The year 2011 proved to be another busy year for enforcement of the Foreign Corrupt Practices Act ("FCPA"). The US Department of Justice ("DOJ" or "Department") and the US Securities and Exchange Commission ("SEC") continued their vigorous enforcement efforts, initiating a total of 23 and 26 cases, respectively.1 A flurry of activity in December doubled the number of cases brought by DOJ and nearly doubled those brought by the SEC. There were 26 cases brought against companies and 23 cases brought against individuals. Both DOJ and the SEC have made the prosecution of individuals for FCPA violations an enforcement priority, and cases brought in 2011 reflect the continued pursuit of that goal. For example, the year ended with DOJ charging eight former executives and intermediaries of Siemens AG and its subsidiaries and the SEC filing charges against six of the same individuals and settled charges against a seventh former executive; civil charges were also brought by the SEC against three former executives of Magyar Telecom, Plc.
The overall enforcement trends persist. In addition to the continued focus on prosecuting individuals, a major portion of the cases continue to involve third-party intermediaries, and substantial financial penalties continue to be imposed. Three of the 11 largest FCPA settlements in history were announced in 2011—the JGC Corporation and Johnson & Johnson cases, both announced in April 2011, took places on the list, and Magyar Telekom and its German parent, Deutsche Telekom AG, just made the list with the December 29 announcement of their settlement.
As described in our Anti-Corruption Enforcement Developments: 2010 Year-in-Review and 2011 Preview, 2010 was a record-breaking year for FCPA enforcement, both in terms of the sheer number of cases initiated—90—and in the penalties extracted—approximately $1.8 billion in financial penalties paid by companies and millions more by individuals. The enforcement activity in 2010 dwarfed that in 2009, which had itself been a record-breaking year. While the pace continues to be brisk, it has noticeably slowed in 2011. The smaller number of cases in comparison to the two prior years, however, should not be interpreted as an indication of a lack of enforcement interest. DOJ has announced that it has more than 150 open FCPA investigations and has signaled it will continue its aggressive prosecution of FCPA violations. In January 2011, in a speech to the Washington Metropolitan Area Corporate Counsel Association, Assistant Attorney General Lanny Breuer said:
"[i]n the Criminal Division, we have dramatically increased our enforcement of the Foreign Corrupt Practices Act in recent years.... We recently promoted a [n]ew head of the Section's FCPA Unit and two assistant chiefs, and we have also increased the number of line prosecutors in the Unit, attracting high caliber attorneys with extensive experience— including Assistant U.S. Attorneys with significant trial and prosecutorial experience and attorneys from private practice with defense-side knowledge and experience. These changes have significantly increased our FCPA enforcement capabilities."2
In October, at an ABA panel, Denis McInerney, Chief of the Criminal Division's Fraud Section, said that DOJ would continue to use aggressive investigative techniques to pursue white-collar criminals and that prosecutors would continue to seek lengthy sentences for those convicted of white-collar crime.3
The somewhat smaller number of filed cases appears to be the result of resources from the Fraud Section being diverted to sustain the large volume of trial activity, most, but not all, of which comes as a result of the Department's focus on individuals, who are more likely than companies to litigate. As McInerney noted at the October American Conference Institute FCPA conference, DOJ is spending significant time and resources working with US Attorneys offices on various trials.4 What remains unclear is how DOJ will balance the massive drain on resources caused by trials with the Department's goal of continuing to pursue new investigations.
In addition to trials, DOJ also appears to be spending time modifying and harmonizing its standard charging documents and agreements and is in the process of preparing FCPA guidance.
On November 8, 2011, in a speech at the National Conference on the FCPA, Assistant Attorney General Breuer announced that DOJ would publish guidance on the FCPA in 2012. Breuer said that "in what I hope will be a useful and transparent aid, we expect to release detailed new guidance on the Act's criminal and civil enforcement provisions." He did not elaborate on what form the guidance would take, and DOJ has declined to offer further details. Commentators and others have expressed hope that the forthcoming guidance will offer greater predictability with regard to DOJ's FCPA enforcement.
The most notable development of 2011 is the record level of trials and related litigation, with guilty verdicts returned in the Haiti Teleco cases, a mistrial declared in the trial of the first group of SHOT Show Sting defendants, and the convictions returned in the Lindsey Manufacturing case being vacated and the indictments dismissed as a result of the court's conclusion that the government had engaged in prosecutorial misconduct. These and other cases also generated judicial decisions and guidance on key issues relating to the FCPA, including the definition of "foreign official," the knowledge requirement under the FCPA, and the jurisdictional scope of the Travel Act, which is often also charged in FCPA cases. Prior to the recent increase in FCPA litigation, judicial interpretations of the FCPA were limited and positions asserted by enforcement authorities often were unchallenged in the context of settlements. Given that key decisions issued in 2011 are the subject of appeals and that significant trial activity is expected to continue in 2012, further judicial guidance is likely forthcoming, along with the possibility of interesting and surprising developments, if 2011 is any guide.
As enforcement activity has increased in recent years, critics have argued that the FCPA disadvantages US businesses and creates an unpredictable business environment. Some have advocated for amendments to the 1977 legislation or for other legislation to alter the enforcement landscape. In June 2011, the House Judiciary Committee's Subcommittee on Crime, Terrorism, and Homeland Security held a hearing on the FCPA, which focused on a range of criticisms of the FCPA, its potential harmful effects on US business interests, and possible reforms intended to clarify and amend various aspects of the FCPA. The Subcommittee hearing and proposed legislative changes, similar to those introduced in prior years and with a likewise uncertain future, are discussed below.
After the major staffing and organizational changes in 2010, there were fewer changes in 2011. In June 2011, FCPA Unit Chief Cheryl Scarboro left the SEC. In September 2011, Kara Brockmeyer was appointed to head the SEC's FCPA Unit. Brockmeyer was an Assistant Director in the Enforcement Division for six years, and led FCPA investigations involving Halliburton Co., KBR Inc., Technip S.A., and Snamprogetti Netherlands B.V./ENI S.p.A. She will help oversee and implement the SEC's strategy for FCPA enforcement and will head a team of 30 attorneys. One of her biggest challenges in 2012 will be effectively managing and investigating tips received under the new Whistleblower Program, discussed in detail below.
Although indications are that the SEC will continue to vigorously pursue FCPA violations, SEC Enforcement Division Chief Robert Khuzami recently stated that the SEC will consider filing negligencebased charges where appropriate, but that the agency does not follow a strict liability approach with regard to FCPA enforcement and would not "degenerate" into such an approach.5 Khuzami specifically mentioned that the agency does not follow a strict liability approach with regard to FCPA enforcement.
The SEC's FCPA Unit, which was one of five new specialized enforcement units launched in 2010, pursued industry-wide "sweep" investigations in 2011, a continuation of an enhanced strategy used by both the SEC and DOJ previously. Although many members of the SEC's FCPA Unit are based in Washington DC, others are located in the SEC's regional offices. Early in the year, the Boston office issued requests to various financial services firms seeking information on their dealings with sovereign wealth funds. In June 2011, various oil companies announced that they had received an inquiry from the Miami office related to their operations in Libya.
The SEC launched an FCPA website in 2011, which provides a comprehensive list of FCPA enforcement actions, from 1978 to the present, and includes links to relevant documents for cases since 2000.6 DOJ has a similar site, which was redesigned in 2010, that contains a link to related enforcement actions.7
In addition to US anti-corruption efforts, other countries made significant efforts over the past year in the enforcement and legislative spheres. The United Kingdom's Bribery Act 2010 ("UK Bribery Act"), which was passed in 2010 and came into force on July 1, 2011, appears to rival the FCPA in scope and jurisdictional reach. Both Canada and Australia initiated their first significant prosecutions under their anticorruption laws. International cooperation has also continued among global enforcement authorities. For example, DOJ has acknowledged a high level of cooperation from the Haitian government in connection with the Haiti Teleco case and significant assistance provided by the authorities in Greece, Poland, and the United Kingdom in connection with the Johnson & Johnson case, both of which are discussed below.
This article discusses the most significant FCPA and anti-corruption related developments of the past year and looks forward to what 2012 will bring.
II. The FCPA
The FCPA's anti-bribery provisions make it unlawful for any issuer, domestic concern, or person acting within the United States to offer or make a payment of anything of value directly or indirectly to a foreign official, international organization official, political party, or party official, or any candidate for public office, for the purpose of influencing that official to assist in obtaining or retaining business.8 A covered company can be held liable for payments made on its behalf by agents or distributors.
The FCPA's accounting provisions require companies with securities listed in US trading markets to keep books, records, and accounts that accurately and fairly reflect any transaction and disposition of assets in reasonable detail, and to maintain an adequate system of internal accounting controls.9 A covered company is responsible for ensuring that its controlled subsidiaries, including foreign subsidiaries, comply with the FCPA's accounting provisions.
III. Enforcement Trends and Statistics
US authorities continued their strong enforcement efforts, initiating a total of 49 cases in 2011—26 against companies and 23 against individuals. A flood of activity in December significantly increased the number of cases initiated in 2011. As discussed above and as illustrated in Figure 1 below, enforcement activity increased dramatically in recent years, culminating in the record-breaking 90 cases initiated in 2010. It remains to be seen whether activity has peaked, but a close look at the 2010 numbers may indicate that the numbers were unusually high as a result of several cases involving an uncommon number of defendants. For example, as reported in our 2010 Year-in-Review, in January 2010, 22 individuals were indicted in connection with a single FBI undercover operation at the SHOT Show, a weapons trade show in Las Vegas. Several other matters involved numerous defendants, such as Panalpina World Transport (Holding) Ltd. (involving a total of seven companies) and the Tobacco Industry settlements (involving three subsidiaries and two global tobacco parent companies, as well as individual defendants).
A. Large FCPA Sanctions Continue
FCPA settlements continue to involve large sanctions, with three settlements from 2011 making it into the top 11 corporate FCPA settlements, as illustrated in Figure 2 below. It is not surprising that the 2008 Siemens settlements, involving combined DOJ/SEC penalties of $800 million, and the 2009 KBR/Halliburton settlements, involving combined penalties of $579 million, remain, respectively, the first and second largest DOJ/SEC collective FCPA settlements to date. What is remarkable, however, is that the third through eleventh largest collective FCPA settlements all occurred in 2010 or 2011. Interestingly, nearly all of the companies in those settlements are headquartered outside the United States.
Also of note is the March 2011 guilty plea by Jeffrey Tessler, one of the consultants hired by the TSKP joint venture in connection with the Bonny Island project in Nigeria. As part of his plea, Tessler agreed to forfeit $148,964,568—an amount that would place him at number eight, were he a company
B. Prosecution of Individuals is Continued Priority
In 2011, US enforcement authorities reiterated their priority of prosecuting individuals for FCPA violations. In a January 26, 2011 speech, Assistant Attorney General Breuer said "we have aggressively pursued individual executives under the FCPA," citing the charges against the president and the CFO of Lindsey Manufacturing and the former CEO and former vice president of Latin Node, Inc. ("LatiNode").10 At the October ABA FCPA conference, a special agent with the FBI's FCPA squad said "holding individuals responsible and putting them in jail is a really good deterrent."11 Charles Duross, Deputy Chief of DOJ's Criminal Division and the head of DOJ's FCPA Unit, echoed the sentiment at the National Conference on the FCPA, noting that just because a case against a company is resolved and time has passed, it does not mean DOJ is finished. He specifically cited the LatiNode case, where a corporation settled FCPA issues and DOJ later prosecuted individual executives.12 The recent indictment of former executives from Siemens is another example.
As for the SEC, in October 2011, Tracy Price, Assistant Director of the SEC's FCPA Unit, said, "You're going to see a lot more cases against individuals.... We are continuing to increase our efforts to bring charges against corrupt individuals who have a role in the accounting and control violations that occur."13 This may be in part due to changes under the Dodd-Frank regulatory regime, as the act clarifies the SEC's power to bring actions against "control persons." Under the "control person" theory of liability, the individual who had authority over the person (or company) who committed the wrongdoing can be held responsible. This provision allows executives to be held liable even if they had no direct knowledge of the alleged misconduct. Thus far, the SEC has only pursued that theory of liability once in an FCPA case.
Although larger FCPA settlements in recent years have had fewer attendant individual prosecutions than might be expected, US enforcement authorities appear committed to increasing the perception that FCPA violations can lead to individual prosecutions and that corporations' settlements for criminal wrongdoing do not foreclose the possibility of individual prosecutions in those same matters.
In 2011, charges against a number of individuals were either brought or resolved. Individual resolutions included guilty pleas by three SHOT Show defendants; guilty pleas by four former executives of Miamibased LatiNode, which had settled a corporate FCPA case in 2009; and an SEC settlement against Paul W. Jennings, the former CEO of Innospec, Inc., which had settled corporate FCPA charges in 2010. Many of the new cases initiated against individual defendants in 2011 were brought in December. On December 13, 2011, DOJ and the SEC filed criminal and civil charges against former senior executives and agents of Siemens AG and its subsidiaries.14 Assistant Attorney General Breuer remarked that the Siemens indictment "reflects our commitment to holding individuals, as well as companies, accountable for violations of the FCPA."15 The criminal indictment alleges that two middlemen and six former Siemens executives, including the first board member of a Fortune Global 50 company to be charged under the FCPA, committed to $100 million in bribes to secure a $1 billion government contract to produce national identity cards for Argentina. One former Siemens executive is accused of smuggling $10 million into Switzerland for bribe payments; other former executives and agents allegedly participated in meetings to negotiate the bribes, authorized payments of $60 million over a decade to officials at the highest levels of two Argentine presidential administrations, and concealed the bribes during an arbitration aimed at recovering the anticipated proceeds of the cancelled contract. The SEC also announced charges against six of the same former Siemens executives and an additional former executive. One of them, Bernd Regendantz, settled with the SEC without admitting or denying the allegations and consented to the entry of a final judgment that permanently enjoins him from committing future violations. He paid a €30,000 administrative fine ordered by the Munich prosecutor (approximately $40,000).
These alleged acts in Argentina were part of the 2008 Siemens corporate settlement of global bribery allegations requiring payments of $1.6 billion to US and German authorities, including the largest FCPA settlement to date of $800 million in combined DOJ and SEC penalties. Siemens pleaded guilty to violating the FCPA internal controls and books and records provisions but was not charged with a substantive bribery offense, preserving the company's ability to do business under federal contracts.16 DOJ had faced criticism for not bringing charges against individual executives involved. With the cooperation of Siemens and its audit committee in the long investigation, DOJ is now pursuing bribery charges against the individual Siemens executives, in addition to charges of wire fraud, conspiracy to commit wire fraud, and conspiracy to commit money laundering. The investigation and prosecution of Siemens is an example of global cooperation among enforcement authorities.
As reported in our 2010 Year-in-Review, Snamprogetti Netherlands B.V., Technip S.A., KBR/Halliburton, and JGC Corporation entered into a four-company joint venture to win four contracts to design and build liquefied natural gas production plants in Nigeria as part of the Bonny Island project, which was valued at $6 billion. The joint venture—called TSKP—allegedly hired two agents to pay bribes to a range of Nigerian officials, including top-level executive branch officials, to assist the joint venture in winning the contracts. The joint venture made at least $182 million in payments to various consultants. All four companies and several individuals have pleaded guilty, including KBR's former CEO and a former KBR sales consultant; sentences are scheduled for 2012. JGC, a Japanese engineering and construction company, the last joint venture partner to resolve the matter, settled the charges in 2011 (the 6th largest FCPA fine—the other joint venture partners paid the 2nd, 4th, and 5th) and entered into a deferred prosecution agreement ("DPA") with DOJ, which requires it to retain an independent compliance consultant for two years to review and design the implementation of its compliance program and to enhance its compliance program to ensure it meets certain standards.17
According to court documents, Jeffrey Tessler was hired by TSKP as a consultant along with a Japanese trading company to pay bribes to Nigerian government officials.18 Tessler controlled a Gibraltar corporation that was paid $132 million by TSKP in funds that in part were intended to be used for paying the bribes. Tessler was extradited from the United Kingdom and pleaded guilty to one count of conspiracy to violate the FCPA and one count of violating the FCPA in March 2011. As noted above, Tessler agreed to forfeit $148,964,568 in connection with his plea. Sentencing for Tessler is scheduled for February 2012.
On July 12, 2011, DOJ filed a superseding indictment in the long-running Haiti telecommunications case ("Haiti Teleco"), charging three additional individuals and one additional company for their roles in the foreign bribery, wire fraud, and money laundering case.19 The charges relate to the scheme by officials and employees of Florida-based telecommunications companies to bribe officials of Haiti's state-owned national telecommunications company. Two individuals had been indicted in December 2009 in the same case.
C. Third-Party Risks
Another continuing trend is the involvement of sales agents, intermediaries, and other third parties in FCPA violations. At the National Conference on the FCPA, Deputy Chief Charles Duross said that third parties present a significant risk for FCPA exposure and that third parties were involved in all of the most recent cases.20 The 2011 settled matters are consistent with that trend.
In April 2011, Johnson & Johnson ("J&J"), the manufacturer of medical devices, pharmaceuticals, and consumer health care products, agreed to pay a $21.4 million fine to DOJ as a part of a DPA for violations of the FCPA.21 J&J entered into the agreement to resolve improper payments by its subsidiaries to government officials in Greece, Poland, and Romania as well as kickbacks paid to the former government of Iraq as part of the UN Oil-for-Food Program. J&J acknowledged that employees and agents of its subsidiaries made various improper payments to publicly employed health care providers in order to induce them to purchase medical devices and pharmaceuticals. Additionally, kickback payments were made to the former Iraqi government on behalf of J&J subsidiary companies to secure contracts to provide humanitarian supplies. J&J was not required to retain a corporate monitor but must report to DOJ on the implementation of its remediation and compliance efforts every six months during the three-year agreement. Although DOJ found that the company's pre-existing compliance and ethics program was "effective," J&J was required to undertake "enhanced compliance undertakings," including conducting FCPA audits at least once every three years of at least five operating companies that are at high risk for corruption because of their sector and location, and appointing a senior corporate executive with significant FCPA experience as Chief Compliance Officer. According to the DPA, the $21.4 million fine represents a 25% reduction off of the bottom of the US Sentencing Guidelines' fine range and was the result of J&J's "voluntary and thorough disclosure of the misconduct at issue, the nature and extent of J&J's cooperation in this matter, penalties related to the same conduct in the United Kingdom and Greece, J&J's cooperation in the Department's investigation of other companies, and J&J's extraordinary remediation."22 In a settlement with the SEC related to the same conduct, J&J agreed to pay $48.6 million in disgorgement of profits, including pre-judgment interest.23
On December 29, 2011, DOJ and the SEC announced criminal and civil settlements totaling more than $95 million with the largest telecommunications provider in Hungary, Magyar Telekom, Plc. ("Magyar Telekom") and its German parent, Deutsche Telekom AG ("Deutsche Telekom").24 The parallel FCPA settlements resolve allegations that Magyar Telekom entered into a secret agreement with government officials to protect the company's T-Mobile brand from competition in the Macedonian mobile phone market. Magyar Telekom admitted that executives made payments of approximately $6 million to intermediaries under bogus consulting and marketing contracts that they "knew, or were aware of a high probability" would be paid directly or indirectly to Macedonian government officials. Magyar Telekom also admitted to paying approximately $9 million in a similar bribery scheme in Montenegro. The two-year DPA requires Magyar Telekom to implement an enhanced compliance program and report annually to DOJ on compliance and remediation efforts. Deutsche Telekom entered into a separate two-year NPA with DOJ to resolve charges that it obscured the true purpose of the Magyar Telekom bribes on its consolidated financial statements and failed to include the sham contracts in its books and records. The SEC separately announced charges against three former Magyar Telekom officials, including the former Chairman and Chief Executive.
In January 2011, Maxwell Technologies Inc. ("Maxwell"), a California-based manufacturer of energystorage and power-delivery products, settled criminal and civil FCPA charges stemming from improper payments related to sales of Maxwell's products to state-owned manufacturers of electric-utility infrastructure in several Chinese provinces. DOJ and the SEC alleged that Maxwell's wholly owned Swiss subsidiary, through the use of a Chinese agent, bribed officials at state-owned manufacturers in China to secure contracts worth more than $15.4 million. Maxwell allegedly made these payments at the agent's instruction by adding 20% to the invoices of state-owned customers and passing the surplus to the agent who then used the amount to bribe officials at the same state-owned customers. Members of Maxwell's US management discovered the bribery scheme in 2002 and knowingly perpetuated it by mischaracterizing the bribes as sales commissions and reclassifying kickbacks as a reduction in revenue. Maxwell agreed to pay more than $14 million to resolve the charges, entering into a three-year DPA with DOJ and settling with the SEC, without either admitting or denying the SEC's allegations. According to the DPA, Maxwell's criminal penalty was 25% below the bottom end of the range recommended by the US Sentencing Guidelines due to Maxwell's voluntary disclosure and cooperation with the investigation.
Another settlement involving improper payments made by an agent involved Comverse Technology, Inc., a New York-based provider of software for communication and billing services, which settled criminal and civil FCPA charges stemming from improper payments made by its Israeli subsidiary, Comverse Limited (collectively, "Comverse").25 According to the charging documents, Comverse engaged an Israeli agent to transfer approximately $536,000 to employees connected to Hellenic Telecommunications Organisation S.A. ("OTE"), a partially state-owned telecommunications provider in Greece, to secure business from OTE. During the period at issue, the Greek government was the entity's largest single shareholder and was also the OTE's largest customer for telecommunications services. The agent opened a bank account and used a shell company based in Cyprus to transfer payments to the OTE employees that were recorded in Comverse's records as agency fees. Comverse agreed to pay a combined monetary penalty in excess of $2.8 million, entering a non-prosecution agreement ("NPA") with DOJ and civil settlement with the SEC, in which Comverse did not admit or deny the allegations.
D. Travel and Entertainment in High-Risk Markets
On March 18, 2011, International Business Machines Corporation ("IBM") entered into a $10 million settlement with the SEC to resolve FCPA books and records and internal controls charges involving IBM subsidiaries in South Korea and China.26 The settlement reflects the SEC's apparent willingness to allege that a parent's internal controls were deficient based on conduct in a subsidiary in circumstances where there was no evidence that the parent had knowledge or reason to know of the alleged improper payments. The SEC alleged that employees of IBM's Korean subsidiary and a Korean joint venture, in which IBM held a 51% interest, provided a total of $207,157 in cash payments, and an unspecified total value of entertainment, travel, and gifts to South Korean government officials in exchange for confidential information and mainframe and personal computer sales contracts. The SEC also alleged that employees of IBM's two wholly-owned subsidiaries in China engaged in a widespread practice of providing overseas trips, entertainment, and improper gifts to Chinese government officials of an unspecified total value. More than 100 IBM-China employees were allegedly involved in an improper travel and entertainment scheme planned by two key IBM-China managers. There were also allegedly more than 114 instances of fabricated invoices, improperly documented and/or funded trips, and unapproved sightseeing activities. In addition, IBM-China personnel allegedly falsely designated travel agents as training providers and submitted fraudulent purchase requests to funnel payments for unapproved trips for Chinese officials.
On December 20, 2011, Aon Corporation and its subsidiaries (collectively, "Aon"), an international insurance firm based in Chicago, agreed to pay $16.26 million to resolve allegations involving improper international travel and entertainment expenses, as well as other improper payments to government officials.27 In its NPA with DOJ, Aon admitted that while many of the trips had a business connection, significant portions of the funds were used for the personal benefit of the officials and their spouses and that Aon's books and records did not accurately reflect the true purposes of these expenses. DOJ "substantially reduced" the monetary penalty as a result of Aon's comprehensive global internal investigation, complete disclosure of facts to DOJ and the SEC, and extensive remediation of the company's internal controls. The penalty was also reduced in light of an earlier £5.25 million (approximately $8 million) penalty paid to the UK's Financial Services Authority ("FSA") to resolve bribery allegations involving conduct in six Asian and European countries. The civil settlement with the SEC resolved charges of improper payments to officials or third-party facilitators in Egypt, Vietnam, Indonesia, the United Arab Emirates, Myanmar, Bangladesh, and Costa Rica.
E. High-Risk Markets and Industry-Specific Risks
A number of cases involved business activities in high-risk markets, such as China, including Maxwell, discussed above. In addition, on October 13, 2011, the SEC issued an administrative cease and desist order to Watts Water Technologies, Inc. ("Watts"), a Delaware corporation that designs, manufactures, and sells water valves and related products, and Leesen Chang, a former interim general manager for Watts Valva Changsha Co., Ltd., ("CWV"), a wholly-owned Chinese subsidiary, in connection with violations of the FCPA's books and records and internal control provisions.28 The SEC alleged that CWV paid employees of Chinese state-owned design institutes to recommend CWV products and to create design specifications that favored CWV products for infrastructure projects developed and run by stateowned entities. CWV's sales policy provided that all sales-related expenses—including travel, meals, entertainment and "consulting fees" paid to design institutes—would be born by CWV sales employees out of their sales commission, which was approximately 7% of the contract price, and provided that sales personnel could use their commission to make payments to employees of design institutes of up to 3% of the total contract amount. The SEC alleged that Chang had approved many of these and knew or should have known the payments were improperly recorded as sales commissions. Chang also resisted efforts to have the sales policy translated, which prevented Watts from discovering the improper payments sooner. Watts agreed to penalties of $3.7 million, including $2,755,815 in disgorgement, $820,791 in prejudgment interest, and a $200,000 penalty. Chang agreed to pay a $25,000 penalty.
A settlement was reached with Rockwell Automation, Inc. ("Rockwell") involving similar conduct in China. In May 2011, the SEC filed an administrative action alleging that a Rockwell subsidiary in China used third-party intermediaries to pay $615,000 to employees of state-owned Chinese design institutes, which the SEC alleged had the power to influence contract awards by state-owned customers.29 While the design institutes did provide legitimate services, the SEC alleged that Rockwell intended the payments to buy influence. The SEC further alleged that $450,000 was used to fund sightseeing and non-business related travel and entertainment for design center employees and these expenses were booked as legitimate business expenditures. Rockwell voluntarily reported the misconduct, consented to a ceaseand- desist order, and agreed to pay $2,761,091 in disgorgement, prejudgment interest, and a civil penalty.
On July 27, 2011, Diageo plc—one of the world's largest producers and distributors of premium alcoholic beverages—settled charges with the SEC for multiple violations of the FCPA. Diageo agreed to pay more than $16 million, consisting of $11,306,081 in disgorgement, $2,067,739 in prejudgment interest, and a $3 million penalty.30 According to the SEC's cease-and-desist order, Diageo paid more than $2.7 million to various government officials in India, Thailand, and South Korea to increase sales and obtain tax benefits relating to its Johnnie Walker and Windsor Scotch whiskeys, among other brands. With respect to India, the SEC alleged that Diageo paid $1.7 million in bribes to government officials to secure sales that yielded more than $11 million in profit for the company. In Thailand, Diageo allegedly made payments of nearly $600,000 to a Thai government and political-party official for "consulting" services. The Thai official intervened on Diageo's behalf in multi-million dollar tax and customs disputes, helping Diageo obtain favorable resolutions with the Thai government. In South Korea, Diageo allegedly made $86,000 in payments to a customs official who helped secure significant tax rebates from the government. Other payments went to customs officials for travel and entertainment expenses connected with the tax negotiations. Diageo also gave hundreds of cash payment gifts to South Korean military officials to obtain and retain liquor business. The SEC found that Diageo and its subsidiaries failed properly to account for these improper payments in their books and records by concealing them as legitimate vendor or other business expenses and in several instances failed to record the improper payments altogether. Diageo was credited for its cooperation and remedial actions, including termination of responsible employees.
In addition to risks posed in high-risk markets, companies face industry-specific risks, such as interactions with government officials in connection with licensing and permitting, customs, and immigration. For example, in February 2011, Tyson Foods, Inc. settled criminal and civil FCPA charges related to conduct that occurred in its wholly-owned Mexican subsidiary, which allegedly made $90,000 in payments to Mexican state-employed veterinarians who were involved in certifying Tyson food products for export. A payment scheme was established whereby the veterinarians' wives were included on the subsidiary's payroll and fictitious invoices were submitted for payment by one of the veterinarians. A local plant manager reported to a Tyson accountant that the wives did not actually perform any work for Tyson and that unusual monthly invoices were paid to a veterinarian. Tyson executives met in Arkansas to discuss the issue and concluded that the veterinarians' wives must be removed from the payroll, but they then endeavored to modify the scheme and shift the payroll payments to the veterinarians themselves. The invoices for the veterinarians subsequently showed an increased amount for "professional honoraria" in exactly the amount previously paid to the wives. Tyson agreed to disgorge to the SEC $1.2 million in illgotten gains and prejudgment interest. It resolved criminal charges with DOJ through a two-year DPA, agreed to pay a $4 million criminal fine, and agreed to report on its compliance program twice a year. In announcing the settlement, Assistant Attorney General Breuer cited Tyson's voluntary disclosure of the misconduct, a comprehensive internal investigation, cooperation with government regulators, and remedial measures. Tyson's criminal fine was 20% below the applicable minimum under the US Sentencing Guidelines.
These cases highlight the importance of being aware of—and taking steps to address—local business practices that may raise corruption issues. Thorough risk assessments are therefore a key component of effective compliance programs. Both the US Sentencing Guidelines and the UK Bribery Act's 2011 Guidance list periodic compliance program risk assessment as a key element in creating and implementing an effective anti-corruption program. Commercial organizations should regularly and comprehensively assess the nature and extent of the risks relating to bribery to which they are exposed. Relevant risk factors depend on the business, but might include dealings with jurisdictions with perceived high levels of corruption, as well as transactions involving political contributions, licenses, permits or public procurement. In Maxwell, for example, DOJ listed the following areas of risks to be assessed: (1) geography; (2) interaction with types and levels of government officials; (3) industrial sector of operations; (4) involvement with joint ventures; (5) licenses and permits in operations; (6) degree of government oversight; and (7) volume and importance of goods and personnel going through customs and immigration.
F. A New Tool at the SEC—Deferred Prosecution Agreements
On May 17, 2011, the SEC announced that it entered its first-ever DPA, a part of the SEC's 2010 Cooperation Initiative.31 The case involved Tenaris S.A., a global supplier of steel products and services related to the oil and gas industry, and allegations that Tenaris employees violated the FCPA by bribing Uzbekistan officials to award the company several pipeline contracts, which resulted in nearly $5 million in profits. Tenaris agreed to pay $5.4 million to the SEC in connection with the DPA. On the same day, the company announced a settlement of related criminal charges through a two-year NPA with DOJ requiring it to pay a $3.5 million criminal penalty.32 In announcing the settlement, SEC Director of the Division of Enforcement Robert Khuzami said that Tenaris's "immediate self-reporting, thorough internal investigation, full cooperation with SEC staff, enhanced anti-corruption procedures, and enhanced training made it an appropriate candidate for the Enforcement Division's first Deferred Prosecution Agreement."33
It remains to be seen whether such agreements will be seen as meaningfully different from other types of FCPA settlements available to the SEC, including administrative proceedings. Prior to the implementation of Dodd-Frank, the SEC could only levy administrative monetary penalties against "regulated" persons, such as investment advisors and brokers who are required to register with the SEC. If the SEC wanted to assess a financial penalty against a non-regulated company or executive, it had to file a settlement, subject to judicial approval, in a US District Court. Following the implementation of Dodd-Frank in 2010, the SEC has the ability to levy administrative fines directly against non-regulated individuals and entities. In recent Congressional testimony, SEC Chairwoman Mary Schapiro cited the $3 million administrative penalty imposed against Diageo plc for alleged FCPA violations as a feature of Dodd-Frank that provides additional investor protections. Schapiro observed "these new tools are augmenting our Enforcement Division's own, proactive initiatives to enhance its effectiveness by bringing more cases—and more significant cases—more swiftly and more efficiently."34 As discussed above, in July 2011, the SEC resolved a case against Diageo through an administrative proceeding.
G. Merger & Acquisition Risks
On March 24, 2011, Ball Corporation ("Ball"), a Colorado-based household product manufacturer, settled SEC civil charges that it had violated the FCPA's books and records and internal controls provisions.35 Ball agreed to pay a $300,000 penalty and agreed to the entry of a cease-and-desist order. According to the SEC papers, during its acquisition of an Argentinean company, Ball discovered that the target had made improper payments to customs officials. Despite knowledge of the improper payments, Ball neglected to implement post-acquisition internal controls designed to detect and prevent such payments, allowing its Argentinean subsidiary to continue to make over $100,000 in payments to Argentinean customs officers. The payments were disguised on the subsidiary's books and records as legitimate customs expenses, and the president and vice president of the subsidiary were allegedly aware of the improper payments and improper bookkeeping. In announcing the fine, the SEC noted that Ball had voluntarily disclosed the misconduct and cooperated with the investigation.
The Ball settlement is a reminder that acquirers should conduct sufficient due diligence prior to closing and that due diligence findings, however unpleasant, should not be ignored. Post-closing integration of the new business into the parent compliance program is also a key component of M&A activity. In the action against Ball, the SEC stressed that although external due diligence performed on the target suggested that its executives may have previously authorized questionable payments to customs officials, Ball failed to bring about effective changes, and key personnel responsible for dealing with customs issues remained at the target after the acquisition.
H. Intersection of FCPA and Antitrust
The September 2011 Bridgestone Corporation ("Bridgestone") settlement is another example of the continued focus on the oil services industry and also highlights the intersection between the FCPA and other laws—in this case, antitrust. Bridgestone, a Tokyo-based manufacturer of marine hose (used to transfer oil between tankers and oil storage facilities) and other industrial products, agreed to plead guilty to conspiring to violate the Sherman Act and the FCPA by conspiring to rig bids, fix prices, and allocate market share of marine hose, and conspiring to make corrupt payments to government officials in Latin America to obtain and keep business.36 DOJ asserted jurisdiction over the Tokyo manufacturer based on the allegation that emails or faxes were sent to or from Japan to the United States in connection with the bribery scheme. DOJ agreed to a substantially-reduced fine of $28 million, which was the result of mitigating factors, among them Bridgestone's cooperation with investigations, including conducting a worldwide internal investigation, voluntarily making employees available for interviews, and collecting, analyzing, and providing voluminous evidence and information to DOJ. Bridgestone also undertook extensive remediation efforts and committed to enhance its compliance program and internal controls.
I. Shift Away from Compliance Monitors; Increased Use of Alternatives
Imposition of compliance monitors appeared to decline in 2010, along with the appearance of alternative enhanced compliance measures. In 2011, the majority of matters resolved with DOJ involved alternative compliance measures, with approximately half requiring defendants to file self-reports to the government regarding their compliance efforts. Among them were Johnson & Johnson, Armor Holdings, and Magyar Telekom. In contrast, JGC Corporation was required to retain an independent compliance consultant to review the design and implementation of its compliance program. There were no 2011 cases in which a compliance monitor was imposed.
IV. Record-Level Trial Activity and Related Litigation
Prior to the government's increased focus on individuals, there were four litigated cases involving the FCPA (and, accordingly, four individual decisions interpreting the statute). In recent years, however, there has been a significant increase in the number of defendants (including some corporate defendants) challenging FCPA charges at trial or otherwise litigating FCPA issues. This creates risks both to prosecutors—whose interpretations of the FCPA until now had been largely unchallenged in settlements—and to defendants—who face the uncertainties that come with trials. The trial activity in 2011 delivered victories and setbacks for both groups.
A. New Judicial Precedent on the Meaning of "Foreign Official"
In 2011, courts in two FCPA prosecutions issued significant opinions on the meaning of "foreign official." In both cases, the defendants moved to dismiss charges brought in connection with alleged bribes paid to officers and employees of state-owned companies, arguing that such entities are not government instrumentalities within the meaning of the FCPA.37 Declining to adopt a categorical rule, both courts held that state-owned companies generally may qualify as governmental instrumentalities, depending on a fact-specific analysis of multiple factors. Applying the factors, one court concluded that the state-owned company at issue was a government instrumentality within the meaning of the FCPA. The other court found that the issue was a question of fact that was intertwined with evidence relating to the alleged offense that would be presented at trial. A third decision, issued in early January 2012, also rejected a challenge based on the meaning of the term "foreign official."38
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1 Initiated cases include indictments, criminal informations, complaints or other charges (including those that are simultaneously settled) filed by DOJ and the SEC. Where charges are asserted against multiple entities (e.g., both a parent and subsidiary) or multiple individuals, each is counted as a separate initiated action.
2 Asst. Attorney Gen. Lanny A. Breuer of the Criminal Div. Speaks at the Annual Meeting of the Washington Metro. Area Corp. Counsel Ass'n ("Breuer Corp. Counsel Speech") (Jan. 26, 2011), available at http://www.justice.gov/criminal/pr/speeches/2011/crmspeech-110126.html.
3 Chris Matthews, Fraud Section Chief: Aggressive White Collar Prosecution Here to Stay, Just Anti-Corruption (Oct. 28, 2011), http://www.mainjustice.com/justanticorruption/2011/10/28/fraud-section-chief-aggressive-white-collar-prosecution-here-to-stay/.
4 Matt Ellis, What FCPA Enforcement Is Thinking, FCPAmericas Blog (Nov. 14, 2011), http://mattesonellislaw.com/fcpamericas/what-fcpa-enforcement-is-thinking.
5 Yin Wilczek, Khuzami: SEC Pursuit of Negligence Cases Will Not Devolve into Strict Liability Approach, BNA Sec. Law Daily, Nov. 14, 2011.
6 SEC Enforcement Actions: FCPA Cases, http://www.sec.gov/spotlight/fcpa/fcpa-cases.shtml .
7 DOJ, Criminal Division, Fraud Section: Foreign Corrupt Practices Act, http://www.justice.gov/criminal/fraud/fcpa/. A link provides information regarding related enforcement cases.
8 15 U.S.C. §§78dd-1 to -3.
9 15 U.S.C. §78m(b).
10 Breuer Corp. Counsel Speech, supra note 2.
11 Rachel G. Jackson, With Expanded Authority, SEC Sets Sights on Individuals, Just Anti-Corruption (Nov. 28, 2011), http://www.mainjustice.com/justanticorruption/2011/11/28/with-expanded-authority-sec-sets-sights-on-individuals/.
12 Ellis, supra note 4.
13 Jackson, supra note 11.
14 Press Release, DOJ, Eight Former Senior Execs. and Agents of Siemens Charged in Alleged $100 Million Foreign Bribe Scheme (Dec. 13, 2011), available at http://www.justice.gov/opa/pr/2011/December/11-atj-1626.html ; Press Release, SEC, SEC Charges Seven Former Siemens Execs. with Bribing Leaders in Argentina (Dec. 13, 2011), available at http://sec.gov/news/press/2011/2011-263.htm.
15 DOJ, Eight Former Senior Execs. and Agents of Siemens Charged in Alleged $100 Million Foreign Bribe Scheme, supra note 14.
16 Gov't's Sentencing Mem., United States v. Siemens Aktiengesellschaft, No. 08-CR-367 (D.D.C. Dec. 12, 2008).
17 Press Release, DOJ, JGC Corp. Resolves FCPA Investigation and Agrees to Pay a $218.8 Million Criminal Penalty (Apr. 6, 2011), available at http://www.justice.gov/opa/pr/2011/April/11-crm-431.html.
18 United States v. Tessler, No. 09-cr-00098 (S.D. Tex. 2009).
19 Press Release, DOJ, Florida Telecomm. Co., Two Execs., an Intermediary and Two Former Haitian Gov't Officials Indicted for Their Alleged Participation in Foreign Bribery Scheme (Jul. 13, 2011), available at http://www.justice.gov/opa/pr/2011/July/11-crm-910.html.
20 Ellis, supra note 4.
21 Press Release, DOJ, Johnson & Johnson Agrees to Pay $21.4 Million Criminal Penalty to Resolve FCPA and Oil for Food Investigations (Apr. 8, 2011), available at http://www.justice.gov/opa/pr/2011/April/11-crm-446.html.
22 Deferred Prosecution Agreement, at 5, United States v. DePuy, Inc., No. 11-cr-00099 (D.D.C. Apr. 8, 2011).
23 Litigation Release, SEC, Johnson & Johnson to Pay More Than $70 Million in Settled FCPA Enforcement Action (Apr. 8, 2011), available at http://www.sec.gov/litigation/litreleases/2011/lr21922.htm.
24 Press Release, DOJ, Magyar Telekom and Deutsche Telekom Resolve FCPA Investigation and Agree to Pay Nearly $64 Million in Combined Penalties (Dec. 29, 2011), available at http://www.justice.gov/opa/pr/2011/December/11-crm-1714.html ; Press Release, SEC, SEC Charges Magyar Telekom and Former Execs. with Bribing Officials in Macedonia and Montenegro (Dec. 29, 2011), available at http://sec.gov/news/press/2011/2011-279.htm.
25 Press Release, DOJ, Comverse Tech. Inc. Agrees to Pay $1.2 Million Penalty to Resolve Violations of the FCPA (Apr. 7, 2011), available at http://www.justice.gov/opa/pr/2011/April/11-crm-438.html ; Press Release, SEC, SEC Files Settled FCPA Case Against Comverse (Apr. 7, 2011), available at http://www.sec.gov/litigation/litreleases/2011/lr21920.htm.
26 Litigation Release, SEC, IBM to Pay $10 Million In Settled FCPA Enforcement Action (Mar. 18, 2011), available at http://www.sec.gov/litigation/litreleases/2011/lr21889.htm.
27 Press Release, DOJ, Aon Corp. Agrees to Pay a $1.76 Million Criminal Penalty to Resolve Violations of the FCPA (Dec. 20, 2011), available at http://www.justice.gov/opa/pr/2011/December/11-crm-1678.html ; Litigation Release, SEC, SEC Files Settled FCPA Charges Against Aon Corp. (Dec. 20, 2011), available at http://www.sec.gov/litigation/litreleases/2011/lr22203.htm.
28 Watts Water Tech. Inc. and Leesen Chang, Exchange Act Release No. 65555 (Oct. 13, 2011), available at http://www.sec.gov/litigation/admin/2011/34-65555.pdf.
29 Rockwell Automation, Inc., Exchange Act Release No. 64380 (May 3, 2011), available at http://www.sec.gov/litigation/admin/ 2011/34-64380.pdf.
30 Diageo plc, Exchange Act Release No. 64978 (July 27, 2011), available at http://www.sec.gov/litigation/admin/2011/34-64978.pdf.
31 Press Release, SEC, Tenaris to Pay $5.4 Million in SEC's First-Ever DPA (May 17, 2011), available at http://www.sec.gov/news/press/2011/2011-112.htm.
32 Press Release, DOJ, Tenaris S.A. Agrees to Pay $3.5 Million Criminal Penalty to Resolve Violations of the FCPA (May 17, 2011), available at http://www.justice.gov/opa/pr/2011/May/11-crm-629.html.
33 SEC, supra note 31.
34 Mary L. Schapiro, SEC Chairman, Statement Before Senate Comm. on Banking, Housing, and Urban Affairs (Dec. 6, 2011), available at http://www.sec.gov/news/testimony/2011/ts120611mls.htm.
35 Ball Corp., Exchange Act Release No. 64123 (Mar. 24, 2011), available at http://www.sec.gov/litigation/admin/2011/34-64123.pdf.
36 Press Release, DOJ, Bridgestone Corp. Agrees to Plead Guilty to Participating in Conspiracies to Rig Bids and Bribe Foreign Gov't Officials (Sept. 11, 2011), available at http://www.justice.gov/opa/pr/2011/September/11-at-1193.html.
37 United States v. Noriega, No. 2:10-cr-01031-AHM (C.D. Cal. Feb. 28, 2011) (hereinafter "Lindsey Manufacturing"); United States v. Carson, No. 8:09-cr-00077-JVS (C.D. Cal. Feb. 21, 2011).
38 United States v. O'Shea, No. 4:09-cr-00629 (S.D. Tex. Jan. 3, 2012). O'Shea also involved alleged bribery of officials at the same state-owned utility company at issue in the Lindsey Manufacturing case. US District Judge Lynn N. Hughes denied O'Shea's motion to dismiss, without issuing a written opinion, rejecting his argument that the recipients of the alleged bribes were not foreign officials. Rachel G. Jackson, Challenge to 'Foreign Official' Definition Denied in Texas Bribery Case, Just Anti-Corruption (Jan. 5, 2012), http://www.mainjustice.com/justanticorruption/2012/01/05/challenge-to-foreign-official-definition-denied-in-texas-bribery-case/. However, on January 16, 2012, Judge Hughes granted O'Shea's motion for acquittal. According to media reports, Judge Hughes said he found that the testimony of the government's chief witness did not link O'Shea to the crime and that O'Shea's motives were lawful. Mike Koehler, O'Shea Not Guilty of Substantive FCPA Charges, FCPA Professor (Jan. 17, 2012), http://www.fcpaprofessor.com/oshea-not-guilty-of-substantive-fcpa-charges.
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