FCPA Enforcement Keeps Hitting New Highs

2006 marked a banner year for enforcement actions and prosecutions under the Foreign Corrupt Practices Act—and experts say 2007 could be busier yet.

The number of enforcement actions under the FCPA—a statute that, among other things, makes it illegal to bribe foreign officials to obtain or keep business—skyrocketed last year, with the Justice Department and the Securities and Exchange Commission resolving actions against 11 individuals and four companies. There have been 48 corporate resolutions to FCPA charges brought by those two agencies in the law’s 30-year history.

Warin

“There’s been a steadying ramp up of FCPA enforcement action, and last year was a crescendo year,” says Joseph Warin, a partner at the law firm Gibson Dunn & Crutcher. He predicts that “this year will trump last year” in enforcement actions, and a recent spate of enforcement activity suggests as much. The SEC and DoJ announced three enforcement actions in February, involving El Paso Corp., Dow Chemical, and subsidiaries of Vetco International.

Deborah Gramiccioni, former assistant chief of the fraud section in the criminal division of the Justice Department and now vice president of Trace International, an anti-bribery nonprofit, agrees that the pace of FCPA actions is accelerating.

“Not only is the Department of Justice making these types of prosecutions a priority, but the FBI also recently announced that they are committed to devoting additional resources to these types of cases,” Gramiccioni says. “With the addition of resources, we very well may see an upswing.”

The additional resources also could translate into a rise in covert investigations that result in prosecution, rather than voluntary disclosures, she says. And Warin warns that the SEC “is farming out enforcement efforts ... to its regional offices more frequently, so they have added person power working on these matters.”

Low

What’s more, FCPA-related actions often can pack a one-two punch. In cases where the SEC and DoJ both have jurisdiction, the two “typically prosecute using different authorities,” says Lucinda Low, a partner at the law firm Steptoe & Johnson. SEC actions focus on the statute’s accounting provisions, while Justice Department actions focus on the anti-bribery aspects of the law.

In the early days of the FCPA, Low says, the focus was primarily on procurement activities overseas. In recent years, however, the FCPA has been applied “in a wide range of international business activities”—including charitable contributions, sponsorship of travel, gifts, and entertainment, tax payments, and customs enforcement, Low says.

Experts note that the FCPA actions in 2006 underscore a number of trends in enforcement officials’ thinking. Among them:

Bigger Penalties And Fines

Just as the number of enforcement actions grew in 2006, so too did the penalties and fines; multimillion dollar fines “are the rule today, not the exception,” Warin says. He also says there is “a substantial focus” on the amount of profits achieved by the alleged misconduct. “The SEC in particular is using that as a measure of disgorgement,” he says.

In October 2006, Schnitzer Steel Industries and its Korean subsidiary SSI International Far East Ltd. agreed to pay a combined total of $15.2 million to settle allegations of payments in China and South Korea. Schnitzer Steel entered into a deferred-prosecution agreement with the DoJ, under which it agreed to disgorge $6.27 million in profits on the sales to government-owned customers and to pay $1.45 million in prejudgment interest. The company also agreed to annual reviews by a compliance consultant for three years of its anti-corruption compliance program encompassing the FCPA, U.S. commercial bribery laws, and foreign anti-bribery laws. It also consented to an SEC cease-and-desist order.

Meanwhile, SSI pleaded guilty to violations of the FCPA’s anti-bribery provisions and the federal wire-fraud statute, conspiracy to violate those laws, and to aiding and abetting violations of the FCPA books and records requirements, paying a $7.5 million criminal penalty.

“I expect to see higher penalties across the board,” Low says. “If the government perceives that a company doesn’t have an effective compliance program, the likelihood they’ll be prosecuted and have significant penalties increases dramatically. We can see that in the Schnitzer Steel case.”

Voluntary Disclosure

All three experts who spoke with Compliance Week cite a current trend of voluntary disclosures. While that might seem to contradict the concurrent trend of higher fines, Gramiccioni says settlements often reflect rewards to companies for voluntary disclosures, which penalty figures cited in isolation don’t reveal. For example, she says, “Many companies get the benefit of a deferred-prosecution agreement, which is itself a big reward.” She notes that in rewarding companies for cooperation, under advisory sentencing guidelines, federal prosecutors “can’t agree to greatly reduced fine amounts.”

Low, however, says, “a pretty active debate” exists in the FCPA community as to whether the benefit companies get for voluntary disclosures is as clear and substantial as the government likes to suggest.

“While the trend right now is toward voluntary disclosures, there’s concern about the benefit received, especially when you look at the penalty levels,” she says. “So whether that trend will continue is, in my mind, an open question.”

Gramiccioni

Gramiccioni says companies “are taking this issue more seriously.” “They want robust internal controls and are voluntarily disclosing problematic conduct and working with [the] DoJ to rectify problems,” she says. If the trend of voluntary disclosures continues, she says, we’re likely to continue to see more deferred prosecutions.

BACKGROUND

An excerpt from the SEC’s litigation release regarding the settlement with Dow follows.

The Securities and Exchange Commission today filed a settled civil action in the United States District Court for the District of Columbia alleging that The Dow Chemical Company (Dow) violated the books and records and internal controls provisions of the Foreign Corrupt Practices Act (FCPA) [Sections 13(b)(2)(A) and 13(b)(2)(B) of the Securities Exchange Act of 1934 (Exchange Act)], in connection with an estimated $200,000 in improper payments made by a fifth-tier foreign subsidiary of Dow to Indian government officials from 1996 through 2001. Without admitting or denying the allegations in the Commission's complaint, Dow consented to pay a $325,000 civil penalty.

The complaint alleges that the Dow subsidiary, DE-Nocil Crop Protection Ltd. ("DE-Nocil"), headquartered in Mumbai, India, manufactured and marketed pesticides and other products primarily for use in the Indian agriculture industry. According to the complaint, beginning in 1996, DE-Nocil made approximately $39,700 in improper payments to an official in India's Central Insecticides Board to expedite the registration of three DE-Nocil products. Most of these payments were made through agreements with contractors which added fictitious charges on its bills, or issued false invoices, to DE-Nocil. The contractors then disbursed these extra funds, at DE-Nocil's direction, to the CIB official. The complaint also alleges that from 1996 and to 2001, DE-Nocil made $87,400 in improper payments to state officials in order to distribute and sell its products.

The complaint alleges that, in addition to these payments, DE-Nocil also made improper payments to Indian government officials consisting of an estimated $37,600 for gifts, travel, entertainment and other items; $19,000 to government business officials; $11,800 to sales tax officials; $3,700 to excise tax officials; and $1,500 to customs officials. In sum, over a six-year period, DE-Nocil distributed an estimated total of $200,000 in improper payments through federal and state channels. According to the complaint, none of these payments were accurately reflected in Dow's books and records, and Dow's system of internal accounting controls failed to prevent the payments.

In a related proceeding, the Commission today issued a settled cease-and-desist order against Dow finding that that Dow violated the books and records provisions and internal controls provisions of the Exchange Act in connection with the improper payments made by DE-Nocil. Without admitting or denying the Commission's findings, Dow consented to the entry of the order that requires Dow to cease and desist from violating those provisions.

Source

Litigation Release No. 20000 (Securities and Exchange Commission; Feb. 13, 2007)

Warin also believes companies and boardrooms get that message: “Since Sarbanes-Oxley, when a matter is reported, audit committees and boards generally are more inclined to push for voluntarily disclosure.”

Broader Views Of Enforcement

Another notable FCPA resolution also happened in October: the case of Statoil, a Norwegian oil and gas company whose stock trades on U.S. exchanges. In October 2006, the company paid a total of $21 million to settle charges related to bribe payments it made to an Iranian official to secure oil and gas rights in Iran. It marked the first time that the Justice Department took criminal enforcement action against a foreign issuer for violating the FCPA, sending a clear message that the United States will enforce the FCPA against foreign-owned companies.

“It’s clear our enforcement agencies are not just focusing on prosecuting U.S. companies, but also foreign companies active in U.S. capital markets where they’re engaged in practices that have connection to the U.S.,” says Low. “At the time, Statoil represented the high-water mark of penalties against a foreign issuer.”

The company paid a $10.5 million criminal penalty in a three-year deferred-prosecution agreement with the Justice Department and another $10.5 million in disgorgement in a related proceeding by the SEC. Statoil also had to hire a compliance consultant. Notably, Norwegian authorities had leveled a $3 million penalty against Statoil for the same conduct, which U.S. prosecutors credited in their settlement.

“That may be the first time that’s been done in an FCPA case,” Low says. “We may see more of that as there are more cases of multiple prosecutions in different jurisdictions.”

Low says regulators and enforcement agencies are “just beginning to grapple with the question of who goes first” when multiple countries, such as the home country, a host country, and the United States, all have jurisdiction.

Alternative Nationality Jurisdiction

For the first time, the Department of Justice in 2006 invoked the “alternative nationality jurisdiction” provision of the FCPA to prosecute a U.S. national based on wholly extraterritorial conduct, when it filed charges last March against Faheem Mousa Salam, a U.S. citizen, for his role in an alleged bribery scheme in Iraq.

Under alternative nationality jurisdiction, a U.S. national can be prosecuted for bribery under the FCPA based on the offender’s nationality alone—even if the conduct occurs abroad with no nexus to U.S. commerce.

“The law always had extraterritorial impact, but this takes it even further into the foreign arena, since there’s no longer a need for a connection to the U.S.,” Low says. She expects more prosecutions based on that legislative authority. “It means U.S. companies, citizens, and permanent residents carrying on activities anywhere in the world have the FCPA following them.”

Gramiccioni agrees. She expects that increased cooperation and mutual legal assistance from other countries in the future, as well as stronger diplomatic conventions for collecting evidence, will make it easier to prosecute such cases.

Buyer Beware In Acquisitions

Another telling case came in April 2006, when the SEC settled an investigation of Tyco International. In settling the probe, the SEC imposed a $50 million civil penalty and $1 disgorgement for a range of securities law violations, including violations of the FCPA in Tyco’s acquired operations in Brazil and South Korea.

“Clearly there’s a belief from the government’s perspective that when doing an acquisition, a corporation should scrutinize carefully the aquiree’s foreign operations and make sure work wasn’t achieved through payments of bribes,” Warin says.

A legal bulletin from Steptoe & Johnson noted that the SEC made a point of highlighting what it viewed as inadequate due diligence by Tyco in the acquisition of the Brazilian entity in 1998. “This statement makes clear the continued emphasis of U.S. enforcement officials upon addressing FCPA issues in corporate merger and acquisition transactions,” the bulletin said. The alert also noted that in the last two years, the DoJ and the SEC have taken enforcement action relating to FCPA issues in the acquisitions of Titan Corp., a business unit of ABB, and InVision Technologies.