Previously published in Casino Enterprise Management
On March 1, Las Vegas Sands Corp. (LVS) disclosed that the Department of Justice and the Securities and Exchange Commission were investigating alleged violations of the Foreign Corrupt Practices Act (FCPA) by the company in connection with its gaming operations in Macau. The company now faces the prospect of huge fines, disgorgement of profits and imprisonment for those deemed complicit in any violations, not to mention the certainty of millions of dollars in legal fees necessary to investigate and defend against these allegations.
The FCPA prohibits the payment of bribes to foreign officials and provides for civil and criminal sanctions against companies and individuals who authorize, make or conceal such payments. The risk of FCPA violations is particularly high in those industries that require frequent and significant interactions with foreign officials vested with discretionary authority. The highly regulated nature of the gaming industry, coupled with the potential for enormous profits for those companies that successfully navigate the regulatory gauntlet, makes it a potential hotbed for FCPA violations.
Enforcement under the statute has recently increased dramatically, producing more indictments and aggregate financial penalties in the last four years than in the statute's previous 30 years of existence. In this new era of heightened enforcement, news that the government has trained its sights on a company doing business overseas has become almost commonplace. The LVS announcement is notable, however, for it represents FCPA enforcers' first efforts to review the conduct of a member of the gaming industry.
The government's enforcement strategy frequently targets entire market sectors, and thus the LVS investigation may signal the beginning of a broader effort to root out and sanction FCPA violations in the gaming industry. Such violations are likely to be widespread, given the nature and scope of gaming companies' interaction with foreign officials, the locations of industry hotspots (often countries where official corruption runs rampant) and the relative scarcity of previous enforcement activity that might alert industry members to the risk and encourage them to avoid violations. Those operating in that sector should take heed of the LVS announcement and recognize the need to take affirmative steps to mitigate the substantial risks of enforcement actions which, until now, remained hidden.
Background on the FCPA
The statute consists of two components, commonly referred to as the "anti-bribery" and "accounting" provisions. The anti-bribery provisions speak in prohibitive terms, forbidding anyone—including American companies of all sizes, U.S. citizens and permanent residents, even foreign nationals in certain situations—from corruptly offering, promising or giving anything of value, directly or indirectly, to a foreign official for the purpose of obtaining or retaining business anywhere in the world.
The accounting provisions create affirmative obligations, requiring certain companies—for the most part, those that are publicly traded—to maintain "books, records and accounts which, in reasonable detail, accurately and fairly reflect the transactions ... of the issuer." Companies must also devise and maintain internal controls designed to provide reasonable assurances that financial transactions are executed in accordance with generally accepted accounting standards.
Recognizing that corrupt activity flourishes when concealed, the accounting provisions seek to negatively reinforce compliance with the anti-bribery prohibitions by mandating transparency under threat of separate and additional penalties where any registered company pays a bribe and fails to declare and disclose it as such.
The LVS Allegations
The government's focus on LVS appears to arise out of a lawsuit filed by Steven Jacobs, who was fired from his role as CEO of the company's Chinese affiliate. In a complaint filed in Clark County, Nev., in October 2010, Jacobs makes a number of allegations concerning "repeated and outrageous demands" made upon him by LVS CEO Sheldon Adelson. Among those claims, Jacobs alleged that Adelson demanded that he exert "leverage" over certain government officials in Macau in order to further LVS' interests. In addition, he charged that Adelson mandated the continued retention of a Macau attorney despite concerns that the individual's employment posed "serious risks" under the FCPA.
It is unlikely that these allegations alone triggered the government's investigation. At a minimum, Jacobs and possibly others provided additional, detailed information to bolster the notion that LVS violated the statute, and the government shaped the scope of its inquiry to match those claims.
Regardless of the source of the triggering information, LVS now finds itself in the unenviable position of having to fight multiple battles on different fronts. In addition to gathering the mass of information demanded by the DOJ and SEC subpoenas, LVS must also conduct its own investigation of the underlying events, and prepare for a rash of class action suits by those shareholders seeking recovery for the drop in LVS' share price.
Recent media reports also indicate that the Chinese authorities have opened a separate investigation into the matter and, regardless of the outcome of that review, the company can expect an inquiry from Nevada gaming authorities. In sum, LVS is in for a long, costly multi-front battle over these allegations, in which the company will be expected, as a practical matter, to prove its innocence.
How to Confront FCPA Risks
LVS will likely find that the expenditure of resources necessary to defend these investigations, and the severity of the consequences they ultimately bring about, will stand inversely proportionate to size of the company's prior FCPA compliance efforts. In other, simpler words: In the FCPA context, an ounce of prevention is worth a pound of cure. While LVS cannot revise history at this stage, it can serve as a cautionary tale for other gaming companies that face similar risks and wish to avoid a similar fate.
In light of the FCPA's relatively low profile until recently, many companies remained blissfully unaware not simply of the potential risks of enforcement actions, but of the statute itself. The government's focus on investigating and prosecuting FCPA violations changed the landscape dramatically. At this point, every company operating internationally, regardless of the extent those activities, needs to understand the contours of the FCPA and the potential risks it presents.
Regardless of the size of the company, the nature of its business or the location of its operations, transforming a commitment to compliance from an abstract concept to a concrete strategy starts with the same step: assessing the risks the company faces.
Reduced to its essence, this process reveals the "who, what, where, when and how" of the intersections between the company's operations and foreign officials. These interactions span a wide range, from the marketing of goods and services directly to government entities or state-owned enterprises to more routine contacts such as customs, taxes and visas. In industries like gaming, where government authorization at the outset is essential and regulatory oversight is ever present, opportunities abound for companies to run afoul of the FCPA.
Whatever the magnitude of FCPA risks a company faces, those risks are amplified when interactions with foreign officials are carried out by intermediaries. Those acting on behalf of the company during such interactions can create huge exposure by violating the FCPA, regardless of whether or not they are deemed "employees" in the traditional sense.
The prospect for danger in such a scenario is not difficult to envision: A foreign consultant is retained to represent the company's interests before foreign officials, and is compensated based on the level of success achieved in convincing those officials to exercise their discretion in the company's favor. What are the chances the foreign consultant will pay the official a bribe, using the company's money or perhaps some portion of commission he stands to reap? Pretty good, based on history. Those chances increase significantly where bribery is ingrained in the fabric of local culture and when the company fails to take adequate (or, in some cases, any) steps to ensure that the intermediary is aware of and complies with the FCPA.
To mitigate these risks, gaming companies need to understand all dimensions of their interactions with foreign officials. After gathering that information, those companies can employ measures to educate those participating in such interactions (including outside agents and consultants) about the FCPA's requirements and monitor those interactions. Recognizing that the breadth and depth of activity may make this task an overwhelming one, basic strategies can be employed that allow the company to leverage its ability to observe violations in the present (e.g., by rewarding employees who report such behavior) and deter them in the future (e.g., by imposing meaningful disciplinary sanctions on violators). While the process will always be a challenging one, those forewarned and equipped with proper compliance tactics will find the threats manageable, and the potential legal exposure reduced dramatically.
FCPA risks prompt a wide range of reactions from those subject to the statute's reach. Some companies consider the risk of violation or detection so small that they ignore it altogether. Others, overwhelmed by the FCPA's dense language, amorphous contours and draconian consequences, waste time, effort and money by engaging in frantic, uninformed and unfocused attempts to comply with the statute's broad mandates. The proper approach to FCPA compliance lies between these two extremes and is informed by a candid and thorough analysis of the company's activities. Gaming companies engaged in international business that plot this course now, before the full onset of industry-wide enforcement efforts, will find themselves best equipped to manage the business and enforcement risks the statute presents.
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