SFO expects corporates to do what they can to establish that their partners are complying with ethical obligations but recognises the practical and legal limits to this. However, the SFO would expect any new joint ventures to address anti-corruption issues. The SFO has already had a number of discussions with companies about their joint ventures.
- Hospitality – Mr Alderman was clear that it was not correct that all hospitality or promotional expenditure was illegal under the Act. Sensible, proportionate entertaining or promotional expenditure is lawful.
By way of practical example, he referred to buying breakfast or lunch for a client or flying a group of prospective clients from another part of the world to see the company’s facilities in the UK. This will usually be sensible business. A month long all expenses paid holiday to the company’s private island in the Caribbean would likely be viewed with suspicion.
- Sporting events – the SFO is considering giving more guidance on the appropriateness of taking clients to sporting events.
- Facilitation payments – Mr Alderman was very clear that these were bribes and illegal. He referred to the respect he has for corporates which have adopted a zero tolerance policy towards facilitation payments. According to him, these corporates find their policy good for business as their employees are not bothered by demands for these payments because their policy is well known. He also referred to the SFO’s sympathetic approach to situations when payment is demanded under extreme duress or in medical emergencies. The prosecution guidance should also provide more clarity on the issue.
Without pre-empting the guidance which is anticipated shortly, the SFO is clearly keen to lay to rest some of the wilder speculation which has recently appeared in the press concerning the impact of the Act, particularly with regard to corporate hospitality. Mr Alderman has sought to leave his audience with the impression that the SFO’s enforcement of the Act will be tough, yet underpinned by common sense. The written guidance should reinforce that message.
With a title like "Tactical Secrets" I was expecting a insiders look into fly fishing for Steelhead trout . But then I realized I was reading the New York Times. Instead, this piece addresses the government's assertion of the state-secrets privilege in General Dynamics Corp v. US.
Déjà vu all over again. Nick Silver compares the political landscape that President Clinton faced with the current congressional make up now facing President Obama.
When blogs reference other blogs, we here in the Round Up office get excited. Howard Sklar at Open Air Blog explains why he disagrees with the FCPA Professor and Alexandra Wrange (of TRACE) over the impact of the UK Bribery Act.
Sudan Watch: With referendum results showing overwhelming support for secession, Khartoum is calling for an end to the US embargo. In news that should surprise absolutely no one, the US has decided to wait and see.
The National Institute of Standards and Technology has issued new guidelines for cloud computing. If "safeguarding data in the public cloud" is something you are in to, or have no idea what it means, you may want to read this.
The implementation of the UK Bribery Act has been delayed, the UK Ministry of Justice has confirmed today.
The Act was due to be implemented in April 2011, three months after guidance was to be published about the “adequate procedures” firms should have in place to prevent bribery.
It was originally thought that the guidance would be published at the end of this month. The guidance has now been delayed although there are rumours circulating that it may be published in the next few weeks.
As previously reported, the Act has been the subject of significant debate about its potential adverse impact on the British economy as well as of criticism about its lack of clarity.
It is thought that the delay will result in changes to the guidance, a draft of which has so far been the subject of consultation, but not to the Act itself.
- Just once I'd like a "pilot" program to be about Top Gun. This SBA program isn't, but it will help small businesses compete for large contracts.
- Ezra Klein takes a look at what it means to be pro-labor during these economic times.
- Here at the Round-Up we love all things in summary form -- so head over to the exportlawblog's update of the Iran sanctions.
- The FCPA Professor temporally moved his classroom to the Hill. Find out what the Professor taught Senator Specter.
In advance of the much anticipated consultation in the United Kingdom on the creation of the proposed Economic Crime Agency (“ECA”), which is due to take place this spring, the Home Office announced this week that it plans to take a greater role in the fight against economic crime by having the ECA fall within its remit rather than that of the Treasury. On 17 January 2011 it set out plans to merge the Serious Fraud Office (“SFO”) into the soon-to-be-formed, all-powerful National Crime Agency (“NCA”). It also suggested that the ECA could become part of the NCA.Continue Reading...
On January 13, 2010, the London Evening Standard reported that Prime Minister David Cameron’s office has ordered a review of the new UK Bribery Act as a result of strong concerns expressed by UK business leaders and others about the potential adverse impact the Act might have on the British economy. The Act has the effect of potentially criminalising corporate gift-giving, facilitation or "grease payments" and hospitality, regarded by many as vital to doing business abroad. The review will be conducted by a committee chaired by the Chancellor of the Exchequer and the Business Secretary whose charge is to scrutinise a broad range of regulations which are perceived as hindering business growth.
That same day, Vivian Robinson, the General Counsel of the Serious Fraud Office (SFO), the agency responsible for enforcing the sweeping anti bribery law, predicted that the review would not result in any “transformational changes” to the Act and may only impact the formal guidance on the Act that is to be published by the UK’s Ministry of Justice. That said, Mr. Robinson also stated that we can expect to see the formal guidance issued by the end of January. [For our posting on the Ministry’s consultation with industry which has taken place in relation to the guidance, see link ]. If that is the case then the effective date of the Act will remain on track for April 2011.Continue Reading...
- Since there is no Nicorette equivalent for oil addiction, Stephen Stromberg takes a hard look at the cost of reducing U.S. dependence on oil. If that doesn't spark your interest, Stromberg also challenges his readers to accuse him of playing a role is a mysterious communist conspiracy to destroy civil rights. So the post has that going for it...
- Santa may be taking some time off right now, but rest assured when it comes to billions of U.S. tax dollars, someone is watching to make sure you aren't being naughty. Arnold Fields, Special Inspector General for Afghanistan Reconstruction, has stepped down amid questions of SIGAR effectiveness.
- Just to confuse everyone, UK regulators have begun paying fines to those they regulate. In other news, up is down.
- While the Roth ITAR case may never go away, it looks like Professor J. Reece Roth will be forced to.
- *Attention* government contracts attorneys: If your friends and loved ones stare blankly at you when you explain what it is you do, it turns out they are not the only ones who are confused. Check out this amusing breakdown of confused experts.
- New Year, new Congress, new rumblings about government fraud . An attorney involved in civil suits against the company formerly known as Blackwater is calling for the federal government to pursue cases involving allegedly corrupt defense contractors.
- Can't find time in your busy schedule to visit your grandparents? No problem, they may be coming to a work place near you.
- The Round-Up would like to wish a belated happy 33rd to the FCPA. One of our favorite FCPA commentators, the FCPA Professor has penned a worth-reading birthday announcement.
- Washington Technology peers through its crystal ball and forecasts how companies in the federal markets can continue to grow in 2011.
- If you saw the New York Times articles about OFAC, you may be wondering how Treasury decided to respond. By blog, of course.
- If you have not been paying attention to Sudan, now is the time to start. As the referendum concerning the unification of the country gets underway, the Guardian lets you catch up in a hurry.
This post was written by Joelle E.K. Laszlo.
While it’s usually good to be the first to do something in Hollywood, it is decidedly not good when that something is violate the Foreign Corrupt Practices Act (“FCPA”). Former power couple Gerald and Patricia Green are learning that lesson the hard way, as they spend the holidays and beyond in Federal prison. Though the Greens and the Government are appealing the six-month sentences handed down in August, it’s safe to say the Greens’ post-conviction lifestyle won’t come close to matching what it was before.
The Greens were originally indicted in January 2008 for bribing the former governor of the Tourism Authority of Thailand (“TAT”) in exchange for contracts to operate and manage the annual Bangkok International Film Festival (“BIFF”) from 2002 through 2007. In October 2008 the plot thickened as a superseding indictment added bribery charges related to several other TAT tourism programs. In all, and among other things, the Greens were accused of violating the FCPA ten times, ultimately paying out $1.8 million to generate nearly $14 million in revenue. In September 2009 a Los Angeles jury found the Greens guilty of nine FCPA violations and nearly all of the other charges against them.
Sentencing of the Greens was postponed numerous times over several months, as both sides battled to sway the court’s final act. The Justice Department, arguing that FCPA defendants who do not plead guilty or otherwise cooperate with the Government generally receive stricter sentences, asked for ten years in prison for each Green. Defense counsel requested five years’ probation, noting both that Mr. Green suffers from emphysema and that the BIFF generated substantial revenue for Thailand and its people, and thus there were no real victims from the Greens’ actions. After a final lengthy hearing, in August 2010 the Greens were sentenced to six months in prison each, followed by six months of home confinement.
Though the Greens’ prison sentences are some of the lightest ever received by FCPA defendants, there is no Hollywood ending to their story. Under a forfeiture agreement approved along with their sentences, each Green personally owes the Government nearly $1.05 million and any amount of their production company’s pension that can be traced to their offenses. The Justice Department intends to seize and sell a home owned by Mrs. Green to satisfy the judgment. And unable to muster any more funds for his defense, Mr. Green will be represented in his sentencing appeal by a court-appointed attorney. Thus the Greens’ saga is not really fodder for a future blockbuster, or even a movie of the week, though it may make for a good public service announcement on complying with the FCPA.
If the estate tax was called the death tax, would we all try to live a little healthier? (It’s the holidays – I'll make and break my resolutions in a few weeks). Regardless of its title, the tax is on the table. So what should congress do about it?
As a child, my parents coerced my siblings and I to get along through the promise of presents from Santa. Turns out FCPA violators who play nice with the DOJ may be able to secure a present of their own: a Non-Prosecution Agreement.
Holiday takeaways: good = presents; bad = coal; Microsoft engineer who attempts to export ITAR controlled goods to China = criminal complaint.
- It seems that the business sector finds the requirements of regulatory compliance to be burdensome. Who knew?
- Ezra Klein gets two-thirds of the way to a Clint Eastwood analysis of the financial commission's final report. Make sure to check out his summary before Friday's vote.
- I've stressed the importance of the Davis Bacon Act on these pages before. In case you thought I was kidding, I'm not: check our Mike Purdy's blog for a reminder of the importance.
- Ineffective assistance of counsel. Need I say more? Read it.
- I know there's a clever line in here about students becoming the teacher or vice versa, but it isn't coming to me. Check out Dick Cassin's piece at thebriberyact.com on what the UK can learn from the FCPA.
This post was written by Sarah R. Wolff.
In January 2010, the Securities and Exchange Commission ("SEC") announced a new cooperation initiative intended to encourage and incentivize individuals and companies to cooperate with and assist the SEC in its investigations and enforcement actions. That initiative, which was characterized as a “potential game-changer” for the SEC’s Enforcement Division by its new director, Robert Khuzami, gave the SEC a new set of tools for its “enforcement toolbox”, including cooperation agreements, deferred prosecution agreements and non-prosecution agreements. These options, while employed by the Department of Justice, were not previously available in SEC enforcement matters. In addition to outlining those tools in a revision to the SEC’s Enforcement Manual, the Commission provided a policy statement detailing the factors the SEC considers when evaluating cooperation by individuals and by companies.
The SEC evidenced its latest expression of interest in obtaining cooperation with its July 23, 2010 announcement that it had awarded a $1 M bounty to two whistleblowers for their substantial assistance in providing information and documents leading to the imposition and collection of civil penalties in the Commission’s May 2010 insider trading actions brought against Pequot Capital Management, Inc. and various individuals. The award was made pursuant to the Commission’s then-existing authority under the Securities Exchange Act of 1934 to award bounties to whistleblowers in insider trading cases. Significantly, in the twenty years since the SEC received its bounty authority, it had only awarded a total of $160,000 to five claimants. All of that appears to have changed with the adoption of the Dodd-Frank Act.
Among the many provisions of Dodd-Frank are specific provisions designed to significantly expand the SEC’s authority to reward whistleblowers for information beyond insider trading cases. The Act provides for the payment of potentially large awards as well as for the protection of employees who provide information to or assist the SEC relating to any violation of the securities laws. To be sure, in order to qualify for a whistleblower award, the information provided to the SEC by the whistleblower must be “original” information; in other words, the information must not previously have been known to the SEC. But if that information provides substantial assistance and leads to a successful enforcement action resulting in over $1,000,000 of monetary sanctions imposed on the wrongdoer, then the SEC has the discretion to award the whistleblower not less than 10 percent and not more than 30 percent of the monetary sanctions collected.
On November 3, the Commission published its proposed rules for implementing the whistleblower provisions of Dodd-Frank. Comments on the rules, which total over 180 pages, are due by December 17, 2010.
Have these developments changed the landscape for clients and their counsel in considering whether, and when, to self-report a potential FCPA or other securities law violation to the SEC or other regulators? Certainly the past five years have seen an uptick in enforcement activity in FCPA investigations and actions, and many of those investigations began with a self-report. The confluence of increased pressure to cooperate early in order to obtain full cooperation “credit” with Dodd-Frank’s whistleblower protections mandates that companies must even more carefully evaluate how they will conduct internal investigations at the first sign of possible wrongdoing. Does an e-mail or an anonymous tip of suggested wrongdoing automatically trigger a full blown investigation? How early companies must share their concerns, preliminary or otherwise, if not their findings, with the SEC and other regulators in order to get cooperation credit, becomes an even more critical decision under the new regulatory regime.
One obvious risk of holding back is that the SEC will receive information from a company employee who in years past might have gone to an in-house compliance officer to voice her concerns. Instead, she went directly to the SEC. Such conduct raises significant issues for companies that have installed significant compliance programs and which now must deal with risk management where the government’s financial incentives may undermine their efforts. In the end, every decision as to whether and when to self-report, and the nature and extent of an internal investigation, are fact-intensive, and there isn’t a one-size fits all prescription. It remains to be seen how the SEC will parse the “race” to disclose and cooperate, in terms of either rewarding an early disclosure or penalizing a company for failing to timely cooperate by, for example, imposing a more significant penalty and other remedies against a company in a subsequent enforcement action.
At a minimum, the dynamics have changed at the SEC and, when combined with Dodd-Frank, present new challenges in navigating the cooperation waters.
I bet you think pretty highly of yourself. I know I do … come on, I’m a lawyer! (Please insert stereotypical lawyer joke here – put a good one in the comments if you dare). From time to time, I’m “gently” reminded that not all of my accomplishments are oh-so noteworthy. As my brother used to say after I would regale him with some of my more humdrum endeavors: “what do you want, a cookie?” It looks like I’m not the one in search of a cookie.
When I think of auditors, the first thing I think of (after the Grim Reaper) is efficiency. So why then is the Defense Contract Audit Agency amending its procedures in a way that “could expose the government to massive overcharges by prime contractors?”
Interested in potentially saving millions of dollars? Yep, I thought so. Now lets play: Follow the Blogosphere Link Machine. This post is my reference to the FCPA Blog’s reference to an article written by Andrew Weissmann and Alixandra Smith discussing the potential for substantive FCPA revision.
After the roaring success of the first Round-up (remember when I gave it the cool nickname) we are back for round two. Here is a quick jog around the regulated legal world.
- Have you ever known a professor who didn't love golf? I didn't think so. Have you ever been able to get a lawyer to stop talking about the law? Don't lie to me, its rude. It was going to happen sooner or later, but I'm hoping this one sticks around -- ladies and gentlemen, for your tee time banter: The FCPA Mulligan Rule.
- I hope you got all of your "Congress never does anything" jokes out of your system. These Lame Ducks could cost you a fortune.
- 10 years ago the thought of having two employers would have meant that I had: 1) two small paychecks, 2) a couple of lousy jobs, and 3) at least one terrible middle manager to report to. I'd much rather be a federal contractor in this day and age, where having joint employers means there are more people to sue.
- If you sit real still, watch closely, and are willing to have less fun than bird watching, you can witness the birth of the proxy advisor industry.
This post was written by Michael A. Grant.
Hello good-looking regulatory attorneys. Welcome to the first installment of the Regulatory Round-up (catchy, I know). If you are reading this post, odds are someone in an office larger than yours is wondering why you aren't working -- but I'm glad you stopped by. The goal of this weekly installment will be to connect you to stories from around the blogosphere that impact those of us practicing in regulated industries. While the primary focus of the Round-up (look, I already gave it a trendy nickname) will be the 7 topics to the left, I'll be sure to mix in other stories that catch the eye. Here's hoping you see something new, have a laugh, or at least get some legitimate "professional reading" time.
- State and local agencies, you remember Davis-Bacon right? You met at that government contracting convention in Hawaii? You remember … the tiki torches, the pig roast, the Pacific breeze, and non sequiturs about the FAR … but I digress. Looks like you might want to spend some time getting reacquainted; after all, federally funded construction projects must comply with the prevailing wage requirements.
- Tax the bad or fund the good? Ezra Klein discusses differing approaches to combating climate change.
- Who’s left to review the competitive effects of this merger? (or) Why its better to regulate than be regulated. The Competition Law Blog breaks down the proposed merger of the Office of Fair Trading and the Competition Commission.
- You know that feeling you get when you think your banker is stealing from you? You may be on to something.
- I always liked the expression “a license to print money.” Securency International is in the businesses of printing other peoples money, so why are their businesses and homes being raided?
More Politicizing of the Debarment Rules as House Passes Legislation to Debar Contractors Who Violate FCPA
On September 15, 2010, the House unanimously passed H.R. 5366, referred to as the “Overseas Contractor Reform Act (the “Act”)”. The Act would amend federal law to require that any individual, partnership, or corporation found to be in violation of the Foreign Corrupt Practices Act of 1977 (“FCPA”) be proposed for debarment from any federal contract or grant within 30 days after final judgment of such violation. The FCPA is a law that prohibits bribery of foreign officials by U.S. or related companies. The Act declares that it is the policy of the U.S. Government that no contract or grant should be awarded to individuals or companies that violate the FCPA. Promulgation of the Act is said to be in reaction to media reports last year that a private security contractor allegedly authorized illegal payments to Iraqi officials to prevent Iraq from revoking the company’s license to operate in the country.
In analyzing the Act, one must first consider whether the provisions of the Act are necessary. The current regulations provide that conviction of a criminal offense, like the FCPA, is cause for debarment. See FAR 9.406-2(a)(1). Moreover, a separate cause for debarment exists for firms and individuals who are convicted of committing bribery. See FAR 9.406-2(a)(3). Therefore, the Act does not grant the Government with any additional authority. However, because FCPA actions are oftentimes resolved by execution of a non-prosecution agreement (“NPA”) or deferred prosecution agreement (“DPA”), contractors must be aware of the consequences of the Act when negotiating such agreements. Specifically, contractors must ensure that the negotiated NPA or DPA does not expressly required the company to admit to violating the FCPA or committing bribery.
The Act is currently being considered by the Senate. Reed Smith will continue to keep you posted on the progress of this legislation.
This post was written by Simon Hart.
Eight weeks and counting. That is the period that the UK’s Ministry of Justice has given for responses to their consultation paper on the guidance which will be published by the Government as to what might constitute “adequate procedures” for companies who might find themselves relying on the statutory defence under the new Bribery Act 2010. What is significant is that the Government has consciously truncated the usual 12 week consultation period so that the formal guidance can be published in January 2011 with the intention being that the Act will still come into force in April 2011.
The draft guidance is built upon 6 principles:
- risk assessment
- top level Board commitment,
- due diligence
- clear practical and accessible policies and procedures
- effective implementation
- monitoring and review.
Around each of these the Government has identified a number of draft questions that organisations need to ask themselves in order to decide whether their procedures are adequate for their business. As expected, it appears the guidance will be high level, leaving the onus upon companies to interpret what is required.
Whilst the form of the draft guidance is not a surprise, the timetable for the consultation shows a clear commitment by the Government to bring this Act in to force in spring of next year. In planning terms, that is a very short space of time for corporations to assess their business models and put in place the necessary procedures. The clock is ticking.
For those wanting to review and respond to the consultation, the relevant papers can be found here.
Quelle surprise! The Ministry of Justice has recently announced that the UK Bribery Act will not come into force until April 2011 (six months later than previously suggested). The legislation that was rushed through before the recent general election needs some fine tuning, or at least a little elaboration about how it will work in practice.
The reason for the delay is so that the Government can engage in a consultation with businesses about the "adequate procedures" guidance to be published, as well as to give commercial organisations time to ensure their systems and controls are in line with the new Act. Certainly, this is sensible given that evidence of adequate procedures in place will serve as a defence to the corporate offence of failing to prevent bribery.
However, the new timetable has been met with cynicism from groups that campaigned for the legislation. It is feared that the extra time will allow the Government to water down the Act and make it easy for corporate bodies to wriggle off the anti-corruption hook. We shall have to wait until the Government's guidance is published in early 2011 to see whether the strict liability corporate offence retains its teeth.
For further information on the Bribery Act and recent developments, please click here.
This post was written by George Brown, Matt Stone, Simon Hart, Sarah Wolff, and Jim Sanders.
The Bribery Act 2010 (the "Act") which recently was passed by Parliament has far-reaching implications for any business which is either registered in the UK or which has any part of its operation in the UK. The breadth and importance of this legislation means that corporates and their senior officers would be well advised to familiarize themselves with the effects of this new law.
Why is this legislation important to you and your business? The Act includes:
- A new corporate offence of failing to prevent bribery: this is a strict liability offense: a company's guilt can be a result of an attempted or actual bribery on the company's behalf;
- "Senior officers" (including non-board level managers) can individually be held criminally liable for a company's bribery offenses;
- Extensive extra-territorial powers of prosecution similar to those found in the U.S. Foreign Corrupt Practices Act ("FCPA");
- Offenses apply to both public and private sectors (unlike the FCPA);
- No carve-out for facilitating or "grease" payments (unlike the FCPA)
- Conviction could mean debarment from all public sector contracts within the European Union.
This legislation comes at a time of increased international co-operation between regulators not only in matters relating to bribery, including enforcement of the FCPA, but in connection with financial fraud, insider dealing and related activities. The extensive powers provided by the Act will be used by UK enforcement agencies such as the Serious Fraud Office ("SFO") to clamp down on corrupt behavior. The Bill received Royal Assent on 8 April 2010 and its various provisions are likely to be bought into force over the next six months.
To view the entire client alert, please click here.