United States: FCPA & Anti-Bribery Alert Fall 2016 (October 2016)

CHAPTER 1: TRENDS & LESSONS

The combination of resolved actions, ongoing criminal and regulatory investigations, guidance issued by regulatory authorities, 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

  • Large Corporate Penalties Remain in Play: Despite the stated focus on individual liability, more than a decade into the modern era of anti-corruption enforcement, it remains clear that enforcement agencies continue to seek and will not hesitate to impose substantial corporate penalties that can pose enterprise risk for certain organizations. This is evidenced by several nine-figure settlements (excluding costs associated with investigations and post-resolution requirements, such as monitorships), such as the January 2016 settlement between U.S. and Dutch authorities and VimpelCom, for a combined $795 million (see p.91).
  • Renewed Focus on Holding Individuals Accountable: Even as corporate penalties remain a significant factor, the United States has made it an explicit priority to target and prosecute individuals for FCPA and related violations. Between January 2015 and August 2016, approximately 25 individuals were prosecuted by U.S. authorities in connection with FCPA settlements and FCPA violations, sometimes on related charges such as money laundering. The September 2015 Yates Memorandum (see p.11) announced that the DOJ would emphasize the importance of prosecuting individuals for corporate wrongdoing.

    Additionally, under the DOJ's new FCPA Pilot Program (see p.13) and in recent settlements, the DOJ has demonstrated that it will assess remedial actions that companies have taken against individuals when determining whether a company is eligible to receive remediation credit. For example, in explaining why LATAM (see p.70) paid a criminal penalty within the U.S. Sentencing Guidelines' recommended penalty range (rather than receiving credit for a penalty below the guidelines), the DOJ noted that LATAM failed to discipline the employees involved.

    Other countries also appear focused on prosecuting individuals for corruption related violations. For instance, in July 2016, the Serious Fraud Office charged seven former and current employees of F.H. Bertling Ltd. (see p.479) on charges that the individuals bribed foreign government officials in Angola. And as discussed further in our Focus Issues below, Brazil and China have both continued to aggressively pursue individuals. In Brazil, enforcement efforts associated with Operation Car Wash have resulted in over 226 official proceedings against individuals (see p.17). In China, Operation Fox Hunt—a campaign to capture the high-level "tigers" and low-level "flies" who have accepted bribes—and Operation Sky Net have produced dramatic results: between 2014 and January 2016, over 300,000 Party members – including several senior members – were disciplined for corruption related offenses (see p.26).

  • Increasing Enforcement Agency Resources and Cooperation: The dynamics and pace of international corruption enforcement is changing. American enforcement agencies now have greater resources than ever before, and these increased resources are also being leveraged more than ever by the increasing levels of cooperation with (and among) other national enforcement agencies as well as with multilateral development banks.
    • U.S. Adding Resources to Investigate Corruption: Both the DOJ and FBI have announced increases in manpower to their FCPA enforcement groups, highlighting the attention to and prioritization of FCPA enforcement by these agencies. In early 2016, the DOJ announced that it was adding 10 prosecutors to the FCPA unit of the Fraud Section, a more than 50% increase in the staffing for the unit. According to the DOJ, "[t]he Department's demonstrated commitment to devoting additional resources to FCPA investigations and prosecutions should send a message to wrongdoers that FCPA violations that might have gone uncovered in the past are now more likely to come to light."

      Additionally, in March 2015, the FBI created three new squads of special agents committed to investigating and prosecuting conduct related to international bribery. These squads are based in New York City, Los Angeles, and Washington, D.C., and consist of agents, analysts, and other professional staff who have significant experience with white collar crimes, particularly foreign bribery cases. They will focus both on investigating the "supply side" of international corruption—the companies which offer and pay bribes—and the "demand side"—the foreign officials soliciting bribes and sometimes using the U.S. banking system to launder or hide the bribes they receive. The squads coordinate with the DOJ and SEC, as well as with international law enforcement agencies.

    • International Coordination: As much as ever, international regulators are cooperating in their anti-corruption enforcement efforts. The DOJ and SEC continue to rely upon and provide assistance to a growing number of non-U.S. enforcement agencies in complex bribery investigations. In November 2015, the SEC and U.K. Serious Fraud Office each announced settlements with ICBC Standard Bank (see p.113). Just a couple of months later, the DOJ, SEC, and the Public Prosecution Service of the Netherlands reached a global settlement with VimpelCom. Such cooperative efforts have been extending beyond the traditional U.S.-U.K. channel. In its September 2015 press release announcing the enforcement action against Hitachi (see p.107), for example, the SEC stated that it had received support not only from the DOJ and FBI, but also the South African Financial Services Board and, for the first time ever, the African Development Bank's Integrity and Anti-Corruption Department. In connection with Operation Car Wash in Brazil, reports are that Brazilian authorities are cooperating not only with U.S. and U.K. authorities, but also those in Switzerland, Monaco, Portugal, and elsewhere.
    • Further Validation for MDBs: It is no secret that the World Bank and other multilateral development banks have taken an aggressive approach toward investigating and sanctioning companies for fraud, corruption, and collusion on bank-financed projects (see p.498). However, recent actions by U.S. regulators have validated the role these banks play in global anti-corruption enforcement. In particular, as mentioned, the African Development Bank ("AfDB") is now actively coordinating with the SEC and DOJ where appropriate, an effort that led to an action against Hitachi by the SEC in addition to the settlement agreed between Hitachi and the AfDB. Similarly, the DOJ declined to impose a monitor for Alstom so long as Alstom's compliance efforts were accepted by the World Bank, which had imposed its own compliance monitor as part of an earlier, separate settlement.
  • Emphasis on Self-Reporting: For several years, the DOJ and SEC have sought to encourage companies to self-report violations, and both agencies have taken concrete actions to incentivize such reporting. In November 2015, the SEC announced a policy change, requiring companies to self-report violations in order for the Enforcement Division to recommend resolution through an NPA or DPA. In April 2016, the DOJ announced its FCPA Pilot Program, in which the DOJ will consider a declination for FCPA violations if a company voluntarily self reports the violation and meets certain other conditions (namely, remediation of the misconduct, cooperation with the DOJ's investigation, and disgorgement of profits earned as a result of the misconduct).

    The DOJ and SEC have begun acting in accordance with these guidance changes. Since April 2016, the DOJ has issued declination letters to three companies through the Pilot Program, two of which (Akamai (p.57) and Nortek (p.77)) also reached Non-Prosecution Agreements with the SEC.

  • Emphasis on Cooperation: The DOJ and SEC have long signaled that extensive cooperation with their investigations may yield less severe penalties. Since 2015, the DOJ and SEC have been attempting to better define what cooperation is expected and what credit will be afforded. In September 2015, in connection with the Yates Memorandum, the DOJ made clear that to receive cooperation credit, a company must disclose all relevant facts about individual misconduct.

    The DOJ provided more detail regarding cooperation and credit in the FCPA Pilot Program. The DOJ stated that to receive full cooperation credit, a company must disclose all facts relevant to the investigation, including the involvement of the company's officers, employees, or agents. In addition, a company must preserve and collect relevant documents and information and provide timely updates on its internal investigation. The DOJ also set guidelines for the credit that a company can earn for cooperation: for companies who cooperate but do not voluntarily disclose the violation, credit will be capped at a 25% reduction off the bottom of the U.S. Sentencing Guidelines penalty range.

    The importance of full cooperation is illustrated by the June 2016 action against Analogic Corporation and its subsidiary, BK Medical (see p.59). Although BK Medical voluntarily disclosed the violation and took extensive remediation measures, it did not receive full credit for cooperation because it failed to disclose all relevant facts about its internal investigation, particularly the number and identities of end-users who received bribes. As a result, although otherwise eligible for a 50% reduction or declination under the DOJ Pilot Program, BK Medical only received a 30% reduction off the bottom of the Sentencing Guidelines fine range for its self-disclosure, remediation, and cooperation.

  • Credit for Management Changes: Regulators may use enforcement actions as carrots or sticks, either to force changes in management where the regulators believe management is insufficiently attuned to corruption concerns, or to reward companies that change management in response to findings of misconduct. The Resource Guide notes that "[n]o executive should be above compliance . . . and no person within an organization deemed too valuable to be disciplined, if warranted." Furthermore, the DOJ has stated that "for a company to receive full cooperation credit following a self-report, it must root out the misconduct and identify the individuals responsible, even if they are senior executives."

    This view has been borne out in settlement language. For example, in the 2016 settlement and declination with Nortek, authorities noted that Nortek had terminated five involved persons, including the offending subsidiary's managing director and CFO. In the 2016 settlement and declination with Johnson Controls, the DOJ noted that Johnson Controls had terminated 16 employees and closed the offending subsidiary (see p.65).

  • Role of Media Leaks and Data Hacks in Initiation of Investigations: Cyber-security is an everincreasing focus of corporations, as domestic and foreign hackers are developing more sophisticated means of stealing company data. In addition, in the digital age, more information is available to employees at the touch of a button than ever before, increasing the risk of leaks and hacks. Leaks and hacks can significantly impact or prompt potential government investigations. In early 2016, a leak of emails from oil services company Unaoil resulted in a series of stories in Australian and American news outlets, prompting intense media scrutiny and an SFO investigation into Unaoil's business practices. Subsequently, Unaoil clients such as KBR and Core Laboratories disclosed that they had received questions from the DOJ related to its investigation into whether certain services provided by Unaoil may have violated the FCPA, and that they were cooperating with the DOJ. Petrofac, a U.K. oil services company that engaged Unaoil primarily in Kazakhstan from 2002-2009, hired external audit and law firms to conduct an independent investigation and announced that it "did not find evidence confirming the payment of bribes."

    Similarly, a cyber-security breach at the law firm of Mossack Fonseca made public millions of documents (the so-called "Panama Papers" discussed at p.51) regarding offshore accounts and beneficial ownership of the firm's clients, information that law enforcement agencies around the world are drawing on to investigate possible corruption, tax, and money laundering offenses. In the era of Wikileaks and expert hackers, not to mention significant incentives for would-be whistleblowers, it is becoming increasingly difficult for companies to maintain secrecy over their sensitive data.

Trends in the Interpretation and Application of the FCPA:

  • Expansive Assertion of Anti-Corruption Jurisdiction: For years, U.S. regulators have taken, and continue to take, an expansive jurisdictional view as to the applicability of the FCPA. For example, in the 2016 VimpleCom settlement, the DOJ cited the use of U.S.- based email accounts and the use of U.S.-based correspondent bank accounts as jurisdictional bases for VimpleCom and its subsidiary, Unitel. When combined with increased enforcement activities by other countries and international bodies (such as the World Bank Group and the African Development Bank Group), companies face a multitude of possible enforcement bodies devoting more attention to investigating and sanctioning corruption, and the number of places in the world where companies can operate without fear of prosecution is shrinking.
  • 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 SEC's August 2016 Key Energy settlement (see p.68), the SEC stated that the parent company ignored red flags when it failed to ask why its Mexican subsidiary wanted to donate 26 times more gifts to the Pemex Christmas party raffle than the year before, and when the local country manager explained that the increase was due to an increase in business that year.
  • Direct Parent Company Involvement Not Required: The DOJ and SEC continue to hold parent companies liable for books and records or internal controls violations committed without their knowledge by their non-U.S. subsidiaries when the subsidiaries' misrepresented financials are consolidated into the parent corporations' books and records. In connection with the 2016 settlement between the SEC and Johnson Controls, for example, the SEC alleged that Johnson Controls was liable for the actions of its Chinese subsidiary even though Johnson Controls was not accused of having any prior knowledge of the illicit behavior. The U.K. SFO has taken a similar position in moving against Mabey Engineering under the Proceeds of Crime Act for actions of its subsidiary Mabey & Johnson (see p.495). As a result, companies must ensure that their anticorruption compliance policies and procedures are implemented throughout the corporate structure and extended to subsidiaries, including those gained through acquisition.
  • Use of Money Laundering, Wire Fraud, and Related Financial Crime Statutes: Prosecutors remain committed to enforcing laws prohibiting other financial crimes, such as money laundering and wire fraud, that often intersect with FCPA enforcement actions. Unlike the FCPA, these statutes can apply to foreign officials or private parties for soliciting or accepting corrupt payments, as demonstrated by the prosecutions of Vadim Mikerin (the former President of a U.S.-based subsidiary of Russia's State Atomic Energy Corporation) and three former PDVSA officials (Ramos, Gravina, & Maldonado), all of whom pleaded guilty to money laundering-related charges (see p.124).
  • Broad Reading of "Anything of Value": The FCPA prohibits far more than mere cash payments and can be violated by the provision of such diverse benefits as entertainment, scholarships, vehicles, shoes, or stock and profits sharing. Travel expenditures, even when there is some link to legitimate business and promotional activities, remain a frequent source of charged impropriety when excessive or not mostly related to the business purpose.
    • Scrutiny of Jobs & Internships: Benefits to relatives of the foreign official may also run afoul of the law, as demonstrated by the DOJ and SEC's settlements with BNY Mellon and Qualcomm regarding in part, the hiring of relatives of Chinese government officials. 
    • Spotlight on Gifts & Hospitality: Regulators' increasing focus on gifts & hospitality is illustrated by the fact that so many U.S. enforcement actions since the beginning of 2015 have included the improper provision of gifts, hospitality, and/or travel, including Akamai, BHP Billiton, Bristol-Myers Squibb, FLIR, Key Energy, LATAM & Plaza, Nortek, Olympus, the PDVSA individual prosecutions (Rincon & Shiera et al.), PTC & Yu Kai Yuan, Qualcomm, SciClone, and Las Vegas Sands.
  • Compliance Monitors and Consultants: The imposition of compliance monitors or consultants as part of settlements continues to be a key element of negotiations. 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. In April 2016, with the announcement of the FCPA Pilot Program, the DOJ publicly expressed its willingness to forego a compliance monitor under appropriate circumstances. In particular, the FCPA Pilot Program memorandum indicates that if a company has established a risk-based compliance program with an independent and appropriately staffed compliance team, the DOJ will consider foregoing the imposition of a monitor, assuming other criteria of the Pilot Program are also met (including cooperation). (For more on the Pilot Program, see p.13)
  • Focus on Conduct in China: Enforcement actions involving conduct in China are as prevalent in U.S. enforcement activity in 2015 and 2016 as ever before. Nine of the 23 settlements (40%) announced from January 2015 through publication in August 2016 involved improper conduct in China: Akamai, Bristol-Myers Squibb, Johnson Controls, Las Vegas Sands, Mead Johnson, Nortek, Qualcomm, SciClone Pharmaceuticals, and Yu Kai Yuan (PTC).
  • Focus on the Financial Services Industry: While the energy, pharmaceutical, and defence industries have long been targets of increased attention with respect to FCPA enforcement, activities within the financial services industry appear to be under additional scrutiny. This appears consistent with general enhanced regulatory focus on the industry since the 2008 financial crisis. In 2011, the SEC notified a number of banks and private equity funds that it was investigating whether they may have violated the FCPA in relation to their dealing with sovereign wealth funds. Then, in 2013, the Sons and Daughters hiring-related investigations brought new FCPA scrutiny to banks, leading to the 2015 BNY Mellon settlement (see p.97). Also in 2015, five former Direct Access Partners executives were sentenced to prison terms of 1-4 years for their roles in paying bribes to secure bond trading business (see p.166), and in 2016, ICBC Standard Bank settled with the SFO and SEC in relation to bribes paid in connection with a $600 million sovereign debt security private placement. As of August 2016, JP Morgan Chase was reportedly close to resolving its own "Sons and Daughters" investigation, and, hedge fund Och-Ziff Capital Management Group LLP announced an FCPA settlement reserve of $414 million, with press reports that the DOJ may seek a guilty plea in relation to conduct in Libya.

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