Recent enforcement actions have confirmed the value of well-formulated and meticulously implemented corporate compliance policies in deflecting or mitigating the results of Foreign Corrupt Practices Act (“FCPA”) enforcement actions at the entity level. Two recent enforcement reports highlight the impact of such corporate policies.
In April 2012, the U.S. Securities and Exchange Commission (“SEC”) and the Department of Justice (“DOJ”) charged a former Morgan Stanley managing director with violations of the FCPA’s anti-bribery provisions, Section 13(b)(5) of the Securities Exchange Act of 1934, and other related violations. Garth Peterson, who had formerly led Morgan Stanley’s real estate investment business in Shanghai, China, agreed, subject to court approval, to an enforcement settlement and plead guilty to criminal conspiracy for his role in conducting a fraudulent scheme that netted him an interest of approximately $3.4 million in Chinese real estate holdings. Through a matrix of off-shore shell companies and unwitting payment by Morgan Stanley of millions of dollars in bribes to a Chinese official, Peterson was able to line his own pockets by working both sides of real estate transactions between Morgan Stanley and a Chinese government-controlled company. The SEC’s Release 2012-78 (April 25, 2012) discussing the prosecution and settlement states that Peterson “cultivat[ed] a relationship with the Chinese official and [took] advantage of his ability to steer opportunities to Morgan Stanley and his influence in helping with needed government approval. . . At the same time, Peterson and the Chinese official expanded their personal business dealings both in a real estate interest secretly acquired from Morgan Stanley as well as by investing together in Chinese franchises of well-known U.S. fast food restaurants.”
Morgan Stanley itself, however, was not prosecuted for Peterson’s violations, apparently in large part because of its robust and well-enforced system of internal controls. Morgan Stanley not only discovered the violations and reported to its regulators, but also cooperated fully in the government investigation. Both the SEC and the DOJ Releases placed heavy reliance on the details of Morgan Stanley’s internal corporate FCPA policies, and the careful and consistent enforcement of those policies. In addition to an extensive training, monitoring, and enforcement program, Morgan Stanley was able to demonstrate that it had provided Peterson with at least 35 FCPA compliance reminders and had required annual certification of his adherence to the company’s code of conduct, as well as requiring annual disclosure of his outside business interests. As a result, Morgan Stanley was able to take advantage of the often-advanced, but seldom accepted “rogue employee” defense.
In contrast, SEC Release 2012-32 (February 24, 2012) disclosed that Noble Corporation was charged with FCPA violations as part of a sweep of the oil services industry in late 2010. Although the company cooperated with investigators and negotiated a Non-Prosecution Agreement (“NPA”) with the DOJ, it was forced to pay more than $8 million to settle civil and criminal litigation. An important factual distinction between the activities of Peterson at Morgan Stanley and the Noble executives may have influenced this result; the Noble executives apparently did not personally benefit from the bribes paid to induce Nigerian customs officials to illegally grant the company temporary permits to continue to operate Noble’s oil rigs in Nigeria. While both sets of executives lied to their respective companies, thus circumventing both company policies and the anti-bribery and books and records provisions of the FCPA, only Noble itself benefitted from its executives’ activities.
The other major distinction between the two situations appears to have been the companies’ level of attention to policing and enforcing their respective anti-bribery policies. Morgan Stanley’s policing of its policy was rigorous, and it was able to produce evidence of extensive training and follow-up. Although the description of Noble’s corporate policy in the NPA is much less detailed, it appears that the policy lacked a device to cross-check reporting to the Noble Board’s Audit Committee. The fact statement which Nobel agreed to in the NPA also reveals a lack of urgency in Noble’s review of alleged improprieties until news of a competitor’s reporting of similar infractions surfaced, and there is no mention of the extent of its employee training programs or certifications of compliance. Perhaps as a result of these deficiencies, a condition of Noble’s NPA was its agreement “to adopt new or to modify existing internal controls, policies, and procedures” to bolster both its compliance policy and the enforcement of that policy.
The contrasting results of these enforcement actions emphasize the importance of not only a well-formulated and robust anti-bribery compliance policy, but also strict enforcement and remedial procedures. Indeed, in its Release on the Morgan Stanley situation, the DOJ reiterated the provisions of the 2011 Federal Sentencing Guidelines, Section 8B2.1, including the six key criteria for establishing an “Effective Compliance and Ethics Program:”
- Oversight by high-level personnel
- Due care in delegating substantial authority
- Effective communication to all levels of employees
- Reasonable steps to achieve compliance, which include systems for monitoring, auditing and reporting suspected wrongdoing without fear of reprisal
- Consistent enforcement of compliance standards including disciplinary mechanisms
- Reasonable steps to respond to and prevent further similar offenses upon detection of a violation
The results of the Morgan Stanley and Noble Corporation investigations highlight the importance of these criteria to every company doing business on an international basis, and make regular review of anti-bribery policies and procedures more critical than ever.