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CORPORATE COMPLIANCE
Customs Update: Compliance? What compliance?
(Published in the JOURNAL of COMMERCE ONLINE May 21, 2007)
 to view article.
LOS ANGELES -- It is impossible to read the trade press, and sometimes even the general press, without thinking, where is that company’s compliance program?
In no particular order of significance, but certainly getting many headlines, there is the recent ITT Corp. settlement with the Department of Justice, for a staggering $100 million. The case
involved military night vision equipment. ITT sent classified materials overseas without proper authority. Why? Because a few folks (okay, likely lots of individuals) ignored the rules. What happened?
The government charged ITT exported defense-related technical data to China, Singapore and the United Kingdom without first obtaining an appropriate license or written authorization from
the State Department. ITT also omitted critical information from Arms Exports Required Reports. Finally, ITT failed to take significant and timely corrective action. Imagine how much
worse would have been the outcome if the company had not self-reported to State? ITT pleads guilty to two violations of the 1976 Arms Export Control Act; pays a $2 million criminal fine; a
$50 million deferred prosecution penalty and forfeits $28 million as the proceeds of its illegal actions. In addition, ITT pays a fine to State of $20 million.
The $50 million deferred penalty will be suspended for five years. ITT may reduce it on a dollar-for-dollar basis by investing toward the acceleration, development and fielding of the most
advanced night vision technology. In other words, State assumes at least some of this technology fell into the wrong hands and is giving ITT the ability to make the existing
technology obsolete. What is most intriguing about the settlement is that there was no debarment, or export ban. Typically with a case of this significance, State (and Commerce)
would be expected to ban the company from exporting for a period of years. The thinking is this did not happen with ITT since it has such a prominent place in the night vision equipment field.
Put another way, State thought its highest priority after punishing ITT was to get better night vision equipment.
Why did ITT send the written materials to others? Because it was outsourcing production of
some components to a firm in Singapore in order to reduce cost and increase profit. In turn, that firm farmed work out to companies in China and Britain. As a result of this mess, federal
enforcement officers are expanding their scrutiny of outsourcing by all defense contractors.
As the name implies, night vision technology enables our military (and others) to see clearly at
night. The recent Hamas-Israeli conflict resulted in a sort of tie. Some have suggested that is because Hamas obtained night vision equipment, which is not to suggest it came from ITT. The
Iraq war is another example where the military quite rightly wants to make sure the insurgents do not have access to our highly sophisticated equipment. Plus, of course, there are always
concerns about the ever-growing Chinese military.
There was apparently some evidence that ITT internal compliance officials warned others not to
violate the export regulations but were ignored. Justice clearly painted ITT as a company where some decision-makers put profits ahead of compliance and national security.
The night vision equipment is one of many examples that are causing a clash between military needs and export regulations. Recently, there have been reports the American military in Iraq is
finding itself in the position that it cannot give certain equipment to coalition forces as U.S. export laws bar such action. As a result, American military personnel must continue to fight in
areas where it wishes to turn over more responsibility to others.
We all heard about problems at Boeing springing from the jet maker improperly using
information belonging to rival Lockheed to gain government procurement contracts. In the end, Boeing paid $615 million to settle criminal and civil charges. The company’s reputation took a
severe hit, as senior executives were sentenced to federal prison, and the company lost $1 billion worth of aerospace launches, was denied certain export licenses, and faced other export bans.
Against that backdrop, one may ask, what was senior management at banana importer Chiquita Brands thinking?
Recently, Cincinnati-based Chiquita agreed to pay a $25 million fine to settle a long-standing
Justice investigation into whether it knowingly paid protection money to Colombian paramilitary and rebel groups designated as terrorists by the United States. The company’s explanation
was it paid the money in order to protect its people and facilities in volatile parts of the country. That defense makes sense and was valid when the payments started in 1997. It was not until
2001 the recipient was declared a foreign terrorist organization and a specifically designated national. Management did not learn this fact until 2003 (which begs the question -- why not?),
and following a board meeting, it disclosed the payments to Justice. Executives came away from that meeting feeling Chiquita would not be pursued for prior payments, but its Colombian
entity continued making those payments. It was sold in June, 2004. In an ironic twist, Colombian authorities mentioned the possibility of seeking criminal charges against senior
executives for approximately $1.7 million in payments.
Clearly one can sympathize with Chiquita wanting to protect its people and facilities, but was
this the right way to do it? What did its compliance program require? Did its compliance program even cover this topic?
Next, let’s turn to the False Claims Act. In United States v. Merck-Medco Managed Care.
L.L.C., 336, F.Supp.2d 430, E.D.Pa. 2004, a federal court held the failure to have a proper compliance and ethics program which is effective under applicable legal standards and industry
practices can be the basis for a False Claims Act claim. This approach was based on the concept that the failure to have such a plan in place can lead to the filing of claims paid by the
federal government which are “knowingly” false.
In order to prove top management knew or should have known what was going on, Justice had
to establish a level of intent. Since there was no paper trail, Justice ticked off the elements of an effective compliance plan as articulated in the Sentencing Guidelines:
- establish an effective code of ethics;
- designate specific high-level personnel with direct responsibility for overseeing compliance who have direct access to top management and the board of directors;
- appoint a compliance officer with responsibility for independent investigation and the power to act on matters related to compliance;
- inform employees of the existence and details of the company’s compliance program;
- establish a procedure of regular reports to the board concerning internal investigations;
- put in place effective means to monitor, audit and report on compliance, including an anonymous hotline and protection for whistleblowers;
- implement systems to assure reasonable steps are taken to respond to or investigate reported offenses; and
- regularly enforce the company’s policies and procedures through corrective action.
Justice successfully argued that since Medco did not have such a compliance program in place, it acted in reckless disregard of the truth or falsity of the claims made to the government
and so was liable for their falsity.
Finally, for purposes of this column, there is the Foreign Corrupt Practices Act. It applies to
publicly traded companies only. In its simplest terms, FCPA bars bribes, i.e., payments made by companies to government officials to get deals or favorable treatment. There is a huge
difference between presenting a token gift and one which is clearly intended to “grease the wheels” to get a desired deal. We are already beginning to hear stories of prosecutions against
American nationals for bribery actions which occurred in Iraq. For those of us old enough, we recall the bribery acts which impacted the aircraft manufacturers some 30 or so years ago.
In each of these cases, one has to ask the question: where was the company’s compliance program? Was it robust enough to identify the problem and head it off before it became
something that could be called “betting the company?” How did management respond when faced with the actions on which Justice relied? What remedial action was put in place? Did the
company disclose its violations to the relevant agencies?
True, each of the situations discussed involves large multi-national companies. Equally true is
the fact that when dealing with international trade issues, none of the agencies with jurisdiction make a distinction between large and small companies. Compliance is compliance and if you
do not have an adequate program in place, you will get nailed! The federal government will find out, even if it comes from one of your competitors, and your competitors reporting your
transgressions is a procedure recognized in the law as a qui tam action. Maybe we’ll talk about that basis for action in another column. For now, just how good is your compliance program?
When was it last tested by you? When was it last updated?
LOCKHEED SUIT DISMISSED
09/06
Lockheed sued certain employees claiming they violated the Computer Fraud and Abuse Act by accessing Lockheed computers, copying proprietary information and delivering those trade secrets to L-3 Communications Corp. Lockheed claimed L-3 wanted the information to gain an
unfair advantage for a government contract bid and conspired with the individuals to wrongfully obtain Lockheed’s trade secrets. Lockheed had a mountain of computer forensic evidence
proving the employees accessed and copied hundreds of pages having to do with the specific project which were transferred to disks and removed.
The employees won because they were able to convince the court they did not violate specific provisions of the Act involving access and authority. So, there is no federal jurisdiction. Next step state court?
How are your systems protected?
Customs Update: Why Sarbanes-Oxley is Important
(Published in the Journal of Commerce June 14, 2004)
to view document in printable format
Financial and legal publications are full of articles about Sarbanes-Oxley, the law which took effect in 2002 in response to the financial shenanigans alleged to have occurred in companies
like Enron, WorldCom, Tyco, to name a few. In it simplest terms, Sarbanes-Oxley (or SOX as it has become known) requires the CEO and CFO to certify to the Securities and Exchange
Commission that the internal controls the company has in place are adequate to insure: 1) the proper authorization of the company's transactions; 2) the company's assets are safeguarded
against unauthorized or improper use; and 3) the company's transactions are properly recorded and reported to permit preparation of financial statements in conformity with generally accepted accounting principles.
In other words, a company is expected to have sufficient internal controls in place so that its management is able to reasonably assure the reliability of its financial reports and financial
statements by external users, especially shareholders. Additionally, these internal controls must assure the prevention or timely detection of unauthorized financial activities which could
have a material effect on the company's financial statements.
The long and short of it is SOX is intended to protect a company's assets and to give
shareholders an accurate and complete picture of how the company is making and spending its money. If so, why should SOX encompass international trading activities? Well, first let's
make clear that SOX only applies to publicly traded companies. However, for those of you working in companies not traded on a stock exchange, you need to consider the
consequences of SOX for one simple reason -- it effects you, too!
When Customs audits an importer, one of the criteria insisted upon is that a company have
documented internal controls. The auditors do not distinguish between those company which are privately held and those which are publicly traded. All are required to adhere to the same
standard. The same is true when dealing with other regulators, including the U.S. Attorney's Office in the event of criminal cases. In fact, if a company is involved in a criminal case and the
crime arose from circumstances which were not handled in accord with the company's internal controls, under sentencing guidelines, a downward sentence adjustment is called for. We are
all familiar with the lenience which results with Commerce, State, Treasury, Customs, for example, when filing a disclosure about past violations.
When dealing with trading issues, implementation of SOX raises all sorts of potential problem areas. Let's start on the export side. Does the company screen for licensing requirements and
prohibited end users and uses? This is a requirement of State, Commerce and Treasury, but SOX also demands it. If a company does not screen, it exposes itself to serious penalty action
and/or criminal prosecution, both of which impact the company's bottom line. If the company's revenues are reduced, the dividends it pays its shareholders and the value of its stock are
reduced, thereby making the company less valuable and profitable. Is there a more financially negative impact?
Similarly, on the import side, there are activities which demand attention. For example, does
the company employ multiple brokers? If so, how are their activities managed? What does a company do to determine the correct classification and value of its goods? What does a
company do to make sure the same goods are entered identically at each port of entry? Here, too, the failure to properly manage the operation be disastrous.
The requirements of SOX are not intended to reach every mistake, only those which materially impact the company's bottom line. In other words, a $1,000 mistake gets viewed differently
than a $100,000 or $1 million mistake. Nonetheless, they all have to be detected and dealt with. It is the level of scrutiny a company applies to each which is the focus of SOX. The
$1,000 erRodriguez O’Donnell might result from a simple mistake and so be properly addressed within the department where it was made. However, the bigger the headache, the
greater the level of scrutiny and the higher the rank of the reviewers.
Whether publicly traded or not, the internal controls demanded by SOX are a good idea for all
companies, regardless of size, for purely sound business reasons. The bottom line is not helped by unexpected duty increases, seizures, penalties, shipment delays/costs or, worst of
all, bad publicity - all of which inevitably undermines brand name value. There is nothing worse than trying to explain to a buyer that you are unable to deliver the order because your own
government won't let you ship!
CORPORATE COMPLIANCE / SARBANES-OXLEY
5/04
The financial and legal papers are full of commentary about Sarbanes-Oxley (or SOX as it is known). While applying only to publicly traded companies, SOX nonetheless has implications
for all international traders, regardless of size or ownership. For more details visit our website to view "Sarbanes-Oxley and its Import/Export implications."
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