Often the best guidance on how to avoid Foreign Corrupt Practices Act charges comes from the details of cases that government authorities chose not to pursue. Companies looking to improve their FCPA compliance programs got two such cases recently. Together, the cases speak volumes about how to get a declination from the Department of Justice.
In an unusual move, the Department of Justice opted not to bring enforcement actions against Image Sensing Systems and Layne Christensen in two separate cases pertaining to alleged violations of the FCPA. Statements issued by the companies themselves cite numerous reasons why the Justice Department declined to prosecute.
The decision not to pursue charges of any kind is a marked departure from most FCPA cases, in which the government typically gives companies credit for strong compliance programs, often entering into non-prosecution agreements or deferred prosecution agreements. Even those agreements, however, almost always come with strings attached; it’s rare for a company to get complete exoneration.
The most recent case to result in a declination resolved an FCPA investigation into ISS. The developer of traffic management systems first disclosed in a securities filing in March 2013 that law enforcement authorities in Poland had charged two employees of ISS Europe, its Polish subsidiary, with criminal bribery violations related to a project in the country.
“At every step, we not only tried to cooperate, but anticipated what they might need. We found it to be an extremely cooperative relationship.”
Russ Berland, Partner Stinson Leonard Street
In response, a special subcommittee of the audit committee immediately engaged outside counsel to conduct an internal investigation, and voluntarily disclosed the matter to the Justice Department and the Securities and Exchange Commission, the company stated in a securities filing. Early this month both agencies notified the ISS that they would not bring any enforcement actions.
Self-Disclosure
The ISS declined to offer further comment, other than what’s already been publically disclosed. In comparison to another FCPA investigation that similarly resulted in a declination by the Justice Department, however, the two cases together highlight the potential benefits companies can gain from voluntary disclosure.
In the second case, for example, global water management, construction, and drilling company Layne Christensen also chose to self-disclose to the government after questions were raised internally in September 2010 concerning potential improper payments that had been made over a considerable period of time by Layne to third parties interacting with government officials in Africa.
Russ Berland, a partner with law firm Stinson Leonard Street, who represented Layne in the investigation, says the company discovered the questionable payments while it was in the process of enhancing its anti-corruption compliance program and in the course of beginning a global risk assessment.
“When those issues came to light, we embarked on an internal investigation,” explains Steve Crooke, general counsel of Layne. The audit committee of the board engaged outside counsel and accounting firm BKD to assist in its efforts.
Prior to making the voluntary disclosure, the company first needed to determine “whether the issues that had been raised had enough credibility and substance to be self-disclosed,” Berland says. The initial plan was to first look into the original allegations, and then beyond that to determine whether other issues needed to be addressed, he says.
The initial review period lasted two months and involved interview trips to Perth, Australia (where Layne’s regional accounting center was located) and Zambia. Based on the results, the board made the decision to self-disclose to the Justice Department and SEC in December 2010.
Following that self-disclosure, the investigation process was extensive, to say the least. The Stinson investigative team, for example, made several on-site visits to numerous company locations in Africa and Australia, where the alleged misconduct occurred or relevant information was kept. This included the Democratic Republic of Congo, Burkina Faso, Mali, Tanzania, and Zambia and Perth.
With the assistance of other Stinson attorneys who were “extremely adept at thorough and economical document review,” Berland says, the investigation team at the completion of the investigation had obtained 47 hard drives and 22 mobile devices and had combed through over two million documents.
Cooperation Credit
Cooperation went a long way. Berland says the idea was to approach the government with the mindset, “‘this is your area. We’ll take whatever direction you give us on how this is done.’ At every step, we not only cooperated with the government’s requests, but tried to anticipate what they might need,” he says. “We found it to be an extremely cooperative relationship.”
Since the company chose to self-disclose from the get-go, “we just decided that, no matter what, we were going to continue in that mode of cooperation and transparency,” Berland says. “In the end, it served us very well.”
In August the Justice Department notified Layne that it had closed its inquiry into the matter, although the SEC’s investigation remains ongoing. “We hope to settle the SEC investigation in the near future,” Layne’s CEO David Brown said in a statement.
Crooke says the Justice Department’s resolution of the investigation reflected Layne’s “self-disclosure, appropriate remediation activities, and very good cooperation with the government regulators.”
Layne’s situation also serves as yet another example of the potential tangible monetary benefits that can be gained from voluntary self-disclosure and cooperation. Based on the Justice Department’s decision to close its investigation, Layne reduced its previous accrual for resolution of the matter from $10.4 million to $5.1 million.
Kris Tufto, chief executive of the ISS, also stressed the lasting influence of the company’s cooperation credit. “From the very beginning, we have voluntarily cooperated with the authorities and have worked diligently to implement measures to enhance our internal controls and compliance efforts,” he said. “We understand that those efforts have been recognized and that the resolution of the investigation reflects this cooperation.”
During remarks at the Global Investigation Review Program this month, Marshall Miller, principal deputy assistant attorney general for the Justice Department’s Criminal Division, reiterated the importance of cooperation. “We would like corporations to cooperate; we will ensure that there are appropriate incentives for corporations to do so,” he said. “But if there is no cooperation, we will continue to investigate and prosecute the old-fashioned way, and companies will face the consequences.”
Layne’s Form 10-Q
Below is a statement from Layne Christensen regarding the Justice Dept. and SEC FCPA probe.
As previously reported, in connection with updating its Foreign Corrupt Practices Act policy, questions were raised internally in late September 2010 about, among other things, the legality of certain payments by Layne to agents and other third parties interacting with government officials in certain countries in Africa. The audit committee of the board of directors engaged outside counsel to conduct an internal investigation to review these payments with assistance from outside accounting firms.
The internal investigation found documents and information suggesting that improper payments, which may have violated the FCPA and other local laws, were made over a considerable period of time, by or on behalf of, certain foreign subsidiaries of Layne to third parties interacting with government officials in Africa relating to, among other things, the payment of taxes, the importing of equipment and the employment of expatriates.
Layne made a voluntary disclosure to the U.S. Department of Justice and the Securities and Exchange Commission regarding the results of the investigation and have cooperated with the DOJ and the SEC in connection with their review of the matter. On August 6, 2014, the DOJ notified Layne that inquiry into this matter has been closed. The investigation by the SEC remains ongoing.
Layne is engaged in discussions with the SEC regarding a potential negotiated resolution of these matters. Layne believes that it is likely that any settlement will include both the payment of a civil monetary fine and the disgorgement of any improper benefits.
Source: Layne Christensen.
“If a corporation wants credit for cooperation, it must engage in comprehensive and timely cooperation,” Miller added. “Lip service simply will not do.”
In addition to ISS and Layne, other companies that have received declinations, in part, for their cooperation during an FCPA investigation include firearms manufacturer Smith & Wesson, and oil and gas company PetroTiger.
Compliance Enhancements
In addition to voluntary disclosure and cooperation efforts, both ISS and Layne also implemented a series of remedial measures to enhance their internal controls and compliance efforts. For its part, ISS said it ended the employment of the two Polish employees involved in the misconduct. “We are also assessing and implementing enhancements to our internal policies, procedures, and controls,” the company stated.
With the assistance of Manny Alas and his team at PwC, Layne took “an in-depth evaluation and assessment of its internal controls and compliance practices including the redesign and implementation of new or enhanced FCPA controls and procedures” Berland says. These efforts were led by the company’s newly appointed chief compliance officer, Jennafer Watson, to ensure the company put in place best-in-class compliance controls, he says.
Initially, the compliance group focused very heavily on FCPA compliance, particularly in Africa, where the misconduct allegedly occurred, Berland explains. From there, Watson built out the compliance program, which included extensive face-to-face training with third parties in those countries, as well as employees, who were “trained, and trained, and trained again,” Berland says.
Layne further instituted “a very robust due diligence program for its third parties,” particularly those who have regular interaction with government officials, Berland says. Based on that due diligence, the company made the determination to not continue work with certain third parties, he says.
The company also put in a number of robust compliance controls. Specifically, the company focused on the monitoring and auditing of transactions “to make sure there weren’t any dollars flowing out to third parties that had not been vetted and approved,” Berland says.
Showing the company’s commitment not only to the investigation, but also the remediation efforts is “absolutely essential,” Berland says. In the case of Layne, for example, not only did Crooke attend all of the meetings with the government, “but on several occasions, the chair of the audit committee attended, as well,” he adds. “That sent a very positive message to the government that the company got it and was doing the right things.”
Learning from Morgan Stanley
In 2012, the Justice Department similarly exonerated Morgan Stanley of FCPA charges for its extensive cooperation, robust internal compliance program, and voluntary disclosure of the misconduct. “Often overlooked is one of the critical factors that led to that declination: Morgan Stanley assisted the government in identifying the individual executive responsible for the criminal conduct, Garth Peterson, and in securing evidence to hold Peterson criminally responsible,” Miller said.
For other companies facing an FCPA investigation, engaging the help of outside experts who have been through the process many times before and can help the company “not have to reinvent the wheel,” Berland says, really helps in the end to see the successful conclusion of an FCPA investigation and remediation.
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