2012 FCPA Enforcement Trends And Developments - Securities

Although the number of U.S. Securities and Exchange Commission (SEC) and Department of Justice (DOJ) Foreign Corrupt Practices Act (FCPA) enforcement actions brought in the first eight months of 2012 has declined considerably from the total number brought in 2011¹, several revealing developments have occurred thus far this year. Highlights for 2012, which are described more fully below, include: the importance of corporate cooperation, clarification regarding successor liability and the impact of the Dodd-Frank whistleblower rules on FCPA enforcement. In addition, we look forward to the much anticipated release of the DOJ's FCPA guidance and legislative reform initiatives.

2012 Highlights

Corporate Cooperation

Recent settlements and comments made by both the SEC and the DOJ continue to reflect that strong compliance programs, self-reporting and extensive cooperation may lead to reduced penalties and, in some cases, declinations. For example, in the Biomet case, the company allegedly made improper payments between 2000 and 2008 to doctors employed by public hospitals and agencies that allegedly continued after internal auditors became aware of the practice as early as 2000². Despite these allegations, the DOJ entered into a deferred prosecution agreement (DPA) that included fines with a 20 percent reduction from the minimum fine amount. The DPA cited "Biomet's extensive internal investigation, the nature and extent of Biomet's cooperation in this matter, Biomet's cooperation in the DOJ's investigation of other companies and Biomet's extraordinary remediation" as factors for entering into the agreement³.

Another example in which corporate cooperation led to reduced fines was in the action against Smith & Nephew (S&N), one of several companies to settle with the SEC and the DOJ in connection with their joint investigation into the pharmaceutical and medical services industry. In that case, the government alleged that S&N utilized a Greek distributor to funnel up to $9.4 million of improper payments to doctors at public hospitals and agencies between 1998 and 2008⁴. According to the government, S&N sold products to a distributor at full price but later transferred an amount equal to a distributor discount to an offshore account controlled by the distributor to fund the improper payments⁵. In part because S&N investigated and disclosed the misconduct, reported its findings to the SEC and the DOJ, cooperated fully and undertook remedial measures, the government entered into a DPA and provided S&N with a 20 percent reduction off the bottom of the fine range⁶.

Bizjet International, Data Systems & Solutions and Marubeni all are actions resolved in 2012 where, despite significant allegations of improper conduct, the companies were able to enter into a DPA that included 20 percent to 30 percent penalty reductions partially due to voluntary disclosure, extraordinary cooperation and extensive remediation.

In addition to the settlements in the first half of the year, the SEC's and the DOJ's public announcements regarding the declination in the Morgan Stanley matter was significant. In that matter, Garth Peterson, an employee of Morgan Stanley, pleaded guilty to conspiring to violate the FCPA's internal control provisions, while the SEC and the DOJ chose not to prosecute Morgan Stanley⁷. Both agencies publicly discussed their decision not to pursue an action against Morgan Stanley as a result of the company's effective internal controls, voluntary disclosure, and cooperation with the SEC and the DOJ during the investigations.

According to the SEC complaint, Peterson developed a personal relationship with the chairman of a Chinese-owned entity that enabled Morgan Stanley to obtain approval for real estate deals in China. During Peterson's time as Managing Director of Morgan Stanley's Real Estate practice in China, he arranged for himself and the Chinese official to receive payments of at least $1.8 million "disguised as finder's fees that Morgan Stanley's funds owed to third parties."⁸ In addition, Peterson circumvented internal controls enabling him to transfer an ownership interest in a Shanghai building to himself and the Chinese public official. According to government allegations, Peterson, who resided in Singapore, established a holding company with the Chinese official and a Canadian attorney. In 2006, Peterson then persuaded Morgan Stanley to sell an interest in a Shanghai real estate deal to the holding company while concealing his ownership interest in the entity. Morgan Stanley sold its interest to the holding company at less than market value, which resulted in a paper profit of approximately $2.5 million for Peterson and his partners.⁹

According to court documents, Morgan Stanley had a robust compliance program and internal controls designed to prevent employees from making improper payments to foreign government officials.¹⁰ This involved employing more than 500 compliance officers, regularly monitoring transactions and random testing for improper payments; providing a toll free compliance hotline; and requiring annual certifications indicating compliance with the company's code of conduct. Further, between 2002 and 2008, Morgan Stanley provided extensive training regarding anti-corruption policies to personnel based in Asia. During the same period, "Morgan Stanley trained Peterson on the FCPA seven times and reminded him to comply with the FCPA at least 35 times."¹¹ Despite the systems and training in place at Morgan Stanley, Kara Novaco Brockmeyer, Chief of the SEC Division of Enforcement's FCPA Unit, observed that Peterson "took advantage of his firm and its investment advisory clients" and "orchestrated a scheme to illegally win business while lining his own pockets and those of an influential Chinese official."¹²

The announcements by the SEC and the DOJ appear to signal that companies can avoid prosecution by implementing compliance programs and undertaking internal reviews designed to detect violations. The public nature of the declinations may provide some insight into the much anticipated FCPA guidance that may further elaborate on what conditions and factors supported their determination with respect to Morgan Stanley.

Successor Liability

Companies and business groups continue to raise concerns regarding the lack of clarity with respect to acquirer liability stemming from FCPA violations that occurred prior to or near the date of the acquisition. Recent enforcement actions have involved misconduct occurring at the acquired company both before and after acquisition. For example, in the Ball Corporation case, the SEC alleged that although Ball learned of potential FCPA violations at an Argentinean subsidiary after the acquisition, the company did not take adequate measures to ensure that the conduct did not recur following the acquisition.¹³ In another matter, the SEC alleged that Diageo plc provided more than $2.7 million in improper payments to government officials in India, South Korea and Thailand. According to the SEC, Diageo was aware of lax internal controls at the time of the acquisition in 2006 but failed "to make sufficient improvements to these programs until mid-2008," when it discovered the corrupt payments.¹⁴ In the Watts Water Technologies matter, the SEC alleged that in connection with improper payments made after its acquisition of a Chinese subsidiary, Watts failed to implement adequate internal controls, and, despite providing an FCPA policy, it failed to adequately train its employees in China.¹⁵

A corporate compliance program, which often is attached to a DPA or a non-prosecution agreement, contains policies and procedures that the companies must implement as part of the settlement. The corporate compliance program included as an attachment to three recent resolutions—Bizjet,¹⁶ Data Systems¹⁷ and NORDAM,¹⁸—provided further guidance to companies with respect to what procedures companies should undertake in the event of a merger or acquisition. The guidelines incorporated into these resolutions indicate that a company considering an acquisition should: 1) conduct appropriate risk-based due diligence on a potential new business entity, including appropriate FCPA and anticorruption due diligence by legal, accounting and compliance personnel, 2) ensure that the company's policies and procedures regarding the anti-corruption laws are applied as quickly as is practicable to a newly acquired business, 3) train the acquired company employees as soon as is practicable and 4) conduct an FCPAspecific audit of the newly acquired or merged entity as quickly as possible.¹⁹

Whistleblower Rules

In August 2011, the SEC implemented its final rules for its whistleblower program authorized under the Dodd-Frank Wall Street Reform and Consumer Protection Act. The program calls for a cash award of between 10 percent and 30 percent to be paid to an individual who voluntarily provides original, high-quality information to the SEC that leads to enforcement actions in which monetary sanctions of greater than $1 million are collected. The law provides significant protection from retaliation and requires that the SEC not disclose any information provided by the whistleblower that could identify the individual.

In August 2012, the SEC announced its first payout from the whistleblower program.²⁰ Speaking about the action, Robert Khuzami, Director of the SEC's Division of Enforcement, noted that "[t]his whistleblower provided the exact kind of information and cooperation we were hoping the whistleblower program would attract.... Had this whistleblower not helped to uncover the full dimensions of the scheme, it is very likely that many more investors would have been victimized."²¹

According to Sean McKessy, Chief of the SEC's Whistleblower Office, the SEC receives approximately eight tips a day.²² Given the sanctions typically associated with FCPA actions that would provide an extremely large monetary incentive to potential whistleblowers, companies weighing the decision of whether to voluntarily disclose potential misconduct now must consider that a whistleblower could provide information directly to the government.

Anticipated in 2012

FCPA Guidance

In November 2011, Assistant Attorney General Lanny Breuer commented that the DOJ expected to provide "detailed new guidance" regarding the FCPA that would serve as a "useful and transparent aid."²³ In anticipation of this guidance, a coalition of more than 30 businesses and trade groups led by the U.S. Chamber of Commerce's Institute for Legal Reform (ILR) sent a letter to the SEC and the DOJ requesting clarification of key definitions, including "foreign official" and "instrumentality" under the FCPA, as well as clarification regarding parent subsidiary and successor liability.²⁴ In addition, the letter requested that consideration be given to corporate compliance programs in enforcement decisions and that an exception for de minimis gifts be established. In May 2012, the International Corporate Accountability Roundtable also submitted a letter to the SEC and the DOJ responding to the arguments presented by the ILR and urging against weakening the FCPA.²⁵ As of August 31, 2012, guidance had not been released by the DOJ.

FCPA Reform

The discussion surrounding FCPA guidance is an issue within the broader debate of FCPA reform. Over the past several years, congressional interest in FCPA reform has been high as evidenced by a number of hearings on FCPA reform and enforcement. In June 2011, a hearing held by the House Judiciary Committee's Subcommittee on Crime, Terrorism, and Homeland Security considered several proposals to reform the FCPA that largely were derived from a 2010 Chamber of Commerce report.²⁶ Groups such as the ILR continue to be active in advocating for the business community and argue that the lack of predictability in the enforcement of FCPA provisions is causing U.S. businesses to miss opportunities. Equally zealous in their advocacy are the anti-corruption proponents who argue that the requested reforms will make it easier for companies to do business in corrupt countries and will dampen anticorruption efforts to increase profits. This debate certainly will continue; however, given the election year, it likely will be postponed.

Conclusion

Despite the decline in new actions, FCPA investigations continue to be incredibly costly, potentially resulting in multimillion dollar fines and penalties, and serve as a significant distraction to management. The settlements in 2012 continue to underscore the importance for companies with potential FCPA exposure to expend necessary resources to develop and implement effective compliance programs that are designed to detect violations and are subject to rigorous internal review.

Footnotes

1. In 2011, the SEC and the DOJ brought 25 and 23 FCPA enforcement actions, respectively. In the first eight months of 2012, the SEC and the DOJ have brought six and 10 FCPA enforcement actions, respectively.

2. www.sec.gov/litigation/complaints/2012/comp22306.pdf

3. www.justice.gov/criminal/fraud/fcpa/cases/biomet/2012-03-26-biomet-dpa.pdf

4. www.sec.gov/litigation/complaints/2012/comp22252.pdf

5. www.justice.gov/opa/pr/2012/February/12-crm-166.html

6. www.justice.gov/criminal/fraud/fcpa/cases/smith-nephew/2012-02-01-s-n-dpa.pdf

7. www.justice.gov/opa/pr/2012/April/12-crm-534.html

8. www.sec.gov/news/press/2012/2012-78.htm

9. www.justice.gov/opa/pr/2012/April/12-crm-534.html

10. www.justice.gov/criminal/fraud/fcpa/cases/petersong/petersong-information.pdf

11. www.justice.gov/opa/pr/2012/April/12-crm-534.html

12. www.sec.gov/news/press/2012/2012-78.htm

13. www.sec.gov/litigation/admin/2011/34-64123.pdf