All Things Investigations Podcast

Michael DeBernardis (00:00):

But the worst thing you can do is create a antagonistic relationship with your compliance monitor. One, you will always lose. There's no scenario where a monitor and a company go to, let's say it's the Department of Justice, and have some debate, and the Department of Justice sides with the company. Almost no scenario, I don't want to paint too broad a brush there, but you're going to lose, the monitor's going to win, and so there really is no point in creating this antagonistic relationship. That's not to say that you have to just roll over and do absolutely everything the monitor says, and I actually think that's why it's really important from the outset to establish a very cooperative and collaborative relationship because then a monitor is going to be more open to feedback, more open to input from the company or council about what might work, what might not work, why the company has decided not to implement a recommendation or do something the monitor said. The monitor will be more receptive to that feedback.

Tom Fox (00:57):

Welcome to the Hughes Hubbard Anti-Corruption & Internal Investigations practice group's podcast All Things Investigations. Hughes Hubbard Anti-Corruption & Internal Investigations practice group represents many of the premier companies around the world, providing advice on issues spanning the full anti-corruption and compliance spectrum. In podcast, host Tom Fox and members of the Hughes Hubbard Anti-Corruption & Internal Investigations practice group will highlight some of the key legal issues involved in white collar and other investigations, both domestically and internationally. We will tackle topical issues involved in investigations as well as explore how companies and prevent and detect issues that arise in conducting investigations on a worldwide basis.

Tom Fox (01:50):

Hello everyone, this is Tom Fox back for another episode, and today I have with me Mike DeBernardis. Mike's a partner at Hughes Hubbard, and we are going to look at some of the key developments in ethics, compliance, and FCPA from Q1 2022. So first of all, Mike, welcome to the podcast.

Michael DeBernardis (02:07):

Thanks Tom. Happy to be back on.

Tom Fox (02:09):

Mike, we only had a couple of cases, but I really want to maybe mine those a little bit from your perspective. The KT enforcement action. Was there anything in here that interested you or you've really used to counsel clients to think about their compliance program in a different way?

Michael DeBernardis (02:26):

Yeah, it's interesting. For relatively small FCPA resolution, there is a lot in here that's useful for me from a compliance, from a training perspective for clients. This case is full of corruption cliches. If you go down the list, you're talking about slush funds, check, use of intermediaries, check, charitable contributions, check, and down the line. And when we're talking with clients from a preventative standpoint, from a compliance standpoint, and we're talking about things like it's really important to have controls around charitable contributions, you sometimes do get pushback to say is that really an area that we have to think about? How often are those going to be used improperly? And so when you have a case like this, where KT Corp did use charitable contributions ostensibly to charitable foundations as a means for bribery, it's a useful case study to show clients. So from that perspective, it's been surprisingly fruitful in terms of the training opportunities and the lessons learned. I think the big takeaway from this action though is companies often are presented with an opportunity to correct course. You see this pretty often, this is a really stark example of it.

Michael DeBernardis (03:43):

There was some misconduct that's gone along, they learn of it, maybe it's through an audit. Here, it was through really a very public announcement and some news stories about the senior executive that KT Corp, who had essentially created a slush fund and he was ultimately charged with embezzlement, although I believe acquitted after some appeals, and it offered an opportunity to correct course, to say wait a second. If this is going on, what else is going on? Do we need to improve our control environment? Do we need to do a broader investigation to see what else might be happening? But they really didn't and they transitioned from that particular scheme of inflating executive bonuses to create a slush fund to a new scheme of using gift cards to create a slush fund, and the conduct continued for another three or four years and involved other countries as well. So it drives home the point of when you're presented this opportunity, when the red flag is raised that, "Hey, we might have an issue here," it's really important to correct the course at that time.

Tom Fox (04:46):

The next case involved a [Marsh McClendon 00:04:50] subsidiary called [Jardine 00:04:52], which was a UK company, and this is one of the rare declinations with disgorgement, a rarely used tool in the DOJ's arsenal, but I think a useful tool that every company can think about. Could you maybe describe what the declinations with disgorgement process is and how that can be very useful for a company that finds himself in FCPA hot water?

Michael DeBernardis (05:15):

Sure. This really comes out of what is now termed the corporate enforcement policy. It started several years ago with the pilot program for voluntary disclosure of FCPA resolutions, and I think this is actually a really good example of the corporate enforcement policy working exactly as designed. So essentially under this policy, if a company voluntarily discloses misconduct and that misconduct is not known to the Department of Justice beforehand, and take other steps, including cooperating fully with the investigation, providing all relevant information, several other steps, including disgorging any ill-gotten gains from the misconduct, there is a presumption that, rather than prosecuting or deferring a prosecution, the Department of Justice will issue a declination, will decline to prosecute the company. That is the presumption under the corporate enforcement policy.

Michael DeBernardis (06:11):

That's really what happened here. I think it was Jardine, prior to its acquisition by Marsh & McLennan, learned of this conduct in 2017, they disclosed it to authorities in 2018, before it became public, before the department knew about it. At least according to the declaration letter, they cooperated fully with the department's investigation and, again according to the declination letter, provided all available in information, including specifically mentioned is all information about individuals potentially involved, and they agreed to disgorge 29 million in ill-gotten gains from the conduct. And as a result, they got this declaration, which is really, you're talking about end results from an FCPA investigation, the second best result. I mean the best would be a decision that there was no violation of the FCPA, but especially when it's clear that there has been a violation, this is probably the best result you can hope for.

Michael DeBernardis (07:07):

It's also interesting, I think, because I don't know if in 2018, when they made this voluntary disclosure decision, they were already in the process of discussions about being acquired or looking to sell, but it certainly makes that process easier. If they had decided not to disclose this information to the Department of Justice and as Marsh & McLennan is going through its due diligence as part of the acquisition, I suspect that this would've come up had they done any real due diligence on it, it really makes the finalization of that transaction much more difficult. Here, having already self-disclosed, I imagine it was easier for both Jardine and for Marsh & McLennan to get their head around what the implications of this could be, what the ultimate effect of this disclosure could be down line, and really build that into the purchase price and take appropriate steps afterwards. So really, to me, it's the first declination we've had in quite some time, but it's a really good example of how the process was designed and really working exactly as it was designed to work.

Tom Fox (08:09):

Mike, there's a couple of questions that have come up over time to time that really deal with squarely your wheelhouse, which is investigating matters and then negotiating with the government, and helping companies get through that process, that I wanted to ask you about. The first one is really that dynamic tension in a investigation. And by that, I mean the tension of those who want to fully investigate, fully fully, then the tension with those perhaps who are not lawyers or compliance professionals who may want to have a more targeted focused investigation, but perhaps also a less costly investigation. And then the need, when you're in that situation and you do have to sit down across from the regulators, to be able to give them some reasonable assurance that you have fully investigated and you've uncovered everything. How do you navigate that dynamic tension?

Michael DeBernardis (09:05):

It's really one of the most difficult aspects, I think, of this job. Starting out, scoping investigations is incredibly important but also can be incredibly difficult. You are in a situation where, as the term they use, boiling the ocean, this is very rarely the appropriate answer. One, it's incredibly expensive, often incredibly inefficient, wasteful, and can take a really long time to get to the answer you're looking for. But finding the proper scope for an investigation, which is often one of the first steps, really can be a challenge. When you're dealing with various stakeholders, obviously you're going to be dealing with some who want this to be as narrow as possible and others who, particularly external stakeholders, say this should be really broad.

Michael DeBernardis (09:47):

From that perspective, the approach I typically take is making sure that the scope is tight, and by tight, I don't mean narrow, but I don't want any loose strands of an allegation out there. So we want to make sure, based on the allegation we have, that we are covering all the basis of that allegation, and that the decision regarding the scope, and the decision regarding the process is justified and carefully documented. That's also incredibly important. And then what we'll often do is expand as necessary as the investigation dictates. The issues that come up later, particularly as you start dealing with the regulator, is in responding to questions such as how do you have confidence that the same conduct didn't happen somewhere else? And that can be a really difficult question to answer unless you have gone and expanded your investigation globally, wherever you have operations.

Michael DeBernardis (10:46):

Sometimes it's simple enough to say based on the nature of the misconduct controls and what we identified as the root cause, we have reasonable assurance that is limited to this circumstance, any promises that you intend to continue to investigate as you move forward, you have to be really careful not to do, both as a investigator, as a lawyer representing a company, and as a company representative, is to not make any representations of a level of certainty without some justification. So that's where companies can find themselves in trouble is where you say, "We're sure this didn't happen anywhere else," and you don't really have justification for making that representation, and it turns out, two years later, that news breaks that you had the same exact problem or a similar problem across the globe or in a different region. That's where those representations can come back and haunt you.

Tom Fox (11:35):

We also had a really interesting court opinion recently, not in the anti-corruption area but in the trade sanction area. It involved the Chinese entity ZTE. For those who may not remember the saga, ZTE had an $850 million fine assessed by the Department of Justice and the court ordered a monitorship. Thereafter, ZTE was found to continue to engage in nefarious activities and the Department of Commerce issued a $1 billion fine, and the Department of Commerce put their own monitor in place, so ZTE was under dual monitorships. The first monitor, the court appointed monitorship recently ended. The court concluded that. Court had some rather extraordinary statements in it about ZTE's non-cooperation with the monitor and perhaps ongoing violative conduct by ZTE, but I really wanted to use that, Mike, to focus on how important the company's cooperation and work with the monitor during the pendency of a deferred prosecution agreement, non-prosecution agreement, or other resolution is and how can either someone like yourself as an outside counselor or someone inside really work to make that resolution satisfactory?

Michael DeBernardis (12:54):

Yeah, it's incredibly important. We have a lot of experience. I have a lot of experience serving in this role as buffer council, if you will, where we are working with a company who has a monitor, we're acting as an intermediary between the two. To me, for a successful monitorship, which means that, when I'm working with the company, it ends at the earliest possible opportunity, if course, but also that adds some value because, hopefully always but certainly often, the monitor is an expert in the field as well, they might have some fresh ideas about how the company can improve its compliance controls. So from an initial point, we always counsel our clients to be receptive to input from the monitor. View this as an opportunity to truly improve your processes, your procedures, your controls. You're paying for it, you might as well get some benefit out of it.

Michael DeBernardis (13:44):

But the worst thing you can do is create a antagonistic relationship with your compliance monitor. One, you will always lose. There's no scenario where a monitor and a company go to, let's say it's the Department of Justice, and have some debate, and the Department of Justice sides with the company. Almost no scenario, I don't want to paint too broad a brush there, but you're going to lose, the monitor's going to win, and so there really is no point in creating this antagonistic relationship. That's not to say that you have to just roll over and do absolutely everything the monitor says, and I actually think that's why it's really important from the outset to establish a very cooperative and collaborative relationship because then a monitor is going to be more open to feedback, more open to input from the company or council about what might work, what might not work, why the company has decided not to implement a recommendation or do something the monitor said. The monitor will be more receptive to that feedback.

Michael DeBernardis (14:39):

I think it's also important at the outset of these monitorships is to work with the monitor to appropriately come up with a work plan and appropriate scope for the monitorship that the regulator agrees with, because where I've found difficulties that come in is where the monitor says, "I want to do X, and Y, and Z," and the company's reaction is, "Well, we had no idea you were going to be doing that type of thing. We think that's beyond the scope of this monitorship." And so agreeing to that upfront takes some of that surprise out and it takes some of the potential conflict out later on. So long-winded answer there, Tom, but that's something I actually just have a lot of strong feelings on is how important it is really to establish a positive working relationship with the monitor. They're going to be there. Once you agree to a monitor, there's no getting rid of them until the timing's up. So like I said, establishing a good relationship and finding value in it I think are very important.

Tom Fox (15:33):

Mike, I'd like to turn to perhaps some other areas in compliance outside the FCPA, and the first one is the US versus Coburn decision by US district judge Kevin McNulty on a discovery dispute. And I had the opportunity to take a really deep dive into this case with your partner, Mike Huneke, on this podcast, so I don't want to recreate that, but if I could maybe tie it to your remarks around the need for a focused investigation plan, following that plan, if you do expand that plan, to put that in writing and explain why you need to do it.

Tom Fox (16:10):

Because it struck me as one of the things in Coburn, and that was a situation where an outside law firm's investigation and all of what I would call attorney work product had to be turned over, how important is to have a process and to follow that process? Because it strikes me that one of the things a criminal defendant might do is to attack the underlying investigation and make you, the lawyer in charge, justify it. So I was wondering if maybe I could get your thoughts on to expand about why it's important to have an investigation plan and then a protocol, and follow that, and if you need to explain that in an expanded document.

Michael DeBernardis (16:47):

Yeah, that's right. I've seen a lot of commentary following the Coburn decision on this point, exactly. This shows how important it is to have really documented and justified investigations, and to be ready for increased scrutiny. I think that was important before this decision, I don't know that it has changed my thought on this very much, but it does highlight part of the reasons that it's so important, from an investigative standpoint, to focus on process. The results obviously are important, but I'm very much a process driven person when it comes to investigations. We're going to have a documented process, it's going to be justified and, to the extent it's going to be altered, that's also going to be documented and justified. It's a very iterative process, iterative work plans, and notes to file, all these things that when someone five, six, seven, eight years down the line looks at your investigation, they're not left with any questions as to why did they do that?

Michael DeBernardis (17:47):

Why did they identify those custodians? Why did they limit the scope to this geography? Why did they limit it to this timeframe? Because all of that is going to be laid out very clearly and justified in documentation in the file for the investigation. And all that really should have driven the decisions you made anyway. Those decisions are critically important to an investigation. It's important not to just, "We're going to interview 10 custodians," without any justification or reason behind that. So this just, in a roundabout way, drove home the point that process in internal investigations, particularly ones that you think may go external, so ones that may need to be presented and justified to a regulator, is just real important, and making sure the decisions you make throughout are documented and justified. You never know when your investigation might face scrutiny. It can be hard to remember six years later why you made a certain decision, and so it's really important to make sure it's documented in the file.

Tom Fox (18:43):

Mike, the SEC has proposed some changes to the whistleblower program. What did you see in those changes that caught your attention?

Michael DeBernardis (18:50):

The bigger one was reverting back to an old part of the rule. These changes are in direct response to the amendments from 2020 and in 2020, the more controversial change at that time was this idea that in the SEC whistleblower program, when the SEC is the determining the appropriate total amount of the award, one of the things they could look at is the total amount of the award. The implication, at least from that change, was the SEC might say, "Frankly, that's just too big of an award. We're going to lower it. We're going to lower the award amount, just because that's just too big of a number." And there was some pushback when that change was made. Of the various changes, that was the most controversial. If you look at the changes from 2020, I don't know that was necessarily the intent of the way that the wording was changed, but that was certainly an effect of the change that was made.

Michael DeBernardis (19:42):

And so one of the proposed changes now is to say you can look at the total amount of the award, but only to increase it. So only if we find that the award is just too low based on all of the cooperation provided, et cetera, et cetera, we can raise a number. We're not going to lower it just because it's too big of a number. The other change is also interesting. I can't say I'm familiar enough to know how impactful it is, but the other major change now is, again, reverting back to the old way it was done, which is this definition of related actions. Your whistleblower award can be based on any award the commission receives or any penalty the commission receives, but also anything received from related actions. And the 2020 change really carved out instances where maybe another agency has its own whistleblower program.

Michael DeBernardis (20:31):

And so basically saying look, if another agency has its own whistleblower program and that agency also gets a reward, gets a penalty out of this initial whistleblower report, then you should really be compensated under that whistleblower program and not the SEC's whistleblower program. And it looks like the purpose of this most recent change is to walk that back a bit, I think honestly, to allow some more discretion, particularly in instances where maybe the other agency has a much less favorable whistleblower reward program. At the end of the day, the SEC has been clear we want to incentivize people to come forward, and bigger the incentives, the more likely they are to come forward. And really from the SEC's perspective, the whistleblower program's been a really big success. And so anything they can do to incentivize more people to come forward, I think they're trying to do.

Tom Fox (21:19):

I think it would be remiss if we didn't mention the Russian invasion of Ukraine, and I don't really want to visit that from the trade sanctions or economic sanctions perspective, but really more from the anti-corruption perspective. I've been thinking about that a lot, what it might mean going forward, and I was wondering from where you sit, are you counseling clients on ABC compliance for this geo region, this set of countries? Are you getting questions or are you guys doing what lawyers always do, which is sit around internally and just debate about it?

Michael DeBernardis (21:52):

Yeah, we are getting some questions. We did a webinar last week where this came up. My view from an ABC perspective on this is whenever there's a crisis, especially a global crisis, as I would categorize this, it can breed misconduct. It creates opportunities for employees to really feel desperate and that desperation can really breed misconduct. And so when you have a situation like this where you have already strained supply chains that are now even more disrupted or you have a very large market, for many companies, that is now off limits, maybe two very large markets that are off limits, and that can create a lot of tension for sales people that cover those regions, for the teams involved in procuring materials. And that's where you just have to be careful. I think you have to be really careful with the way you're handling this tension that's created and the business demands that are coming from it.

Michael DeBernardis (22:53):

The second part of it is what happens when, hopefully soon, this is over and we start looking at the reconstruction in Ukraine, and I imagine there'll be significant flow of funds to the country to rebuild it, as really there's been incredible devastation there. And whenever you have that flow of funds and those opportunities, I'm sure it'll be a highly competitive marketplace there for some of that work. You see this time and time again, Oil-for-Food Programme, all of these programs where there's just significant spending and effort to get things done quickly, there's opportunities for corruption there too. So it's more long those lines of the opportunities for misconduct that pop up from these situations. All you can do at this point is to be careful and keep an eye on.

Tom Fox (23:37):

I've been trying to think of an analogy on your second point on the rebuild, and frankly all I could really get to was things like hurricane devastation in Haiti or other that I might characterize as smaller single year events, but I think you're spot on on the Oil-for-Food as a framework for us both to think about what could happen, what will happen in the rebuild too, to help our clients understand how to navigate it, and frankly what we might see from the regulatory/enforcement perspective from the Department of Justice, so I may have to ask you to come back and talk about that.

Tom Fox (24:12):

Although we've had a paucity of FCPA enforcement actions, we've had some significant announcements of companies who are actually reserving money publicly to settle FCPA cases. And I don't think there's a bigger one than Glencore, which has publicly announced a reserve of 1.5 billion. It looks like, and if I can even tie this into the Lisa [Monaco 00:24:33] speech, Kenneth Polite and others from the department said they're coming, and that meant FCPA enforcement actions. It does look like we may have some significant ones, if not near term, certainly in 2022. Are there any that have caught your eye so far?

Michael DeBernardis (24:49):

Certainly Glencore. I mean anytime a company sets aside over $1 billion for a potential resolution, that's going to catch your eye. It also seems that'll be one of those very large ones with regulators from around the world involved. Then there's been at least two others. I think Honeywell set aside over 150 million or said they're accruing over 150 million back last fall, and a company called [Stericycle 00:25:14] accrued 60 million or so also in the fall. So those are coming.

Michael DeBernardis (25:18):

One of the things I'm watching with really all three of those but more so the Honeywell and Glencore, those companies are so large and have such a history that I think it'll be an interesting test case for one of the policy adjustments Lisa Monaco mentioned, which was we're going to consider the full history of corporate misconduct not just misconduct in the specific subject area. So when they're considering the appropriate it penalty for Glencore or Honeywell, they're not going to look at not just past FCPA misconduct but others. For companies that have operations, as these companies do, around the world and a long history, they're going to have nicks, and bruises, and issues from time to time. It just happens. And so I'll be curious to see if there's anything in those ultimate enforcement documents that talks about what types of misconduct, if any, that Department of Justice looked at.

Tom Fox (26:14):

Now like to turn to something near and dear to both of our hearts, which is the new Hughes Hubbard Anti-Corruption & Internal Investigations practice podcast All Things Investigations. I'm going to brag on both of us, Mike, because I think it really came about because of the great podcast you and I have had over the past few years on our quarterly FCPA and compliance wrap ups, but could you tell us a little bit about the podcast and, from your perspective, what you hope to get out of it?

Michael DeBernardis (26:42):

Yeah, I'm really excited. It did come out of this, it was your brainchild though, so I do thank you for that, but I'm really excited. I think we have a lot of really sharp lawyers in our practice group and in our broader white collar practice group at the firm, we really pride ourselves on being on top of what's happening, and so we need to be able to counsel clients and speak really knowledgeably about it. And this is going to be a great platform for that. One of the things I'm really excited about is I come on here and we get to talk about FCPA, which is near and dear to my heart. And we cheat sometimes and expand into other topic areas but this is really going to be a great opportunity to touch on, like the title says, all things investigations.

Michael DeBernardis (27:22):

And so that could be congressional investigations, it could be antitrust investigations, workplace misconduct investigations, and really making sure that we're touching on all of the most relevant and hot button issues as they come up. And so, as you mentioned, I know you spoke to Mike Huneke recently, that was a really great first one, he's incredibly sharp and knowledgeable, and we got some really exciting ones coming out. So I'm really looking forward to it. Aside from, I think, being a valuable resource, a free one, for listeners, so subscribe, it's really fun. I think it's fun to come on and talk about this stuff.

Tom Fox (27:56):

Well, I've certainly enjoyed it as well, so I hope our listeners will check it out. We're definitely going to link to it in the show notes. Unfortunately, we're near the end of our time for this episode, but I was wondering if anyone wanted any more information on yourself or any of the topics we've touched on today, what would be the best way for them to find out?

Michael DeBernardis (28:13):

Both LinkedIn and on our website, we now have a bunch of resources, the anti-corruption and internal investigations group. We're linking to the All Things Investigations podcast. We have the most recent version of our annual anti-bribery alert, so go on there, you can get that. I don't know if you've received your copy yet, Tom, but we just got our printed versions available and you can sign up to receive a nice hard copy version that ends up being a really useful resource for the year. So visit our website and all of that information is really accessible there.

Tom Fox (28:44):

Well, Mike, thanks again and I look forward to continuing this conversation.

Michael DeBernardis (28:47):

Thanks, Tom.