The London Olympics and the Bribery Act

The London Olympics in 2012 will be a test of strength, agility and endurance. That’s just be for the corporate sponsors trying to comply with the UK’s Bribery Act.

Unlike the US Foreign Corrupt Practices Act, the UK’s Bribery Act applies equally to payments made to foreign government officials as it does to payment made to domestic companies. Should a potential bribery case arise under the Bribery Act, the only defense of the organization is to show that it had “adequate procedures” in place to stop bribery. Guidance on what are “adequate procedures” will not be promulgated until at least early 2011.

It is estimated that £100m will be spent on hospitality during 2012 London Olympic games. It will be a compliance headache for companies with hospitality tents, events and other rewards for customers.

Here in Massachusetts, you can’t offer a public official tickets to a playoff game or World Series game. That’s true even if the official pays for the ticket. It’s considered special access and you are getting a benefit of access that is not available to the general public.

If you take that same position, maybe corporate sponsors should only be handing out tickets to Olympic events that are not sold-out. That sounds silly. But it may be one of the challenges faced with corporate sponsors at the London Olympics in 2012.

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Will Cash Incentives for Whistleblowing Undermine Compliance Programs?

Section 922 of the Dodd-Frank Wall Street Reform and Consumer Protection Act provides an expanded whistleblower program that allows the whistleblower to get part of the money paid to the SEC for the violation. After several years of encouraging the development of internal complaint hotlines and compliance programs, Congress seems to now be encouraging a trip to the Feds before reporting a problem internally. On November 3, 2010, the Securities and Exchange Commission (SEC) published its Proposed Rules for Implementing the Whistleblower Provisions of Section 21F of the Securities and Exchange Act of 1934.

I think the approach is poor and could undermine corporate compliance programs. On the other hand, I think employees are more likely to report the problem internally than externally. Reporting externally is a much bigger step. You don’t know who is getting the report or what they will do with it.

The promise of cash payments is a bit remote. It’s not like the SEC will be cutting a check once you make the call. There will months, if not years, of investigation and litigation before there is any money available. And that is assuming the Feds win. In the meantime, the reporter has jeopardized his or her job and career.

I think the typical person is much more likely to talk to their friendly, internal compliance people before they go racing off to the Feds seeking fame and riches.

Now there is some evidence that I’m correct. The National Whistleblowers Center has released a report on the Impact of Qui Tam Laws on Internal Corporate Compliance. Based on a review of qui tam cases filed between 2007-2010 under the False Claims Act, the overwhelming majority of employees voluntarily utilized internal reporting processes, despite the fact that they were potentially eligible for a large reward under the False Claims Act. 89.7% of employees who would eventually file a qui tam case initially reported their concerns internally, either to supervisors or compliance departments.

Their conclusion:

“The qui tam reward provision of the False Claims Act has existed for more than 20 years and has resulted in numerous large and well-publicized rewards to whistleblowers. However, contrary to the disingenuous assertions by corporate commenters, the existence of this strong and well-known qui tam rewards law has had no effect whatsoever on whether a whistleblower first brings his concerns to a supervisor or internal compliance program. There is no basis to believe that the substantively identical qui tam provisions in the Dodd-Frank law will in any way discourage internal reporting.”

It may not be meaningful for some time. The Securities and Exchange Commission is operating under budget constraints and put the whistleblower office on hold until funding clears up. The new Congress may repeal provisions of Dodd-Frank, but they can limit some of the funding.

Much of the whistleblower program is in SEC Release 34-6323. Comments are open until December 17, 2010. Certainly, the proposed rule could change significantly bases on the comments. There have been lots of comments from the compliance community at the public companies subject to this rule. I would like to see the rule changed as a validation of internal compliance programs.

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Business Ethics and Term Paper Mills

Having someone else write you college term paper is cheating. There is no ethical debate. If you use one of these services you are passing off another person’s work as your own.

Since I was in college and law school before the rise of the internet, these services were not easy to find during my school years. Occasionally you would find an 1-800 advertisement in the back of a magazine. Maybe you heard through the rumor mill that someone could help.

Now, it’s easy to find hundreds of services to help you with your paper. I’m sure they are tempting after blowing off a class all semester.

The Chronicle of Higher Education recently ran an essay from one of the people working for a term paper mill. What caught my eye was not the topic of term paper mills, but the subject of the paper discussed in the story: business ethics.

The student used the term paper mill to help with the proposal for the paper, then came back for the seventy five page report, for a response and revision based on the professor’s criticisms, and finally used the ghost writer to produce the 160-page graduate thesis. All of it written by the term paper mill and none by the student.

Clearly, the business ethics professor did not get through to this student.

In an different story from another term paper writer, that writer when given an open topic assignment on ethics, would “write on the ethics of buying term papers, and even include the [term paper mill] broker’s Web site as a source.”

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Money Laundering Using Trust and Company Service Providers

Trusts and Company Service Providers (TCSPs) can provide an important link between financial institutions and some of their customers.  TCSPs have often been used, wittingly or unwittingly, in the conduct of money laundering activities. The majority of TCSPs are established for legitimate purposes, the Financial Action Task Force’s research Shows that some TCSPs are being used, unwittingly or otherwise, to help facilitate the misuse of trust and corporate vehicles.

The FATF’s Money Laundering Using Trust and Company Service Providers report evaluates the effectiveness of the practical applications of the FATF’s 40+9 Recommendations as they relate to TCSPs.  It also considers the role of TCSPs in the detection, prevention and prosecution of money laundering and terrorist financing.

The report is an update f the 2006 report: The Misuse of Corporate Vehicles, Including Trust and Company Service Providers, 2006. presents issues for consideration that should help to reduce the use of TCSPs for money laundering purposes.

There are no simple answers, other than knowing your business partner. Complex arrangement of entities are usually required to make structures tax-efficient across international borders, to isolate risk, to meet regulatory requirements, and to clarify management. On the other hand, bad guys can use these structures to hide the true ownership and that the true source of capital is dirty money.

The Financial Action Task Force (FATF) is an independent inter-governmental body that develops and promotes policies to protect the global financial system against money laundering and terrorist financing.

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Email, Warrants and Corporate Email

Inside the company, you can take away your employees expectations of privacy when it comes to email. It has been unclear whether the same is true when it comes to the government inspecting your email. Surprisingly, there has been little law on whether your email would be subject to same protections as your phone calls from government snooping. Does the government need a warrant to obtain the contents of your email from your internet service provider?

The latest case to address the issue is U.S. v. Warshak out of the Sixth Circuit Court of Appeals which held:

If we accept that an email is analogous to a letter or a phone call, it is manifest that agents of the government cannot compel a commercial ISP to turn over the contents of an email without triggering the Fourth Amendment. An ISP is the intermediary that makes email communication possible. Emails must pass through an ISP’s servers to reach their intended recipient. Thus, the ISP is the functional equivalent of a post office or a telephone company. As we have discussed above, the police may not storm the post office and intercept a letter, and they are likewise forbidden from using the phone system to make a clandestine recording of a telephone call—unless they get a warrant, that is.


The case is based on charges against the manufacturer of Enzyte with its Smilin’ Bob commercials. The company got into mess of mail and wire fraud because of their sales practices and banks closing down their accounts.

The government seized 27,000 emails from the company’s internet service provider under the the Stored Communication Act (18 U.S.C. §§ 2701 et seq.), a statute that allows the government to obtain certain electronic communications without procuring a warrant. As you might expect, the company objected to this government action.

Once you become a registered investment advisers, you are going to be subject to inspection by the Securities and Exchange Commission. The SEC will likely not need a warrant for any records or communication required to be kept under the Investment Advisers Act. You can’t have an expectation of privacy for stuff you are required to submit to SEC examination.

As an employer, you own the hardware and the network and you can decide how your employees use them. If you clearly state that your employees have no expectation of privacy for email on the company’s network then you are free to dig into their email traffic as part of an internal investigation.

The Warshak case is important for criminal law, but has no effect on corporate email policies.

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Compliance Bits and Pieces for December 17

Here are some compliance-related stories that recently caught my attention:

Additional Settlements in New York Pension Fund Investigation in the Pay to Play Blog

New York State Attorney General and Governor-Elect Andrew Cuomo has announced additional settlements in his investigation of “pay-to-play” practices and conflicts of interest at public pension funds.

FTC Gives Guidance on Securing Data on Digital Copiers by Melissa Klein Aguilar in Compliance Week

A gentle reminder from the Federal Trade Commission: Make sure your information security plan covers the digital copiers your company uses. The agency has some tips for businesses on safeguarding sensitive data, such as Social Security numbers, account numbers, or health records that may be stored on the hard drives of digital copiers, in order to prevent the risk of fraud and identity theft.

Regulation of Private Fund Advisers at the State Level

The Dodd-Frank Wall Street Reform and Consumer Protection Act raised the level for registration with the SEC and removed the commonly used exemption from registration used by private fund advisers. That means smaller traditional investment advisers will be kicked out of the SEC registration and into the state registration systems. That also means that advisers to funds with less than $150 million are potentially subject to state-level registration and regulation.

In general, advisers to private funds with less than $150 million in assets under management will be exempt from SEC registration but still must submit reports to the SEC and maintain certain books and records. This, along with venture capital fund advisers are the new “exempt reporting advisers” category. They are not excluded from the definition of “investment adviser” under the Investment Advisers Act and are not required to register under the Investment Advisers Act.

That means states are not preempted by Section 203A of the Investment Advisers Act from requiring “exempt reporting advisers” to register.

Advisers to private funds with more than $150 million under management are federal covered advisers and merely have to notice file in the states in which they maintain a place of business. (Investment adviser representatives for private fund advisers are required to register with the states if they meet the definition of investment adviser representative under SEC Rule 203A-3.)

The North American Securities Administrators Association has begun looking at the issue of how states with regulate private fund advisers under the $150 million level. They have issued their Proposed NASAA Model Rule on Private Fund Adviser Registration and Exemption.

The model rule would provide the basis for an exemption from state registration only for advisers only to 3(c)(7) funds, including venture capital funds formed under 3(c)(7). Presumably funds falling under the 3(c)(1) exemption would be subject to state registration.

Under the proposed model rule, an investment adviser solely to one or more private funds will be exempt from state registration requirements if the adviser satisfies certain specified conditions:

  • The adviser cannot be subject to a disqualification under 230.262 of title 17, Code of Federal Regulations.
  • The adviser’s clients must be limited to private funds that that qualify for the exclusion from the definition of “investment company” under Section 3(c)(7) of the Investment Company Act of 1940.
  • The adviser must file with the state the report required by the SEC for exempt reporting advisers.
  • The adviser must pay the fees specified by the state.

The proposed rule could change depending on how the SEC changes its proposals for implementing the new registration and reporting requirements in Release No. IA-3110 and Release No. IA-3111. Once the NASAA finalizes the proposed rule, it would be up to the states to adopt the rule. They may not adopt it all or may change it significantly.

NASAA is seeking comments on their proposed rule. Comments should be submitted electronically to [email protected], but written comments may be mailed to NASAA, Attn. Joseph Brady, 750 First Street, NE, Suite 1140, Washington, DC, 20002. The deadline for submission of comments is January 24, 2011.

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Corporate Compliance after Dodd-Frank: Dealing with Whistleblower Bounties

Securities Docket produced a webcast “Corporate Compliance after Dodd-Frank: One Voice; How Many Masters?” that focused on the SEC’s proposed new whistleblower rules and their implications for internal controls and compliance programs, investigations, self-reporting incentives and employer/employee relations, including executive compensation and employee reporting responsibilities.

The panelists:

  • Byron Egan, Partner Jackson Walker L.L.P.
  • Jeffrey Sone, Partner Jackson Walker L.L.P.
  • Gary Kleinrichert, Senior Managing Director FTI Consulting

Section 922 of Dodd-Frank provides an expanded whistleblower program that allows the whistleblower to get part of the money paid to the SEC for the violation.

There is a lot of gnashing of teeth among compliance professionals because this provision would encourage an employee to ignore internal complaint processes and head directly to the Feds. Those internal whistleblowing program came out of Sarbanes-Oxley, the legislation enacted as a result of the last financial crisis.

The new program is not applicable to private companies that are not subject to registration under the Securities Act of 1934. Section 922 of Dodd-Frank is an amendment of that law.

Employees with a legal, compliance, audit, supervisory or governance responsibility have limited eligibility for the whistleblower bounty. They are not eligible if the information was communicated to them with the reasonable expectation that they would take steps to respond to the violation. They are then eligible if the company does not disclose the information to the SEC within a reasonable time or proceeds in bad faith.

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In prognosticating the impact, we can look at the False Claims Act which has a similar whistleblower bounty program. Under that legal framework, most people don’t report to the government until they have given their company a chance.

Much of the whistleblower program is in SEC Release 34-6323. Comments are open until December 17, 2010. Certainly, the proposed rule could change significantly bases on the comments.

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CFIUS Annual Report on National Security Transactions

The Committee on Foreign Investment in the United States is a multi-agency regulatory body empowered to review transactions involving a foreign person and a U.S. business that may affect national security. On November 14, 2008, the Department of the Treasury issued its final rule to implement the Foreign Investment and National Security Act of 2007, which provided guidelines for the Committee on Foreign Investment in the United States when reviewing investments by foreign persons in U.S. businesses for national security issues.

If your transaction has implications for national security and your investment vehicle has significant foreign ownership of the party or the other side has significant foreign ownership, they you need to pay attention to CFIUS. There has been little guidance on what level of control and what would be a threat to national security.

Recently, CFIUS delivered its unclassified Annual Report to Congress for the calendar year 2009 and it offers some insight into the breadth and power of this little known agency.

In 2009, 65 CFIUS notices were filed and determined to describe “covered transactions” within their regulatory review.

Of the 65 notices filed, 7 were voluntarily withdrawn from CFIUS consideration the initial review and investigation phases. New notices were filed in 3 transactions and 3 transactions were abandoned. The seventh withdrew the transaction with the declared intent of re-filing a CFIUS notice.

Twenty-five of the covered transactions were subject to investigation, extending the period of delay for the transaction.

In 2009, CFIUS agencies negotiated, and parties adopted, mitigation measures for five different covered transactions. These measures involved acquisitions of U.S. companies in the computer software, telecommunications, and energy sectors. No transaction was blocked.

In a key finding, the CFIUS judged that judge that foreign governments are “extremely likely” to continue to use a range of collection methods to obtain critical U.S. technologies. Sources: