Bill Singer, Contributor
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4/26/2012 @ 9:25AM |1,837 views
A Cynic's Guide To Shocking Revelations of Co
uption in China And Mexico
On April 25, 2012, former managing director for Morgan Stanley’s real estate business in China, Garth Peterson, 42, an American citizen living in Singapore, pleaded guilty in federal court in Brooklyn, NY to a one-count criminal information charging him with conspiring to evade internal accounting controls that Morgan Stanley was required to maintain under the Foreign Co
upt Practices Act (“FCPA”).
In the Federal prosecutors Press Release, it is asserted that:
Morgan Stanley maintained a system of internal controls meant to ensure accountability for its assets and to prevent employees from offering, promising or paying anything of value to foreign government officials. Morgan Stanley’s internal policies, which were updated regularly to reflect regulatory developments and specific risks, prohibited
ibery and addressed co
uption risks associated with the giving of gifts, business entertainment, travel, lodging, meals, charitable contributions and employment. Morgan Stanley frequently trained its employees on its internal policies, the FCPA and other anti-co
uption laws. Between 2002 and 2008, Morgan Stanley trained various groups of Asia-based personnel on anti-co
uption policies 54 times. During the same period, Morgan Stanley trained Peterson on the FCPA seven times and reminded him to comply with the FCPA at least 35 times. Morgan Stanley’s compliance personnel regularly monitored transactions, randomly audited particular employees, transactions and business units, and tested to identify illicit payments. Moreover, Morgan Stanley conducted extensive due diligence on all new business partners and imposed stringent controls on payments made to business partners.
Form Over Substance: And yet, despite all of those impressive compliance protocols and policies, Morgan Stanley still couldn’t prevent the criminal conduct alleged in this case and, gee, no one at the firm had an inclination about what was going on for a really long time.
Unfortunately, so much of what passes for compliance activity on Wall Street always seems impressive but for some odd, inexplicable reason, under the pressure of real world events, the impressiveness of these compliance safeguards often wither and come off as more form rather than substance. I mean, c’mon, how else do we explain why we keep reading about all these multi-faceted and multi-layered compliance regimes that never quite seem to catch the humongous violations until way, way after the fact? For a case involving the failure of internal compliance controls used to verify the accuracy of supposedly independent and accurate “Mark to Market” prices submitted to the Bank of Montreal by one of its traders, read: Commodities CEO Gets 30 Months In Prison In Mark To Market Scheme (April 26, 2012).
In Peterson’s case, the prosecutors alleged that he had conspired with others to circumvent Morgan Stanley’s internal controls in order to transfer a multi-million dollar ownership interest in a Shanghai building to himself and a Chinese public official , who was his friend. According to the allegations, Peterson encouraged Morgan Stanley to sell an interest in a Shanghai real-estate deal to Shanghai Yongye Enterprise (Group) Co. Ltd., a state-owned and state-controlled; however, in reality, Peterson was a
anging a deal whereby the interest would be conveyed to a shell company.
Gee, let’s see here, who could possibly control that shell company? Eureka! Turns out that the shell was controlled by Peterson, a Chinese public official associated with Yongye, and a Canadian attorney. In 2006, Morgan Stanley sold the interest to the shell company at a discount, which resulted in an immediate paper profit of more than $2.5 million.
Peterson faces a maximum penalty of five years in prison and a maximum fine of $250,000 or twice his gross gain from the offense.
The prosecutors’ Press Release advises that:
After considering all the available facts and circumstances, including that Morgan Stanley constructed and maintained a system of internal controls, which provided reasonable assurances that its employees were not
ibing government officials, the Department of Justice declined to
ing any enforcement action against Morgan Stanley related to Peterson’s conduct. The company voluntarily disclosed this matter and has cooperated throughout the department’s investigation.
Separately, the Securities and Exchange Commission filed a Complaint in the Eastern District of New York and announced a settlement with Peterson. The SEC Complaint charged Peterson with with violations of the anti-
ibery, books and records and internal control provisions of the FCPA, and with aiding and abetting violations of the anti-fraud provisions of the Investment Advisers Act of 1940. Peterson consented to a court ordered disgorgement of $254,589 and to relinquish to a court-appointed receiver the interest he secretly acquired from Morgan Stanley’s fund in the Jin Lin Tiandi Serviced Apartments (cu
ently valued at about $3.4 million). Peterson consented to permanent industry bars based on the anticipated entry of the injunctions against him and his criminal conviction.
Bill Singer’s Comment
Not to be too philistine here but are we all living in the same world? Given the recent headlines about Walmart and Mexico, and other similar FCPA cases, are we enforcing upon American businesses a code of conduct that is aspirational but not practical? Are we setting up a system of business ethics that is setting up American business for failure when it comes to the realities of the emerging nations and developing economies?
NO — absolutely do not infer from those questions that I am espousing
ibery and co
uption as tools for market penetration or boosting revenues. Carefully re-read my comments and note a lack of advocacy by me for that position. What I am doing is raising the questions:
· How are our businesses supposed to compete in co
upt societies when the price of admission to various markets is a
ibe, a kick-back, or the offer of hidden participation in a high-stakes deal?
· What advantage is gained if the dirty dollars are paid by a Russian, a German, or a Japanese company but not an American — and if you advocate such a next-in-line solution, how does that benefit the victimized nation if the co
uption comes at the hands of and out of the pockets of a non-American? (Which is sort of like asking whether you would prefer to be the victim of a Latino, Asian, African American, or Caucasian armed ro
er.)
Without question, we should not be involved in a race to the bottom. That compromised vision was partially responsible for the domestic policies that pushed us into the Great Recession. On the other hand, business is not conducted in an MBA classroom but in the back alleys and darkened back rooms of far too many unscrupulous “fixers” in impoverished and emerging nations. In North Africa and the Middle East, such conditions provoked uprisings. In other regions, the official response ranges from benign indifference to charging the executed for the cost of the bullet.
Ultimately, we risk becoming betrothed to hypocrisy if we do not successfully wrestle with the challenge of acknowledging the pervasive co
uption of many foreign business environments and formulating a practical response as to how our nation — we as a people — choose to deal with such co
uption. Pretending that ponderous layers of compliance policies are the solution is ridiculous — as if the repetitive nature of these FCPA prosecutions don’t prove that truth.
Again, don’t put words in my mouth. I am simply serving the role of an agent provocateur here. These questions need to be asked and the answers given due consideration.
This article is available online at:
http:
www.fo
es.com/sites
illsinge
2012/04/26/a-cynics-guide-to-shocking-revelations-of-co
uption-in-china-and-mexico/
January 21, 2010
F.B.I. Charges Arms Sellers With Foreign Bribes
By DIANA B. HENRIQUES
Sometimes the proposition was delivered in a quiet corner of the Mandarin Oriental Hotel in Miami. Sometimes the setting was the elegant Ritz-Carlton Hotel, a few blocks from the White House.
The topic might be grenade launchers, rifles, handguns, ammunition or bulletproof vests — components of the basic Warlord Starter Kit.
But the question put to a succession of arms industry executives last May was always the same: Would you pay
ibes to get a piece of a $15 million contract to equip the presidential guard of an African country?
According to the Justice Department, almost two dozen executives said yes, put it in writing and wrote checks — without realizing that the African officials getting the
ibes were actually undercover F.B.I. agents.
The play-acting ended on Tuesday, when 22 top-level executives, including a senior sales executive at Smith & Wesson, were a
ested in what Justice Department officials called the first undercover sting ever aimed at violations of the federal ban on corporate
ibes paid to get foreign business.
Even in its relatively quiet disclosure of the cases on Tuesday, the Justice Department was careful to withhold any details that might identify or endanger the undercover team, saying that the investigation was continuing.
The case is the biggest prosecution of individuals for foreign corporate
ibery ever pursued by the Justice Department. The 16 indictments in the case are also the early fruits of a new initiative for the Justice Department, Lanny A. Breuer, assistant attorney general for the criminal division, said in an interview on Wednesday.
“This is the first time we’ve used the technique of an undercover operation in a case involving foreign corporate
ibery,” Mr. Breuer said. “The message is that we are going to
ing all the innovations of our organized crime and drug war cases to the fight against white-collar criminals.”
All of the defendants work at, or run, small companies that supply the staples of military and law enforcement life everywhere — small arms, uniforms, bullets — and that jockey for deals at a level well below military industry giants like Lockheed or Boeing.
The a
ests seemed orchestrated to deliver the Justice Department’s message directly to others in the business. All but one of the defendants were a
ested on Tuesday in Las Vegas, where they were attending the Shooting, Hunting, Outdoor Trade Show and Conference, known as the SHOT Show, which is billed as “the world’s premier exposition of combined firearms, ammunition, archery, cutlery, outdoor apparel, optics, camping and related products and services.”
The drama began to unfold last spring in the sleek beachfront glamour of the Mandarin Oriental Hotel in Miami. There, on May 13, the curtain went up on a two-city sting worthy of a George Clooney caper.
After a closely guarded investigation that had taken more than two years, the cast was in place.
There was a mystery figure identified in the indictments as “Individual 1,” a former executive in the law enforcement and military equipment industry who clearly lent credibility to the business deal offered to the defendants, all described as business associates of his.
There was “Undercover Agent 1,” an F.B.I. agent posing as a representative of the defense minister of an unidentified African nation, Country A. And there was “Undercover Agent 2,” another agent posing as a procurement officer who reported