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American Bar Association

ABA Section of Business Law


ABA Section of Business Law
Business Law Today
November/December 1999


Doing it right - overseas

Compliance programs take on new importance in a global economy

By KENNETH WINER

Winer is a partner at Foley & Lardner in Washington.

Does your company sell to customers outside the United States? Purchase products from abroad? Invest in companies that operate outside the United States? Enter into joint ventures with foreign companies? Pay taxes to foreign governments? If so, you should make sure that your compliance program has been updated to address the legal issues that arise from such activities.

Many U.S. and foreign laws regulate the international business activities of U.S. companies. Compliance programs developed when the focus of the company was on domestic business activities and are likely to prove inadequate to the realities of today’s global economy.

The adverse consequences arising from one unlawful transaction can be substantial. For example, in 1995, Lockheed paid $25 million in fines and penalties and a senior Lockheed executive was sentenced to 18 months in prison in connection with bribing a member of the Egyptian parliament. Moreover, the other consequences of a government investigation or prosecution under these statutes can be harsh, including revocation or suspension of export privileges or import privileges, debarment from government contracts, adverse publicity as well as the expense and disruption of responding to a government investigation or prosecution.

This article is divided into four parts. It begins by discussing some of the U.S. laws that govern international business activities. It then addresses the establishment and communication of compliance standards. Next are other measures necessary to maintain an effective compliance program. Finally, it discusses steps that a company should consider taking when it learns of possible misconduct by an individual or entity acting on behalf of the company.

U.S. laws governing the international business activities of U.S. companies fall into two categories. The first consists of laws, such as antitrust, employment and economic-espionage laws, that are also applied frequently in the domestic context. With respect to these laws, the international business activities of U.S. companies are arguably at special risk because management educated and trained outside of the United States might be less familiar with these laws than management educated and trained in the United States.

The second category consists of laws that are applied most frequently to companies that engage in international business activities. One example is the U.S. Foreign Corrupt Practices Act (FCPA), which prohibits bribery of foreign government officials and officials of public international organizations. 15 U.S.C. 78dd-1, 78dd-2, 78m (1993). The scope of the FCPA reaches far beyond a company paying money to a foreign official in order to influence the official to send business to the company. A U.S. company and its officers and employees can be charged with violating the FCPA based on the activities of the company’s consultants, joint venture partners or a recently acquired subsidiary.

The federal government has also promulgated regulations prohibiting U.S. companies and employees from complying with the boycotts of foreign countries against other countries (such as Israel) that are friendly with the United States and limiting the information that can be supplied in connection with such boycotts. 15 C.F.R. Part 760. Although issues arising under this statute are most frequently encountered in the Middle East, they can arise anywhere.

The U.S. government has also imposed numerous export and import controls as sanctions against various countries and terrorist organizations. Following the Export Administration Regulations, the federal government regulates the exports of products and technology from the United States and the re-exports of U.S.-origin products and technology from one foreign country to another country. 15 C.F.R. Parts 730 to 774. Similarly, the federal government regulates imports into the United States according to customs laws and regulations. 19 U.S.C. 1 (all); 19 C.F.R. 1 (all).

In addition, Uncle Sam has sanctions that govern exports to, imports from and investments in many countries, as well as transactions with the government of such countries, individuals and organizations designated as foreign terrorist organizations or significant foreign narcotics traffickers. 31 C.F.R. Ch. V.

Companies use a variety of materials to establish and communicate standards relating to international trade matters. They frequently use a code of conduct that sets forth general policy statements regarding the company’s values and objectives. This code is typically distributed to all company employees and agents, and sometimes to the company’s business partners.

Many companies supplement their code of conduct with either a pamphlet or an employee handbook. Typically, these materials are more detailed than the code and identify instances when company employees should seek further guidance from company lawyers, compliance officials or supervisory personnel. These materials are typically distributed to all company employees and agents who are in a position to violate the company’s standards and procedures concerning international business. Sometimes, these standards are also provided to consultants and business partners.

It is important that compliance materials be carefully crafted to take into account the company’s specific operations, practices, personnel, corporate culture and history; a form book containing boilerplate language will rarely achieve the goals of an effective compliance program. The handbook should use language that will be as clear as possible to the intended audience.

Obviously, the materials should not permit conduct that is clearly unlawful. In addition, a company must exercise considerable judgment in deter- mining how much discretion to vest in company personnel and what conduct should be prohibited, because — even though the conduct might be lawful — there is an undue risk that the government might view the conduct as unlawful or that the conduct might at least trigger a government investigation or adverse publicity. Thus, companies will often establish standards that are in some respects more stringent than the standard imposed by law.

Some companies also use a reference manual that is distributed to employees with special responsibilities for the implementation of the compliance program. This manual typically sets forth the company’s standards and procedures in great detail. For example, it might identify standard FCPA due-diligence measures to be considered with respect to a foreign representative, such as, in the consideration of the relationship between the representative and relevant governmental entities:

• whether the representative’s compensation is consistent with payments that the company makes elsewhere for similar services and with local custom and law;

• whether the foreign representative has made comments that can be interpreted as references to improper payments;

• the expertise and experience of the representative,

• whether services to be performed by the representative are necessary or appear to be a cover for a prohibited payment, and

• the method and manner by which the representative will be paid, as well as the reputation of the representative.

Many companies supplement the dissemination of these materials with periodic training sessions and other reminders. These serve at least two purposes. First, they make it more likely that company personnel and agents will be mindful of the standards in the conduct of the company’s affairs. Second, they communicate to company personnel and agents that the company is serious about the guidelines.

In addition to establishing and disseminating compliance standards, a company must establish a good compliance environment. It is essential that the company hire personnel who are both competent and honest. Furthermore, the company needs to establish an environment in which employees and agents recognize that the company is serious about compliance. The establishment and dissemination of written standards, coupled with periodic reminders and training sessions, can promote such an environment. In addition, a company can establish such an environment both by vigorously investigating indications of wrongful conduct and by disciplining any employee or agent found to have violated the company’s standards.

The company needs to communicate to its personnel and agents that it places great importance on such compliance. Many companies require designated employees to complete forms periodically that indicate that those employees have reviewed the international trade section of the handbook, that they have not violated the company’s standards, that they are not aware of anyone else who has violated the company’s standards, and that procedures have been followed. Companies often assign internal audit staff to conduct periodic audits to see whether the standards have been followed. Many companies send employees to training sessions that address the relevant legal standards as well as company policies and procedures.

The company must have procedures for pursuing leads that personnel or reps have engaged in wrongful conduct. For example, a company hotline will tend to gather complaints about a wide variety of actual and suspected conduct, much of which is likely to turn out to be legal and appropriate. Similarly, the periodic certification process described above might result in red flags that need to be pursued. The steps that a company should take in response to such indications are discussed in the next section below.

In designing compliance procedures, careful consideration should be given to the extent to which employees will be required to document their actions. That requirement can serve several valuable functions. If the company’s action is later challenged by a government law enforcement agency, the documentation can assist in demonstrating that the company acted reasonably and in good faith. Documentation can also assist the company’s internal audit staff in evaluating whether personnel are complying with procedures. Requiring that employees document their actions might also benefit the company by prompting employees to be more meticulous in following procedures.

Specific corporate personnel must be assigned the responsibility for updating the compliance program in light of changing circumstances. For example, a change in the law might require an update. Similarly, a change in the company’s operations, personnel or compliance history might suggest that the program should be revised.

An important element of any effective compliance program is the capacity and willingness of a company to conduct internal investigations in response to red flags and other indicators of possible violations in order to determine whether standards have been violated. The extent of such internal investigations can vary greatly, depending on the circumstances. In some instances, the internal investigation can appropriately be limited to a few interviews and the gathering and review of a limited number of documents. In other instances, the investigation will require a far-reaching search for documents, the review of vast quantities of documents and extensive interviews with a large number of witnesses.

There are several reasons for pursuing such red flags and other indications of wrongdoing. Management has a need to know whether the standards have been violated so that it can make informed decisions in containing any damage arising from such violations, disciplining employees and representatives responsible for the violations, taking measures to reduce the risk of a recurrence, and (particularly if the company is a publicly owned company) assessing whether disclosure is appropriate.

In addition, investigating indications of wrongdoing communicates to the company’s personnel and representatives that the company is serious regarding compliance and reduces the risk of a recurrence. Furthermore, the information gathered as a result of an internal investigation may assist the company in dealing with potentially hostile entities, such as government law enforcement officials, government regulators, the media and plaintiffs’ counsel.

There are seven basic steps to conducting an investigation.

First, a decision must be made regarding the staffing of the internal investigation. In most instances, it would be appropriate for a company’s legal department (or other company employees acting under the direction of the legal department) to pursue indications of improper conduct in order to determine whether, and by whom, the company’s standards have been violated. This can usually be accomplished with relatively little expense and disruption to the company’s operations.

With respect to significant matters, companies often retain outside counsel to conduct an internal investigation. Outside counsel also are hired because of the perception that they are more independent than company employees or because of resource limitations. Companies also might be more likely to be successful in asserting the attorney-client privilege if the internal investigation is conducted by outside counsel than if the investigation is conducted by company employees. In addition, if the allegations encompass the conduct of the company’s senior officers, legal department or compliance officers, it often is appropriate to retain outside counsel to conduct the investigation. If outside counsel are retained, the company should assign an employee to act as a liaison between the company and the outside counsel.

Second, senior management should issue a memorandum that:

• instructs the investigators to conduct a confidential internal investigation;

• defines the scope of the investigation;

• authorizes the investigators to inform company personnel that they are instructed to cooperate in the investigation; and

• specifies (if appropriate) that the investigation is in anticipation of litigation and for the purpose of the company’s obtaining legal advice. Such a memorandum will assist the company in successfully seeking the protection of the attorney-client privilege and the work-product doctrine in the event that discovery is sought in U.S. courts for documents generated in connection with the investigation.

Third, the investigators should develop an initial action plan. It should identify the documents to be gathered, the witnesses to be interviewed and the nature of the questions to be posed during the interviews. The plan should address the order of the interviews and the extent, if any, to which potential witnesses can be interviewed by telephone. It is important to understand that the action plan will often evolve during the investigation as documents are gathered and reviewed and witnesses are interviewed.

Fourth, consideration should be given to suspending normal document retention procedures (including procedures relating to information stored in computers) in order to ensure that company personnel do not destroy or otherwise dispose of documents relating to the transaction or to the incident that is the subject of the investigation. A diligent search should be taken to locate documents (including e-mail messages and other documents stored in electronic form such as word processing documents) that relate to the subject transaction or incident.

Fifth, the investigators should interview the individuals likely to have knowledge regarding the relevant transaction or the alleged violation. Before interviewing personnel, documents should be reviewed and organized (to the extent appropriate) into exhibits to be shown to witnesses during interviews.

At the outset of each interview, the investigators should state to the witness that:

• senior management has authorized the investigators to state that company employees should cooperate in the investigation;

• the investigators are attempting to determine the truth relating to this transaction and the circumstances surrounding it;

• the investigators are not asking the witness to provide untruthful or misleading information to any government investigators; and

• the witness should not destroy or discard any documents relevant to the investigation.

If the investigators are lawyers, they should also state that:

• they represent the company, and not the individual witness;

• they are seeking information to assist in providing legal advice and services to the company;

• it is important to the company’s ability to successfully assert privileges with respect to the investigation that the witness keep the substance of the interview confidential from anyone other than counsel; and

• the company controls the privileges associated with the investigation and has the sole right to determine whether to waive any privileges associated with this internal investigation.

In some instances, the employee should be asked to acknowledge in writing that he or she has been provided this information.

As a general rule, there should always be at least two investigators present for each witness interview. Having two investigators present makes the interview more effective since one of the investigators can take the lead in asking questions and the other can focus on taking notes. In addition, the second investigator can later serve, if necessary, as a witness to corroborate the recollections of the first investigator regarding both the statements of the witness and that the first investigator conducted the interview appropriately.

The interview notes should be marked as "confidential," and the author of the notes should note (if true) that they reflect his or her mental impressions and that they are not a substantially verbatim record of the interview. The notes should clearly reflect that the investigators made the appropriate statements to the witness at the outset of the interview. The interviewers should not be persons who were involved in the underlying transactions.

During the interview, the investigators should ask questions designed to learn information that the witnesses can recall regarding the transaction and the circumstances surrounding the transaction. It is almost always appropriate to ask the core questions. For example, in an FCPA investigation, it is usually appropriate to ask:

• whether the witness has any reason to believe that a payment was made to a foreign official in connection with the transaction or incident that is the subject of the investigation;

• whether the witness has heard any reference to, or seen any document that referred to, such a payment; and

• whether the witness has any reason to believe that certain company records are inaccurate.

In addition, it is often appropriate to ask additional questions designed to develop any understanding of the transaction or incident, the identity of the individuals involved in the transaction or incident as well as the location and content of the documents generated in connection with the transaction or incident.

In conducting interviews, it is important to be sensitive to cultural differences. For example, in some cultures, it is customary to engage in extended pleasantries before turning to business. In such cultures, it might be prudent to engage in such pleasantries before asking questions relating to the internal investigation.

In conducting the interview, the investigators should be careful not to appear to be attempting to influence the witness to provide answers that are not truthful. To the extent possible, the investigators should avoid telling one witness what another witness has told the investigators or otherwise educating the witness regarding the transaction, although it will often be necessary to refresh the witness’ recollection regarding facts of which the witness once had knowledge.

Sixth, the question of whether to prepare a written report of the investigation and whether to disclose the report to government officials or to the press requires careful consideration. If the company decides to disclose the report to government officials or the media, there is a substantial risk that all of the company’s privileges with respect to the investigation will be deemed waived. If it is decided that the investigators should prepare a written report but that the report should not be disclosed to the government or to the press, the investigators should take steps to preserve the argument that the report is confidential by, among other things, labeling it as confidential and limiting its circulation. The report should also include an express statement (if true) that it was prepared in anticipation of litigation and for the purpose of providing legal services and advice to the company.

Seventh, the company must assess what corrective action, if any, should be taken in light of the information gathered during the internal investigation. Throughout the course of the investigation, the investigators and the company should be alert to whether there might be a continuing, recurring or other prospective violation of law or of the company’s standards and procedures. If it appears that there might be such a violation, then the company should take the measures needed to prevent further violation.

In addition, the company should consider whether to disclose to government officials or to the public either the existence or the results of the investigation. This consideration involves delicate judgments regarding whether disclosure is legally required, the risk that the government might otherwise learn of the violation, and the benefit, if any, the company will receive for having voluntarily disclosed the matter to the government. Furthermore, the company should consider whether any employee or agent should be disciplined and whether the investigation has revealed any areas in the compliance program that should be enhanced.

The increasing globalization of the U.S. economy offers great business opportunities to U.S. companies. Those seeking these opportunities must take steps to address the myriad laws and regulations governing international business actvities. These companies must establish compliance programs designed to prevent unlawful conduct and to detect indications of unlawful conduct. Companies must also take steps in advance so that they will be able to respond quickly if the company does detect indications that unlawful conduct has occurred.

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