From the Experts: How an effective FCPA compliance program can go a long way—sometimes the whole way—in avoiding corporate prosecution.
The U.S. government’s aggressive enforcement of the Foreign Corrupt Practices Act shows no signs of slowing down, and multinational companies continue to face enormous regulatory scrutiny for their overseas business practices. The recent prosecution and guilty plea of a former Morgan Stanley executive, however, is a sign of hope for companies that invest in compliance and do the right thing when problems are found.
Although former executive Garth Peterson engaged in an elaborate conspiracy to bribe a Chinese official to win business for Morgan Stanley (and to line his own pockets), the firm will face no penalties. Why? Morgan Stanley was able to show it had a pre-existing, effective, and evolving compliance program and persuaded the government that Peterson acted on his own and against the company’s established policies.
In short, Morgan Stanley’s compliance program shielded it from an enforcement action. Although there is no doubt that the firm felt the financial and reputational pain of Peterson’s actions, this case is an unusual success story and an example of a well-managed crisis.
The Morgan Stanley story offers valuable insights to the commonly asked question of “What is enough when it comes to compliance?” It also shows that no matter how good a global company’s compliance program, no company is immune from rogue employees. The lesson here is that not every crisis needs be front-page news or a scandal that brings a business to the brink of disaster.
Peterson’s Criminal Scheme
By all accounts, Peterson was a rising star at Morgan Stanley. In 2004, he led the expansion of the firm’s China real estate portfolio and later was appointed to head the Shanghai office’s wholly owned global real estate business. Unbeknownst to Morgan Stanley, however, Peterson had a secret—an undisclosed business relationship with the then-chairman of the state-owned real estate development arm of a local district government in Shanghai. Peterson exploited this relationship to obtain lucrative business opportunities for Morgan Stanley, as well as for necessary licenses and approvals in real estate investments.
Peterson and the Chinese official were also stealing from Morgan Stanley—acquiring millions of dollars worth of real estate interests through a shell company that they secretly owned, in one instance disguising $1.8 million as a finder’s fee.
“Companies that embrace compliance can even use limited transgressions by their employees as an opportunity to show that their program is working.”
The FCPA and its Application to Peterson’s Conduct
The FCPA is a U.S. federal statute that: (1) prohibits covered persons and companies from bribing foreign officials, directly or indirectly, to obtain or retain business or to seek a competitive advantage; and (2) requires issuers of U.S. securities to make and keep accurate books and records and to devise and maintain a system of internal controls sufficient to ensure accountability for, and to prevent the improper use of, its assets. The FCPA exposes violators to significant criminal and civil penalties and fines.
When Peterson’s conduct came to light in 2008, Morgan Stanley acted quickly and, with the help of outside counsel, it conducted an intensive nine-month internal investigation, fired Peterson, and voluntarily disclosed its findings to the U.S. Department of Justice and the Securities and Exchange Commission. Morgan Stanley also notified its shareholders, cooperated fully with the government investigation of Peterson, and undertook additional measures to reinforce and enhance its compliance program.
The case came to a close in late April 2012, when Peterson pleaded guilty in federal court and agreed to settle charges filed by the SEC. Peterson did not plead guilty to bribery; rather, he pleaded guilty to violating the FCPA by conspiring to circumvent Morgan Stanley’s internal controls, a move that appears to have paved the way for the government to give the firm a pass on any charges.
The Big Three Takeaways from the Morgan Stanley Case
- Invest in Compliance from Top to Bottom: Morgan Stanley invested in compliance and was able to prove it. With more than 61,000 employees worldwide, Morgan Stanley currently has over 1,200 legal and compliance division employees who are located in offices where Morgan Stanley conducts business, including China. The legal and compliance division clearly has the requisite autonomy, visibility, responsibility, and resources to effectively steward the program. The division reports to the most senior levels of the firm, including reporting to the firm’s board of directors.
- Make Sure Your Compliance Program Evolves with New Regulatory Developments and Industry Guidance: There have been several new developments in the anticorruption arena in the last few years, including significant FCPA settlements, a new UK Bribery Act and guidance by the U.K. government regarding “adequate procedures” that could provide covered companies with a complete defense to bribery charges. The UK Financial Services Authority also has been conducting industry reviews of regulated entities, including the investment banking industry, to assess whether those entities have put in place adequate controls to combat bribery. Morgan Stanley appears to have been following important developments and improvements in best practices, and it clearly established that its global anticorruption program was evolving. Unlike in other cases where substantial corporate settlements were required, the government did not point to any serious flaws or gaps in Morgan Stanley’s program.
- Make Sure the Elements of an Effective Compliance Program are in Place and Working: Although the DOJ has yet to issue official guidance on the topic, the U.S. government has laid out the components of an effective compliance program as well as its expectations through various settlements, memoranda, and public statements. It appears that Morgan Stanley paid attention. The Peterson court filings described how Morgan Stanley’s program integrated certain key components and was tailored to address its risks; the firm made clear that its anticorruption compliance program was no paper tiger. Among the elements that the government focused on were the following:
- Clear written standards that are updated periodically to account for developments in the law and evolving business risks.
- Documented communications with employees regarding compliance, including training and certifications.
- Reporting mechanisms for employees.
- Controls to detect improper payments and ongoing monitoring, with special attention paid to high-risk regions or activities.
- Comprehensive and documented risk-based due diligence of third parties and potential business partners.
- Ongoing assessments, audits, and remediation of problems.
A Crisis Effectively Contained
The Peterson prosecution demonstrates that the government can (and will) give the ultimate credit to companies that demonstrate a consistent, deliberate, and clear commitment to compliance with support from the top. It also shows that companies that embrace compliance can even use limited transgressions by their employees as an opportunity to show that their program is working.
Thanks to a robust compliance program, Morgan Stanley was able to show that the misconduct in this case was confined to a single rogue employee who acted against the firm’s interests. Faced with a company that had heeded the government’s warnings, invested in a comprehensive compliance program, and reacted appropriately to the crisis, the government rightfully gave Morgan Stanley full credit for its actions, signaling to businesses in similar positions the government’s view of the correct path to follow. In the end, Morgan Stanley’s response to the Peterson affair was nothing short of a home run. The firm’s handling of the matter also was refreshing and must have built credibility in the eyes of investors, analysts, and regulators who, these days, are all too used to reading news about companies doing the wrong thing. As for Peterson, he faces a five-year prison sentence, substantial fines, and a date with a judge who will decide his fate in July.
“The government can (and will) give the ultimate credit to companies that demonstrate a consistent, deliberate, and clear commitment to compliance with support from the top.”
The government’s decision not to pursue any criminal or civil enforcement action against Morgan Stanley was unusual. Even more significant, however, was the government’s rare step of publicly acknowledging that it “declined to bring any enforcement action against Morgan Stanley,” based in large part on the firm’s robust system of internal controls, “which provided reasonable assurances that its employees were not bribing government officials.”
Source: Corporate Counsel