Companies may wish to examine their historical hires.
According to Cohen and Knox, if a company can show that its employment offer was backed by “robust FCPA considerations and based on legitimate considerations, it may withstand investigative scrutiny.”
Fetterman said that companies should be wary of people who do not come in through the company’s ordinary employment practices. “If a foreign official’s family member is
recommended to the company, the company should scrutinize the reason for that recommendation. The company’s FCPA compliance group or legal counsel should look for any connection between the recommendation and work that the company has, or hopes to obtain, from the government entity at which the job applicant’s relative works,” he explained.
In DOJ Opinion Releases 84-01 and 82-04, the DOJ indicated it did not intend to take any action against the companies seeking the opinions based on the fact patterns presented. In 84-01, an American firm wanted to hire an entity as a marketing representative in a foreign country. That entity was run by relatives of that foreign country’s head of state. In 82-04, an American company hired the brother of a foreign official as the agent for a transaction in that country without knowing the familial relationship.
In both of those cases, the companies obtained strong anti-corruption representations that factored into the DOJ’s opinions. (In the case of 84-01, before the hiring, and in the case of 84-02, after, the company learned of the foreign official relationship.) Cohen and Knox wrote that while each
case is fact specific, generally, companies should take two steps when hiring the relative of a foreign official: First, incorporate a broad set of FCPA compliance representations in a written contract and second, establish and document that the new hire is “legitimately qualified, whether standing alone or compared to others under consideration for the same position.”
The JPMorgan investigation serves as a reminder that the DOJ and SEC are still actively pursuing bribery in all of its forms. Companies subject to the FCPA and hiring internationally should take this opportunity to reevaluate their processes and safeguards. “Prospectively, companies should assess their FCPA compliance policies to make sure that they have appropriate measures in place to avoid both
actual FCPA violations and the appearance of possible FCPA violations which could trigger unnecessary, expensive and distracting investigations,” Fetterman said.
As for JPMorgan specifically, hiring is only one aspect of JPMorgan’s business that regulators are scrutinizing: it faces six separate investigations from the DOJ. See, e.g.,
“JPMorgan Chase Anti-Money Laundering Consent Orders Highlight the Role of Risk in Structuring Compliance Programs,” The FCPA Report, Vol. 2, No. 2 (Jan. 23, 2013).
The August 7 filing revealed that it could be forced to absorb
$6.8 billion in future legal losses above its existing reserves.
See “Estimating Loss: When and How to Calculate and Disclose Financial Reserves for FCPA Settlements (Part Two of Three),” The FCPA Report, Vol. 2, No. 14 (Jul. 10, 2013).
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By Joe Mont
T
he winter Olympics are drawing global attention to the Russian re-sort town of Sochi that is hosting the games and, less favorably, to the coun-try’s longstanding reputation as a haven for bribery and corruption.The private-public nature of a project the size of hosting an Olympics makes it a potential magnet for bribery and corrup-tion. With an abundance of contract work for domestic and foreign construction firms, support services, and security and hospitality providers, among others, the competitive nature of getting that work can encourage the open palms of public officials and cut-the-line handouts from eager companies. Add thousands of com-pany executives into the mix—sponsors of the games and those trying to cut longer-term deals in the host country—and the risk that someone will see value in side-stepping anti-corruption laws increases.
When the host country has a reputa-tion and history of corrupreputa-tion like the one Russia has, however, the risks are even more elevated. Corruption watchdog Transparency International puts Russia among the most corrupt of the world’s developed economies, ranking Russia 127 out of 175 countries on perceived level of public sector corruption. Russia ranks be-hind such countries as Albania, Colum-bia, and Niger.
The Winter Olympic Games are doing little to dispel that perception. The price tag for infrastructure needed to host the event has a price tag upwards of $50 bil-lion, the most ever spent to host an Olym-pic games—summer or winter—and al-ready there are allegations of widespread corruption.
The cost itself isn’t the problem says Boris Nemtsov a former deputy prime minister and longtime rival of President Vladimir Putin. “The Winter Olympics in Sochi has become one of the most mon-strous scandals in the history of modern Russia,” he wrote in an article that ap-peared in The Interpreter, a publication of the Institute of Modern Russia, a think tank devoted to fostering democratic and economic development in Russia. “The
scale of expenses is unprecedented—
more than $50 billion—out of which $25 to $30 billion have been embezzled. The money stolen could have paid for 3,000 high-quality roads, housing for 800,000 people, or thousands of ice palaces and soccer fields all over Russia. None of that has happened. Only those oligarchs and companies close to Putin have enriched themselves.”
Even the appearance of corruption must be disconcerting for Russian officials who, attempting to reform its image, have enacted new laws intended to mirror the United State’s Foreign Corrupt Practices Act and crack down on bribery as a way of doing business in Russia. Foreign com-panies looking to do business there, either short-term for the games or long-term afterwards, however, may be alarmed by the new law’s substantial loopholes and fear deals in Russia will tangle them in the FCPA’s enforcement net.
Still, some say the country is serious about getting a handle on corruption. “It looks like Russia is trying to crack down on corruption” says Daniel Fetterman, a former federal prosecutor who is now a partner at the law firm Kasowitz, Benson, Torres & Friedman. “Russia is a country where corruption historically has been fairly rampant. It is beneficial for Russia to show the global economic community that it appears to be serious about com-bating corruption and bribery. However, it remains to be seen whether these anti-corruption and anti-bribery regulations will be effective.”
“The Winter Olympics will be a good testing ground since there has been tre-mendous economic activity surround-ing the development and construction of facilities, arenas, and infrastructure, and already there have been numerous public-ly reported allegations of corruption for significant amounts of money,” he adds.
“The question is whether we will see any real, meaningful enforcement of the new anti-corruption regulations.”
New Law, New Loopholes
O
n the surface, Russia appears to be working to counter its reputation as a haven for corruption. It put a sweep-ing new anti-corruption law into effect on Jan. 1, 2013, that established a broad definition of what constitutes bribery.Beyond just offerings of cash, securities, and property, the law adds prohibitions for kickbacks, low- or no-interest loans, home renovations, debt forgiveness, free and discounted vacation packages, loans of cars or other expensive items, and the transfer of intellectual property rights.
In December, nearly a year later, a high-profile prosecution signaled that the law might indeed have some teeth. A former public official was ordered to pay the equivalent of $29 million—the largest fine ever issued in Russia—for taking a bribe. That same month, Russian officials trumpeted that more than 1,600 Russian lawmakers and other government officials have been indicted for corruption over the past two years, offenses estimated to have cost state coffers as much as $9 billion.
Closer scrutiny of the law and a related Supreme Court resolution, however, re-veal some potentially problematic loop-holes, says John Carney, a former senior enforcement lawyer with the Department of Justice and SEC who is now a partner at law firm BakerHostetler. He says the Su-preme Court’s resolution, “unequivocally states that a payment made to a third par-ty who is not a government official, nor a relative of the government official, is not considered a ‘bribe’ under Russian law.”
“The exemption for third parties under the Russian anti-corruption framework may create enough room to drive a Mack truck through,” Fetterman says. “By
con-“The Olympics will be a good testing ground ... The question is will we see any real, meaningful enforcement of Russia’s new laws.”
Daniel Fetterman, Partner, Kasowitz, Benson, Torres & Friedman
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specifically prohibit using charitable con-tributions to influence public officials, and enforcement actions have under-scored the importance placed on the pro-hibition. In December 2012, for example, drug maker Eli Lilly paid $29.4 million to settle FCPA allegations by the SEC that employees used offshore marketing agree-ments to make payagree-ments to third parties chosen by government officials and made donations to charities at the request of government officials.
“Here’s the problem, these days you really don’t have bags of cash being hand-ed from one party to the next to effect a bribe,” says Peter Spivack, co-leader of the Investigations, white-collar, and fraud practice at the law firm Hogan Lovells.
“So much now involves indirect benefits, or third parties that act as conduits. That’s one of the avenues that continually bedev-il companies.”
Concerns for Foreign Companies
C
arney says international companies operating in Russia need to be aware of the distinctions created by the Rus-sia’s Supreme Court resolution. He and a colleague, Yulia Fradkin, an associate at BakerHostetler, recently addressed this in a client memo. “The Russian law carve-outs will do nothing to protect companies making unlawful payments from mer-ciless SEC and DoJ prosecution,” they wrote. “Previous enforcement actions have confirmed that payments made un-der the thin veneer of charitable donations will be hounded.”In effect, Russian officials may re-quest payments which are perfectly legal under Russian law, but will put the busi-ness at jeopardy of harsh prosecution in the United States. The FCPA “local law defense,” though a potential shield to
li-in the anti-corruption law is, technically, only guidance and not a law or regulation, the standard necessary for the FCPA-pro-vided defense.
“Discount it altogether in planning day-to-day business activities in Russia,”
Carney suggests.
Peter Zeidenberg, litigation partner with the law firm DLA Piper’s FCPA practice, says that foreign companies
tips being shared with the United States and United Kingdom, facilitating their own investigations. While Zeidenberg agrees that inconsistencies in the Russian law must be understood by companies doing business there, but he doesn’t think that should have a chilling effect.
“If there are good business opportu-nities in Russia, companies will want to take advantage of that, but must go in
The following, from a client advisory authored by the law firm Morgan, Lewis & Bockius, are some of the legislatively required compliance requirements for Russian companies.
» Designating departments and officers who are responsible for the prevention of bribery and re-lated offenses
» Cooperating with law enforcement authorities
» Developing and implementing standards and procedures designed to ensure ethical business con-duct
» Adopting a code of ethics and professional conduct for all employees
» Preventing and resolving conflicts of interest
» Preventing the creation and use of false or altered documents
» Russian authorities the right to expropriate property involved in corrupt activities if the parties cannot show evidence of its lawful acquisition.
If a company fails to put the recommended measures in place and an employee (or another person acting on the company’s behalf) offers, promises, or gives a bribe, this will be evidence that the com-pany has not done everything possible to prevent corruption. Accordingly, “unlawful remuneration on behalf of a legal entity”, the company could face a substantial administrative fine. Such fines may range from up to three times the amount offered for performing illegal services (but not less than one million rubles) to one hundred times the amount offered (but not less than one hundred million rubles) in the case of a very large amount (i.e., exceeding 20 million rubles, as specified in the current version of the Administrative Violations Code).
Other amendments to the Anti-Corruption Law included a new requirement for government officials and civil servants (i.e., persons included in specific lists maintained under federal laws and the regu-lations of the Russian Central Bank) to provide information about their personal expenditures, thus facilitating efforts to identify suspicious transactions.
Source: Morgan, Lewis & Bockius.
RUSSIAN COMPLIANCE DEMANDS
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particularly vigilant in making sure ev-erything is done as it should be. They should not allow cash payments, and they should scrutinize expense accounts—but
It’s too soon to tell whether the Olym-pics will be a catalyst for more of those long-term business opportunities, or if the global scrutiny the games have
pics—will be under tremendous scrutiny to see if its own new anti-corruption law is up to the task of keeping thousands of related bids and contracts clean. ■
US investment banks may be forced to change the way they hunt for business in Asia, Latin America and Africa as regulators stateside start to press investigations under the US Foreign Corrupt Practices Act.
The US Securities and Exchange Commission is investigating hiring practices in Hong Kong at JP MORGAN , the second-largest US bank in terms of market capitalisation. At a time when US regulators are placing more scrutiny on the operations of US financial institutions beyond their shores, the move has put other large American investment banks on notice.
The SEC is investigating if JP Morgan hired the offspring of well-connected officials in China’s financial and railways industries in exchange for mandates.
The FCPA’s anti-bribery provisions make it illegal to offer or provide money or anything of value to officials of foreign governments or foreign political parties with the intent to obtain or retain business.
Depending on the circumstances of the recruitment, those hires may be considered bribes under the FCPA.
The employees in question no longer work at the firm, JP Morgan said. No charges have been brought against the bank at this stage.
Nonetheless, an SEC prosecution could cost banks tens of millions of dollars in fines and disgorgement of proceeds, according to a US lawyer.
Given how expensive and potentially damaging an FCPA investigation can be, lawyers recommend that companies put in place very strict protocols around the hiring of close relatives of government officials to avoid even the slightest suspicion of any violation.
For banks such as JP Morgan, however,
the investigation poses a number of problems. Several bankers have privately admitted that the practice is standard operating procedure in China – saying, frankly, it is how business is done. “It is rife throughout the industry,” said a Hong Kong-based headhunter.
Dealmakers in Greater China say the recruitment of bankers based on their connections (if not always blood ties) to politicians and local tycoons has been integral for foreign firms winning roles on big privatisations and other lucrative fundraisings.
“It’s something that’s widespread in the industry and not just in China or Asia.
Banks hire well-connected people,” said one Hong Kong-based IPO adviser.
First of many
JP Morgan may not be the only case – just the first one, said Daniel Fetterman, a former federal prosecutor who is now a partner at Kasowitz, Benson, Torres &
Friedman LLP. “This may be the first of many investigations,” Fetterman said.
Another attorney agreed, suggesting that
“everyone with a global platform is a little bit nervous that the SEC and Department of Justice will begin to look at every hire and every transaction. At a minimum, that could be very expensive,” he said.
JP Morgan also makes a tempting target.
“Bringing a high-profile case would generate a great deal of publicity that would serve to deter other institutions from improperly hiring family members of foreign officials,” Fetterman said.
The investigation of JP Morgan comes at a time when the DOJ and SEC have been building what many attorneys call a robust pipeline of FCPA cases. Despite the increasing number of ongoing
investigations, however, the number of FCPA cases has actually fallen dramatically from the peak in 2010 when the DOJ brought 48 actions and the SEC brought 26.
Last year the DOJ brought only 11 actions and the SEC brought 12. Through to June 30 of this year, the DOJ has brought 13 actions, while the SEC has lagged behind with only four.
“We are in an environment of aggressive FCPA enforcement,” Fetterman said. “Since the economic downturn, both the DOJ and SEC have committed significant resources to investigate FCPA cases.”
If the hires are in line with JP Morgan’s standard hiring practices, sources believe the SEC is unlikely to bring a case. If the hires do not pass scrutiny, however, it could mean trouble, despite claims that the practice is widespread.
“It is not a defense to argue that this is a common practice,” Fetterman said.
Still, in order for the SEC to be successful, the agency will need to demonstrate that those jobs were given with corrupt intent. Although the SEC is investigating JP Morgan, it could conclude ultimately that there was no FCPA violation, Fetterman said.
It may not be so black and white, as dealmakers in China argue that hiring based on relationships is perfectly legitimate. In banking, sometimes a good Rolodex can go further than financial numeracy, sources said.
“Being a relationship banker is all about relationships, so being connected is a qualification,” said the IPO adviser.
“Relationship bankers are often hired for the connections they can bring to the institutions.”
Philip Scipio , Timothy Sifert