Category: Administrative & Regulatory

Lawsuits Against Creditors of NewPage

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The trustee for the litigation trust resulting from the NewPage Corporation bankruptcy has launched nearly 800 lawsuits against pre-bankruptcy creditors of NewPage Corporation seeking payment to the trust.

The lawsuits (also called adversary proceedings) have been filed in Delaware bankruptcy court by litigation trustee Pirinate Consulting Group LLC to recover allegedly preferential payments made in the months prior to the company’s Chapter 11 bankruptcy filing in September, 2011.

Much to the surprise of many who did business with the debtor prior to the bankruptcy filing, not only are they waiting for payment on amounts owed, but they will now face claims that they must give back monies previously received.

Defendants should know there are often defenses to these claims, including that the allegedly preferential payments were made in the ordinary course of business or that additional goods were shipped after those allegedly preferential payments were received. Upon receipt of a complaint, defendants should contact counsel knowledgeable about bankruptcy avoidance actions for assistance. Failure to respond to the adversary proceeding complaint in a timely manner, can result in a judgment and collection efforts by the litigation trustee.

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Who’s GINA and What Should I Know About Her? Re: Genetic Information Nondiscrimination Act

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GINA is not a who, but rather a what. The Genetic Information Nondiscrimination Act (“GINA”) was passed by Congress in 2008. GINA makes it illegal for employers with 15 or more employees to discriminate against employees or applicants on the basis of genetic information. Employers cannot lawfully inquire about (1) an individual’s genetic tests; (2) the genetic tests of an individual’s family members; or, (3) the manifestation of a disease or disorder in the family members of such an individual.

At the end of 2012, the Equal Employment Opportunity Commission (“EEOC”) announced in its Strategic Enforcement Plan that genetic discrimination would be a top priority over the next four years. The EEOC stuck to their word – in May, 2013, the EEOC settled its first lawsuit alleging GINA violations. The suit involved a fabrics distributor, Fabricut, Inc., who allegedly violated the Act by asking a woman for her family medical history in a post-offer medical examination. The company refused to hire the applicant after assessing that she had carpal tunnel syndrome, which led to Americans with Disabilities Act violations as well. The suit was settled for $50,000.

Shortly thereafter, the EEOC filed its second suit against The Founders Pavilion, Inc., a nursing and rehabilitation center. According to the EEOC suit, Founders conducted post-offer medical exams of applicants, which were repeated annually if the person was hired. As part of this exam, Founders requested family medical history, which is a form of information prohibited by GINA.

Employers should ensure that their policies related to employee medical information and any conducted medical exams comply with GINA. In addition, it would be wise for employers to update employee handbooks to state that discrimination on the basis of genetic information is prohibited.

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A Tech Industry-Friendly Stance On Cloud Computing Tax

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In a pleasant surprise, the New Jersey Division of Taxation recently issued guidance announcing that sales tax is not due on most cloud computing services. New Jersey’s position is contrary to a growing national trend in which many states have taken the position that cloud computing is subject to sales tax as the sale of software.

New Jersey demonstrates a pro-information technology industry position. It also comes at the same time that Massachusetts, traditionally an extremely technology-friendly state, appears to have changed its policy direction on taxation of information technology services.

New Jersey Technical Bulletin 72 addresses three types of cloud computing services:

software as a service (SaaS), which offers the use of software on a per transaction basis, through a service contract or by a subscription;

platform as a service (PaaS), which provides access to computing platforms; and

infrastructure as a service (IaaS), which provides hardware, software and other equipment and services necessary to support and manage the content and dataflow of its customers.

The technical bulletin says that software as a service is not subject to New Jersey sales tax as the sale of software because it is not delivered in tangible form, it is not downloaded onto the customer’s computer and title to the software is not transferred to the customer.

However, the bulletin does say that certain types of SaaS may be subject to sales tax as a taxable information service. A taxable information service is defined as:

The furnishing of information of any kind, which has been collected, compiled or analyzed by the seller and provided through any means or method, other than personal or individual information which is not incorporated into reports furnished to other people.

The bulletin then cites examples of taxable information services such as Westlaw, LexisNexis, Commerce Clearing House (CCH) and Rich Internet Application (RIA). But it would appear that most other classes of

SaaS that do not involve compiling or analyzing information should not fall into the taxable information service category. This is a fact-based determination, which would require analysis on a case-by-case basis.

The bulletin states that platform as a service and infrastructure as a service would not be subject to sales tax because they do not represent the sale of tangible personal property, but merely access to the software. The bulletin states that IaaS arrangements that show billing for the rental of hardware (e.g., servers) are not taxable because the customer does not have title or possession of the equipment.

Finally, the bulletin says that web hosting and data hosting services are not subject to New Jersey sales tax.

The position taken by the New Jersey Division of Taxation is quite favorable to providers and customers of cloud computing services, as other states have been taking the opposite approach, saying that many of these services are taxable, including states such as New York, Pennsylvania and Vermont.

Companies that provide cloud-based computing services should determine the states in which they might have a sales tax collection obligation, and whether the services they provide are subject to that state’s sales tax.

To see the full text of this new technical bulletin, please follow this link and click on TB-72.

This pro-IT industry move is in contrast to a new Massachusetts law that went into effect on July 31, just a few weeks after the bill being passed by its Legislature. This new Massachusetts law signals a sea change in the Bay State’s pro-technology industry policy.

Massachusetts now imposes sales tax on most software and hardware design, installation and integration services, including the modification, integration, enhancement, installation and configuration of prewritten software.

So, this new tax will include amounts paid in order to customize any prewritten software for the needs of the customer, including macros and plug-ins that operate in conjunction with the software (although there are exemptions for modifications to free open source software, and software that operates industrial machinery).

This expansion of the Massachusetts sales tax will cast a wide net that will tax hardware and software consulting services that have not been taxable in the past, from the biggest, most sophisticated software consulting firms that manage the integration of software for large corporations, down to the high school student who helps non-tech savvy baby boomers set up their home computer for $20 an hour.

This apparent new direction taken by Massachusetts is a huge contrast to the position staked out by the state’s then-Gov. Paul Cellucci in the early years of the Internet boom, when the debate on the taxation of e-commerce sales was just beginning.

A bill had been introduced in Congress to exempt all e-commerce sales from state taxation. Cellucci was quoted in the Feb. 4, 2000, edition of State Tax Notes as being in favor of the measure because it would be bad tax policy to tax the emerging Internet industry:

Arguing that ‘the rapid growth of high-tech in the past five years’ has created 450,000 new jobs in his state, Cellucci said the taxation of remote and electronic commerce is ‘not just a real threat to the economy of Massachusetts, but for the nation as a whole. Unlike traditional brick-and-mortar businesses, e-commerce ventures are extremely portable, and could easily move their headquarters to an offshore island where they would be immune from any sales tax from this country. (Tax Analysts Document Number: Doc 2000-3441.)

The new Massachusetts law indicates a reversal of the state’s earlier pro-industry policy, while New Jersey, which in prior years has taken an aggressive tax approach to IT taxation, has apparently also reversed course, but in the opposite positive direction.

It is possible that Massachusetts has grown complacent, assuming that its enormous stockpile of human innovation capital will stay put, while New Jersey appears to be recognizing the value of cultivating the IT industry in the Garden State. Time will tell if these shifts in policy toward the IT industry will result in any measurable migration.

This article was previously published by Law360.

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Former Head of Investor Relations Penalized by SEC for Selectively Disclosing Material Nonpublic Information, While Self-Disclosing Company Escapes Charges

Katten Muchin

The selective and early disclosure of material non-public information resulted in a Securities and Exchange Commission cease and desist order and civil penalties against the former head of investor relations at First Solar, Inc. (First Solar or the Company), an Arizona-based solar energy company. The SEC determined that Lawrence D. Polizzotto violated Section 13(a) of the Securities Exchange Act of 1934 and Regulation FD by informing certain analysts and investors ahead of the market that First Solar would likely not receive an important and much anticipated loan guarantee commitment of nearly $2 billion from the US Department of Energy (DOE). The day after those disclosures, the Company publicly disclosed this information in a press release, causing its stock price to dip six percent.

On September 13, 2011, First Solar’s then-CEO publicly expressed confidence at an investor conference that the Company would receive three loan guarantees of close to $4.5 billion, which the DOE previously committed to granting upon satisfaction of certain conditions. Polizzotto and several other First Solar executives learned a couple of days later that the Company would not receive the largest of the three guarantees. An in-house lawyer expressly advised a group of First Solar employees, including Polizzotto, that they could not answer questions from analysts and investors until the Company both received official notice from the DOE and issued a press release or posted an update on the guarantee to its website. According to the SEC, notwithstanding this instruction, Polizzotto and a subordinate, acting at Polizzotto’s direction, had one-on-one phone conversations with approximately 30 sell-side analysts and institutional investors prior to First Solar’s public disclosure. In the conversations, they conveyed the low probability that First Solar would receive one of the three guarantees. In some instances, Polizzotto went further and said that a conservative investor should assume that the guarantee would not be granted.

Polizzotto agreed to pay $50,000 to settle the charges without admitting or denying any of the SEC’s findings. He, however, was not subject to even a temporary industry bar. The SEC did not bring an enforcement action against First Solar due to the Company’s cooperation with the investigation, as well as its self-disclosure to the SEC promptly after discovering Polizzotto’s selective disclosure. In addition, the SEC emphasized the strong “environment of compliance” at the Company, including the “use of a disclosure committee that focused on compliance with Regulation FD” and the fact that the Company took remedial measures to address improper conduct, including conducting additional compliance training.

In the Matter of Lawrence D. Polizzotto, File No. 3-15458 (Sept. 6, 2013).

Internet Peeping Toms and The Internet of Things Face New Hurdles: Federal Trade Commission (FTC) Settles with TRENDnet, Inc.

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The Federal Trade Commission (“FTC”) recently entered into a settlement agreement with TRENDnet, Inc., a company that sells Internet Protocol (“IP”) cameras that allow customers to monitor their homes remotely over the Internet.  Notably, this is the FTC’s first action against a seller of everyday products that connect to the Internet and other mobile devices, commonly referred to as the “Internet of Things.”

The Complaint

In its complaint, the FTC alleged that, despite representing to its customers that TRENDnet’s IP cameras are “secure,” TRENDnet failed to reasonably secure its IP cameras against unauthorized access by third parties.  According to the FTC, TRENDnet transmitted user login credentials in clear, readable text over the Internet and stored user credentials on a user’s mobile device in clear, readable text, despite the availability of free software to secure the transmissions and the stored credentials.  The FTC Further alleged that TRENDnet failed to employ reasonable and appropriate security in the design and testing of the software that it provided consumers for its IP cameras.

Due to TRENDnet’s inadequate security measures, in January 2012, a hacker exploited the vulnerabilities of the TRENDnet system and posted live feeds for nearly 700 of TRENDnet’s IP cameras, including customers that had not made their video feeds public.  These video feeds displayed people in their homes, including sleeping babies and young children playing.  Once TRENDnet learned of this flaw, it uploaded a software patch and attempted to alert its customers of the need to update their IP cameras through TRENDnet’s website.

The Settlement

Last week, TRENDnet entered into a settlement agreement with the FTC to resolve the FTC’s claims.  Pursuant to the settlement agreement, TRENDnet has agreed that it will not misrepresent:

  • the extent to which its products or services maintain and protect the security of its IP cameras;
  • the security, privacy, confidentiality or integrity of the information that its IP cameras or other devices transmit; or
  • the extent to which a consumer can control the security of the information transmitted by the IP cameras.

What’s more, TRENDnet is required to establish, implement and maintain a comprehensive security program that is reasonably designed to address security risks that could result in unauthorized access to the IP cameras or other devices, and to protect the security, confidentiality and integrity of the information that its IP cameras or other devices transmit.  TRENDnet is further required to conduct initial and biennial assessment and reports of such security program by an independent third-party professional every two years for the next twenty years.   Again, some real bottom line costs as a result of these settlements.

Finally, in addition to the measures that TRENDnet must take to protect its customers in the future, TRENDnet must also notify all of its current customers about the flaw in the IP cameras that allowed third parties to access the live feed of TRENDnet customers, and TRENDnet must provide these customers with instructions on how to remove this flaw.

The TRENDnet settlement is the FTC’s first step at regulating data security in the land of the Internet of Things.  Keep a look out to see whether this becomes the FTC’s next hot topic.

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Mandatory Paid Sick Leave Arrives in New York City

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On Thursday, June 27, members of the New York City Council voted to override Mayor Michael Bloomberg’s veto of the City’s Earned Sick Time Act (the Act). New York City thus became the latest (and the most populous) of a growing number of localities – including San Francisco; Washington, DC; Seattle; Portland, ME; and the State of Connecticut – to impose mandatory sick leave obligations on employers.

The NYC Earned Sick Time Act: An Overview

Virtually all private sector employers within the geographic boundaries of New York City are covered by the Act’s provisions. Notable exceptions include a limited number of manufacturing entities, as well as employers whose workers are governed by a collective bargaining agreement that expressly waives the Act’s provisions while at the same time providing those workers with a comparable benefit.

The Act will eventually cover more than one million employees, providing each of them with up to five days of paid leave each year. In its first phase of implementation, currently scheduled to take effect on April 1, 2014, the Act will apply only to those employers that employ 20 or more workers in New York City. The second phase of implementation will begin 18 months later (currently, October 15, 2015), at which time the Act will expand to those employers with at least 15 City-based employees. The Act will require employers with fewer than 15 City-based employees to provide their employees with unpaid, rather than paid, sick time.

New York City-based employees (regardless of whether they are employed on a full- or part-time, temporary or seasonal basis) who work more than 80 hours during a calendar year will accrue paid sick time at a minimum rate of one hour for each 30 hours worked. The Act caps mandatory accrual of paid sick time at 40 hours per calendar year (the equivalent of one five-day workweek). Although the Act provides only for a statutory minimum, employers are free to provide their employees with additional paid time if they so desire. Accrual of paid leave time begins on the first day of employment, but employers may require employees to first work as many as 120 days before permitting them to make use of the time they have accrued.

The Act specifies that employees will be able to use their accrued time for absences from work that occur because of: (1) the employee’s own mental or physical illness, injury or health condition, or the need for the employee to seek preventive medical care; (2) care of a family member in need of such diagnosis, care, treatment or preventive medical care; or (3) closure of the place of business because of a public health emergency, as declared by a public health official, or the employee’s need to care for a child whose school or childcare provider has been closed because of such a declared emergency.

Although the Act allows employees to carry over accrued but unused leave time from year to year, it does not require employers to permit the use of more than 40 hours of paid leave each year. Likewise, it does not require employers to pay out accrued, but unused, sick leave upon an employee’s separation from employment.

Employers that have already implemented paid leave policies – such as policies that provide for paid time off (PTO), personal days and/or vacation – that provide employees with an amount of paid leave time sufficient to meet the Act’s accrual requirements may not be required to provide their employees with anything more once the Act takes effect. As long as an employer’s current policy or policies allow the paid leave in question to be used “for the same purposes and under the same conditions as paid sick leave,” nothing more is necessary.

The Act Requires Proper Notice to Both Employees and Employers

Once the Act is implemented, employers will be required to inform new employees of their rights when they are hired, and will have to post additional notices in the workplace (suitable notices will be made available for download on the Department of Consumer Affairs website). In addition to providing information about the Act’s substantive provisions, employees must also be informed of the Act’s provision against retaliation and how they may lodge a complaint.

Likewise, an employer may require reasonable notice from employees who plan to make use of their accrued time. The Act defines such notice as seven days in the case of a foreseeable situation, and as soon as is practicable when the need for leave could not have been foreseen.

Penalties and Enforcement

The Act will be enforced by the City’s Department of Consumer Affairs. Because the Act contains no private right of action, an employee’s only avenue for redress will be through the Consumer Affairs complaint process. Employees alleging such a violation have 270 days within which to file a complaint. Penalties for its violation are potentially steep; they include: (1) the greater of $250 or three times the wages that should have been paid for each instance of sick time taken; (2) $500 for each instance of paid sick time unlawfully denied to an employee, or for which an employee is unlawfully required to work additional hours without mutual consent; (3) full compensation, including lost wages and benefits, for each instance of unlawful retaliation other than discharge from employment, along with $500 and equitable relief; and (4) $2,500 for each instance of unlawful termination of employment, along with equitable relief (including potential reinstatement).

Employers found to have violated the Act may also face fines from the City of up to $500 for the first violation, $750 for a second violation within two years of the first, and $1,000 for any subsequent violation within two years of the one before. Additionally, employers that willfully fail to provide the required notice of the Act’s substantive provisions will be fined $50 for each employee who did not receive such notice.

The Act, meanwhile, does not prohibit employers from requiring that such an employee provide documentation from a licensed health care professional to demonstrate the necessity for the amount of sick leave taken. Employers are free under the Act to discipline employees, up to and including termination, who take sick leave for an improper purpose. They are prohibited, however, from inquiring as to the nature of an employee’s injury, illness or condition.

Health Care on the Hill: Week of September 9, 2013

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This week Congress returns to Washington, DC following their August recess and are jumping right back into legislative matters. Listed below are a few health-related hearings scheduled for this week.

Each Monday Capitol Health Record will be providing health-related highlights for the coming week.

Tuesday, September 10, 2013

10:15 a.m.
“PPACA Pulse Check: Part Two”
House Energy and Commerce Subcommittee on Health Hearing
2322 Rayburn House Office Building

Wednesday, September 11, 2013

2:00 p.m.
“The Threat to Americans’ Personal Information: A Look into the Security and Reliability of the Health Exchange Data Hub”
House Homeland Security Subcommittee on Cybersecurity, Infrastructure Protection, and Security Technologies Hearing
311 Cannon House Office Building

Thursday, September 12, 2013

10:00 a.m.
“Dental Crisis in America: The Need to Address Cost”
Senate Health, Education, Labor, and Pensions Subcommittee on Primary Health and Aging Hearing
430 Dirksen Senate Office Building

Thursday, September 12, 2013 and Friday, September 13, 2013

In addition to the above Congressional hearings, the Medicare Payment Advisory Commission (MedPAC) will be meeting in Washington, DC on Thursday and Friday to discuss recommendations regarding Medicare payment policies. MedPAC will meet at the Ronald Reagan Building and International Trade Center (1300 Pennsylvania Avenue, NW) from 9:30 a.m. to 5:15 p.m. on Thursday and 9:00 a.m. to 12:00 p.m. on Friday (agenda).

Amy Walker contributed to this article.

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International Group Structures Are Subject to An Ongoing Review for Optimizing Their Tax Position

GT Law

The recent trends show that offshore jurisdictions are off the corporate agenda in view of the increased scrutiny and decreased levels of acceptance from both fiscal and corporate social responsibility perspectives. Client feedback confirms the following rationale for moving corporate tax planning solutions onshore:

  • Increased scrutiny on tax havens and statutory requirements regarding tax substance, potential issues concerning withholding tax and taxation of foreign profits; and
  • Avoiding overtly complicated tax systems with strict CFC (controlled foreign company) regulations, thin capitalization rules and prohibitive transfer tax applicability.

It is a well-known fact that the Netherlands is not a tax haven but a safe haven and a logical choice as an alternative with an extensive double taxation treaty network. In addition, the Netherlands has an extensive bilateral investment protection treaty network that is regarded to provide premium coverage in view of the broad definition of “investor” and “investment” and providing access to dispute resolution through arbitration against independent states and awards that are enforceable against states, often referred to as “the Dutch Gold Standard.” Dutch structures are increasingly a recurring feature in international corporate structures for the purpose of protecting key corporate and personal assets. In this GT Alert, we briefly set out the options for migrating a corporate structure to the Netherlands to benefit from the all of the features that the Netherlands has to offer.

How to Achieve a Corporate Migration

Migrating a corporate entity within the EU into the Netherlands is a straightforward process from a Dutch law perspective. The following options are available:

Registration of an EU member state entity with the Dutch Trade Registry

The tax residence of an existing holding company can often be changed by moving its place of effective management and control outside of its existing jurisdiction for tax purposes. This may trigger a tax charge on exit.

Cross border merger

EU parent companies can migrate to the Netherlands by effecting a statutory merger with a Dutch entity under the cross-border merger regulations. It is also possible for non-EU parent companies to merge with a Dutch company by initially entering into the EU through a conduit EU jurisdiction that permits cross-border mergers with non-EU entities.

Share swap

It is possible to incorporate a holding company in the Netherlands whereby the existing shareholders exchange their existing shares for shares in the newly created Dutch holding company.

Re-registration as Societas Europaea 

An EU parent company can re-register as a European Company (Societas Europaea) and transfer its statutory seat to the Netherlands followed by a re-registration in the Netherlands as a Dutch parent company.

Why migrate to the Netherlands?

Key drivers for migrating the top holding company of an international group structure to the Netherlands are:

  • Low corporate income tax rate of 25% on trading profits (20% up to EUR 200K first band);
  • The Netherlands has an extensive double taxation treaty network with well over 90 jurisdictions;
  • The Netherlands has entered into a vast number of bilateral investment protection treaties (BITS) that offer comprehensive protection against unfair treatment of investments by sovereign states through access to world class dispute arbitration;
  • International and well-recognized jurisdiction with one-tier corporate governance system similar to that of common law countries;
  • Straightforward, cost-efficient and fast incorporation process for Dutch entities;
  • Public company N.V. entities are widely recognized as listing vehicles;
  • The Netherlands is the premier port of entry to mainland Europe with excellent facilities in terms of corporate and financial services;
  • English language optional for proceedings before the Amsterdam courts; and
  • Limited and straightforward corporate reporting requirements.

Taxation

The Netherlands is a gateway to Europe and the rest of the world. For many years, the Netherlands has been a preferred location for foreign companies to establish a business. The location, the political stability and, especially, the beneficial tax regime have turned the Netherlands into one of the go-to countries in this respect. The following tax points are of particular relevance:

  • The general Dutch corporate income tax rate is 25% (20% up to EUR 200K first band). This rate is more than competitive in the region, as all countries surrounding the Netherlands have higher corporate income tax rates.
  • Traditionally, the Dutch participation exemption has been a major attractor of companies to the Netherlands. This facility allows the receipt of dividends and capital gains from subsidiaries free of tax in the Netherlands. The Dutch facility is still one of the most flexible and easy accessible compared to other jurisdictions, especially, with regard to the following conditions: no holding period is required, an interest of 5% is already sufficient to apply, interest in subsidiaries located in tax havens are allowed to benefit from the facility and certain other specific benefits are available.
  • No withholding tax on royalties and no withholding tax on interest.
  • Dividends are taxed at a statutory rate of 15%. However, this rate may be reduced by virtue of tax treaties to 0-10%. In principle, no dividend withholding tax applies to distributions made by a Dutch cooperative pursuant to the domestic rules.
  • No controlled foreign company/Subpart F rules
  • No thin capitalization rules.
  • There is no stamp duty or capital tax.
  • One of the most extensive international tax treaty networks (the Netherlands has concluded over 90 tax treaties, more than most other countries) and the membership of the EU (and corresponding access to EU treaties) ascertain minimal taxation on payments to any group company.
  • Another traditional benefit of the Netherlands is the open attitude of the Dutch tax authorities. The Netherlands offers the possibility to discuss and reach agreement on tax positions in advance with the Dutch tax authorities that can be formalized in agreements (or advance tax rulings) to offer optimum certainty in advance.
  • Currently, the Dutch government´s main focus is on innovation. In 2007, the government was one of the first countries to introduce a special tax regime aimed at innovation (Innovation box). Based on the Innovation box, income earned out of R&D activities can benefit from an 80% exemption, resulting in an effective tax rate of 5%;
  • The Netherlands has extensive experience in the use of hybrid structures (i.e. hybrid entities and hybrid loans). These structures can be used to further optimize the group tax rate.
  • The Netherlands has traditionally not only been very welcoming to foreign companies, but also to expatriates. In the Dutch Personal Income Tax Act, expatriates (with certain skills) can receive 30% of their income as a tax free allowance under the so-called “30%-ruling.” A benefit that also benefits the employer in negotiating (net) salaries.
  • Customs authorities in the Netherlands have a reputation for being cooperative, innovative and exceptionally efficient; all to facilitate the free flow of goods. Customs duties or import charges are charged at a later date, if the goods are stored in accordance with customs procedures in the Netherlands. This leads to considerable cash-flow advantages to foreign shippers.
  • The Netherlands’ position on Value Added Tax (VAT) is also advantageous. In contrast to other EU member states, the Netherlands has instituted a system that provides for the deferment of VAT at the time of import. Instead of paying VAT when the goods are imported into free circulations within the EU, the payment can be deferred to a periodic VAT return. The Dutch VAT system offers companies significant cash-flow and interest benefits.
  • Even though the Netherlands provides several unparalleled tax facilities, it is not blacklisted as a tax haven, but can be considered as a safe haven.
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Working with 3rd Party Providers to Make Dodd Frank Conflict Mineral Compliance Easy

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At your firm or within your company dealing with conflict minerals, you might have recently heard the buzz about the latest Dodd Frank Conflict Mineral Compliance requirements. If these requirements affect the way law firms or companies do business, then working towards compliance initiatives remains a priority.

Regulatory Assessment and Scope Analysis

This involves examining the law firm’s client or company seeking compliance product portfolio and doing an analysis of whether the product are affected by the law and therefore must be in compliance, or “in scope” Vs “out of scope.” It can also include:

  • Examining corporate obligations
  • Determination of key regulatory compliance decision points
  • Creation of a conflict minerals technical document

Creation of a Compliance Plan

This involves creating an end to end compliance plan and associated processes

  • All activities detailed in chronological order
  • Creation of application of due diligence standards
  • Responsibilities assigned to personnel
  • Determination of compliance communication pathways

Software Set Up

Industry standard to date for the majority of companies in scope of this regulation involve using a software platform to manage the large amount of data and suppliers that will be surveyed.Vendor Selection

  • Vendor Selection
  • Decisions to integrate with Enterprise Resource Planning system  (ERP), which is used to design and manage resources within a company, as well as Product Lifecyle Management (PLM), used to design, manufacture and plan the development of products
  • Methodology of supplier communication

Supplier Engagement

This portion of the process involves communication and data collection from the supply chain. Includes:

  • Data collection methodology
  • Reporting and analytics of the data collected
  • Corrective action and addressing problem suppliers

Reporting

Once data has been collected firms enter the reporting phase to complete the process for the first year. This process is then replicated year over year. With the infrastructure in place firms enter the “maintenance” phase of compliance.

Standard practise in the compliance industry has also seen that Law firms or the company seeking Dodd Frank compliance are engaging 3-4 outside service providers.

They are usually:

1.       Law firms: To determine exact requirements and legal requirements.

2.       Software: To provide the platform for data collection, management and analytics.

3.    Accounting: To audit the data collected and ensure strong data backing the program.

4.    Consulting: To develop the processes, work with /train suppliers and help with data collection.

Assisting your clients with Dodd Frank Conflict Mineral Compliance does not have to be complicated. Working through the 5 step process above and working with other 3rd party providers makes compliance at any level easy.

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The Foreign Corrupt Practices Act (FCPA) in the News: Big Scoops, Real Fallout

Sheppard Mullin 2012

In early August, the New York Times reported that the U.S. Securities and Exchange Commission (SEC) is investigating JPMorgan Chase related to alleged violations of the Foreign Corrupt Practices Act (FCPA) in China.  According to the article, the press had not previously reported on the investigation, and the Times knowledge of it was based on a “confidential United States government document.”  The article generated a number of similar news reports.

This is not the first time the media has hopped on the FCPA bandwagon following a juicy story about alleged bribery.  For example, in 2012 and again this year, the New Yorker ran feature articles on alleged corruption in the Macau gambling industry and the Guinean mining industry.  And reports by the Wall Street Journal and other sources, both inside and outside the United States, brought into focus the alleged bribery payments arising from the News Corp phone hacking scandal in the United Kingdom.

The increase in feature reporting on the FCPA makes some sense: stories typically involve racy factual underpinnings, exotic locations, multi-national companies and crooked governments.   Nonetheless, the FCPA may have been underreported in the mainstream press, even as it was being vigorously enforced by the SEC and Department of Justice.

As the press catches up to enforcement, it appears that the stories themselves may in turn have ramifications for the enforcement environment.  One result of more prominent news coverage may be increased pressure on the U.S. government to prosecute alleged FCPA violations.  While it is possible that a news story could trigger a new investigation, coverage of an ongoing investigation would seem to increase scrutiny on it, thereby inciting the government to investigate more thoroughly than might otherwise be the case, or to push harder against potential procedural hurdles like jurisdiction or the statute of limitations.  Given the high cost that has come to be associated with defending against enforcement actions, this type of pressure could lead to major expenditures by companies.  Indeed, some FCPA investigations have reportedly led to $100 million or more in attorneys’ fees.

The FCPA’s heightened visibility in the mainstream press thus brings into relief an issue with which companies need to be particularly aware: bad press.  In fact, the more negative press that accumulates with respect to a particular company and/or allegation, the worse the ramifications for the company.  Investors may start to abandon the company, management changes or other dramatic action may be taken to demonstrate the company’s commitment to addressing perceived problems, and the company may ultimately be more willing to settle the matter on the government’s terms to make the issue go away.

Companies can help protect against violations – and the adverse PR that may come with violations or even allegations of violations – by implementing comprehensive anti-corruption programs.  In addition, companies must foster a “tone from the top” that stresses compliance with anti-corruption laws and open communication about suspected violations.  Potential whistleblowers must feel secure and appreciated for coming forward to report allegations internally, so they are less inclined to report the allegations externally.  In other words, companies that do not want to air their dirty laundry had better keep a clean house.