United States: Undercover DOJ Sting Operations For FCPA Violations: A New Level Of Enforcement

Twenty-two executives and employees of companies in the law enforcement and military equipment industry were arrested on January 18 for violations of the Foreign Corrupt Practices Act ("FCPA"), in the first ever Department of Justice ("DOJ") foreign bribery investigation using undercover federal agents. Sixteen indictments, returned in the U.S. District Court for the District of Columbia on December 11, 2009, were unsealed this week charging a wide range of corporate executives with FCPA violations arising from the undercover sting operation. The defendants were all charged with engaging in schemes to bribe a minister of defense in an unspecified African country in order to secure contracts to provide military and law enforcement supplies to the country's presidential guard.¹ This new development confirms our previous observation that the DOJ is aggressively ramping up its proactive investigation and prosecution of corporations and individuals who engage in or condone acts of bribery and corruption in violation of the FCPA.² The use of undercover agents to pose as co-conspirators in a foreign bribery scheme underscores that such FCPA cases should no longer be considered limited to investigations of allegations by whistleblowers, competitors or disgruntled employees.

Given the DOJ's increased attention on FCPA matters and creative means for pursuing those cases, companies should step back and re-evaluate their FCPA procedures and controls to ensure that they have been appropriately updated and account for currently known risks. Here, we summarize these recent developments and provide guidance as to how companies may improve their due diligence processes and internal controls in order to prevent FCPA violations.

The African Sting Case

The arrests on January 18 mark the largest single investigation and prosecution against individuals in the history of the DOJ's enforcement of the FCPA.³ Twenty-one defendants were arrested while attending an industry trade show in Las Vegas and one defendant was arrested in Miami. According to the indictments, the defendants allegedly agreed to pay a twenty percent "commission" to an undercover FBI agent who was posing as a sales agent who said that he represented the ministry of defense of an unnamed African country, in the hopes that they would each secure a portion of a $15 million deal to provide military and law enforcement supplies to the country's presidential guard.⁴ Indeed, the sales agent allegedly informed the defendants that ten percent of the commission would be paid directly to the minister of defense in exchange for securing the contract. The defendants also agreed to inflate the true price of the military and law enforcement supplies by twenty percent to conceal the commission being paid to the sales agent.⁵

According to the indictments, the twenty-two defendants were high ranking executives from sixteen different companies based in the United States, the United Kingdom and Israel. Each company sold a different type of military or law enforcement equipment, including grenades and grenade launchers, tactical bags, explosive detection kits, M4 rifles, riot control suits, ready to eat meal kits, customized gun accessories, bulletproof vests, rifle-mounted cameras, tactical vehicles, laser grips, pistols, ammunition, uniforms, night vision goggles, armored vehicles and body armor.⁶ In addition to the FCPA charges, each indictment also alleges conspiracy to engage in money laundering.⁷

The investigation had been ongoing for two years, according to DOJ officials, and "approximately 150 FBI agents executed 14 search warrants" in jurisdictions across the country in the course of the investigation, and coordinated with the City of London Police.⁸ The defendants face significant fines and prison terms of up to five years per count for the FCPA violations and up to 20 years for the money laundering violations.

Implications of the African Sting Case on Future FCPA Actions

When asked about the potential impact of the African Sting case, Assistant Attorney General Lanny Breuer, Chief of the Criminal Division of the DOJ explained: "Indeed the undercover techniques used in this case should cause all would-be FCPA fraudsters to pause and to ask: am I really paying off a foreign governmental official or could this be a federal agent? Of course, if you even have to ask yourself this question in all likelihood you shouldn't be doing whatever it is that you are doing."⁹ This is certainly sound advice, and it is very important for high level executives and senior managers at companies with international operations, particularly those with subsidiaries in foreign countries or who operate through the use of agents, third parties or intermediaries, to ensure that they have strong communications and reporting mechanisms and a high level of transparency at all levels of operation so that no employees of the company find themselves asking the dangerous question posed by Mr. Breuer.

FCPA investigations and prosecutions have been rapidly on the rise in recent years, and are likely to continue to feature prominently in the Justice Department's international law enforcement and anti-corruption strategies in the foreseeable future. "Investigating corruption at all levels is the number one priority of the FBI's criminal division," said Assistant Director of the FBI's Criminal Investigative Division Kevin Perkins. "In this era of global commerce, the FBI is committed to curbing corruption at home and overseas. Companies should prosper through honest business practices, not the practice of backroom deals and bribery."¹⁰

Indeed, this recent series of arrests and prosecutions should come as no surprise, in that it represents a continuation of the administration's stated policy to expand FCPA investigations and prosecutions, with an increasing willingness to pursue criminal charges against the individuals involved, in addition to the relevant companies. As Mr. Breuer stated in a speech in November 2009, "Whether we're talking about kleptocracy or those who benefit from bribery, we're going to pursue it and pursue it aggressively."¹¹ In that speech, he explained that "the majority of our cases do not come from voluntary disclosures. They are the result of proactive investigations."¹² Mr. Breuer also said that the DOJ would frown on companies that did not have adequate controls in place to prevent FCPA violations. "We recognize the issue of costs to companies to implement robust compliance programs . . . and to forgo certain business opportunities to avoid the taint of corruption," he said. "The cost of not being FCPA compliant however can and will be much, much higher."¹³

FCPA Best Practices Guidance for Corporate Clients

In light of the DOJ's increased emphasis on proactive investigation of FCPA violations and enforcement of anti-bribery and corruption laws through criminal prosecution of both corporate and individual defendants, companies should take a closer look at their overseas operations and internally assess and improve internal controls and due diligence processes in order to reduce the potential for FCPA liability. In this regard, we offer some brief guidance on best practices for mitigating FCPA risks:

If considering a merger with, or an acquisition of, a company with significant international business operations, it is important to conduct comprehensive due diligence on FCPA issues in order to ensure that there is no successor liability for prior violations and that, going forward, the employees of the acquired entity understand the fundamentals of U.S. anti-bribery and corruption laws and their obligations under them. This can include examining key company documents,

conducting interviews of relevant employees at the target company and examining the target company's books and records.

If any red flags are raised in the initial due diligence inquiry in connection with a proposed merger or acquisition, attorneys and forensic accountants with expertise in FCPA issues should conduct more intensive on the ground interviews in foreign offices and review relevant documents and emails in order to further investigate any suspicious or troubling practices.

In the context of normal business operations, companies should have employee handbooks and codes of conduct that address bribery and corruption issues, and should regularly update these handbooks and codes. If your company does not have ethics training in place that specifically covers bribery and corruption issues within the parameters of the FCPA and other local laws, or if this training is not tailored to employees in regions of the world where corruption is more endemic, your Human Resources and Corporate Governance teams should consider working with outside counsel to create these training modules. In addition to training, companies should institute a reporting system or "hotline" to enable employees to report suspected improper conduct. The Company should also impose appropriate disciplinary procedures to address FCPA violations.

Companies that use third party agents, such as outside sales agents, consultants, intermediaries or subcontractors, must ensure proper oversight over both company employees and third party agents. Third party agents can expose a company to FCPA violations, so it is important that a company monitors and reviews their activities and provides clear guidance on FCPA compliance to them, preferably in written form.

Companies should also implement or update uniform expense and reimbursement policies so that improper travel, lodging, gift, and entertainment expenses can be easily and quickly detected. This involves keeping detailed gift and petty cash logs, having managerial oversight of expenses over a certain amount and requiring receipts for all expense reimbursements.

Footnotes

1 See "Twenty-Two Executives and Employees of Military and Law Enforcement Product Companies Charged in Foreign Bribery Scheme." Department of Justice, Office of Public Affairs. Jan. 19, 2010 (hereinafter "DOJ Press Release"). Available at http://www.justice.gov/opa/pr/2010/January/10-crm-048.html .

2 See Howard W. Goldstein, Kevin J. Harnisch and Steven M. Witzel, "The Good, the Bad and the FCPA." Fried Frank Litigation Update. September 2009, at 2.

3 DOJ Press Release at 1. The FCPA, 15 U.S.C. §§ 78dd-1, et seq., makes it illegal to bribe foreign government officials in order to obtain or retain business, or for the purpose of directing business to another person. It also prohibits individuals or businesses from offering, promising, or authorizing, either directly or indirectly, the payment of anything of value to any foreign official, government employee, officer of a public international organization, foreign political party, candidate, or any agent of those entities.

4 See Grand Jury Indictments in U.S. v. Alvirez, No. CR-09-348 (D.D.C. 2009); U.S. v. Ashiblie, No. CR-09-347 (D.D.C. 2009); U.S. v. Bigelow, No. CR-09-346 (D.D.C. 2009); U.S. v. Caldwell, No. CR-09-345 (D.D.C. 2009); U.S. v. Cohen, No. CR-09-343 (D.D.C. 2009); U.S. v. Geri, No. CR-09-342 (D.D.C. 2009); U.S. v. Godsey, No. CR-09-349 (D.D.C. 2009); U.S. v. Goncalves, No. CR-09-335 (D.D.C. 2009); U.S. v. Mishkin, No. CR-09-344 (D.D.C. 2009); U.S. v. Mushriqui, No. CR-09-336 (D.D.C. 2009); U.S. v. Painter, No. CR-09-337 (D.D.C. 2009); U.S. v. Patel, No. CR-09-338 (D.D.C. 2009); U.S. v. Paz, No. CR-09-339 (D.D.C. 2009); U.S. v. Spiller, No. CR-09-350 (D.D.C. 2009); U.S. v. Wier, No. CR-09-341 (D.D.C. 2009); U.S. v. Weisler, No. CR-09-340 (D.D.C. 2009).

5 Id.

6 Id.

7 Id.

8 DOJ Press Release at 1.

9 Ashby Jones, "FCPA Goin' Prime Time: Huge Bribery Sting Leads to Arrest of 22." Wall Street Journal Law Blog. Jan. 19, 2010. Available at http://blogs.wsj.com/law/2010/01/19/fcpa-goin-prime-time-huge-bribery-sting-leads-to-arrest-of-22 /.

10 DOJ Press Release at 1.

11 See Dionne Searcey, "Breuer: Beware, Execs, The DOJ Will Take Your Fancy Cars." Wall Street Journal Law Blog. Nov. 17, 2009. Available at http://blogs.wsj.com/law/2009/11/17/breuer-beware-execs-the-doj-wants-your-fancy-cars/; "Historically Massive Sting Operation." FCPA Professor, A Forum Devoted to the Foreign Corrupt Practices Act, Jan. 19, 2010. Available at http://fcpaprofessor.blogspot.com/2010/01/historically-massive-sting-operation.html .

12 Id.

13 Id.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.