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Clash of Compliance: Global Anti-Corruption Considerations When Foreign Laws Are At Odds with the FCPA

March 27, 2014

Chelsie ChmelaEvents Manager Chelsie.Chmela@ethisphere.com

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Winston ChanOf Counsel, Gibson, Dunn & Crutcher

Thomas FirestoneOf Counsel, Baker & McKenzie

Lauren ReynoldsEurope Regional Compliance Attorney, Microsoft Corporation

SPEAKING TODAY

Hypothetical• During a routine channel audit of distributor covering China, Russia and Western

Europe, distributor employee makes offhand comment to auditor that distributor regularly relies on “special envelopes” to deal with “customs issues”

• Chronology for discussion:• Commencing internal investigation• Data preservation and review• Interviews• Investigation work product• Remediation• Self Disclosure

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China

China-Specific Challenges

• Limitations on Investigations• Protection of Personal Information • Case Study: Humphrey

• State Secrets Law• Impact on Whistleblowers• Document Review• Document Production to Other Regulators

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Limitations on Investigations

• Best practices and regulators in the U.S., U.K., and elsewhere demand extensive diligence of business partners, suppliers, customers, and others

• Demand from multinational corporations for diligence investigations is growing, but the information that is publicly available is being reduced

• Chinese law and government tactics limit the ability of corporations and other private actors to do diligence on others• Cracking back on corporate investigators• Blocking access to basic information• Forcing investigative firms out of business• Incarcerating foreign investigators

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Protection of Personal Information• Private investigators must attempt to link personal and business

information in order to do adequate diligence individuals and entities• Yet privacy of personal information in China is a growing concern and

protected by law• Article 253 of China's Criminal Law makes it illegal for personnel in government

agencies and certain business sectors (including those at financial, telecom, education, and health institutions) to sell or illegally provide information about citizens

• Both buyer and seller can be criminally liable• Designed to counter rampant theft of and trade in personal information, mostly used

for scams• Nonetheless, these rules also apply to those who collect personal data for corporate

risk assessment

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Case Study: Peter Humphrey

• Chinese authorities arrested two private corporate investigators, Peter Humphrey (a UK citizen) and his wife and business partner Yu Yingzeng (an American citizen)

• Humphrey and Yingzeng own and lead ChinaWhys Co.• One of many China-based firms hired by multinational companies to

investigate possible kickbacks, embezzlement, counterfeiting or other malfeasance

• Humphrey is one of the best known corporate investigators in China• Possibility that Humphrey appeared to have been arrested in connection with

his work for GlaxoSmithKline, the British pharmaceutical group currently under high profile bribery investigation in China

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Case Study: Peter Humphrey (cont’d)

• Accused of breaking Chinese laws related to “purchasing personal information” on Chinese citizens by illegal means • According to a China state-run news agency, authorities believe the couple

“used compilation, purchasing and other methods to illegally acquire and sell a large amount of citizens’ personal information, seeking to make illegal gains”• Conceivably selling the private information to their clients

• Authorities reportedly found records of “household registration, car ownership, property ownership, and exit-entry records” at ChinaWhys’ mainland offices

• Public broadcast of confession

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Humphrey Case – Press Comments• “The allegations against the couple will probably send a chill

through the fraud and commercial investigation firms in China that help foreign investors navigate the country’s business landscape”

• Arrest is the “latest indication that authorities are uncomfortable with investigations by foreigners”

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Considerations for Use of Investigators

Consider:• Written agreement that all internal and external investigators must

abide by all Chinese laws, specifying those most applicable• Training for all internal and external investigators on relevant laws• Where appropriate and possible, seek approval for actions by relevant

government agency• Exercise extra care around personal information

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State Secrets Law• Chinese Constitution imposes obligation on all citizens to

“keep state secrets”• State Secrets Law came into effect in October 2010

• Defines seven categories of state secrets 1. Major policy decisions on state affairs; 2. Matters of national defense and the activities of the armed forces;3. Diplomatic activities and matters of foreign affairs; 4. Secrets in the areas of national economic and social development; 5. Secrets concerning science and technology; 6. Secrets concerning activities for safeguarding state security and the investigation of

criminal offences; and 7. “[A]ny other secrets” as determined by the State Administration for the Protection of

State Secrets• Broad catch-all to broad law

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State Secrets Law (cont’d)

• New Implementing Regulations for the State Secrets Law came into effect in March 2014

• The government “may not classify items that lawfully should be made public as state secrets”• Regulations do not clarify what ought to be made public. Unclear whether

new rules have any effect on the broad statutory definition of state secret. • “The scope of the classified item shall be timely adjusted

according to changing circumstances”• This suggests the government will continue to have broad discretion over

what qualifies as a state secret.

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State Secrets Law (cont’d)

• Expansive definition creates several compliance and investigation-related challenges for multinationals • The company handling that information may be dealing in state secrets without being

aware of the sensitivity of the information• Documents or information received in the normal course of business may easily fall into

categories like “national economic and social development" or "science and technology”• Industries with state-owned entities (energy, mining and resources, or

telecommunications) likely have state secrets• Criminal sanctions for intentional or negligent disclosure, illegally

obtaining, or unlawfully holding state secrets• Illegal to remove data from the PRC if a state secret• Law impacts use and handling of information and data within China and the

sharing of information and data outside of China

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Case Study: Xue Feng• U.S. geologist Xue Feng obtained publicly-available database about

China’s (most state-owned) oil industry• Feng sold the database to his employer, U.S. consulting firm HIS Energy

(now known as IHS Inc.)• This information was deemed to be a state secret after Xue had sold the

information• Xue was prosecuted, convicted of stealing state secret information, and

sentenced to 8 years in jail• Xue claims torture in detention• Then U.S. Ambassador to China, Jon Huntsman, was at court for the

sentencing, in a show of high-level U.S. concern

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Limitations on Whistleblowers

• Robust compliance program must allow employees and other individuals to anonymously report acts of non-compliance

• On September 12, 2013, the Chinese government announced that it would protect from retribution and attacks people who use an officially sanctioned website to report corruption

• Nonetheless, whistleblowers in China that provide information to the DOJ, SEC, or within the company but outside of China may be in violation of the State Secrets Law• In 2013, 52 whistleblower tips to the SEC came from individuals in China and 20

tips came from individuals in Russia. Of countries outside the US, only the United Kingdom (66) and Canada (62) had more tips.

• Potentially at odds with whistleblower provision of Dodd-Frank, and best practices calling for internal anonymous reporting mechanisms within an organization

• Consider: • System for reporting allegations of non-compliance solely within China

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Document Review• Prohibition on removing documents and information containing

state secrets from China may slow down and impair ability to review documents as part of government and/or internal investigation

• Consider: • Initial review for state secrets only

• Documents should be hosted in China• Reviewers should be reviewing in China

• Once state secrets reviews is complete, substantive review can be conducted outside of China

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Document Production to Other Regulators

• Prohibition on removing documents and information containing state secrets from China applies to requests and subpoenas for documents and information issued by foreign regulators

• In 2011, the SEC sued a Chinese technology company suspected of fraud• As part of that investigation, the SEC issued a third-party subpoena for

audit documents to China-based member firm of a Big Four audit firm (the “Audit Firm”)

• The Audit Firm refused to produce documents from China on the grounds that the documents included information relating to state-controlled companies and which could potentially be classified as state secrets

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Document Production to Other Regulators(cont’d)

• The Audit Firm argued that the disclosure would expose itself and its employees to the risk of criminal liability under applicable Chinese laws, and urged diplomatic solution between SEC and Chinese regulators

• Eventually resolved by diplomatic agreement between Public Company Accounting Oversight Board, China Securities Regulatory Commission, and China Ministry of Finance

• In January 2014, a SEC judge issued an initial decision barring the Chinese units of the Big Four Firms from auditing US-listed companies for 6 months• The SEC sought audit work papers from the Firms as part of a series of accounting

fraud probes.• The Firms refused to provide the work papers, claiming disclosure would violate

Chinese secrecy law.

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Document production to other regulators(cont’d)

• The SEC judge found the Firms “willfully” failed to disclose these documents.• “[T]o the extent [the Firms] found themselves between a rock and

a hard place, it is because they wanted to be there.” • “[The Firms] operated large accounting businesses for years,

knowing that, if called upon to cooperate in a Commission investigation into their business, they must necessarily fail to fully cooperate and might thereby violate the law.”

• The Firms filed an appeal to the initial decision in February 2014. The appeal will be heard by the 5-member panel of Commissioners

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Document Production to Other Regulators(cont’d)

• Consider: • Reasoned explanation to foreign regulators regarding Chinese

laws and attendant restrictions• If truly impossible to comply with both foreign subpoenas and

Chinese laws, urge diplomatic solution, but be prepared to fight• If no resolution possible, potential need to balance costs of non-

compliance within each country

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Russia

Privilege

− Applies only to “advocates,” a special class of lawyers allowed to represent defendants in criminal proceedings

− Does not apply to ordinary lawyers or in-house counsel− As a practical matter, it is almost impossible to maintain

privilege in Russia

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Data Privacy

− Personal data defined broadly to include name, date and place of birth, information about family status, profession, income, education

− Creates a second category of “sensitive personal data” defined as personal data relating to race/ethnic origin, religious beliefs, health condition and sexual life

− Processing is also defined broadly to include obtaining, organizing, accumulating, updating, using, disclosing, etc.

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Data Privacy (cont’d)

− Consent is required for processing of personal data unless where necessary to the performance of a contract to which the subject is a party

− Express written consent is required for processing of sensitive personal data

− Personal data can be transferred out of Russia only if the recipient country adequate and sufficient protection, defined as those countries which have signed and ratified the COE Convention on Processing of Personal Data (Strasbourg, 1981)

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Data Privacy (cont’d)

− Exceptions to transfer prohibition:• 1) Where necessary to the performance of a contract to which

the subject is a party• 2) Where subject has given written consent• 3) Where transfer is necessary to the performance by the

Russian Federation of its obligations under an international agreement

• Question as to whether anti-corruption legislation creates another exception

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Data Privacy (cont’d)

− Ambiguity regarding terms and exceptions means that best practice is to get express written consent of employees

− This can usually be obtained if the Country Director issues an order directing employees to cooperate with the investigation

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Employee Termination

− Heavily regulated by local labor law− Article 81 of the Labor Code identifies the circumstances

under which an employer may unilaterally terminate. Includes:

• “Committing at the place of work a theft of the property of others, embezzlement or wilful destruction or damaging of property if this has been established by a court conviction or by a resolution of a judge, body or official duly authorised to consider cases on administrative breaches, and if this conviction has come into legal force.”

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Employee Termination (cont’d)

− As a result. it is extremely difficult to terminate an employee for committing a crime absent a criminal conviction

− If an employee is wrongly terminated, court can order reinstatement and compensation

− Practical solution is usually to create a record of poor performance, unsuitability, disciplinary violations and then negotiate a termination

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Termination of Distributors

− Federal Anti-Monopoly Service (FAS) is very aggressive in policing alleged abuse of dominant position and unjustified refusals to deal by foreign importers

− FAS defines “market” very narrowly and “dominance” very broadly.

− Consequently, foreign companies that terminate local distributors for suspected corruption can be prosecuted for unjustified refusal to deal (Novo-Nordinsk)

− Best practice is to have transparent criteria for selecting and terminating distributors and to make a record

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Questions?

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Thomas Firestone is a senior counsel in the London office of Baker & McKenzie. His practice focuses on corruption risks and compliance, including transactional due diligence and internal investigations. He frequently moderates and speaks at legal and business conferences and intergovernmental meetings on crime, corruption and compliance. He also designed and taught special courses at a local law school on white-collar crime and on the US Foreign Corrupt Practices Act (FCPA).

Prior to joining the Firm in 2012, Mr. Firestone worked at the US Department of Justice, first as an Assistant US Attorney in the Eastern District of New York and then as Resident Legal Adviser at the US Embassy in Moscow. Mr. Firestone worked on a number of important cases involving money laundering, racketeering, organized crime and corruption.

Mr. Firestone earned his undergraduate degree from Harvard University, his master’s degree in political science from the University of California at Berkeley, and his Juris Doctor from Harvard Law School.

Thomas Firestone Baker & McKenzie100 New Bridge StreetLondon EC4V 6JAUK+ 44 20 7919 1685Tom.Firestone@bakermckenzie.com

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Lauren Reynolds is a U.S.-qualified attorney and Regional Compliance Attorney for Europe at Microsoft Corporation. In this capacity she is in charge of overseeing regional internal investigations and enforcing Microsoft’s compliance policies. Before joining Microsoft, Ms. Reynolds was a member of the Gibson Dunn & Crutcher’s White Collar Defense and Investigations Group and International Corporate Transactions Group in Munich. Ms. Reynolds focuses on corporate compliance and on white collar criminal matters, in particular on issues related to the enforcement of the Foreign Corrupt Practices Act (FCPA). Ms. Reynolds has advised as a member of a larger team on matters arising from FCPA Compliance Monitorships and numerous internal investigations relating to compliance and disclosure issues under the FCPA.

Ms. Reynolds earned her undergraduate degree from Columbia University, and her Juris Doctor, cum laude, from Georgetown University Law Center. Ms. Reynolds holds a Master of Laws from Humboldt University of Berlin.

Lauren Reynolds Microsoft CorporationMicrosoft Deutschland GmbHKonrad-Zuse-Straße 185716 UnterschleißheimGermany

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Winston Y. Chan is resident in Gibson, Dunn & Crutcher’s San Francisco office. He is an experienced trial and appellate attorney, and is a member of the firm’s White Collar Defense and Investigations Practice Group. He regularly represents entities and individuals in Foreign Corrupt Practices Act matters, including government enforcement actions, internal investigations, compliance reviews and transactional due diligence, both domestically and abroad.

From 2003 to 2011, Mr. Chan served as an Assistant United States Attorney in the Eastern District of New York, where he investigated and prosecuted a wide range of matters as part of that office’s Business and Securities Fraud Section, including Foreign Corrupt Practices Act violations, hedge fund improprieties, insider trading, accounting fraud, market manipulation, False Claims Act matters, and fraudulent offerings of securities. Mr. Chan served in a number of supervisory roles, and received a variety of awards and commendations.

Mr. Chan earned his undergraduate degree, magna cum laude, from Yale University, and his Juris Doctor from Yale Law School, where he was on the Yale Law Journal and president of the Pacific Islander, Asian and Native American Law Students’ Association. Following law school, Mr. Chan served as a law clerk for the Honorable Leonard B. Sand of the United States District Court for the Southern District of New York, and then for the Honorable Chester J. Straub of the United States Court of Appeals for the Second Circuit.

Winston Y. Chan Gibson Dunn & Crutcher555 Mission StreetSan Francisco, California 94105-0921+1 415.393.8362wchan@gibsondunn.com

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