Trends And Recent Developments In FCPA Enforcement - Corporate Crime

Over the past year, both the U.S. Securities and Exchange Commission (SEC) and the Department of Justice (DOJ) have continued to aggressively bring cases against companies and individuals for Foreign Corrupt Practices Act (FCPA) violations. 2010 alone saw eight of the 10 largest monetary settlements for FCPA violations in a year, where the combined fines and penalties to the SEC and the DOJ exceeded $1.8 billion.¹ Because the heightened focus and aggressive stance in pursuing FCPA violations show no signs of abating, companies with potential FCPA exposure should understand recent enforcement trends and become familiar with measures they can take to ensure compliance with the FCPA. Recent trends from enforcement actions, which are described below, include: investigations of individuals, industry wide sweeps, an increase in penalties and use of tools such as deferred prosecution agreements by the SEC.

Recent Enforcement Trends

Investigation of Individuals

Both the SEC and the DOJ continue to seek enforcement actions against individuals who include corporate executives and decision makers. Commenting on the FCPA enforcement action against Paul Jennings, former CEO of Innospec, for allegedly approving bribes to obtain and maintain business, Cheryl J. Scarboro, chief of the SEC's Foreign Corrupt Practices Act Unit, noted, "We will vigorously hold accountable those individuals who approve such bribery and who sign false SOX [Sarbanes-Oxley Act] certifications and other documents to cover up wrongdoing."²

The SEC also has pursued books and records violations where it was determined that individuals had ultimate responsibility for the improper conduct of employees within an organization. In the Nature's Sunshine Products case, although the SEC's complaint did not allege that the CEO and former CFO had knowledge of any improper payments, the SEC claimed that the company violated the books and records and internal controls provisions of the FCPA in its capacities as "control persons."

The penalties for FCPA violations to which individuals are subject can include prison sentences, substantial fines and related legal fees that their employers likely will be prevented from paying. As a result, individuals with potential FCPA exposure, even in the control person context, need to obtain a thorough understanding of the Foreign Corrupt Practices Act and take preventative measures to minimize violations.

Industry wide Sweeps

The Panalpina case, which saw simultaneous settlements reached with six other companies, was the first sweep of a particular industry sector. In speaking about the case, Scarboro added, "This investigation was the culmination of proactive work by the SEC and the DOJ after detecting widespread corruption in the oil services sector. The FCPA Unit will continue to focus on industry wide sweeps, and no industry is immune from investigation."³

In the case of the oil industry and oil services companies, the government used knowledge from one investigation to apply to a broader range of companies within the same industry. In the subsequent sweep of the medical devices and pharmaceutical industries, this technique, along with acquiring knowledge regarding industry practices, aided the government in successfully bringing a number of actions. In the medical devices and pharmaceutical industries, the structure of the industry and predominance of foreign state-owned healthcare providers likely contributed to a high incidence of FCPA violations in that industry. The recent action against Johnson & Johnson illustrates this finding. In that case, Johnson & Johnson agreed to settle the SEC's charges by paying more than $48.6 million in disgorgement and prejudgment interest in connection with alleged bribes to public doctors and health administrators in Greece, Poland and Romania and for kickbacks to Iraq to obtain contracts under the United Nations Oil for Food Program. According to the DOJ, Johnson & Johnson "cooperated extensively with the government and, as a result, has played an important role in identifying improper practices in the life sciences industry."⁴

Given the SEC's and the DOJ's success in utilizing industry wide sweeps and seeking assistance from companies under review to identify susceptible industry practices, it is likely that these sweeps will continue.

Increase in Penalties

As noted above, 2010 was a record year in fines charged by the SEC and the DOJ, with the top three settlements against BAE, Snamprogetti and Technip yielding more than $1.1 billion. Already in 2011, two new settlements have entered the top 10 with the JGC Construction and Johnson & Johnson settlements of $218.8 million and $70 million, respectively.⁵

Although the settlements noted above are high, both the SEC and the DOJ indicate that the willingness of a company to cooperate appears to lower the fine. In most cases, however, the SEC does not comment on the impact of cooperation on the settlement. In addition to the enormous settlement costs, companies and individuals bear the burden of the cost associated with investigating and resolving the cases. Cooperating in an SEC investigation typically entails conducting a broad internal investigation into the allegations, as well as performing a critical review of internal controls, and also can include an ongoing monitor to observe and report on compliance. As such, the settlement cost presents only a partial view of the total cost associated with contending with an FCPA investigation.

Use of Deferred Prosecution Agreements by the SEC

Last year, the SEC announced an initiative to encourage individuals and companies to provide information and assist in SEC investigations.⁶ The initiative includes the use of cooperation agreements; deferred prosecution agreements and non-prosecution agreements; a streamlined process for submitting witness immunity requests to the Department of Justice; and evaluation of whether, how much and in what manner to credit cooperation by individuals to ensure that potential cooperation arrangements maximize the Commission's law enforcement interests. "This is a potential game changer for our division," said Robert Khuzami, director of the Division of Enforcement. "There is no substitute for the insider's view into fraud and misconduct that only cooperating witnesses can provide. That type of evidence can expand our ability to conduct our investigations more swiftly and to act quickly to file charges, freeze assets and protect investors."

For the first time, the SEC utilized one of the items noted in its initiative — the deferred prosecution agreement — in an action against Tenaris. Tenaris allegedly violated the FCPA by bribing government officials in connection with obtaining contracts to supply oil and natural gas pipelines in Uzbekistan. The deferred prosecution agreement calls for Tenaris to pay $5.4 million in disgorgement and prejudgment interest, cooperate with the SEC investigation, update the company's code of conduct, have certain employees certify compliance with the code and train employees on the FCPA. According to Khuzami, Tenaris' "immediate self-reporting, thorough internal investigation, full cooperation with SEC staff, enhanced anti-corruption procedures and improved training made it an appropriate candidate for the Enforcement Division's first deferred prosecution agreement."⁷

Given the focus at the SEC regarding the new compliance initiative and a history of using tools such as deferred prosecution agreements in FCPA matters at the DOJ, more deferred prosecution agreements may be struck by the SEC and companies under review.

Compliance Considerations

In light of the SEC's and the DOJ's aggressive pursuit of FCPA cases, coupled with the potential for fines, penalties and investigation costs, companies now more than ever should make it an imperative to be vigilant regarding FCPA compliance. Some basic considerations include the following:

In both the Alcatel and Tyson FCPA actions, the SEC commented that a lax system of internal controls contributed to the failure to detect or prevent misconduct. As such, companies and their counsel should ensure that a corporate compliance program is implemented that includes policies and procedures that address the FCPA, that the policies and procedures are effectively communicated, and that employees have access to guidance regarding the FCPA, including appropriate training.

Many FCPA enforcement actions have involved actions of agents and consultants. For example, in the Alcatel matter, Alcatel's subsidiaries allegedly used consultants who performed little or no legitimate work to funnel more than $8 million in bribes to government officials in order to obtain or retain contracts. As such, prior to engaging an agent or consultant, proper due diligence should be performed. This should include, at a minimum, performing a detailed background check, obtaining an understanding of the agent's or consultant's payment structure and gauging the agent's or consultant's awareness of FCPA provisions.
Before payment is made, verify that the services billed, in fact, were performed. Internal controls surrounding payments to agents and consultants should be in place to ensure that any payments are in accordance with contract terms, have been properly approved and were paid into the account of the agent or consultant providing the services.

Consideration should be given to requiring certification that the agent or consultant has complied with all laws in performing services for the company.

In instances where the risk of improper payments may be high, pre-approval of gift, travel and entertainment expenses, as well as political and charitable contributions, may be warranted.
FCPA procedures should be thoroughly integrated with internal controls and be subject to periodic testing by internal audit.

Conclusion

Because the SEC and the DOJ undoubtedly will continue to make FCPA enforcement a priority, companies engaged in business in foreign markets must be knowledgeable about the provisions of the FCPA. In addition, companies need to ensure that they are cognizant of their exposure and potential risk areas so they can adequately design, implement and monitor an effective FCPA compliance program to mitigate FCPA violations.

Footnotes

1. See www.fcpablog.com – 2010 FCPA Enforcement Index.

2 See http://sec.gov/news/press/2011/2011‐21.htm

3 See http://www.sec.gov/news/press/2010/2010‐214.htm

4 See http://www.fcpablog.com/blog/2011/4/8/johnson‐johnson‐in‐77‐million‐global‐settlement.html

5 See http://www.fcpablog.com/blog/2011/4/8/jj‐joins‐new‐top‐ten.html

6 See http://sec.gov/news/press/2010/2010‐6.htm.

7See http://www.sec.gov/news/press/2011/2011‐112.htm