United States: FCPA/Anti-Bribery Alert - Winter 2013

INTRODUCTION

To paraphrase Mark Twain, reports of the FCPA's death were greatly exaggerated. Although at times many pillars of anti-corruption enforcement seemed to be crumbling or at least showing cracks, 2013 has seen a string of developments that reinforce that anti-bribery laws — and their vigorous enforcement — are here to stay.

Where once we watched the Shot Show prosecution crumble, we now see indictments and plea deals for even non-U.S. citizens and non-U.S. issuers. Where once we saw monitorships seemingly falling into disfavor, we now see them restored and imposed in the most high-profile, high-stakes cases. Where once enforcement of the U.K. Bribery Act seemed a paper tiger, we now see active prosecutions. And where we once wondered if non-U.S. governments would continue to strengthen and enforce anti-bribery laws, we see resounding confirmation in the form of investigations and enforcement activity from heretofore unseen jurisdictions such as Australia and Canada.

Indeed, the success of international efforts to harmonize anti-corruption laws and their enforcement on a U.S.-based enforcement model has been striking. International anti-corruption regulation and enforcement are becoming increasingly similar between countries and between international organizations. Among other examples of this trend, the enactment of the Crime and Courts Act 2013 in the United Kingdom has authorized the U.K. Serious Fraud Office ("SFO") to resolve violations of the Bribery Act through Deferred Prosecution Agreements ("DPAs"), and the SFO has launched its first prosecution under the Bribery Act. As the initial prosecutions of the Bribery Act by the SFO begin to emerge, the existence of these resolution tools may transform the United Kingdom into a jurisdiction like the United States where voluntary disclosures become more commonplace.

Further, international organizations continue to play an important role in shaping the compliance landscape. The World Bank has spearheaded multiple anti-corruption reforms that have led to increased cooperation and cross-debarments among multilateral development banks. The development and continuing evolution of its own sanctioning and monitoring procedures has had a significant impact.

Similarly, the OECD continues to encourage enhancements to anti-bribery legislation and enforcement efforts worldwide. Canada, for example, has undertaken important developments in response to OECD criticism, proposing amendments to its Corruption of Foreign Public Officials Act ("CFPOA") and securing its first conviction of an individual under that law. Similarly, in September 2012, French prosecutors obtained their first corporate conviction on charges of bribery. Russia has become a signatory of the OECD Convention and amended its anticorruption laws following remarks from the OECD working group. Brazil also enacted a new anti-corruption law that will come into effect early next year and significant efforts are being undertaken by companies domiciled or engaging in business in Brazil in efforts to comply with the new law as it becomes effective. Other countries are expected to adopt more stringent legal requirements in the near future as well.

Hughes Hubbard's FCPA/Anti-Bribery Alert Winter 2013 discusses these and other anti-bribery developments. This Alert begins with a summary and analysis of certain critical enforcement trends and lessons from recent settlements and other related developments. Following that analysis and a detailed discussion of the FCPA Resource Guide, the Alert provides: (i) a brief discussion of the statutory requirements of, and penalties under, the FCPA; (ii) a description of FCPA settlements and criminal matters from 2005 through 2013 in reverse chronological order; (iii) an overview of the Bribery Act, together with recent developments and enforcement actions in the United Kingdom; (iv) a review of select international developments; (v) an overview of other FCPA-related developments; and (vi) a summary of each DOJ Review and Opinion Procedure Release issued from 1980-present.

SUMMARY AND ANALYSIS

The combination of resolved actions, ongoing criminal and regulatory investigations, guidance issued by regulatory authorities, DOJ Opinion Procedure Releases, and other developments discussed below underscore a number of important themes of which companies should be aware in conducting their operations, designing and implementing their compliance programs, considering whether to enter into potential transactions or to affiliate with an international agent, intermediary or joint venture partner, and dealing with government agencies. These themes take the form of both enforcement trends and practice lessons.

Enforcement Trends

  • Increased Global Enforcement Trends: Although the United States remains the most active anti-corruption regulator, other agencies around the world (including national regulators and multi-national development banks) have shown a greater proclivity toward prosecuting bribery offenses - either through enforcement of their own anti-corruption laws or regulations or through increased cooperation with agencies in other jurisdictions - suggesting the beginning of an increased trend towards a global enforcement environment.

    • Enforcement of Anti-Corruption Laws by Other Countries: Countries from Australia to Cambodia to the U.A.E. are actively evaluating and enhancing their anti-corruption efforts, and Brazil, Russia, Colombia, Canada and the United Kingdom have, in recent years, adopted strengthened anti-corruption statutes or undertaken significant prosecutions or investigations. Other OECD Convention signatories, such as France, the Netherlands, and the Slovak Republic (to name a few) are facing increasing pressure - including from the OECD Working Group - to actively enforce their anti-corruption laws. Non-OECD nations have also aggressively investigated and prosecuted corruption offenses, including with respect to foreign nationals. In June 2013, for example, Chinese officials detained three GlaxoSmithKline managers in connection with allegations that the drug company had bribed Chinese doctors, and public reports suggest that Chinese regulators may be investigating the conduct of other multinational organizations operating in China.
    • Increased Enforcement by and Cooperation Among Multinational Development Banks:Increasingly, multinational development banks' anti-corruption standards and enforcement activities are important considerations for companies providing goods or services that are, or potentially will be, financed (even partly) through international development funding. The World Bank Group has been a leader in this regard, having debarred more than 400 entities and individuals since 2001. In 2006, the World Bank and several other international financial institutions agreed on the harmonization of anti-corruption standards, common investigative practices, and information sharing, and in 2010 several of these institutions agreed to a cross-debarment treaty among these institutions. This new trend toward cross-debarment greatly amplifies the impact of debarment by any one of the participating institutions.
    • Cooperation Between International Anti-Corruption Regulators: To a greater extent than ever, international regulators are cooperating in their anti-corruption enforcement efforts. The BAES, Siemens, Total, Innospec, and Alcatel-Lucent settlements all included stated cooperation between United States and European authorities, and the ongoing Hewlett-Packard investigation appears to involve German, Russian and U.S. authorities. Moreover, U.S. regulators may consider enforcement activities by non-U.S. regulators in determining the ultimate disposition of a matter, as illustrated by the Aon, Siemens, Flowserve, and Akzo Nobel matters. Indeed, in the Siemens and Akzo Nobel proceedings, the DOJ was willing to take into account settlements with non-U.S. regulators when determining whether, and to what extent, to impose a criminal sanction. British authorities took a similar approach in the Johnson & Johnson case, limiting their prosecution to account for double-jeopardy concerns based on the U.S. enforcement action. Echoing and encouraging this trend, the OECD's Recommendation of the Council for Further Combating Bribery of Foreign Public Officials in International Business Transactions encourages member countries to cooperate with authorities in other countries in investigations and legal proceedings. (See, e.g., Alcatel-Lucent, Flowserve, AGCO, Innospec, Siemens, Akzo Nobel, BAES, Hewlett-Packard, Aon, Johnson & Johnson).
  • Continued Vigorous Enforcement in the United States: The United States remains the global pace-setter in establishing a vigorous anti-corruption enforcement posture, which has resulted in FCPA violations posing one of the most, if not the most, significant corporate challenges to U.S. companies operating internationally and to international companies listed on the American exchanges or with activities that touch the United States. Penalties — including fines, disgorgement and prejudgment interest — imposed between January 2012 and October 2013 topped over $740 million. (See, e.g., Stryker, Diebold, Total, Ralph Lauren, Parker Drilling, Philips, Eli Lilly, Tyco, Oracle, Pfizer, Orthofix, Nordam, Data Systems, Biomet, BizJet, Smith & Nephew, Marubeni). The number and breadth of these enforcement actions have resulted in part from the broad reading that the DOJ and SEC have given to the jurisdictional and substantive elements of the law.

    • Expansive Jurisdictional Reach: U.S. regulators continue to take an expansive jurisdictional view as to the applicability of the FCPA. The charging documents applicable to Siemens Venezuela, Siemens Bangladesh, and Siemens Argentina in the groundbreaking 2008 Siemens settlement detail connections, but not particularly close or ongoing connections, between the alleged improper conduct and the United States. Similarly, the United States government obtained the extradition of Wojciech Chodan and Jeffrey Tesler, both United Kingdom citizens who were indicted for their involvement in the Bonny Island, Nigeria bribery scheme and who are described in the charging documents as "agents" of a domestic concern. Clearly, regulators, in what they deem to be appropriate circumstances, will look carefully for hooks to establish U.S. jurisdiction over perceived violations of anti-corruption laws and regulations. (See, e.g., BAES, Siemens, Tesler and Chodan).
    • Use of Constructive Knowledge Standard: The DOJ and SEC have shown a clear willingness to rely on the constructive knowledge element of the FCPA, invoking "high probability" language and relying on circumstantial factors, in instances where a company's conduct may fall short of actual knowledge. In the Eli Lilly case, for example, the SEC explicitly stated in its Complaint that "[w]hen knowledge of the existence of a particular circumstance is required for an offense, such knowledge is established if a person is aware of a high probability of the existence of such circumstance, unless the person actually believes that such circumstance does not exist." Similarly, in charging BAES with failure to maintain an effective anti-corruption compliance program, the DOJ repeatedly stated that the company failed to maintain an effective anti-corruption program because it ignored signaling devices that should have alerted it to the "high probability" that third parties would make improper payments. The December 2011 Second Circuit decision upholding Frederic Bourke Jr.'s conviction on a constructive knowledge standard further strengthens this position. (See, e.g., Eli Lilly, BAES, Alcatel-Lucent, GlobalSantaFe, Bourke).
    • Broad Reading of "Foreign Official": The FCPA defines the term foreign official to include more than just ministry officials or other high-level government functionaries, but also employees of a government "instrumentality." In the FCPA Resource Guide, the DOJ and SEC rely on the ruling in Carson in explaining that "whether a particular entity constitutes an 'instrumentality' under the FCPA requires a fact-specific analysis of an entity's ownership, control, status, and function." Similarly, the DOJ stated in Opinion Procedure Release 12- 01 that members of a royal family of a foreign government are not "foreign officials" per se under the FCPA, but that their status as such would be determined on a "fact-intensive, case-by-case" basis. In practice, however, U.S. federal prosecutors continue to construe the term "foreign official" to include even relatively low-level employees of state agencies and state-owned institutions, such as workers in hospitals, telecommunications companies, shipyards, and steel mills, and members of an executive committee overseeing the construction of a government-owned hotel. Even journalists working for state-owned media concerns, an unpaid manager of a government majority-owned entity, and officials at entities that are controlled (but not majority-owned) by a government fall within the government's broad interpretation of "foreign official." There is every reason to believe that jurisdictions outside the United States will take a similarly expansive view. (See, e.g., DOJ Opinion Procedure Release 12-01, DOJ Opinion Procedure Release 08-03, DOJ Opinion Procedure Release 08-01, Lindsey Manufacturing, Alcatel-Lucent, KBR/Halliburton, York, Fu, Delta & Pine, Wooh, Dow, Vetco, UIC, ITT, Comverse, Johnson & Johnson, Smith & Nephew, Biomet).
    • Broad Reading of the "Obtain or Retain" Business Element: The SEC and DOJ continue to read the "obtain or retain business" element of the FCPA broadly to capture a wide range of conduct beyond the prototypical payment to win a contract award, including payments to obtain confidential bidding information, expedite and approve patent applications, obtain favorable treatment in pending court cases, schedule inspections, obtain product delivery certificates, alter engineering design specifications in favor of a particular bidder, obtain preferential customs treatment, avoid or expedite necessary inspections, alter the language in an administrative decree, obtain governmental reports and certifications necessary to market a product, reduce taxes, or receive favorable referrals and reports to customers. (See, e.g., Helmerich & Payne, Nature's Sunshine, AGA Medical Corporation, Willbros Group, Bristow, Delta & Pine, Martin, Dow, Vetco, Kay, Dimon, OECD Phase 3 Report, Rockwell, Watts Water).
  • Large Corporate Penalties: Corporate penalties in the tens and hundreds of millions of dollars have, over the last several years, become commonplace. The combined $1.6 billion in penalties levied against Siemens in 2008, collectively by U.S. and German authorities, far exceeded all previous FCPA-related sanctions. Siemens was quickly followed by the KBR/Halliburton settlement totaling $579 million. The BAES ($400 million to resolve an FCPA-related investigation through a false statement plea), Total ($398 million), Snamprogetti/ENI ($365 million), Technip ($338 million), JGC ($218 million), Daimler ($185 million), and Alcatel-Lucent ($137 million) settlements are among others to break nine figures.
  • Parent-Subsidiary Liability: The DOJ and SEC have prosecuted or charged parent companies based on the conduct of far-removed foreign subsidiaries. As discussed immediately below, the agencies have initiated such enforcement actions even in the absence of alleged knowledge or direct participation of the parent company in the improper conduct.

    • Direct Parent Company Involvement Not Required: The DOJ has held companies criminally liable for books and records or internal controls violations committed without their knowledge by their foreign subsidiaries, including in connection with several Oil-for-Food settlements. The SFO has taken a similar line in moving against Mabey Engineering under the Proceeds of Crime Act for actions of its subsidiary Mabey & Johnson. As a result, companies must ensure that their anti-corruption compliance policies and procedures are implemented throughout the corporate structure and extended quickly to newly acquired subsidiaries. (See, e.g., Willbros Group, AB Volvo, Flowserve, Westinghouse, Akzo Nobel, Ingersoll- Rand, York, Bristow, Paradigm, Textron, Delta & Pine, Dow, Deutsche Telekom, Mabey & Johnson).
    • Foreign Subsidiaries Treated as Agents of the Parent: As discussed further below, a parent company can be liable for improper payments made by its foreign subsidiaries if the parent maintains sufficient control over the subsidiary's operations to establish an agency relationship. In practice, the DOJ takes an expansive view of the meaning of "control." In the context of a non-prosecution agreement ("NPA"), for example, the DOJ and Ralph Lauren appeared willing to acknowledge that the parent company's hiring of its Argentinean subsidiary's general manager was sufficient to establish an agency relationship. The DOJ has also advanced an agency theory of liability in enforcement proceedings, including in the criminal information underlying its action against Schnitzer Steel's Korean subsidiary as well as charging documents against Diagnostic Products Corporation and its Chinese subsidiary. The DOJ likely will continue to use the agency theory reflected in these cases (at least as an initial enforcement posture) in charging a parent company for corrupt acts by a foreign subsidiary, despite the parent's lack of direct knowledge or participation. (See, e.g., Ralph Lauren, Philip (Schnitzer), Diagnostic Products).
    • Accounting Provisions Violations: When a subsidiary's misrepresented financials are consolidated into the parent corporation's books and records, this can give rise to an independent violation by the parent of the FCPA books and records and internal controls provisions if the parent company is a U.S. issuer, even though the parent company may not be aware of such misrepresentations. In connection with the 2013 settlement between the SEC and Philips, for example, the SEC alleged that the parent issuer was liable for the actions of its Polish subsidiary even though it had no prior knowledge of those violations. The SEC also filed a complaint in 2012 against Oracle Corporation, arguing that the NASDAQ-listed company was liable for the maintenance of "secret cash cushions" by its wholly owned Indian subsidiary, despite not advancing any argument that Oracle knew of the actions of its subsidiary employees. (See, e.g., FCPA Resource Guide, Philips, Oracle, Fiat, Faro, Willbros Group, AB Volvo, Flowserve, Westinghouse, Akzo Nobel, Ingersoll-Rand, York, Bristow, Paradigm, Textron, Delta & Pine, Dow, Deutsche Telekom, Mabey & Johnson).
  • Requirement of Monitors and Consultants: The imposition of compliance monitors or consultants as part of settlements continues to be commonplace. In 2012 and 2013, half of the FCPA-related DPAs included such requirements, including most recently those with Diebold and Total. In general, the DOJ considers several factors when deciding whether to impose a monitorship, including (i) whether the company has an effective internal compliance program and sufficient internal controls, (ii) the seriousness, duration, and pervasiveness of the misconduct, and (iii) the nature and size of the company. Recent cases continue to reflect the DOJ's practice, as outlined in its previous memorandum on the Selection of Monitors in Criminal Division Matters, of permitting the settling company to choose its own corporate monitor from a pool of qualified candidates, subject to DOJ approval, rather than having the DOJ make the appointment itself. But the use of monitors is not a universal feature of settlements. DPAs with Parker Drilling, Pfizer, Orthofix, and Data Systems & Solutions as well as NPAs with Ralph Lauren, Tyco, and Nordam Group instead only required the companies to undertake periodic internal reviews during the term of the agreements on their remediation efforts and the implementation of their enhanced compliance programs and internal controls, and to provide reports detailing the findings of those reviews to the DOJ or SEC. (See, e.g., Diebold, Total, Biomet, Marubeni, Smith & Nephew, Mabey & Johnson, Parker Drilling, Pfizer, Orthofix, Data Systems, Ralph Lauren, Tyco, Nordam Group).
  • Prosecution for Payments to Non-Government Officials: Enforcement agencies in the United States and other jurisdictions have shown a willingness to investigate or prosecute improper payments to individuals and entities other than "foreign officials," even though such payments may not violate the anti-bribery provisions of relevant anti-corruption statutes, such as the FCPA. As discussed below, enforcement agencies have brought charges or launched investigations in connection with allegations of payments to governmental entities, private parties, and former government officials.

    • Payments to Governmental Entities: The anti-bribery provisions of the FCPA and the Bribery Act do not technically cover payments made to government entities, as opposed to the officials who work for such entities. As a result, businesses have traditionally viewed payments to government entities as a relative safe harbor that would be unlikely to incur liability. Nevertheless, in certain circumstances, enforcement agencies may be willing to look beyond the face of a payment to a state-owned or governmental institution if there is a suspicion that the company knew or should have known that there was a reasonable likelihood that such payments would be passed on improperly to a government official. Press reports from 2013, for example, confirmed that the U.K. Crown Prosecution Service is currently investigating Shell and ENI for possible money laundering violations in connection with the payment of $1.3 billion directly to the Nigerian government for the purchase of an oil field, following allegations from watch groups that the companies used the Nigerian government as an intermediary to transfer nearly 85% of the $1.3 billion payment to a third party owned by former Nigerian Oil Minister, Dan Etete. Similarly, without addressing the issue directly, the DOJ's Oil-for-Food prosecutions were premised on improper payments and kickbacks that companies made to directly to the Iraqi government, rather than to Iraqi officials. (See, e.g., Shell/ENI).
    • Payments to Private Parties: The Bribery Act prohibits commercial bribery payments to private parties in addition to improper payments to government officials. Some commentators have suggested that the inclusion of this prohibition represents a significant expansion over the breadth and scope of the FCPA. While technically true, the DOJ and the SEC nonetheless possess a wide array of other prosecutorial tools that they can use to pursue companies or individuals for improper payments to non-U.S. private parties abroad, including the Travel Act, money laundering, and wire fraud statutes, as well as the accounting and internal controls provisions of the FCPA. Many of the proceedings against companies operating in the telecommunications and pharmaceutical / medical device industries, for example, have included payments to persons employed by private institutions, while the Control Components' prosecutions coupled FCPA charges with charges that the company violated the Travel Act by making corrupt payments to private entities, both in the United States and abroad, in violation of California state law against commercial bribery. In the 2012 settlement with Tyco, the DOJ and SEC stated that the company violated the FCPA in connection with "illicit payment schemes" and "improper payments" that Tyco's various subsidiaries made to private individuals (as well as government officials) in China, the Democratic Republic of Congo, Madagascar, Malaysia, Mauritania, Niger, and Saudi Arabia. (See, e.g., Tyco, Control Components, Smith & Nephew).
    • Prosecution for Payments to Former Government Officials: As with the other payments discussed above, the DOJ and SEC will look for creative ways to prosecute other conduct that they consider to be improper, including payments to certain former government officials — even if the agencies cannot pursue FCPA anti-bribery charges. The DOJ prosecuted Tyco and Alcatel-Lucent for, among other things, payments made by those companies' subsidiaries to former employees of a public utilities company in Indonesia and a former Nigerian Ambassador to the United Nations, respectively. (See, e.g., Tyco, Alcatel-Lucent).
  • Prosecutions of Individuals: The SEC and DOJ remain willing to pursue charges against individuals when the facts warrant such action. In the first ten months of 2013 alone, the DOJ announced enforcement actions against fourteen different individuals — more than in the previous three years combined. (In 2009, however, the DOJ and SEC filed charges against more than thirty individuals.) These recent enforcement actions include cases against (i) three former executives of the now-bankrupt Direct Access Partners, who pleaded guilty in late August 2013 to criminal counts of violating and conspiring to violate the FCPA in connection with improper payments to Venezuelan state banking officials (see Lujan, Clarke, Hurtado), (ii) the Venezuelan government official who allegedly received improper payments from the Direct Access Partners executives (see Gonzalez), (iii) a French citizen who has been accused of obstructing the DOJ's investigation into BSG Resources, a mining company that won extraction rights in the Republic of Guinea (see Cilins), and (iv) former executives of Maxwell Technologies, Alstom and BizJet (see Maxwell Technologies, BizJet, Pierucci, Pompani, Rothschild and Hoskins).

    • Prosecution of Individuals as well as Employers: Enforcement agencies have indicated that, even within the context of corporate settlements involving heavy fines, they will also seek to hold culpable individuals criminally liable. As demonstrated by the 2013 announced filings of prosecutions of former executives from BizJet (Dubois, Jensen, Kowalewski, and Uhl), individual enforcement actions can follow or coincide with company settlements. The 2013 announced filings of charges against former executives from Alstom (Hoskins, Rothschild, Pomponi, and Pierucci), as well as previous prosecutions against former executives of Alcatel-Lucent (Sapsizian), KBR (Stanley), Control Components (Morlok, Covino, Carson, Cosgrove, Edmonds, Ricotti, and Kim), and Willbros (Steph), demonstrate that the government also brings cases against individuals before reaching a resolution with their employers.
    • Prosecution of Individuals Rather Than Employers: The government has shown it is willing to pursue individuals in their capacity as "domestic concerns" without pursuing associated entities, as illustrated by the 2013 actions against the Direct Access Partners executives (see Lujan, Clarke, Hurtado) and previous actions against former executives of Morgan Stanley (Peterson), Film Festival Management (Gerald and Patricia Green), and Pacific Consolidated Industries (Smith and Self), among others. The SEC remains similarly willing to charge rogue individuals. As stated in the SEC's press release regarding Peterson, "[t]his case illustrates the SEC's commitment to holding individuals accountable for FCPA violations, particularly employees who intentionally circumvent their company's internal controls." The SFO has indicated too that it will prosecute individuals without prosecuting the company itself in appropriate circumstances.
    • Prosecution of Non-U.S. Citizens: Recent actions have confirmed once again that enforcement agencies do not consider citizenship as a dispositive factor in deciding whether to prosecute. The Control Components prosecutions, for example, included indictments of foreign citizens acting abroad as agents of a domestic concern. Frederic Cilins, a French national, currently faces obstruction charges in connection with allegations that he sought to destroy documents and otherwise interfere with a U.S. grand jury probe of a company's activities to obtain mining rights in Guinea. (See, e.g., Cilins, Control Components).
    • Related Prosecutions of Foreign Government Officials: Though the FCPA does not apply to foreign officials who receive bribes, enforcement agencies have begun to use alternative avenues to prosecute government officials implicated in corrupt conduct. In May 2013, the DOJ arrested a Venezuelan government official and charged her with violations of the Travel Act based on allegations that she had facilitated unlawful activity under the FCPA and New York state laws against commercial bribery. (See Gonzales). In both the Terra Telecommunications and Gerald and Patricia Green cases, the government brought charges against government officials relating to money laundering or transportation of funds to promote unlawful activity. (See, e.g., Gerald and Patricia Green, Terra Telecommunications). Additionally, the DOJ's recently launched Kleptocracy Asset Recovery Initiative directly targets corrupt foreign officials for forfeiture actions. (See Kleptocracy Asset Recovery Initiative).
    • Possibility of Severe Prison Sentences: In October 2011 and May 2012, the DOJ obtained its most severe sentences for individuals' FCPA violations to date, the fifteen-year prison term imposed on Joel Esquenazi, nine year prison term imposed on Jean Rene Duperval, and seven year prison term imposed on Carlos Rodriguez as part of the Terra Telecommunications/Haiti Teleco action. These followed several years of increasingly harsh sentences for individual offenders and serve as perhaps the starkest reminder to employees and directors of the FCPA's severity. Indeed, in certain circumstances, judges have diverted from prosecutorial recommendations and imposed harsher sentences: despite a recommendation that former Armor Holdings executive Richard Bistrong be sentenced only to probation, home confinement and community services, for example, he was sentenced to an eighteen-month prison term, followed by three years of probation and community service. At the same time, however, judges have also shown a willingness to impose more lenient sentences than requested by the DOJ, including most recently with the cases of former executives of Morgan Stanley and Control Components in 2012. Former Morgan Stanley executive Garth Peterson was sentenced in August 2012 to a nine-month prison sentence, despite the fact that prosecutors had sought a minimum sentence of fifty-one months. Similarly, although the DOJ requested prison sentences of fourteen and fifteen months for former Control Components executive David Edmonds and Paul Cosgrove, respectively, the district court sentenced Edmonds to four months in prison followed by four months of home confinement and Cosgrove only to thirteen months of home detention. (See, e.g., Terra Telecommunications, Garth Peterson, Control Components, Bistrong).
    • Control Person Liability: The SEC charged individuals such as Noble CEO Mark Jackson and Nature's Sunshine Products, Inc. executives Douglas Faggioli and Craig D. Huff as control persons under Section 20(a) of the Exchange Act. Control person liability theory allows the SEC to charge individuals within a company with securities violations, even when evidence of direct knowledge or participation in the violative behavior may be lacking. The SEC's charging documents did not allege any direct involvement or participation of Faggioli or Huff in the underlying books-and-records and internal controls FCPA violations. The Jackson, Faggioli, and Huff prosecutions underscore the risks faced by executives who do not adequately supervise those responsible for compliance with the accounting provisions of the FCPA. (See, e.g., Noble, Nature's Sunshine).
  • Use of Related Statutes: U.S. authorities and other regulators continue to use complementary statutes (such as those governing export control or false statements) to bring corruption-related charges. The interconnectivity of the various statutes, and the relative ease by which multiple offenses can be established through similar and overlapping facts, is a reminder not to take a narrow view of anti-corruption compliance. In addition, U.S. authorities' use of other statutes to bring charges allows them to seek greater penalties and expands their ability to punish corrupt conduct, even when an FCPA violation might not be established.

    • Breadth of the False Statement Statute: The willingness of the DOJ to take a more expansive approach to anti-corruption enforcement is underscored by the use of the false statement statute, which generally can reach a wide range of conduct, from informal communications (such as the letters sent by BAES to the Department of Defense) to court, regulatory, or congressional testimony. Companies must be cognizant that they will potentially be held accountable for virtually any representation made to the U.S. government or a U.S. government official regarding anti-corruption compliance.
    • Export Control and Government Contracts Connection: Government contractors and companies subject to U.S. export controls may face heightened scrutiny and risks with regard to anti-corruption compliance. As the BAES case illustrates, such companies may be required to make representations to the government, which can themselves become the source of legal liability if those representations are inaccurate or incomplete with respect to anti-corruption elements. Such companies must be cognizant not only of anti-corruption rules, but also of the legal liability the companies face for making statements regarding their anticorruption efforts as part of regulatory schemes, such as the export control laws and federal acquisition regulations. As the DOJ's push to broaden anti-corruption enforcement continues, this intersection of different enforcement regimes will become even more important.
    • Money Laundering, Wire Fraud, and Related Financial Crimes: Prosecutors also remain committed to enforcing laws prohibiting other financial crimes, such as money laundering and wire fraud, that often intersect with FCPA enforcement actions. These statutes can also apply — unlike the FCPA — to foreign officials for their conduct related to the corrupt payment, as demonstrated by the March 2013 complaint against a Venezuelan government official. Antitrust laws may also be used by prosecutors or in civil actions where the improper conduct negatively affects competition, such as by bid-rigging. (See, e.g., Gonzales, BizJet, Green, O'Shea, Terra Telecommunications, Innospec, Military and Law Enforcement Products Sting, Bridgestone).
  • Use of Industry Sweeps: The SEC and DOJ have continued to use industry-wide sweeps in conducting their investigations, including the oil-services industry, the pharmaceutical and medical equipment industries, and the film industry. Given the successful prosecutions that have come from these sweeps, further sweeps should be expected. Recent prosecutions of multiple companies in the aircraft maintenance and alcohol industries, therefore, may be a harbinger of future enforcement actions. With the Chinese government's investigation of GSK, and public reports that other international pharmaceutical companies are similarly being scrutinized, it is possible that other international regulators may adopt a similar prosecutorial approach. Indeed, the SFO announced in October 2013 that it too would focus on "sectoral sweeps . . . , such as construction and public contracts, oil and gas." (See, e.g., Hollywood Sweep, Panalpina-Related Oil-Services Sweep, Beverage Industry Prosecutions, Stryker, Nordam, Orthofix, Eli Lilly, Pfizer).
  • Targeting Suspect Jurisdictions: The DOJ and SEC hold the position that conducting business in or through suspect jurisdictions may itself be a red flag, including with respect to both notoriously opaque banking jurisdictions like the British Virgin Islands and corruption-prone countries or regions.

    • Suspect Banking Jurisdictions: Companies are well advised to ensure that there is a legitimate reason to engage entities located in traditional "tax havens," as opposed to using them as a masking technique or for an illicit motive (such as inappropriate tax avoidance by the agent). In the BAES Information, for example, the DOJ took particular issue with BAES's conduct involving both the British Virgin Islands and Switzerland as jurisdictions notorious for discretion. Similarly, the SEC noted in particular that Eli Lilly's Russian subsidiary had made payments to third-party entities located in Cyprus and the British Virgin Islands. The Senate PSI Report also highlights the need for enhanced scrutiny when dealing with transactions involving accounts in notoriously opaque banking centers. (See, e.g., Eli Lilly, BAES, Senate PSI Report).
    • Jurisdictions Perceived to Have High Levels of Corruption: Additionally, enforcement agencies also target companies that conduct business in countries or regions in which they consider corruption to be common. The AB Volvo and Textron settlements both were based in part on the failure to conduct adequate due diligence and the need for enhanced compliance measures when conducting business in the Middle East. There was similar language in the 2006 Tyco settlement regarding South Korea, as well as in the Siemens charging documents regarding the developing world as a whole. The Second Circuit's Bourke decision directly stated that Bourke's knowledge that corruption was pervasive in Azerbaijan contributed to his constructive knowledge of improper payments. (See, e.g., Bourke, Volvo, Textron, Senate PSI Report).
  • Use of Traditional Law Enforcement Techniques: The common thinking has been that enforcement actions are most likely to arise from self-reporting companies or whistleblowers. While this may be true, the DOJ is also willing to rely on the assistance of the FBI and traditional law enforcement techniques to find and investigate violations of the FCPA. The unsealed court filings in the DOJ's case against former BizJet executive Peter DuBois, for example, revealed that he had worked in an "undercover capacity" in connection with the DOJ's investigation, surreptitiously recording conversations with former BizJet executives and subjects of other investigations. (See, e.g., BizJet).
  • Creative Methodologies for Uncovering Information: The Siemens settlement demonstrated regulatory approval (manifested by its consideration as part of the company's cooperation credit) of a groundbreaking amnesty and leniency program aimed at providing company counsel with timely, complete, and truthful information about possible violations of anti-corruption laws. Siemens instituted an amnesty program whereby employees were encouraged to voluntarily report corrupt practices without fear of termination or claims by the company for damages. The approval of such a program likely signals regulatory acceptance of the broader use of creative approaches to collect and process accurate and complete information from within a company and, in turn, respond appropriately to such information. Indeed, following its April 2013 confidential settlement agreement with the World Bank, SNC-Lavalin instituted a similar amnesty program to encourage employees to provide information on any potential corrupt practices within the company. The Dodd-Frank Act, passed by Congress on July 15, 2010, takes a more aggressive approach, mandating that the SEC pay whistleblowers who provide it with original information leading to enforcement actions over $1 million a reward of 10% to 30% of the total sanctions collected. The SFO has also instituted a whistleblower reporting service. (See, e.g., SNC-Lavalin, Siemens, Dodd-Frank Act, SFO Whistleblower Service).
  • SEC Signals New Efforts to Protect Compliance Officers: Recent statements and actions by the SEC demonstrate that the enforcement agency has adopted a broad strategy of seeking to protect and strengthen the position of compliance officers. On August 27, 2013, the SEC instituted administrative and cease-and-desist proceedings against Carl Johns, a portfolio manager for, among other things, violating Rule 38a-1 of the Investment Company Act that prohibits fund personnel from taking "any action to coerce, manipulate, mislead, or fraudulently influence the fund's chief compliance officer in the performance of his or her duties." Although there is no parallel rule under the Securities Exchange Act, SEC officials have indicated that this enforcement action reflects a broader protective approach that could be extended beyond the Investment Company Act. On October 22, 2013, SEC Chairman Mary Jo White cited the Johns case as part of the SEC's strategy to protect compliance officers and noted that the SEC would "be looking for more cases [like Johns] to drive that message home." Similarly, in an October 7, 2013 speech to the Society of Corporate Compliance and Ethics, Associate Director of Enforcement Stephen L. Cohen stated, in the context of discussing anti-corruption compliance developments (including the FCPA Resource Guide and Ralph Lauren NPA), that the Johns case "should send a clear message" that the SEC would "not tolerate interference" with chief compliance officers endeavoring to do their jobs.
  • Regulators May Force or Reward Management Changes: In certain circumstances, regulators may use enforcement actions as a tool to force a change in management where the regulators believe management is insufficiently attuned to corruption concerns. Regulators may also reward companies that change management in response to findings of misconduct or seek lesser penalties where management changed before the misconduct came to light. As noted in the Resource Guide, "[n]o executive should be above compliance, no employee below compliance, and no person within an organization deemed too valuable to be disciplined, if warranted. Rewarding good behavior and sanctioning bad behavior reinforces a culture of compliance and ethics throughout the organization." This view has been borne out in settlement language. In connection with the 2012 settlement action with Tyco, for example, the DOJ and SEC both praised the company for its substantial remediation efforts, which included among other things "the termination of over 90 employees, including supervisors, because of FCPA-compliance concerns." The DOJ also praised Siemens for its remedial efforts, including that it "replaced nearly all of its top leadership," as well as (See, e.g., Tyco, Technip, Siemens, Schnitzer).
  • Self-Reporting, Remedial Measures, and Cooperation: Through a variety of means, the DOJ and SEC have signaled that companies that self-report violations and cooperate extensively with their investigations may face less severe penalties. For example, despite allegations of wide-ranging improper conduct over a sustained period, including illicit payments to government officials in Kazakhstan, China, Mexico, Nigeria, and Indonesia between 2002 and 2007, the DOJ entered into an NPA with Paradigm in return for the company paying a relatively small fine of $1 million, implementing new enhanced internal controls, and retaining outside counsel for eighteen months to review its compliance with the NPA. In doing so, the DOJ emphasized as "significant mitigating factors" the fact that Paradigm "had conducted an investigation through outside counsel, voluntarily disclosed its findings to the Justice Department, cooperated fully with the Department and instituted extensive remedial compliance measures." Similarly, the recent NPAs with Nordam Group and Ralph Lauren included criminal penalties of only $2 million and $885,000, respectively — significantly less than the mean ($33.3 million) or median ($12.7 million) for corporate penalties in 2012 and 2013. At the same time, however, substantial cooperation and self-reporting efforts do not always result in such low penalties; despite self-reporting violations after a review of 454 entities in 50 separate countries and undertaking substantial remediation efforts, Tyco agreed to a criminal fine of $13.68 million in an NPA with the DOJ. Separately, Diebold agreed to pay over $48 million in fines, disgorgement and prejudgment interest following its voluntary disclosure. The SEC has also announced standards to evaluate cooperation by companies and individuals, including the use of DOJ-like DPAs (first used in the Tenaris settlement) and NPAs (first used in the Ralph Lauren settlement) with the attendant requirements of full cooperation, waiver of statute of limitations, and enhanced compliance measures. (See, e.g., Diebold, Ralph Lauren, Tyco, Nordam Group, BizJet, Smith & Nephew, Bridgestone, Rockwell, Tenaris, ABB, Innospec, Siemens, Faro, AGA, Westinghouse, Bristow, Paradigm, Textron, Dow, Baker Hughes).
  • Declinations: The DOJ and SEC have sought to assure companies that, where they have compliance programs in place and can demonstrate that they have conducted credible, good-faith internal reviews which uncover misconduct by low-level employees, enforcement agencies will increasingly prove willing to decline enforcement action. The Resource Guide notes that the DOJ had "declined several dozen cases [in the two previous years] against companies where potential FCPA violations were alleged." The Resource Guide goes on to provide six anonymized examples of instances where they have declined to prosecute corporate entities as a means of illustrating that such declinations exist, and the circumstances under which they may be provided. Notable recent declinations include (i) ERHC Energy (which received letters from the DOJ and SEC in April 2012 confirming that the enforcement agencies had closed actions related to the subpoenas ERHC Energy received in 2006 and 2007); (ii) Morgan Stanley (which, despite violations by the company's employee, the DOJ declined to prosecute in part because of the stated reason that "Morgan Stanley constructed and maintained a system of internal controls, which provided reasonable assurances that its employees were not bribing government officials") (see Garth Peterson); (iii) Schlumberger and Nabors Industries (both of which had been under investigation as part of the Panalpina-sweep but received confirmation in late 2012 from the DOJ (Schlumberger) or SEC (Nabors Industries) that the agency would not pursue an enforcement action) (see Panalpina Sweep); and (iv) Medtronic (which received confirmation from the DOJ and SEC in June 2013 that the investigations into the company — unlike with others in the medical device industry — "would be closing . . . without pursuing any enforcement action or charges against the Company") (see, e.g., Stryker, Orthofix, Biomet, Smith & Nephew).

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