Moyer: Over the last year enforcement actions under the Foreign Corrupt Practices Act - the "FCPA" - reached an all-time high. There were more cases than ever before, higher penalties than ever before, an unprecedented string of cases arising in the M&A context, and the imposition of innovative sanctions not previously used. Both Justice Department and SEC officials have publicly stated that FCPA enforcement has been given priority status in their agencies.
Moreover, fueled by new Sarbanes-Oxley requirements and by insistent government encouragement, corporations have made more voluntary disclosures than ever before. These disclosures have, in turn, highlighted issues of how and to what extent companies receive more lenient treatment for voluntary disclosure, full cooperation, and waiver of the attorney-client privilege.
As corporate counsel, how have you and your companies been affected by this new climate, either in terms of how you think about FCPA issues and how you respond to them?
Weissman: I do not think the "new climate" has greatly affected the way Lockheed Martin thinks about and responds to FCPA issues. We have had a rigorous FCPA compliance program in place since the formation of Lockheed Martin Corporation in 1995. We have had a zero tolerance policy for FCPA violations since our formation. Our zero tolerance policy is independent of the current enforcement climate.
Baldassano: Let me first point out that I am not a member of the Law Department of Schering-Plough (although I am a lawyer and have worked on FCPA matters for Justice and in the private sector); my task is to work with the senior management team to redefine and re-implement Schering-Plough's compliance program. In this enforcement environment it is more critical than ever to raise awareness among our employees. We train, train, train. We're in the pharmaceutical business, and many of our customers are government employees - for that reason we place a good deal of emphasis on explaining what good relationships with our customers should be. We live by three principles that have international appeal: (1) we don't buy business; (2) we only hire doctors when we need them and pay fair prices for their services: (3) our promotional messages are always consistent with our labels. We feel these three defining principles protect us from FCPA and other marketing risks world-wide. It is also helpful to have the right tone at the top led by our CEO Fred Hassan who insists on integrity in all business matters.
Lytton: We take potential FCPA issues very seriously. We are a global company doing business in over a hundred countries around the world. In some of those countries, there has not been a tradition and a culture where a commitment to compliance with anti-bribery laws has been a priority. We have to make sure that it is a priority not only for our employees but for those with whom we do business. We are taking a very proactive approach to train our people. They have very practical questions and want to do the right thing. But, they need to know where the lines are drawn between appropriate and legal entertainment, and improper gratuities or payments. What may be crystal clear to someone sitting in the United States may be far less clear to someone in a small town in Brazil or China. When a potential issue comes to our attention, we immediately investigate and take appropriate action. Where voluntary disclosure is appropriate, we discuss the matter with the Department of Justice and the SEC. A concern that I have heard from some General Counsel is whether a company with many thousands of employees will be penalized when they are trying to do the right thing and make a voluntary disclosure. How the government responds to voluntary disclosures is being closely watched by companies.
Moyer: In some celebrated recent cases, companies have gone voluntarily to enforcement with FCPA issues while a merger was pending but before closing. In each instance, the objective was to resolve outstanding FCPA issues prior to the completion of the merger transaction. Implicit in each of these cases was the concern that the acquiring company would risk successor liability for prior violations of the target company unless the issues were resolved with enforcement officials prior to closing. In each of these instances, save one, this process ended with a final disposition of the open issues prior to the closing deadline and the avoidance of successor liability. At the same time, however, resolving the open issues required massive, costly investigations and resulted in harsh penalties. In one instance, the merger collapsed because the deadline was not met. What do you see as some of the practical consequences of conducting pre-merger FCPA due diligence, of voluntarily disclosing suspected FCPA violations pre-merger, and of making the resolution of FCPA issues a pre-condition of closing?
Weissman: Lockheed Martin has no desire to acquire an FCPA violation. This makes effective pre-merger FCPA due diligence critical. It also makes the resolution of FCPA issues a pre-condition of closing. Obviously, thorough FCPA due diligence and resolution of any FCPA issues can be a time-consuming process under some circumstances. This puts a premium on effective cooperation between us and a proposed acquiree and requires an attitude of openness and cooperation with the Department of Justice and the SEC. If FCPA issues exist, they need to be identified, voluntarily disclosed to the enforcement agencies and resolved as quickly as possible.
Baldassano: Pre-merger due diligence of FCPA matters is the responsible thing to do, but it requires negotiation with all parties. It is expensive, takes a lot of time and will inevitably delay the transaction. There are many unknowns to be run down, and matters can become quite complicated. You may think you have uncovered everything there is to know about an event or series of events, but you don't have the subpoena power and the same leverage as the government in doing investigations. Another issue is the waiver of the attorney-client privilege which may come about in the course of pre-merger disclosure. In this day of transparency and Sarbanes-Oxley, the decision on disclosure may be made for you depending on the facts and circumstances.
Lytton: In a situation where a deal is pending for either the purchase, merger or disposition of a company or a unit of a company, and an issue is flagged, FCPA due diligence must be conducted and any issues resolved promptly. It can be expensive and time consuming. Nonetheless, there really is no substitute for adding this to the due diligence list of items that need to either be closed or accounted for in contemplation of closing the deal.
Moyer: For 20 years, the United States was the only country in the world with a law prohibiting bribery of foreign government officials. Now, with multiple international conventions in place, more than 60 other countries have laws similar to the FCPA, but enforcement remains spotty. An OECD official recently reported that about half of the countries that are signatories to the OECD anti-corruption convention have investigations or prosecutions underway. What is your sense of the amount of progress that has been made in leveling the proverbial "playing field"? As a practical matter, are U.S. companies still at a competitive disadvantage?
Weissman: I believe that some progress has been made in raising the awareness of non-U.S. companies of the need for anti-bribery compliance. I do not believe, however, that the "playing field" has been leveled yet for U.S. companies. I do not think this will happen until some of the other OECD countries have actually brought enforcement actions and imposed penalties on companies and individuals within their jurisdictions for directly or indirectly paying or offering bribes to foreign officials.
Baldassano: I agree that the situation is better but there is by no means a level playing field. As I travel around the world, my discussions about the critical need to subscribe to FCPA and anti-bribery principles is no longer a foreign message as it was five years ago. Because business people understand and agree with this message shows that we are making progress. Without enforcement, however, things will not vastly improve.
Lytton: Companies that are subject to the FCPA are still at a disadvantage because there is far from unanimity in terms of philosophy or practice in some countries about these issues - especially very poor countries where the public officials are woefully underpaid. Having said that, I think there has been a general increase in the recognition by other countries that this is an issue that must be recognized and dealt with. But, we are a very long way from having a level playing field in this area.
Moyer: The art and science of conducting internal investigations to assess and respond to possible violations of law have long been a topic of interest to corporate general counsel. Recent cases have suggested, however, that the FCPA context presents some new questions. Internal investigations of possible FCPA violations not only require substantive knowledge of the law and how it is being enforced, but also perhaps better planning and greater urgency than in the past. For example, how does one best anticipate the enforcement agency's question of whether you have taken steps to satisfy yourself that the problem you are disclosing is limited to a particular country or business unit and is not systemic throughout the company? And given that the cost of some recent investigations conducted under time pressure have reached the tens of millions of dollars, how can you best manage the costs of an internal investigation without the risk of being seen as trying to restrict its scope? How do you deal with these issues and do they enter into your selection of outside counsel?
Weissman: The way you can best anticipate such a question from an enforcement agency is to ensure that you've done a thorough due diligence on the problem you're disclosing in advance. You need to know before going to the enforcement agency whether the problem you are disclosing is limited to a particular country or business unit and not systemic. If you have a good compliance program, if similar problems have not arisen in the past and there is no indication of similar problems in other countries or business areas, and if the problem appears to be based on particular or unique facts and circumstances, you should be able to demonstrate that.
Baldassano: Many multinationals do business in over 150 countries. How do you do investigations in this number of countries, especially where there are no allegations of wrongdoing? One technique to determine if there are any endemic problems is to conduct a self-assessment using internal resources at company locations around the world, being guided by earlier experiences that caused you to investigate in the first place. As a hypothetical, assume you have a problem with an off-book account which people in the company have been using as a slush fund to pay government officials. You would then take that experience as a model for testing whether the same off-book accounts exist elsewhere. If the test proves no further violations and presents no additional indicators of wrongdoing, you should be able to convince the government you do not have a like problem in other countries. How do you keep outside counsel from doing phantom investigations where there are no allegations of wrongdoing? You want an outside counsel who is willing to work with your internal resources worldwide. I would look for outside counsel that recognizes that he/she can add value by guiding the self-assessment, not by sending lawyers to countries all over the world to conduct investigations
Lytton: Fundamentally, the government is going to have to have trust in the people whom they are dealing with to conduct the investigations, review the results and set the right "tone at the top" going forward in a company. The people who work on a matter for a company must have a solid reputation for integrity. Internal investigations are very expensive and time consuming. Some allegations turn out to be absolutely baseless or inaccurate, raising no legal issues - though they could raise management or business issues. A company has to be prompt in separating those matters that do not raise legal issues, and determine when and how to investigate those that do. Unfortunately, there is almost no "cheap" way to get the job done. But, selection of counsel who both the company and the government can trust is essential.
Moyer: The standard for FCPA compliance programs continues to rise. Each year, so-called "best practices" become more ambitious as enforcement officials articulate new principles and impose new compliance obligations in FCPA settlements. Revisions to the Sentencing Guidelines suggest that the appropriate question now is not whether a company has an FCPA compliance program or even whether it has all of the appropriate elements. Rather, the question has become whether a company's compliance program has succeeded in creating a "culture of compliance" within the company. What are the implications, and the challenges, of such a standard for American companies?
Weissman: Creating a "culture of compliance" within a company is critical to an effective FCPA compliance program. The best written compliance program in the world, the best FCPA policy, and the best due diligence procedure on international consultants are all worthless if they're not respected and followed and if the company's management and employees are not personally committed to them. Such a "culture of compliance" arises through the commitment of a company's most senior management, on-going training, and constant vigilance and attention to ensuring strict compliance.
Baldassano: Culture is the most important element in the success of a program designed to prevent fraud. The culture that governs our company is "leading with integrity." This helps our employees when faced with a government employee with his hand out to say "no." The compliance department can explain the law and train our people as to why it's good business to work in an anti-bribery environment, but it is our tone at the top and the support we give our employees who exhibit business integrity that assures us that our program is working. Business integrity is good business.
Lytton: The practical challenge we all face is that there will never be a defect free organization of human beings. Whether a political entity, a governmental entity or a business entity - someone may ignore clear messages and rules and violate a company's policy and the law. The fact that a violation occurs is not proof that the entity failed to set the right tone or the right culture. What we all really strive for is making sure that when a problem does arise - as it inevitably will in such large organizations - that the company acts promptly and effectively and that the law enforcement agencies will be as surprised as the company that it could have happened notwithstanding the company's best efforts. And, Arthur Anderson should have taught us many lessons - but one is that punishing a large organization for the misdeeds of a few inevitably results in inequities and hardships on people that are unjustified and unfair.
Moyer: Five of the last six FCPA enforcement actions have included in the settlement a requirement that the company retain an "independent compliance consultant." These consultants are charged with evaluating the company's existing compliance program, making binding recommendations on program enhancements, and monitoring program implementation. Independent compliance consultants, or monitors, are hired and paid by the company, but directed by the SEC, to whom they also have some reporting or disclosure obligations. These hybrid arrangements, although still in their infancy, are raising many questions, including questions of privilege, which the company can't invoke with respect to any communications between the consultant and the agencies. Do you have initial reactions to this new phenomenon, which enforcement officials suggest may become routine elements of FCPA settlements, and the practical challenges they may present?
Weissman: My only comment is that the appointment of an "independent compliance consultant" is an indication that the company's compliance program was non-existent or broken and that the enforcement agencies did not believe that the company could fix the problem on its own. The best way to deal with this recent phenomenon is to prevent it by having and maintaining an effective FCPA compliance program.
Baldassano: Increasingly, SEC settlements include the requirement for an independent monitor. If the independent monitor has good experience in the international arena, his/her assessment could have value. I think the success of independent monitors will depend on the growth of expertise in this area. As more and more reviews are done, we should see certain best practices develop.
Lytton: The SEC's reasoning behind imposing independent monitors is to ensure that the companies violating the FCPA remain committed to compliance after they settle with the SEC. From that perspective, a monitor sounds like a good idea. But the effectiveness of a monitor in a large organization is still an open question. There is simply no substitute for the management and Board of the company setting the right tone at the top, adopting the right policies and procedures, having an effective training and audit program, and demonstrating a commitment to ethics, compliance and accountability.