@Risk

Just so you don’t think that all of the anti-bribery exposure is in the US or the UK, France and the US recently announced their first joint investigation and prosecution.

Total, S.A., a French oil and gas company that trades on the New York Stock Exchange, has agreed to pay a $245.2 million monetary penalty to resolve charges related to violations of the Foreign Corrupt Practices Act (FCPA) in connection with illegal payments made through third parties to a government official in Iran to obtain valuable oil and gas concessions.

As part of the agreed resolution, the US DOJ filed a criminal complaint in U.S. District Court for the Eastern District of Virginia charging Total with one count of conspiracy to violate the anti-bribery provisions of the FCPA, one count of violating the internal controls provision of the FCPA, and one count of violating the books and records provision of the FCPA.  The department and Total agreed to resolve the charges by entering into a deferred prosecution agreement for a term of three years.  In addition to the monetary penalty, Total also agreed to cooperate with the department and foreign law enforcement to retain an independent corporate compliance monitor for a period of three years and to continue to implement an enhanced compliance program and internal controls designed to prevent and detect FCPA violations.

In addition, the U.S. Securities and Exchange Commission (SEC) entered into a cease-and-desist order against Total in which the company agreed to pay an additional $153 million in disgorgement and prejudgment interest.  Total also agreed with the SEC to comply with certain undertakings regarding its FCPA compliance program, including the retention of a compliance consultant.

As part of the joint investigation, French enforcement authorities announced that they had requested that Total, Total’s Chairman and Chief Executive Officer, and two additional individuals be referred to the Criminal Court for violations of French law, including France’s foreign bribery law.

In sum, between 1995 and 2004, at the direction of an Iranian official, Total corruptly made approximately $60 million in bribe payments under agreements for the purpose of inducing the Iranian official to use his influence in connection with Total’s efforts to obtain and retain lucrative oil rights.  Total mis-characterized the unlawful payments as “business development expenses” when they were, in fact, bribes designed to corruptly influence a foreign official.  Further, Total failed to implement effective internal accounting controls, permitting the consulting agreements’ true nature and true participants to be concealed and thereby failing to maintain accountability for assets.

Expect to see more of this kind of joint cooperation as more countries get together to go after global violators.

On May 30, the SEC issued new guidance on the Conflict Minerals Rule. These FAQs are not rules, regulations, or statements of the Commission. Further, the Commission has neither approved nor disapproved these FAQs. Here is a summary of key elements. The full FAQ can be accessed here.

Product Packaging:

Question:

An issuer manufactures or contracts to manufacture a package or container that contains a conflict mineral, and the issuer uses the package or container in the display, transport, or sale of a product the issuer also manufactures or contracts to have manufactured.  Would a conflict mineral necessary to the functionality or production of the package or container also be considered necessary to the functionality or production of the product under the rule?  What if the container or packaging is necessary to preserve the product until the time the product is purchased or used?

Answer:

No.  Only a conflict mineral that is contained in the product would be considered “necessary to the functionality or production” of the product.  The packaging or container sold with a product is not considered to be part of the product.  Once the consumer starts to use a product, the packaging is generally discarded.  This conclusion is true even if a product’s package or container is necessary to preserve the usability of that product up to and following the product’s purchase.  If, however, an issuer manufactures and sells packaging or containers independent of the product, the packaging or containers, in that circumstance, would be considered a product.

Generic Components:

Question:

If a product manufactured by an issuer or contracted by an issuer to be manufactured contains a conflict mineral solely because the conflict mineral is in a “generic” component included in the product, does the issuer need to conduct a reasonable country of origin inquiry regarding the origin of the conflict mineral in the generic component?  We note that the issuer has not contracted to manufacture the generic component.

Answer:

Yes.  An issuer would be required to conduct a reasonable country of origin inquiry with respect to conflict minerals included in generic components included in products it manufactures or contracts to manufacture.  In this regard, there is no distinction between the components of a product that an issuer directly manufactures or contracts to manufacture and the “generic” ones it purchases to include in a product.

Logo on Generic Product:

Question:

Is an issuer that specifies that its logo be etched into a generic product that is manufactured by a third party considered to be “contracting to manufacture” the product?

Answer:

No.  The Commission in the adopting release stated that an issuer is not considered to be “contracting to manufacture” a generic product if its actions involve no more than “affixing its brand, marks, logo, or label to a generic product manufactured by a third party.”  Etching or otherwise marking a generic product that is manufactured by a third party, with a logo, serial number, or other identifier is not considered to be “contracting to manufacture.”

Read the entire FAQ as linked above for more questions.

Aggressive prosecutions of FCPA violations continue, as evidenced by this recent announcement:

The United States Attorney for the Southern District of New York, the DOJ, and the FBI, recently announced the unsealing of a Criminal Complaint against two employees of a U.S. broker-dealer, and a senior official in Venezuela’s state economic development bank, arising from a conspiracy to pay bribes  for directing financial trading business to the Broker-Dealer.  All three defendants were presented yesterday in federal court in Miami and remain in custody.

From April 2009 through June 2010, the defendants participated in a bribery scheme in which the bank official directed trading business she controlled to the Broker-Dealer, and in return, agents and employees of the Broker-Dealer split the revenue the Broker-Dealer generated from this trading business with her. During this time period, the Broker-Dealer generated over $60 million in mark-ups and mark-downs from trades with with the bank. Agents and employees of the Broker-Dealer, devised a split with the bank official of the commissions paid by to the Broker-Dealer. Emails, account records, and other documents collected from the Broker-Dealer and other sources reveal that the official received a substantial share of the revenue generated by the Broker-Dealer for bank-related trades. Specifically, the official received monthly kickbacks from Broker-Dealer agents and employees that were frequently in six-figure amounts.

A DOJ official said: “Today’s announcement is a wake-up call to anyone in the financial services industry who thinks bribery is the way to get ahead. The defendants in this case allegedly paid huge bribes so that foreign business would flow to their firm. Their return on investment now comes in the form of criminal charges carrying the prospect of prison time. We will not stand by while brokers or others try rig the system to line their pockets, and will continue to vigorously enforce the FCPA and money laundering statutes across all industries.”

Global manufacturers are putting their supply chains at the center of their business strategies to serve as the foundation for operational efficiency and collaborative innovation, according to KPMG’s 4th annual Global Manufacturing Outlook - Competitive Advantage- Enhancing Supply Chain Networks for Efficiency and Innovation. And improving risk controls is a key part of these strategies, as it is tied for second place in the priority ranking of supply chain initiatives by survey respondents. Let’s take a closer look at what the report says about the importance of risk management as it relates to visibility and collaboration.

As the supply chain takes center stage in the business strategies of global manufacturers, executives continue to eye tepid economic growth with subdued optimism: reducing cost structure (51 percent) again leads the ranking as a priority, followed by sales growth (36 percent) and improving risk controls (36 percent). In fact, fifty-eight percent of respondents say they will regionalize/localize supply chains to improve the management of their supply chain risk.

In order to more effectively identify and manage this risk, companies are viewing their channel partners as more of a “network”. For companies of all sizes, genuinely closer working relationships between suppliers and other partners will be critical to maximizing their responsiveness to changes in the market. More effective and efficient collaboration enables firms to optimize inventory, logistics, and other operational costs.

Effectively managing supply risk also relies on deep supply chain visibility, the new watchword in supply chain optimization and a major opportunity for many companies. Many companies have a substantial opportunity to boost performance, agility, and resilience by improving visibility across their supply chain network. Nearly half of the companies say they lack visibility beyond their Tier 1 partners. And only 9 percent say their firm can assess the impact of supply chain disruptions within hours, although for the biggest companies (revenues of US$5 billion or more) this rises to 20 percent.

Read the entire report here.

The Securities and Exchange Commission today announced a non-prosecution agreement (NPA) with Ralph Lauren Corporation in which the company will disgorge more than $700,000 in illicit profits and interest obtained in connection with bribes paid by a subsidiary to government officials in Argentina from 2005 to 2009. The misconduct was uncovered in an internal review undertaken by the company and promptly reported to the SEC.

The SEC has determined not to charge Ralph Lauren Corporation with violations of the Foreign Corrupt Practices Act (FCPA) due to the company’s prompt reporting of the violations on its own initiative, the completeness of the information it provided, and its extensive, thorough, and real-time cooperation with the SEC’s investigation. Ralph Lauren Corporation’s cooperation saved the agency substantial time and resources ordinarily consumed in investigations of comparable conduct.

The NPA is the first that the SEC has entered involving FCPA misconduct. NPAs are part of the SEC Enforcement Division’s Cooperation Initiative, which rewards cooperation in SEC investigations. In parallel criminal proceedings, the Justice Department entered into an NPA with Ralph Lauren Corporation in which the company will pay an $882,000 penalty.

“When they found a problem, Ralph Lauren Corporation did the right thing by immediately reporting it to the SEC and providing exceptional assistance in our investigation,” said George S. Canellos, Acting Director of the SEC’s Division of Enforcement. “The NPA in this matter makes clear that we will confer substantial and tangible benefits on companies that respond appropriately to violations and cooperate fully with the SEC.”

Kara Brockmeyer, the SEC’s FCPA Unit Chief, added, “This NPA shows the benefit of implementing an effective compliance program. Ralph Lauren Corporation discovered this problem after it put in place an enhanced compliance program and began training its employees. That level of self-policing along with its self-reporting and cooperation led to this resolution.”

According to the NPA, Ralph Lauren Corporation’s cooperation included:

• Reporting preliminary findings of its internal investigation to the staff within two weeks of discovering the illegal payments and gifts.
• Voluntarily and expeditiously producing documents.
• Providing English language translations of documents to the staff.
• Summarizing witness interviews that the company’s investigators conducted overseas.
• Making overseas witnesses available for staff interviews and bringing witnesses to the U.S.

According to the NPA, the bribes occurred during a period when Ralph Lauren Corporation lacked meaningful anti-corruption compliance and control mechanisms over its Argentine subsidiary. The misconduct came to light as a result of the company adopting measures to improve its worldwide internal controls and compliance efforts, including implementation of an FCPA compliance training program in Argentina.

Under the NPA, Ralph Lauren Corporation agreed to pay $593,000 in disgorgement and $141,845.79 in prejudgment interest.

The SEC took into account the significant remedial measures undertaken by Ralph Lauren Corporation, including a comprehensive new compliance program throughout its operations. Among Ralph Lauren Corporation’s remedial measures have been new compliance training, termination of employment and business arrangements with all individuals involved in the wrongdoing, and strengthening its internal controls and its procedures for third party due diligence. Ralph Lauren Corporation also conducted a risk assessment of its major operations worldwide to identify any other compliance problems. Ralph Lauren Corporation has ceased operations in Argentina.

Clearly, FCPA compliance and due diligence programs have tangible financial benefits.