Published by Law360.com, June 15, 2012
In late April 2012, the New York Times broke a front-page story about Wal-mart and its potential exposure under the Foreign Corrupt Practices Act ("FCPA") in Mexico. According to the NYT, top executives at Wal-mart de Mexico shut down an internal investigation of wide-spread bribery of local Mexican officials in 2005, only to revive it and disclose it to the US Department of Justice in 2011 after learning about the NYT's own investigation of the same bribery allegations. Putting aside difficult news cycles, what other challenges lie ahead for Wal-mart under the FCPA?
The FCPA, which prohibits the bribery of foreign officials and imposes "books and records" requirements on certain covered entities, has become "second only to fighting terrorism in terms of priority" at the Department of Justice ("DOJ") and "at the vanguard of (FCPA's) enforcement" at the Securities and Exchange Commission.1 The DOJ and the SEC have collected a total of $1.8 billion in civil penalties, fines, disgorgement, and prejudgment interest from enforcement actions under the FCPA and $652 million in 2011. Lawyers who handle cross-border mergers and acquisitions correlate increased FCPA enforcement activity to significant increase in transactional costs, post-transaction integration costs, direct compliance and investigation costs, and the abandonment of legitimate transactions.2
Internal investigations can cost a lot of money. Whatever its motive, in 2005 Wal-mart opted for a lower budget preliminary inquiry by in-house investigators in lieu of an "independent, spare-no-expense investigation major corporations routinely undertake when confronted with allegations of serious wrongdoing by top executives" recommended by an outside law firm.3 This do-over in 2011 could quickly exceed $100 million, if measured by past investigations.4 For example, Avon Products, the international cosmetics juggernaut, spent $59 million in 2009 for legal fees and costs to conduct an internal FCPA investigation, another $95 million in 2010, and another $22.5 million for the first quarter of 2011.
Avon's internal investigation was launched in 2008, with the oversight of the company's Audit Committee, after receiving an allegation that travel, entertainment and other expenditures were made in connection with Avon's China operations, presumably to influence the lifting in 2006 of government restrictions on direct selling so the company could conduct traditional doorto- door sales. This internal investigation, which Avon disclosed to the SEC, also uncovered millions of dollars of questionable payments to government officials in Brazil, Mexico, Argentina, India, and Japan and led to a formal order of investigation by the SEC in 2011. Now a grand jury is investigating how U.S. executives at Avon reacted or did not react to an internal audit regarding bribery allegations in China back in 2005.5 Avon may still get a break on the mitigation of fines and penalties (and preserve its reputation) for self-reporting and selfinvestigation, as the DOJ and SEC would prefer. In fact, the DOJ recently declined to charge Morgan Stanley with FCPA violations in a case involving a former managing director of its real estate business in China due, in part, to its compliance program and voluntary disclosures "(a)fter considering all the available facts and circumstances, including that Morgan Stanley constructed and maintained a system of internal controls, which provided reasonable assurances that its employees were not bribing government officials."
Under the FCPA, however, the doctrine of respondeat superior makes a corporation potentially responsible for the actions of all employees and agents, in many cases without regard to whether the company authorized the improper conduct or it was undetectable by the company's compliance procedures. Despite the recent breakthrough in the Morgan Stanley matter, the FCPA and the enforcement agencies make no guarantees that the tens of millions and personal capital spent to prevent, uncover, or investigate the potential FCPA violations, will be rewarded.6 As stated by the Hon. Michael Mukasey, who served as U.S. Attorney General from 2007 to 2009:
It is true that the DOJ or SEC may look more favorably on a company with a strong FCPA compliance program when determining whether to charge the company or what settlement terms to offer, and such compliance programs may be taken into account by a court at the sentencing of a corporation convicted of an FCPA violation. However, such benefits are subject to unlimited prosecutorial discretion, are available only after the liability phase of a prosecution, or both. There is also no guarantee that a strong compliance program will be given the weight it deserves.7
In other countries, the adoption and effective implementation of an adequate organizational risk management and control model could clear a company of liability for bribery and other crimes committed by rogue employees, including managers, executives and thirdparties, to benefit the company. The U.S. Chamber of Commerce lobbied Congress for the adoption of a similar good faith compliance defense to the FCPA in 2011.8 Such an amendment would allow a company to defend an FCPA claim by demonstrating that the company undertook adequate measures to prevent and detect violations.
In "Revisiting A Foreign Corrupt Practices Act Compliance Defense" (Wisconsin Law Review, Forthcoming), Prof. Michael Koehler, a former FCPA practitioner who runs the website www.FCPA Professor.com, cogently explains the rationale for a good faith compliance defense:
- A company's pre-existing compliance policies and procedures, and its good faith efforts to comply with the FCPA, should be relevant as a matter of law when a non-executive employee or agent acts contrary to those policies and procedures and in violation of the FCPA. A compliance defense would not apply to corrupt business organizations, activity engaged in or condoned by executive officers, or activity by any employee if it occurred in the absence of pre-existing compliance policies and procedures.
- The unique aspects and challenges of complying with the FCPA in the global marketplace warrant a specific FCPA compliance defense.9
- Several countries similar to the U.S., which are signatories to the Organization for Economic Cooperation and Development Convention on Combating Bribery of Foreign Public Officials in International Business Transactions (the "OECD Convention"), have a compliance-like defense in their domestic laws.10
- The compliance defense would be a transparent mechanism to account for a competent compliance structure. DOJ already recognizes a de facto FCPA compliance defense in sentencing guidelines and prosecutorial manuals, which are opaque, unpredictable, and subject to discretion.11
Without transparency or clarity as to the benefits of good faith compliance, there is at least anecdotal evidence that the regulatory risks associated with FCPA enforcement and voluntary disclosure deter legitimate international business opportunities.12 Insisting on rigid U.S.-style compliance may strain business relationships and cause corporations to be overly cautious and avoid activity that is permitted under the FCPA. Representatives of U.S. regulated companies may inadvertently offend potential business partners, by citing the FCPA as the basis for foregoing a celebratory banquet after the completion of contract negotiations, in breach of local or tradition.13 Tweaking the FCPA to include a good faith compliance defense may very well stimulate more robust FCPA compliance and cooperation, level the playing field for US concerns in the international marketplace, and promote legitimate international business activity.
1 Daniel J. Grimm, "The Foreign Corrupt Practices Act in Merger and Acquisition Transactions: Successor Liability and its Consequences," 7 NYU Journal of Law & Business, 249-250 (2010).
2 See Committee on International Business Transactions, New York City Bar Association, "The FCPA and its Impact on International Business Transactions-Should Anything be Done to Minimize the Consequences of the U.S.'s Unique Position on Combating Offshore Corruption?" (December 2011), at 1-2.
3 David Barstow, "Vast Mexico Bribery Case Hushed up After Top-Level Struggle," The New York Times (April 21, 2012).
4 Peter Henning, "The Mounting Costs of Internal Investigations," The New York Times (March 5, 2012).
5 Over 97 percent of the $625 million recovered by DOJ and SEC through FCPA enforcement in 2011 resulted from voluntary or public disclosures.
6 Based on anecdotal evidence, the International Business Transactions Committee of New York City Bar estimates that multi-national companies spend in the high tens of millions of dollars on FCPA compliance costs each year. Committee on International Business Transactions, New York City bar Association, at 10.
7 Michael Koehler, "Revisiting A Foreign Corrupt Practices Act Compliance Defense" Wisconsin Law Review ( Forthcoming) at 31 citing "Foreign Corrupt Practices Act," Hearing Before the Subcommittee on Crime, Terrorism, and Homeland Security of the Committee on the Judiciary, House of Representatives, 112th Congress, First Session (June 14, 2011), available at "http://judiciary.house.gov/hearings/printers/112th/112- 47_66886.PDF" .
8 Michael Koehler, "Revisiting A Foreign Corrupt Practices Act Compliance Defense" Wisconsin Law Review (Forthcoming) at 31. U.S. Senators Christopher Coon, Amy Klobuchar, and Mike Crapo and U.S. Rep. James Sensenbrenner have been advocates of FCPA reform.
9 While the bribery allegations at Wal-mart de Mexico are sensational, a U.S. court may conclude that the underlying payments to the government officials for permits were allowable under the facilitating payments exception of the FCPA. See Michael Koehler, "Understanding Wal-mart," www.fcpaprofessor.com (May 1, 2012). The UK Bribery Act 2010, which is regarded as the UK counterpart to the FCPA, prohibits facilitation payments.
10 Professor Koehler would incorporate the defense by making it an element of the bribery offense. To charge a business organization with a substantive bribery offense, the DOJ will have the burden of establishing, as an additional element, that the company failed to have policies and procedures reasonably designed to detect and prevent the improper conduct by non-executive employees or agents. Such a compliance defense would not apply to conduct engaged in or condoned by executive officers. Michael Koehler, "Revisiting A Foreign Corrupt Practices Act Compliance Defense" Wisconsin Law Review, Forthcoming (2012) at 16.
11 Id. at 1-2.
12 Committee on International Business Transactions at 11.
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