Even the Best Consultants Require Careful Oversight: Boeing and McKinsey Encounter the FCPA

7 Min Read By: Stuart Deming

Before the recent controversy involving The Boeing Company and its 737 MAX 8, a New York Times article suggested that actions on the part of McKinsey & Company may have exposed itself and possibly Boeing to liability under the Foreign Corrupt Practices Act (“FCPA”).[1] However, no definitive conclusion should be drawn from the Times article.  A violation of the FCPA is not necessarily involved, certainly by McKinsey and Boeing. Yet the article raises a number of important issues that merit consideration.

Background

What the article suggests is that because of Boeing’s need for titanium in 2006, “it did what many companies do when faced with vexing problems: it turned to McKinsey & Company, the consulting firm with the golden pedigree, purveyor of ‘best practices’ advice to businesses and governments around the world.”

Boeing asked McKinsey to evaluate a proposal, potentially worth $500 million annually, to mine titanium in India through a foreign partnership financed by an influential Ukrainian oligarch.

McKinsey says it advised Boeing of the risks of working with the oligarch and recommended “character due diligence.” Attached to its evaluation was a single PowerPoint slide in which McKinsey described what it said was the potential partner’s strategy for winning mining permits. It included bribing Indian officials.

The partner’s plan, McKinsey noted, was to “respect traditional bureaucratic process including use of bribes.” McKinsey also wrote that the partner had identified eight “key Indian officials”—named in the PowerPoint slide—whose influence was needed for the deal to go through. Nowhere in the slide did McKinsey advise that such a scheme would be illegal or unwise.

According to the article, “neither McKinsey nor Boeing was charged in the case, and Boeing has not been accused of paying bribes. But several employees of the two companies are believed to have testified before a grand jury. Boeing continued to pursue the venture even after being advised that its partner’s plans included paying bribes, records show.” Importantly, the article notes that “ultimately the deal fell apart.” 

Consideration of All Relevant Factors

By itself, the disclosure on the PowerPoint slide does not constitute a violation of the FCPA. A multitude of factors come into play before any determination can be made as to whether an FCPA violation may be involved. In particular, evidence of corrupt intent is required. This is the lynchpin to any violation of the FCPA’s anti-bribery provisions.[2] A host of other factors may also be involved. 

For example, what precisely happened next? What were the roles of McKinsey and Boeing? As is, the disclosure reveals a suggested course of conduct that, if pursued, would constitute a violation of the FCPA’s anti-bribery provisions. Disclosures of this sort can and do surface as part of due diligence. Indeed, they pose a significant red flag. In most situations, such a disclosure may effectively preclude proceeding. But they do not automatically pose an absolute bar to proceeding. 

In the context of the article, what the disclosure represents is corroboration of what may have been intended, assuming the parties proceeded in the manner suggested. In a vacuum, it does not constitute conclusive evidence of improper inducements. Nor does the disclosure, by itself, demonstrate that improper inducements were actually made or even attempted. But the disclosure does reflect intent in terms of what was contemplated. From a prosecutor’s perspective, it would be invaluable corroborating evidence along with whatever other evidence may exist.

Consultants Should Err on the Side of Making Disclosures

Consultants should certainly err on the side of making candid disclosures. In this situation, it is not known what disclaimers may have been formally or informally made in conjunction with the PowerPoint slide. But regardless, proposals should not leave the realities of a relationship or transaction vague or ill-defined.  The more the realities are spelled out, the more likely potential problems can be avoided. Either the prospective endeavor does not proceed or special measures are undertaken to ensure that improper inducements are not made. 

Mere language in an agreement or other forms of admonitions do not constitute special measures. Much more is required. The special measures may impact the structure of a transaction. They may mean that a range of carefully designed controls are instituted. In essence, it means that special efforts must be undertaken to put in place effective mechanisms to preclude the prospect of improper inducements. In many situations, taking such steps may not be realistic or even possible. In others, creative and effective mechanisms may be possible.

Of course, prudence dictates that disclosures of the nature suggested by the article include disclaimers and appropriate cautionary language. But the disclosure itself is a positive development as it allows for a company to make an informed decision. It also allows for a company to take a range of measures to ensure that what is suggested does not take place. From a compliance perspective, the critical factor is what is done with the information. 

From the content of the Times article, it is not really known what took place. It is suggested that Boeing went forward before finding another source of the titanium. But we really do not know the specifies of what that entailed. Could going “forward” mean conduct of a very preliminary nature? Were special measures undertaken? Did Boeing, for example, exercise control over each step in the process?  Are there other critical facts of which we are not aware? In any event, it would appear that McKinsey put Boeing on notice regarding what might be involved. And Boeing is certainly well equipped to understand the implications.

Vicarious Liability

In a larger context, the allegations contained in the Times article signal the degree to which issues of vicarious liability may arise where there are incorrect assumptions as to what may expose a company to liability under the FCPA. Simply retaining the services of a well-respected firm does not, by itself, foreclose a company’s prospect of vicarious liability. 

Mere size should never be determinative. But the experience and reputation of a well-respected consulting firm may prove critical as to the likelihood of exposure to vicarious liability. This is because a firm of such stature is more likely to have in place a compliance program and related controls that tend to minimize the prospect of questionable conduct. An additional and compelling factor is the greater likelihood that the firm has the relevant experience. In short, an experienced and reputable firm is less likely to stumble due to sheer ignorance.

However, it is a mistake to believe that retaining the services of a well-respected consulting firm relieves a company of any oversight. The law applies equally to big and small firms as it does to highly-reputable and less-reputable firms. A consulting firm acts on a company’s behalf. What it does on behalf of a company may expose that company to liability. Quite simply, a company cannot take a head-in-the-sand approach to what a consulting firm does on its behalf. It must carefully monitor the efforts of its consulting firm.

Consulting Firm Liability

The Times article also raises the larger issue as to how a consulting firm may expose itself to liability as an accessory. Here, without more information, no assessment can be made as to whether there was a misstep on the part of McKinsey. Proper disclaimers may well have been made in conjunction with the PowerPoint presentation or in other ways. Yet, without appropriate and timely disclaimers or cautionary admonitions, a consulting firm may later be deemed to be an accessory if a proposed relationship or transaction proceeds in a particular manner. 

This is fundamentally similar to advising employees about what is said in emails. One must always operate on the basis that whatever information is communicated may be misconstrued. As a result, the utmost care needs to be exercised when conveying sensitive information. This is particularly so when a consulting firm is reporting on situations or on a course of conduct that could be perceived as questionable. A footnote or reliance on boilerplate language may not suffice.  The recipient should be on clear notice as to the issues of concern.

In sum, the Times article very much merits consideration. In the absence of more facts, no conclusions should be drawn as to the conduct of either McKinsey or Boeing. But from a legal perspective, it prompts careful thought and reexamination of relationships with consulting firms. It serves as a reminder of the care required in overseeing the work of consultants. In its own way, the article also serves as a vital reminder to consultants as to the care required in conveying information assembled on a client’s behalf.  


[1]W. Bogdanich and M. Forsythe, “‘Exhibit A’: How McKinsey Got Entangled in a Bribery Case,” The New York Times (Dec. 30, 2018).

[2]15 U.S.C. §§ 78dd-1, 78dd-2, 78dd-3 (2019).

ABOUT THE AUTHOR

Kalamazoo, MI

Stuart Deming

Stuart H. Deming represents foreign and domestic companies, organizations, audit committees, and individuals in a range of business, legal compliance, and investigatory matters. He provides advice on…

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