What Happens in Rome Can Put You in Jail in the US.

Wednesday, September 5, 2012 19:34

A few years back, Las Vegas changed its city motto to “What happens in Vegas, Stays in Vegas”, as if that was going to get someone out of trouble should they be caught doing something stupid by their wife, the cops, a pit boss. As Prince Harry recently found out.

In China the motto has been more along the lines of “when in Rome”. That, to succeed in China one must go local. Do as they do.

The problem is that Chinese firms do not have to abide by the FCPA, or by a host of international laws, that are meant to restrict firms (and individuals) from engaging in unlawful business practices. As Garth Powers, former Morgan Stanley Managing Director, exemplifies.

If you don’t remember the case, Garth was caught up in the middle of a real estate scandal a few years ago. He was the banker. she was the fixer. Together they made a lot of money in Shanghai’s real estate market for Morgan and themselves. Which was a problem for the regulators in the US who pursued him legally, and securrd a confession that will result in some jail time back in the U.S.

One point for the Regulators.

To make himself feel better explain the full context of the issue, Powell sat down with CNBC to lay it all out.

First, the details of the “transaction” that got him busted to begin with

I think, let’s just focus for a minute on the transaction for which I’m being charged. The government hasn’t released some important background about that. I made that investment before I joined Morgan Stanley. When I joined, I declared it to Morgan Stanley. Then, Morgan Stanley became familiar with that deal, and decided they wanted to buy in as well.

So, I helped them to do that. Then, in– two– about a year and a half after that– essentially, just to make it very simple, Morgan Stanley forced me out of that deal. And I felt that was unfair, because it had been something I’d had before. Then, I brought them in, and then they were forcing me out.

And so, about a year after that, I found a way to buy back in at the same price that I’d been forced out at. That’s still—a wrong action. When Morgan Stanley forced me out of the deal, I should’ve either quit, and thereby kept the investment, or I should’ve just accepted that they didn’t want me to be involved in the deal as long as the company was involved.

In his defense of why he wasn’t “aware” of FCPA rule and his misconduct, in Powell’s interview he states it’s the systems fault:

But then you have to ask yourself, if it’s obviously not working because people are acting– in ways that show that they have low to zero, FCPA consciousness, then maybe those training programs and e-mails are not enough.

So, it’s not the firm’s fault that you don’t read them, or that you don’t listen, or that you just hang up. But at the end of the day, the compliance program should be about successfully– making people conscious about things like the FCPA.

I can see his point. I mean the system forces you to read emails, attend compliance workshops, and sit on quarterly / yearly calls about compliance, and as MD it is your job to teach others (and make sure they are on the calls)… but it is also the systems fault that you fall asleep, hit mute, or fake a cramp to get off the phone.

Where the interview for me was interesting was simply that the culture he was describing was one that he rightly describes as prevalent. It was prevalent in Morgan, but more to the point of this post, it was prevalent in China. Firms regularly send gov’t relations director to the chamber briefings where various aspects of FCPA and local compliance regulations are discussed, but operationally there are still firms acting as if those regulation.

It is not just contained to a single industry. the problems span nearly every industry I have research / consulted in, and in each industry you have firms who “go native” while others that take compliance seriously. In the case of those that “go native” and have the mantra of “when in Rome” the risks have been growing.

Powell is correct in saying that regulators have accepted (on some level) market conditions, but for firms who believe that will be a constant they are going to get burned. Locally, foreign firms are already coming to understand that as local agencies increase their scrutiny, but as Powell’s case shows, China is willing to share information with US authorities.

Which virtually ensures that we will see more cases along these lines. Where the China MD of a firm who does bad is not just held accountable locally, but is also held accountable back home.

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