In the fervor of conducting trade globally, U.S. companies may inadvertently expose themselves to risk by having inadequate policies, procedures, and monitoring controls to prevent and detect corrupt payments to foreign officials. Highly regarded companies such as Alcatel-Lucent and Chevron have paid dearly for such violations of the Foreign Corrupt Practices Act of 1977 (FCPA). Authors Jennifer Johnston and Jeffrey Garfield provide a brief overview of the act and discuss recent trends in its enforcement.
FCPA enforcement began heating up in 2004, and many companies have spent millions of dollars responding to regulatory inquiries. Inquiries generally involve extensive internal investigations that can result in large fines and requirements to perform ongoing compliance monitoring for an extended period. The financial costs and negative impact on reputation are severe, particularly for companies that don't selfreport violations or are repeat offenders. Executives and other employees have also suffered job losses and jail time. Savvy companies realize that these issues are not going away and are beginning to engage in self-reporting of potential violations.
The FCPA's Basic Provisions
The FCPA contains two primary sets of provisions. The anti-bribery provisions make it unlawful for an "issuer," "domestic concern," or foreign person to make, offer, or promise to pay anything of value to a foreign official, foreign political party, or any candidate for foreign political office with the intent of obtaining or retaining business.
"Issuers" are corporations that have issued securities that have been registered within the United States or are required to file periodic reports with the Securities and Exchange Commission (SEC). A "domestic concern" is any individual who is a citizen, national, or resident of the United States or a business whose principal place of business is the United States or that is legally organized under U.S. law. Foreign persons and foreign companies are also subject to the FCPA if they cause corrupt payments to take place within the United States.
2007 Record-setting Year for FCPA Enforcement
The DOJ and the SEC filed more FCPA enforcement actions in 2007 than at any time in the 31-year history of the statute.
At the 2007 annual meeting of the Society of Corporate Compliance and Ethics in September, both top FCPA enforcement officials – Mark Mendelsohn, the DOJ deputy chief of fraud, and Frederic Firestone, associate director of the SEC's Enforcement Division – told the audience that they intend to continue the aggressive pursuit of overseas bribery.
The anti-bribery provisions specifically prohibit corrupt payments through intermediaries. Thus, it is unlawful to make a payment to a third party while knowing that all or a portion of that payment will go directly or indirectly to a foreign official. "Knowing" includes conscious disregard and deliberate ignorance.
Under the FCPA's accounting provisions, issuers are required to record and maintain books and records that accurately reflect the transactions of the corporation, as well as devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that, among other things:
- Transactions are executed in accordance with management's general or specific authorization; and
- Transactions are recorded as necessary (a) to permit preparation of financial statements in conformity with generally accepted accounting principles or any other criteria applicable to such statements, and (b) to maintain accountability for assets.
The Department of Justice (DOJ) is responsible for civil and criminal enforcement of the anti-bribery provisions with respect to domestic concerns and foreign companies and nationals. The SEC is responsible for civil enforcement of the anti-bribery and accounting provisions against issuers.
Many FCPA violations do not derive from complex business transactions. They may be triggered by adhering to what some cultures consider the norm, offering bribes to foreign public officials. These transactions may not even be deemed inherently wrong or unlawful by local country representatives. But U.S. companies are responsible for all activities that benefit their businesses and ensuring compliance with the FCPA for their worldwide operations.
Generally, the concept of materiality is irrelevant to determining FCPA compliance. The DOJ has prosecuted cases that involved only $5,000, and relatively minor infractions have resulted in stiff fines and penalties. For example:
- Monsanto Co. was cited for a $50,000 payment made by an outside consultant of Monsanto's Indonesian subsidiary to a government official at the direction of a U.S.-based senior Monsanto manager. The SEC and the DOJ found this payment was made to influence the Indonesian government to amend or repeal legislation that would have been disadvantageous to Monsanto. Monsanto agreed to pay $1 million in related penalties.
- Schering-Plough was cited for a $76,000 contribution to a legitimate charitable organization by its Polish subsidiary. The founder and president of the charitable organization was one of 16 government health authorities in Poland. The SEC and the DOJ found this payment was made to promote the purchase of Schering-Plough's pharmaceutical products. Schering-Plough agreed to pay a $500,000 penalty.
Several trends have emerged from recent FCPA enforcement activities.
The DOJ and the SEC Reward Self-reporting
With violations of the FCPA's accounting provision potentially resulting in up to 20 years of imprisonment, many companies have chosen to self-report such issues. From 2005 through 2007, 44 of the 68 reported investigations followed voluntary disclosures to the SEC or the DOJ after internal investigations initiated by the companies. Alice Fisher, assistant attorney general in the DOJ Criminal Division, has clearly indicated that companies that decide to self-report violations are rewarded with "real, tangible benefit."1
For example, in a February 2008 FCPA settlement with Wabtec Corp., the DOJ agreed not to prosecute Wabtec or its subsidiary, Pioneer Friction Ltd. The DOJ noted that Wabtec had conducted an investigation through outside counsel, voluntarily disclosed its findings to the department, cooperated fully, and instituted remedial compliance measures.
The Accounting Provisions Matter
Because of the challenges in proving anti-bribery violations, regulators sometimes ignore the bribery allegations and focus on the inappropriate recording of such transactions in an issuer's books and records. At a recent FCPA conference, Mark Mendelsohn, the DOJ deputy chief of fraud, and Frederic Firestone, associate director of the SEC's Enforcement Division, essentially delivered this message: If the [DOJ] doesn't get you, the SEC will for not keeping accurate books and records. Even kickbacks to private companies can be illegal if they are characterized as consulting fees.2
For example, the SEC cited York International for referring to corrupt payments as "consultancy payments" and "after-sales service fees" in its accounting books and records.3 The company settled with the SEC and the DOJ in October 2007 for combined fines and penalties of approximately $22 million.
The DOJ and the SEC Target Individuals
Prosecutions against individuals grew from 10 in 2006 to 16 in 2007 and are expected to increase. Mendelsohn recently commented that enforcement against individuals is "part of a very concerted effort" intended to "deter the conduct" of individuals.4 Additionally, SEC Associate Director Cheryl J. Scarboro said the SEC will "continue to focus on individuals."5 Donald W. Freese, the head of the Federal Bureau of Investigation's new FCPA unit, said that the only way to deter FCPA conduct is to put people in jail.6
Prosecutions against individuals do not involve only those people directly involved in transmitting or authorizing inappropriate payments; they might also involve executives who fail to establish internal controls to prevent the conduct. Top executives prosecuted for FCPA violations during 2007 include:
- Monty Fu, founder and chairman of Syncor International, paid a $75,000 penalty to the SEC for books-andrecords and internal-controls FCPA violations based on illegal payments made by Syncor's Taiwanese subsidiary to doctors employed by government-owned hospitals.
- Robert Philip, former chairman and CEO of Schnitzer Steel Industries, paid more than $250,000 for FCPA violations involving his approval of cash payments to governmentowned steel mills in China.
Disgorgement of Profits Makes Penalties Stiffer
In 2004, the SEC for the first time required a company to disgorge the profits and losses associated with unlawful FCPA activities. This appears to have become routine SEC practice in determining penalties and fines resulting from FCPA violations. In April 2007, of the $44 million in penalties that Baker Hughes agreed to pay as part of its settlement with the SEC and the DOJ, $23 million represented disgorgement of profits and prejudgment interest.7 In November 2007, Chevron settled with the SEC on FCPA violations under the United Nations Oil-for-Food program by paying a $25 million disgorgement of profits and a $3 million civil penalty.8
International Charges Pose an Additional Threat
In addition to facing concurrent allegations by the DOJ and the SEC, U.S. companies may also face charges within foreign jurisdictions that have adopted anti-bribery provisions. Charges could be filed under the European Union's Convention on the Protection of European Communities' Interests; the Organisation for Economic Co-operation and Development's Convention on Combating Bribery of Foreign Officials in International Business Transactions; and policies by The World Bank and the International Monetary Fund allowing them to investigate corrupt payments.
Regulators Investigate Industrywide and Worldwide Operations
U.S. regulators have broadened their probe of companies operating within certain industries. For example, in 2007, the DOJ and the SEC investigated orthopedic implant manufacturers Medtronic, Smith & Nephew, Stryker, and Zimmer Holdings. And the United Nations commissioned the U.N. Independent Inquiry Committee (IIC) to investigate alleged kickbacks paid to Iraqi government officials by companies supplying humanitarian goods to Iraq under the Oil-for-Food program. The IIC named 2,253 companies worldwide as having made more than $1.8 billion in corrupt payments. More than two dozen companies have disclosed that they are under investigation for alleged FCPA violations related to the Oil-for- Food Program.
The year 2007 also saw companies expand their internal investigations to other countries in anticipation of regulators scrutinizing the thoroughness of the review. Recent examples of multinational investigations of alleged FCPA violations include:
- Textron: charged with making $700,000 in improper payments to obtain or retain business in Bangladesh, Egypt, India, Indonesia, Iraq, and the United Arab Emirates.
- Paradigm BV: charged with providing foreign officials with hundreds of thousands of dollars in cash and improper travel and entertainment benefits to obtain or retain business in China, Indonesia, Kazakhstan, Mexico, and Nigeria.
FCPA Successor Liability Concerns Are Driving Acquirers' Due Diligence
In recent years, successor liability for FCPA violations that might have occurred under someone else's watch has become an issue for companies considering and entering into mergers and making acquisitions. A purchasing company can be subject to fines and penalties due to both a failure to properly detect inappropriate transactions under the FCPA and incorrect books and records maintained by the acquired company.
To pre-empt the issue, more companies are now requesting an opinion letter from the DOJ prior to closing an acquisition when potential FCPA violations are identified during pre-acquisition due diligence. An opinion letter can provide the purchasing company insight into how the DOJ views the identified transactions.
Business leaders can mitigate financial and reputational risks by gaining a better understanding of FCPA basics and enforcement trends. Such an understanding allows companies to identify their FCPA exposure and respond appropriately to minimize losses.
1. "Prepared Remarks of Alice S. Fisher, assistant attorney general, United States Department of Justice, at the American Bar Association National Institute on the Foreign Corrupt Practices Act," Oct. 16, 2006 (www.justice.gov/criminal/fraud/docs/reports/speech/2006/10-16-06AAGFCPASpeech.pdf )
2. "Justice and SEC bang anti-corruption drum," Sept. 17, 2007 (www.financialweek.com/apps/pbcs.dll/article?AID=/20070917/REG/70913010 ).
3. "SEC Files Settled Foreign Corrupt Practices Act Charges Against York International Corporation for Improper Payments to UAE Officials, to Iraq Under the U.N. Oil for Food Program, and to Others," Oct. 1, 2007 (www.sec.gov/litigation/litreleases/2007/lr20319.htm ).
4. "2007 Year End FCPA Update" Gibson, Dunn & Crutcher LLP, Jan. 4, 2008.
6. "FCPA Trend: Seeking Deterrence, the Government Targets Individuals," Jan. 30, 2008 (www.omm.com/newsroom/publication.aspx?pub=584 ).
7. "Baker Hughes Subsidiary Pleads Guilty to Three Felony Charges in Criminal Action Filed by Department of Justice; Criminal Fines, Civil Penalties and Disgorgement of Illicit Profits Total More Than $44 Million," April 26, 2007, www.sec.gov/litigation/litreleases/2007/lr20094.htm .
8. "SEC Files Settled Books and Records and Internal Controls Charges Against Chevron Corporation For Improper Payments to Iraq Under the U.N. Oil for Food Program — Company Agrees to Pay a Total of $30 Million," Nov. 14, 2007, www.sec.gov/litigation/litreleases/2007/lr20363.htm .
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