Corruption, Crime and Compliance

Corruption, Crime and Compliance — Michael Volkov

Ethics 360 Media

Corruption, Crime and Compliance

By Michael Volkov

Ethics 360 Media

Copyright Š 2011 Michael Volkov

All rights reserved. No part of this book may be reproduced or transmitted is any form or by any means without written permission of the publisher.

Information in this book is intended for public discussion and educational purposes only. It does not constitute legal advice and its use does not create an attorney-client relationship.

ISBN 978-981-08-9845-8

To Rosetta, My Love, My Life, My Inspiration

Author’s Preface Please do not ask me how this project started. There are so many themes and strands of ideas and events which lead me to this point in my life, any one of which could explain why I started my own blog and why I am publishing my first book based on my blog entries.

Let’s start with the obvious one – my career has spanned 30 years as an attorney in Washington, D.C., which has given me opportunities to work as a federal prosecutor, a Chief Counsel on the Senate and House Judiciary Committees, a trial attorney in the Antitrust Division and in private practice. In some respects, I have seen it all – from the bloody streets of Washington.

D.C. gang wars, to Capitol Hill where I had the privilege to work for Senate Judiciary Chairman Orin Hatch and House Judiciary Committee Chairman Sensenbrenner, to the White House to watch as then-President George Bush signed into law child protection legislation which I helped guide through Congress.

While all of my career experiences were amazing and give me a unique perspective on the criminal justice system, and Washington, D.C. politics and power, I view life in more expansive way – to me, there are many reasons, too many to even list but to just name a few: my father, Leon Volkov, who defected from the Soviet Union, nearly died in a plane crash, taught himself the English language and eventually became a top Soviet affairs expert and contributing editor at Newsweek magazine comes to mind as I write; my mother, Galina Volkov, the

creative spirit and talented Broadway actress fills my soul with compassion, family love and the virtues of ethical behavior.

However, there is one influence on my life that has come recently and opened up all of my senses, my passion and my creativity. In a sense, she unleashed what was always there but she did so in a special way with her amazing love, support and miraculous life – my wife, Rosetta, who I met over three years ago. She is the reason for my ability to see myself doing something like this and enjoying it.

My blog started with some random thoughts in April of 2011. Like my father, who escaped a plane crash in which everyone died except for him, I have been lucky in life. My readership has grown and I continue to enjoy writing.

I see this as yet another beginning in life.

October 2011

Foreword I have known Michael Volkov for over twenty years.

When I was a Federal Judge in the District of Columbia, Mr. Volkov was an Assistant United States Attorney.

He tried a very important gang drug case before me. It had multiple defendants and was tried over a number of months. He was a skillful trial lawyer. As lead counsel, he was able to manage this complex case to a successful conclusion where all the defendants were found guilty.

This case among others demonstrated his outstanding trial skills.

I now interact with him in the general practice of law. He is now able to once again demonstrate that he is an able lawyer in areas other than trial law. His blog demonstrates great writing skills along with his ability to master complex subjects. His book is a compilation of articles on a number of subjects important to lawyers advising clients how to stay out of trouble. He is a prolific writer and I can say without question, we have not heard the last of his musings. Simply put, his book contains important information that should prove helpful to lawyers, particularly to those who practice in the white collar field.

Stanley Sporkin October 2011

Corruption, Crime and Compliance — Michael Volkov

Table of Contents Author’s Preface.............................................................................. v Foreword ........................................................................................vii Has the Justice Department Lost Credibility? ..................... 17 .... 19 Watch Out Justice Department: Lessons Learned from the Past ................................................................................................. 23 ........................... 27 Idea ................................................................................................. 29 ...... 33 parency ........................................................................................... 37 ........................................ 39 ....................... 41 .................. 45 47 ance Officers .................................................................................. 51 ........................................................ 55 Proper Bounds ............................................................................. 57

— Wiretaps in the Boardroom .................................................................................... 61 Crimes ............................................................................................. 63 Clues ............................................................................................... 65 ...................................................................................... 67 ...................... 71 ............................................................. 75 ance ................................................................................................. 77 tion .................................................................................................. 81 ment ................................................................................................ 83 FCPA Enforcement in the Health Care Industry: We Told ........................................................................................... 85 Becomes Effective ......................................................................... 87 An “Adequate Procedures” Defense: Just How Adequate a Defense? ......................................................................................... 89 FCPA .............................................................................................. 91 tion ................................................................................................... 93 ................ 95 ................ 99

.......................................................................................101 ........................................................................103 .............................................................................................107 ...............109 ............111 Intent? ..........................................................................................113 ................117 cess from Prosecution ..............................................................119 ......................................123 ........125 .......................................129 ment Environment ....................................................................131 ....................133 .............135 nies ................................................................................................137 and Acquisition World .............................................................141 Rules .............................................................................................145 .............................................................................................147

ic ....................................................................................................149 .............................................................................................153 ........................157 Russia: The Anti-Bribery Frontier .......................................161 Brazil and Corruption ..............................................................163 FCPA Compliance in Russia: Watch Out .............................167 ......................................................169 India ..............................................................................................171

Has the Justice Department Lost Credibility?

“You don’t need a weatherman to know which way the wind blows” — Subterranean Homesick Blues, Bob Dylan The Justice Department has taken some serious hits lately — some have been fair and some are unfair. All in all, the trend is not good. If the buck truly stops with the Attorney General, then he is responsible for the “tone-atthe-top.”

DOJ’s missteps lately are alarming. After securing the FCPA convictions of Lindsey Manufacturing and several officers, the prosecutors revealed that they failed to turn over grand jury testimony of the FBI case agent which was important to the defense and specific cross-examination of the case agent. Judge Matz has now put a brake on the case to consider what remedies should be imposed on the government.

In Baltimore, Judge Bennett reamed out the government for its handling of the Tom Drake case — the NSA whistleblower who was charged with ten felonies and allowed to plead at the last second to a misdemeanor.

The government’s case unraveled and the judge let the Justice Department prosecutors know he was displeased with their handling of the matter.

In another stinging rebuke, Judge Mott in Maryland granted a motion for judgment of acquittal for Laura

Stevens, in-house counsel for GlaxoSmithKline, after ruling that the government’s case was so flimsy that he could not in good conscience let the case go to a jury.

In Washington, D.C., after parading the FCPA sting operation leading to over 20 defendants being charged in an undercover operation, the government was unable to convict any of the four initial defendants at trial.

You will notice that I omitted the recent missteps which occurred in the Clemens case resulting in Judge Walton declaring a mistrial. I know the prosecutors personally who are handling the case and I can vouch for their professionalism, dedication and integrity. I will not include them in the list because they do not deserve to be there.

What can we glean from this pattern? As a long-time AUSA, and a manager in the U.S. Attorney’s Office in DC, I can tell you exactly what this reflects — poor management from the Justice Department, and more importantly, a poor tone at the top. Let’s judge the Justice Department by its own standards. When an FCPA violation occurs in a company, the prosecutors look to the tone at the top for compliance. Here, let’s look at the tone at the top at the Justice Department.

In response to the Senator Stevens allegations of misconduct, the Justice Department renewed its training efforts to ensure that prosecutors followed the law. Along the way, this effort has been derailed. More is needed than just training. Take your cues from compliance programs — follow up, assessment, and vigilance are critical. What is clear is that victory at all costs has become more important than winning while preserving the justice system.

The buck stops with Attorney General Holder. It is up to him to address this latest trend.

Enforcement “The United States is a nation of laws: badly written and randomly enforced.”

— Frank Zappa Much has been written about the overall fairness of the Justice Department’s and the Securities and Exchange Commission’s aggressive FCPA enforcement program.

Some have argued that the DOJ and SEC have engaged in uneven justice: corporations plead to non-FCPA offenses, pay big fines, and continue business as usual. Others argue that the DOJ has failed to prosecute individual executives and officers, or to ensure that corporations are debarred or suspended from continuing to sell to the federal government.

As a former federal prosecutor with nearly 20 years experience in the criminal justice system, I can assure you that some of the criticisms are accurate but some completely miss the mark. Last year, the Senate Judiciary Committee examined the controversy surrounding FCPA enforcement, and this year the House Judiciary Committee is planning to look at the issue.

The DOJ is proud of its enforcement program. And rightly so – they have resuscitated a program which was dormant for years and which now collects over one half of all criminal fines imposed each year in the United States.

That is an impressive record.

Aside from the fundamental deficiencies inherent in DOJ’s voluntary disclosure process, DOJ claims that it gives adequate credit for corporate compliance programs, early cooperation and full disclosure. In response, some suggest that plea agreements which are designed to protect companies from debarment and include pleas to non-FCPA charges are unfair. Part of that point is correct; the other part is flat out wrong.

Our criminal justice system operates day-to-day based on plea agreements. In the federal system, over 90 percent of federal cases are resolved through plea agreements.

As part of that process, charge-bargaining is a critical component. DOJ’s decision to permit corporations, or typically country-specific subsidiaries to plead guilty to a non-FCPA offense, is in keeping with this long tradition.

The underlying conduct as described in the plea agreement is known to all – the company engaged in systematic and widespread bribery. Nothing more, nothing less. To extrapolate from such a plea that DOJ is not enforcing the law is misguided and ignores the realities of the plea bargaining process.

On the other hand, DOJ’s willingness to forego debarment and/or suspension is certainly an issue that needs to be examined. As Professor Koehler testified at the Senate Judiciary Committee, BAE was awarded a government contract on the same day it plead guilty to a non-FCPA offense but paid a criminal fine over $400 million. That is certainly uneven justice, and Senators and policymakers should have taken note of this ironic enforcement twist.

Senator Specter and others have criticized the Justice Department for failing to include individual corporate executives and officers in its enforcement actions. The Justice Department’s Antitrust Division has a much better record on this score – corporations and individuals are prosecuted in criminal antitrust cases with equal vigor and

results. Why has DOJ shied away from linking corporate cooperation to requiring cooperation against individual executives and officers at the offending company?

If the goal of DOJ’s enforcement program is corporate compliance, then the enforcement program needs to be recalibrated. Deterrence is an admirable objective and will certainly increase compliance, but DOJ has more tools available to it to encourage and promote cooperation.

DOJ’s antitrust amnesty/leniency program is an example of a program which has been incredibly successful on the enforcement and the compliance ends. While there are certainly problems with the application of a cartel-focused (multi-actor) model to FCPA cases, there are lessons which can be learned from the amnesty/leniency program.

We all aspire to equal justice and we all admire the image of justice that is blind as the hallmark of our judicial system. But right now what is needed is for the Justice Department to listen so that it operates with fairness and equal justice for all.

Watch Out Justice Department: Lessons Learned from the Past The Department of Justice is proud of its record on FCPA enforcement. They take credit whenever and wherever they can. They trumpet every settlement. They proudly proclaim that over half of last year’s criminal fines were collected for FCPA violations. They are entitled to claim success.

It is hard to argue against prosecutions of private companies and individuals who engage in foreign bribery.

Such conduct skews competition in the global marketplace, undermines the integrity of foreign governments and threatens to destabilize governments. These harms are more than evident – they are inescapable and persuasive.

Our national interest supports reducing foreign bribery to protect the integrity of the global economy and foreign governments.

But there is something wrong here with the Department’s approach. Maybe it is because many FCPA practitioners operate inside the Beltway. Something is amiss. Maybe it comes with age. Certainly not with wisdom. We have seen this picture before.

An enforcement agency which operates with hubris and insensitivity to the business community is sure to fall eventually in the political world. Companies and practitioners are frustrated because they have to read tea leaves of Justice Department expectations from criminal settlements and official speeches to decipher what is

expected of them in the compliance world.

Most businesses want to comply in good faith but want more specific guidance on what they have to do to comply with the law. Legal interpretations of terms are made by DOJ lawyers with little judicial supervision.

These are issues which should be addressed by some type of overall regulatory framework or even like the Ministry of Justice tried to do in releasing guidance for the U.K. Bribery Act. In the U.K. there was sensitivity to the needs of business to have clear rules for compliance, safe havens for conduct and some assurance on the risk of prosecution.

The Justice Department will not go that far.

So lets go back to a period in my career in the aftermath of the breakup of AT&T. My hero, District Court Judge Harold H. Greene, watched over the implementation of the antitrust decree in the case, and Justice Department lawyers (some of the brightest and most dedicated lawyers) played a critical role in setting telecommunications policy. The industry accused the judge, and the Justice Department of slowing the telecommunications industry, and eventually the judge and the Justice Department were removed from the issue when Congress enacted the Telecommunications Act of 1996.

In the AT&T case, the Bell Operating companies argued that they needed to be regulated by the FCC, not the Justice Department and a federal judge. Similarly, companies in the FCPA world want to know what compliance policies will satisfy the Justice Department.

Businesses are now complaining, and they have a good argument — they just want to know what the rules of the game are. If they discover a violation through an internal audit, what are the benefits to the company of coming in and disclosing to the Justice Department the conduct? Out of frustration, businesses are now looking to the Chamber of Commerce to lobby Congress and put pressure on the Justice Department to provide some guidance on its

enforcement policies. The Justice Department better lose its hubris and respond in some way, or they may lose the issue all together.

The analogy is not exactly right on point but I am reminding everyone that blind enforcement without responding to legitimate business concerns will result in some type of push back – be it threats of legislation resulting in changes in policy, or even changes in the law itself. My advice to the Justice Department is simple – respond to the business community, adopt some prosecutorial policies and make them public, so that companies can implement meaningful and effective compliance programs without fear of unfair prosecutions.