In today’s edition of Daily Compliance News:
On April 24, 2017, Holcim Group issued a press release announcing the conclusion of the investigation into the payment of its subsidiary LaFarge to designated terrorist organizations. The Press Release stated in part, “The Board has now concluded the independent investigation and confirmed that a number of measures taken to continue safe operations at the Syrian plant were unacceptable, and significant errors of judgement were made that contravened the applicable code of conduct. The findings also confirm that, although these measures were instigated by local and regional management, selected members of Group management were aware of circumstances indicating that violations of Lafarge’s established standards of business conduct had taken place. . . .”
This statement is but one step in a lengthy and sordid process where LaFarge SA (before it merged with Holcim) made millions of dollars in payments to the terrorist group ISIS so that it could keep its Syrian cement plant open and get all the business it could do so during the Syrian Civil War. The Press Release concluded, “In hindsight any misdeeds may seem clear. However the combination of the war zone chaos and the “can-do” approach to maintain operations in these circumstances may have caused those involved to seriously misjudge the situation and to neglect to focus sufficiently on the legal and reputational implications of their conduct.” Indeed. [Emphasis supplied]
As reported by Law360, “France-based Lafarge and its defunct Damascus, Syria unit Lafarge Cement Syria, or LCS, each pled guilty to a count of conspiring to provide material support to foreign terrorist organizations and will pay a total of $777.78 million.” According to the Plea Agreement, this total amount consisted of a total criminal fine of approximately $91 million and forfeiture of $687 million. Please note this is not a Foreign Corrupt Practices Act (FCPA) enforcement action but an enforcement action based on USC 2339B for one count of conspiracy to provide material support to one or more foreign terrorist organizations. While this is not a FCPA enforcement action, it is a matter about corporate culture, tone at the top, senior executive involvement in corruption; in short it is all about compliance and ethics. This complete failure of compliance and ethics makes it a forceful study of the failings of corporate culture in the starkest way possible.
As laid out in the Statement of Facts, Lafarge finished construction of the Jalabiyeh Cement Plant in northern Syria at a cost of approximately $680 million and began operations in 2010. However, almost immediately “it faced strong competition from cheaper cement imported into northern Syria from Turkey, and in December 2010, Executive 3 sought the assistance of Intermediary 1 to intervene with the Syrian government to control the importation of competing Turkish cement.” In early 2011, the Syrian Civil War broke out and LCS wanted to be the biggest supplier in the soon to be war ravaged country. However, in 2012, ISIS began to gain strength and take over territory near the plant. ISIS also threatened LCS employees through intimidation and kidnapping.
Thereafter, five Lafarge executives from the corporate home office became involved in two-year campaign to pay off ISIS to allow the plant to keep in operation and to not threaten its employees. Beginning in the spring of 2013, Lafarge began paying protection money to ISIS through intermediaries and other third-party suppliers. The reason articulated was laid out in the Statement of Facts, (1) keep the investment in the physical assets (i.e., the plant); (2) keep the investment made in employees; (3) stay in the market to keep out Turkish competitors; and (4) make some profits. The payoffs to ISIS were made through a variety of schemes.
There was the old-fashioned way – cash, in the form of fixed monthly payments. There were payments made through intermediaries. You could not call them sales agents, but they were third parties charged with getting the protection for the bribes paid by LCS. There was a ‘tax’ paid on each truck that went in or out of the plant on roads controlled by ISIS. Eventually, in late 2013, these mechanisms morphed into a new business relationship between LCS and ISIS so that both sides were paid out of the profits from the sale of cement in Syria. For LCS it was simply a cost of doing business. At one point, Intermediary 1 was quoted for the following, “We currently sell for $8 to $10 million per month, with a $2 million profit, and pay less than 1⁄4 for protection. Other factories are paying for protection just to exist, without making the profits we are.”
But it did not simply stop with sales and ROI on paying bribes. LCS also purchased raw materials from ISIS, thereby contributing to international terrorism. The Statement of Facts noted, “Also in or about late 2013, LCS began to use Intermediary 2 to engage directly with ISIS-connected suppliers for the purchase of raw materials and supplies. LAFARGE and LCS retained the services of Intermediary 2 after he had personally met with the then-LAFARGE Group Honorary Chairman and a member of the LAFARGE Board of Directors who was a former LAFARGE Chief Executive Officer on September 16, 2013.”
Over the next few blog posts, I will be looking at the Lafarge enforcement action for lessons for the anti-corruption compliance professional. However, there are two additional points buried in all this corruption which bear noting. The first was reported by Pete Brush, in the Law360 article cited above, who wrote that during the court hearing where US District Judge William F. Kuntz II accepted the company’s guilty plea, he stated “This case impacts the victims of terrorist acts.” This would seem to indicate that any person who may have been the victim of ISIS terrorism could now bring suit against Lafarge (open question as to its successor).
The second item was buried in the Plea Agreement which said, “Lafarge’s commitment, in Attachment B, to guarantee the Defendants’ compliance with the terms of this Agreement.” [Emphasis supplied] Note the language used is not ‘certification’ as articulated in the Monaco Memo but ‘guarantee’ compliance with the terms of the Plea Agreement. How would you like to be the one who made that representation?
Tomorrow, we look at the bribery/payment schemes.
In today’s edition of Daily Compliance News:
The Biden Administration promised a new, aggressive approach to corporate crime. Well, the Justice Department just delivered a new, comprehensive policy that raises a number of issues, some of which are likely to be controversial. The new policy incorporates reforms announced last October that largely centered on prior corporate criminal and civil records, the appointment of independent compliance monitors, and expanding the review of responsible persons in an internal investigation. The Justice Department’s new Corporate Enforcement Policy (“CEP”), however, expands on earlier policy changes but includes some new and far-reaching reforms intended to increase individual accountability and promote corporate culture through financial incentives and deterrence policies. This last idea is a significant expansion of DOJ’s CEP and is sure to reverberate through the business and compliance community. Chief compliance officers face a new requirement for their companies — creating an effective system of carrots and sticks to punish misconduct and increase rewards for ethical behavior.DOJ’s new CEP also lays the groundwork for further consideration of corporate responsibility for preserving electronic messaging, ephemeral services, and other electronic data. DOJ’s discussion in this area reflects DOJ’s frustration with a corporate internal investigation that omits access to electronic data, especially in those situations where employees use personal devices for business-related communications. The revised CEP provides guidance to prosecutors and the business community to ensure individual and corporate accountability through the evaluation of various factors, including (1) Corporate History of Misconduct; (2) Self-Disclosure and Cooperation; (3) the Strength of a Company’s Compliance Program; (4) the Use and Monitoring of Corporate Monitors (including their selection and scope of a monitor’s work).
After revisiting “Parking in India” from 2012, we return to explore more from the Foreign Corrupt Practices Act (FCPA) recidivist Oracle Corporation. We previously reviewed the bribery schemes in general and how they worked in practice. Given not simply the recidivist status but the nature and location of the bribery schemes, one might reasonably ask questions about the resolution. Quite simply, how did Oracle achieve the result they did?
The Comeback
Under the FCPA Corporate Enforcement Policy, as developed by the Department of Justice (DOJ), the requirements for leniency were (1) self-disclosure, (2) extensive cooperation during the investigation and (3) thorough remediation up to the conclusion of the matter. Under the recent Monaco Memo, this prong 3 was further explained as creating a compliance program to address the issues which led to the compliance program and then testing that program prior to the conclusion of the resolution. While the Securities and Exchange Commission (SEC) does not have a similar written Policy they have followed the DOJ’s lead on since the implementation of the FCPA Corporate Enforcement Policy in November 2017.
In the 2022 Order, it specified there was some type of self-disclosure. The Order stated, “the Commission [SEC] considered that Oracle self-reported certain unrelated conduct, remedial acts it undertook, and cooperation afforded the Commission Staff.” This is one of the most oblique references to self-disclosure seen in an FCPA enforcement action. It is not clear what the ‘unrelated conduct’ might have been nor how it related to the FCPA violations. Whatever this unrelated conduct was, it was self-disclosed to the SEC and apparently that self-disclosure was enough to satisfy the SEC that self-disclosure had occurred.
The next requirement is thorough cooperation with the SEC during the investigation. Here the Order stated, “Oracle’s cooperation included sharing facts developed in the course of its own internal investigations, voluntarily providing translations of key documents, and facilitating the staff’s requests to interview current and former employees of Oracle’s foreign subsidiaries.” Each one of these factors should be digested by every compliance officer to understand what the SEC thinks is important. It may be different from the DOJ, particularly after the Monaco Memo, but these actions are all clearly important to the SEC.
Finally, of course, is the remediation. Here the Order specified several actions in greater detail than in most Orders. The Order stated, “Oracle’s remediation includes:
Resources
These changes appear to be extensive and potentially significant within the greater Oracle compliance program. There was increased resources made available to Oracle through an increase in head count (15 new positions), restructuring of compliance groups and creation of new compliance teams. Additionally, the implementation of a compliance data analytics program would also fall under additional resources. Finally, Oracle moved to more proactive auditing.
Discipline
There were terminations of Oracle employees including “senior regional managers and other employees involved in the misconduct” in addition to the termination of distributors and resellers involved in the misconduct. While not tied to a disciplinary role but clearly in the less is more approach Oracle substantially reduced the number of business partners within its network.
Training
Next was in the area of training. There was enhanced “training and communications provided to employees and third parties regarding anti-corruption, internal controls, and other compliance issues.” This would seem to indicate enhanced training for those remaining business partners.
Internal Controls
Finally, there was the area of internal controls enhancement. Here there were improvements in the following areas: (a) discounting by improving aspects of the Oracle discount approval process and increasing transparency in the product discounting process through the implementation and expansion of transactional controls; (b) procurement through the increased oversight of, and controls on, the purchase requisition approval process; (c) removal of perverse incentives by limiting financial motivations and business courtesies available to third parties; (d) basic GTE by improving its customer registration and payment checking processes and making other enhancements in connection with Oracle technology conferences.
DOJ
Obviously, recidivist behavior is one of the key areas the DOJ focused on in the Monaco Memo. It is one of the factors the DOJ assesses in any resolution of an enforcement action. The Monaco Memo does note that civil penalties over five years old will be given lesser weight so perhaps the 2012 SEC FCPA enforcement action involving Oracle’s conduct in India plays into the SEC analysis here. There is also the question of a monitor for a company with recidivist behavior which Oracle avoided in this SEC resolution. In the Monaco Memo, two of the areas of evaluation are:
While the SEC Order lays out in detail the remediation, there is no information on any testing performed by Oracle on the new components of its compliance program or on its controls.
As yet there is no information on a DOJ resolution. Given the tenor of the most recent DOJ announcements including the Monaco Memo, and the subsequent speech by Principal Associate Deputy Attorney General Marshall Miller and speech by Assistant Attorney General Kenneth A. Polite, it appears that recidivism will be greatly frowned upon. Also, unclear would be whether the DOJ would require a monitor based upon the remediation made by Oracle as reported in the SEC Order. As noted, there is no indication of testing of the compliance program enhancements. All in all, lots of questions for the DOJ and we will have to wait for a DOJ resolution to see if we can begin to answer some of them.
Please join me tomorrow where I conclude this series by considering what does it all mean for the compliance professional.
In this post, we conclude our exploration of the Foreign Corrupt Practices Act (FCPA) enforcement action involving the now recidivist Oracle Corporation. This enforcement action was concluded with the Securities and Exchange Commission (SEC) resulting in an Order. After having examined the background facts and bribery schemes in some details, we turn to what does it all mean for FCPA enforcement going forward and what lessons can the compliance profession draw from Oracle’s missteps.
Paper Programs Fail
One of the most prominent lessons to be garnered from this matter is that paper compliance programs Do Not Work. That may sound like perhaps the most basic truism in all of compliance but here we are in 2022, looking at a major multinational organization which had a ‘check-the-box’ compliance program around distributors and it eventually bit them in the backside.
After having its first FCPA enforcement action in 2012 involving distributors in India, where deep and unwarranted discounts were used to create a pot of slush funds to pay bribes, Oracle instituted a requirement for a ‘second set of eyes’ outside the business unit for unusual or excessive discounts. According to its policies regarding distributors, a valid and legitimate business reason was required to provide a discount to a distributor. Oracle used a three-tier system for approving discount requests above designated amounts, depending on the product. In the first level, Oracle at times allowed subsidiary employees to obtain approval from an approver in a subsidiary other than that of the employee seeking the discount. At the next level and for higher level of discounts, Oracle required the subsidiary employee to obtain approval from another geographic region and the final level (and for the highest discounts) was from someone at the Oracle corporate headquarters. So far so good.
The problem was there was no requirement for evidence of a business justification to support the requested discount. The Order noted, “Oracle reviewers could request documentary support, Oracle policy did not require documentary support for the requested discounts – even at the highest level.” A statement of why you need a discount without any supporting documents as evidence is simply that – a statement. In other words, there was no way for a higher-level approver to determine if such a request was valid or fraudulent. Ronald Reagan was on to a basic compliance concept when he intoned “Trust, but verify.” Those words still ring true as a basic requirement in any compliance program.
Data Analytics
The Oracle enforcement action emphasized why data analytics is mandatory for any current compliance program. In addition to creating slush funds through discounts to distributors, slush funds were created through fraudulent reimbursement requests for expenses associated with marketing Oracle’s products. If the request were under $5,000, business unit level supervisors at the subsidiaries could approve them without any corroborating documentation indicating that the marketing activity actually took place. In one example from the Order, it noted that an Oracle Turkey sales employees obtained such fraudulent reimbursements totaling approximately $115,200 in 2018 that were “ostensibly for marketing purposes and were individually under this $5,000 threshold.” There was apparently no one looking to see who and how often these reimbursement requests were made by any single employee or approved by any supervisor.
This is as basic a fraud scheme as one can imagine. Think of employee gift, travel and entertainment (GTE) reimbursement where anything over $100 must be preapproved. One BD type or one business unit routinely submits requests after purchases of $99.99 so no preapproval is required. The supervisor approves it, and it is automatically paid to the employee. One reimbursement at $99.99 may not raise a red flag but multiple requests should. The same concept holds true in this situation. However, no one at Oracle was looking at this bigger picture. This is where a data analytics program would pick up such anomalies and flag it for closer inspection and investigation. Oracle appears to have realized this through part of its remediation which included the implementation of a compliance data analytics program moving to proactive auditing.
Internal Control Upgrades
Putting in compliance enhancements to remediate your control failures is a key part to any FCPA enforcement resolution. In this area, there were improvements in the following capacities: (a) in distributor discounting by improving aspects of the Oracle discount approval process and increasing transparency in the product discounting process through the implementation and expansion of transactional controls; (b) in the Oracle procurement process through the increased oversight of, and controls on, the purchase requisition approval process; (c) by the removal of perverse incentives by limiting financial motivations and business courtesies available to third parties; (d) in basic gifts, travel and entertainment policies (GTE) by improving its customer registration and payment checking processes in connection with Oracle technology conferences.
Basic GTE
I cannot believe that in 2022 we are talking about companies that still do not have the most basic GTE policies in force. Since at least 2007, the Department of Justice (DOJ) made clear what was appropriate in business travel, business courtesies and business entertainment. Oracle’s 112 Project decidedly was not as it was designed to appear as a business trip to Oracle’s home office (then in California) related to Oracle’s bid on a project. However, the trip was designed to be a sham to hide boondoggle travel for four government officials. The alleged business meeting at the corporate headquarters lasted only 15 minutes and for the rest of the week, the Oracle BD folks entertained the government officials in Los Angeles and Napa Valley and then took them to a “theme park” in the greater Los Angeles area. Any travel involving government officials or any other covered persons under the FCPA should be submitted to and approved by your compliance function, including costs and the itinerary.
There was much to consider from the SEC enforcement action under the FCPA involving Oracle. We still have not heard from the DOJ. There may be more to come….
In this episode, I visit Mike Huneke, a partner at Hughes Hubbard. We look at the role of the GC in the CCO certification requirement as first announced by Assistant Attorney General Kenneth Polite and confirmed by Deputy Attorney General Lisa Monaco.
Key areas we discuss on this podcast are:
Resources
Mike Huneke on Hughes Hubbard
What is the General Counsel’s role in CEO and CCO compliance certifications? On the FCPA Blog
In this special 5 part podcast series, I am deeply diving into the Monaco Memo and analyzing it from various angles. In this episode of the FCPA Compliance Report, we have the Award-Winning Everything Compliance quartet of Jonathan Marks, Jonathan Armstrong, Karen Woody, and Tom Fox on the Monaco Memo.
1. Tom Fox looks at the Monaco Memo through the monitorship language and answers a listener’s questions about compliance programs under the Monaco Memo.
2. Karen Woody reviews the Monaco Memo, the self-disclosure angle, and investigatory considerations and ponders the role of defense counsel going forward.
3. Jonathan Marks also looks at investigatory issues under the Monaco Memo, the role of the Board of Directors, and the role of the forensic auditor under the Monaco Memo.
4. Jonathan Armstrong’s self-disclosure from a UK angle joins Karen Woody in questioning how defense counsel should move forward.
Resources
Tom 5-Part blog post series in the FCPA Compliance and Ethics Blog
1. A Jolt for Compliance
2. Timely Self-Disclosure
3. Corporate Compliance Programs
4. Monitors
5. The Heat is On
