Day: October 11, 2011

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Franchising and the FCPA

The Foreign Corrupt Practices Act (FCPA) applies to all US companies and individuals which conduct business overseas. FPCA practitioners recognize there are two components: (1) the anti-bribery component, handled by the Department of Justice (DOJ) and (2) the books and records components, handled by the Securities and Exchange Commission (SEC). None of this is new information and indeed, has been present it the FCPA since it was enacted in 1977. This breadth and scope of the FCPA make it mandatory that any business or person which conducts business overseas does so in compliance with the FCPA. One of the lessons learned from 2010 is that a business not traditionally thought of as high risk for FCPA compliance can still run afoul of the FCPA. In October, CB Richard Ellis, a global real estate firm, disclosed possible FCPA violations in China. As reported by the FCPA Blog, the Company reported in a SEC filing that its employees made payments for entertainment and gifts to Chinese government officials, which were discovered during an internal investigation. This blog will look at the franchising industry and explore its possible FCPA exposure.

The franchising model has been in vogue for many years. It has been a successful model in the US and now many corporations are looking at overseas expansion opportunities. Franchise law has become well developed across the US, with many states developing laws to protect the rights and obligations of both parties in a franchise agreement. According to an International Franchise Association survey nearly 1,600 franchise systems in 2008, “nearly two-thirds (61 percent) of respondents currently franchise or operate in non-U.S. markets and three-fourths (74 percent) plan to begin international expansion efforts or accelerate their current ventures immediately.”

There are no reported FCPA enforcement actions regarding franchisors. However, the factors in a franchise relationship would appear to lead to clear FCPA responsibility of the franchisor for its overseas franchisee’s actions. Additionally, court interpretation of the FCPA has held that it is applicable where conduct, violative of the Act, is used to “to obtain or retain business or secure an improper business advantage” which can cover almost any kind of advantage, including indirect monetary advantage even as nebulous as reputational advantage. As almost everyone knows, the FCPA prohibits payments to foreign officials to obtain or retain business or secure an improper business advantage. Nevertheless many US companies view franchisors as different from other types of more direct sales representatives, such as company sales representatives, agents, resellers or even joint venture partners, for the purposes of FCPA liability. However, the DOJ takes the position that a US company’s FCPA responsibilities extend to the conduct of a wide range of third parties, including the aforementioned company sales representatives, agents, resellers, joint venture partners and distributors. It does not take too great a leap of imagination to see that a franchise relationship could be contained within this interpretation. It does not take too many legal steps to see that a franchisee’s actions can impute FCPA liability to a US franchisor.

There are other factors, unique to the franchise relationship, which would point towards FCPA liability of the US franchisor. A US franchisor’s intent and the degree of control it exercises over its overseas franchisees’ operations are factors the DOJ/SEC might consider in determining whether to pursue an FCPA case against a franchisor for bribes made by one of its foreign franchisees. It is always in the financial interest of a US franchisor for its franchisees to be successful businesses. Additionally, most US franchisors require its overseas franchisee’s to use the same company name for branding.

How would all of this play out for a franchisor? As a franchisor moves into foreign markets there could well be the temptation to “grease the skids” and make payments or offer gifts to government officials, or their family members, to get the permits or permissions necessary to open and operate. In many countries, bribery is a common way of getting business done, and there can be tremendous pressure from local agents or franchisee candidates to follow regional customs and use bribes to become or remain competitive. Even if it is not the US franchisor’s own employees which engage in the FCPA violations, the US franchisor will still face the risk of an enforcement action if the franchisee’s employees engage in such conduct.

Most franchisors have thorough financial vetting requirements before allowing any person or business to become a franchisee. However, how many of these same business perform FCPA compliance due diligence on their prospective overseas franchises? How many US franchisors have FCPA compliance training programs? How many evaluate, on an ongoing basis, the FCPA compliance and program of their overseas franchisees? How many US franchisors have a compliance hotline or other reporting mechanism for any compliance violations made against their franchisees?

If you are a US franchisor, looking to expand overseas, one of the first things you should do is to perform a FCPA risk assessment and then use that risk assessment to implement a full FCPA compliance program within your company going forward. If you are a US franchisor which has international franchises but which has not previously reviewed your FCPA requirements, you should do so as soon as possible. If not, your FCPA exposure may be unlimited….

This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at tfox@tfoxlaw.com.
© Thomas R. Fox, 2011

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Heroes of Banking?

Ed. Note-I received the attached guest blog post. I certainly found it interesting that in the UK there might be a view of Ben Lawsky and Eric Holder as heroes for their fights against the banking industry. So presented for your Friday consideration: Do they deserve to be called heroes?

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Eric H. Holder and Benjamin M. Lawsky are names that you may not be familiar with, yet they’re fast becoming known as banking’s most feared men. Together, the men have issued numerous multibillion dollar fines to US and international banking institutions who have been accused of illegal or irresponsible actions.

Eric H. Holder worked as a United States Attorney before serving as a judge for the Superior Court of the District of Columbia. In 1997, he became Deputy Attorney General under the Clinton administration, and was elected as the country’s first African American US Attorney General in 2009, working under the Obama administration.

Like Holder, Benjamin M. Lawsky began his career as a United States Attorney, before becoming Chief Counsel to Senator Charles E. Schumer in Washington DC. However, Lawsky really made a name for himself back in 2011 when he became New York State’s first Superintendent of Financial Services. Lawsky is commonly referred to as a ‘Wall Street Cop’.

What Are Holder & Lawsky Aiming For?

Holder and Lawsky, although frequently grouped together due to their similar roles as the new ‘heroes of banking’, have taken different focuses in terms of bringing regulation back to the financial world. Holder has shown a dedication to many US and global banking institutions’ potential contribution to the 2009 financial crisis, which only recently has shown signs of recovery. The recession has had a significant impact on people all around the world, and Holder believes that the actions of major banks – trusted institutions – may have contributed significantly to the crisis. Holder has been focusing his attention on banks that may have concealed valuable information from investors at the time, and who demonstrated an ignorance of the market despite ongoing warnings regarding the state of the economy.

Lawsky, on the other hand, as Superintendent of Financial Services for New York, is more focused upon the lack of financial regulation not only within New York, but across the United States. It’s no secret that many regulators and Government officials have become what some might describe as ‘corrupt’, or, at the very least, consumed by the industry (evident in the fact that many illegal schemes already uncovered have been in place for decades and have apparently gone unnoticed until now). Currently, many financial institutions do not have anti-corruption policies in place, blamed on the unclear expectations of regulators. Even in terms of regulators who have been working above board, reports suggest that federal agents have acted too slowly to make a difference. One of the main reasons Lawsky has made such a name for himself is because he ‘went rogue’ and filed his own paperwork against banks.

What both Holder and Lawsky want is for illegal activity to be as it should be – illegal. However, they also want individuals to take responsibility for their actions. As Lawsky says, “If a bank commits a criminal act or if a bank commits serious regulatory violations, someone within that bank did it. The corporation is an inanimate thing”. This is reflected in Lawsky’s previous behaviour – although he has threatened multiple times to strip a bank of its licence, he is yet to do so.

Previously what has Lawsky done – is this a sign of what is to come in future years? Essentially is it possible that his past actions, which have not been followed through, represent what course of action he plans to take in the future. 

How is the Financial World Set to Change?

Between them, Holder and Lawsky have already made some dramatic changes to the financial world, uncovering numerous money laundering schemes and encouraging banks to admit to irresponsible behaviour. So far, we’ve seen Holder get Citibank to pay out $7 billion for approving mortgages to poor credit applicants prior to the financial crisis, we’ve seen Credit Suisse’s’ 20 year tax evasion scheme come to light, and we’ve seen Lawsky collect the largest lump sum settlement in the history of NY regulators, with Standard Chartered paying out $340 billion in relation to $250 billion worth of illegal transactions disguised as just $14 billion.

Is Lawsky more of a threat than Holder?

Is Holder playing it safe by going after banks that concealed valuable information from investors?

Is Holder focusing on the lesser threat of concealment, rather than greater threat of lacking AML systems in banks?

Is Lawsky looking to make examples out of banks rather than punish them criminally and/or ruin their business/reputation?

The actions of Holder and Lawsky aren’t expected to transform the financial world instantaneously. Instead, small changes are expected at first, such as alterations in life insurance deals to prevent ‘shadow insurance’ – where companies are using funds for multiple purposes and not retaining enough to repay clients. Bigger changes are to be expected in the long term (such as?). Lawsky acknowledges that some schemes are very well hidden, but become more transparent over time. The effects of Holder and Lawsky are anticipated to be evident for decades.

Some additional questions for your consideration. 

  • Are the punishments harsh enough?
    • Fines vs. criminal charges/damage to business

Heroes?

  • Lawsky more so than Holder – going out on his own, taking matters into his own hands – unafraid to fight for what is right
    • Holder working alongside DoJ – does he have free reign to take action on the banks or does he have to be abide by the DOJ’s rules and regulations. Resulting in reduced punishments for the corporations?