FCPA Enforcements Roll Onward

The last few months have been relatively quiet in Foreign Corrupt Practices Act enforcement, but don’t be fooled. All signs point to another banner year for the U.S. crackdown on foreign bribery and corruption.

Enforcement of the statute, which bars domestic companies from bribing foreign officials, reached record highs during each of the last two years. Observers expect that trend to continue in 2008. “I don’t see any reason whatsoever the trend would change,” says David Pitofsky, a partner in the law firm Goodwin Procter.

Cassin

Richard Cassin, founder of Cassin Law, agrees. “2008 should be a record year for enforcement, based on the number of known investigations that are pending,” he says. Cassin does perceive “a bit of a moratorium right now” on deferred prosecution agreements that may involve monitors. But “when that dam breaks, I think there will be a lot of enforcement actions,” he says.

Indeed, remarks by Justice Department officials suggest this year will be as busy—if not busier—than last. “We definitely have more [FCPA] cases in the pipeline than ever before,” William Jacobson, assistant chief in the fraud section of the DOJ’s criminal division, tells Compliance Week.

Jacobson stresses that the Justice Department brings cases “when they’re ready to be brought” and isn’t driven by numbers. But, he adds, “Because there are so many cases in the pipeline and there are more resources to work those cases, I’d expect to be in about the same ballpark in terms of actions brought in 2008.”

The Justice Department brought 16 enforcement actions against 18 defendants last year. The Securities and Exchange Commission filed 20 of its own actions as well, according to data tracked by Gibson Dunn & Crutcher. At the start of this year, the firm identified roughly 100 companies that are the subject of open FCPA investigations.

Jacobson says most of those cases are not the result of voluntary disclosures—which may surprise some corporate counsels. “We determined that only about a third of the cases we opened in 2007 came in from voluntary disclosures,” he says. The rest came to prosecutors’ attention “in a variety of ways,” including whistleblowers from both inside and outside of companies, he says.

“We’re also seeing more cases lead to other cases,” Jacobson adds. “If we bring a case in a particular industry in a particular country, we try to determine if other companies in that industry in that country are doing the same thing. We’re following those sorts of leads.”

More OFF Cases Expected

One area where companies can expect to see more settlements this year is the United Nations Oil-for-Food (OFF) program. So far, the Justice Department has levied more than $24 million in penalties against suppliers of humanitarian goods under the OFF program.

The OFF cases are atypical, because they involved payments to Iraqi government itself rather than a bribe to any individual Iraqi official. Rather than bribery charges, the cases include charges of wire fraud and violations of the books and records provisions of the FCPA. Jacobson says more Oil-for-Food cases are in the pipeline. “I’m hoping we can close out that docket in 2008,” he says.

The two most recent enforcement actions concerning the U.N. Oil-for-Food Program were against AB Volvo and Flowserve Corp. In late March, Volvo agreed to pay a $7 million penalty as part of a three-year deferred prosecution agreement to settle charges brought against its subsidiaries Renault Trucks and Volvo Construction Equipment AB. The cases involved separate conspiracies to commit wire fraud and to violate the books and records provisions of the FCPA.

According to the Justice Department, employees and agents of Renault Trucks paid a total of roughly $5 million in kickbacks to the Iraqi government for a total of $96 million worth of contracts with various Iraqi ministries. VCE’s predecessor, Volvo Construction Equipment International, and its distributors were awarded some $13.8 million worth of contracts in return for approximately $1.3 million in kickbacks.

PAID UP

Flowserve and AB Volvo recently reached settlements with the SEC regarding Food-for-Oil, or OFF, violations. See more details from company press releases below.

Flowserve Corp. announced today that it has reached final resolution with the U.S. Securities and Exchange Commission and the Department of Justice with regard to their investigations of the participation of a French and a Dutch subsidiary of the Company in sales to Iraq under the U.N. “Oil-for-Food” program during 2001-2003.

The company confirmed that, under the terms of the applicable settlement agreements, Flowserve will pay a fine, profit disgorgement and related prejudgment interest to the SEC totaling $6,574,225 and a penalty to the DOJ of $4,000,000.

Flowserve noted that these amounts were in line with the announced accruals for this purpose already disclosed in connection with its issued third-quarter 2007 financial statements.

“There is no higher priority at Flowserve than legal compliance, and we fully cooperated with the SEC and DOJ in their investigations of this matter,” said Lewis M. Kling, President and CEO of Flowserve. “We are pleased to now be able to put this matter behind us because it will allow us to focus even more intently on the very attractive business opportunities currently available to Flowserve around the globe. ”

Source

Flowserve (Feb. 21, 2008).

AB Volvo today entered into a consent agreement with the U.S. Securities and Exchange Commission (SEC) and a deferred prosecution agreement with the U.S. Department of Justice (DOJ) resolving issues related to the activities of two of its subsidiaries in Iraq under the Oil-for-Food Program.

The settlements include $19.6 million in fines, disgorgement of past profits on the contracts under the Oil-for-Food Program, and interest. The effect of the financial settlements on the operating income for the first quarter is approximately USD 10 million. The agreements with the DOJ and SEC also provide for improved internal compliance programs that AB Volvo and its subsidiaries will implement.

“The incident is, of course, regrettable, but we do note with some satisfaction that the authorities spoke favorably of the cooperation by Volvo as well as Volvo’s own investigation and measures,” says Volvo CEO Leif Johansson. “It is important that we all now learn from what occurred.”

Source

AB Volvo (March 20, 2008).

Volvo also reached a settlement with the SEC, where it agreed to pay a $4 million civil penalty and $8.6 million in disgorgement of profits, including prejudgment interest.

In February, Flowserve Corp. entered into a three-year deferred prosecution agreement and agreed to pay a $4 million penalty for kickbacks paid to the Iraqi government by employees and agents of its subsidiary, Flowserve Pompes SAS, to obtain contracts with Iraqi ministries for the sale of water pumps and spare parts for use in Iraqi oil refineries. According to the Justice Department, employees of Flowserve Pompes paid a total of nearly $605,000 and offered to pay an additional $174,000 in kickbacks to the Iraqi government.

Flowserve also agreed to pay a $3 million civil penalty and approximately $3.5 million in disgorgement in a settlement with the SEC.

As part of their agreements, both companies acknowledged responsibility for the actions of their subsidiaries and agreed to cooperate fully with the DoJ’s ongoing Oil-for-Food investigations.

Hochberg

Joshua Hochberg, a partner at the law firm McKenna Long & Aldridge, says the two enforcement actions demonstrate the Justice Department’s increasing willingness to reach across foreign borders to enforce the FCPA. The cases also clearly show “the need for increased vigilance by companies of the types of wrongdoing DoJ is investigating,” he says.

While the OFF cases can be prosecuted as wire fraud, Hochberg says it’s notable that prosecutors included violations of the books and records provisions in the criminal complaints. Typically, books and records violations are civil matters under the purview of the SEC.

“By doing that, the DoJ is making a statement that they will go after books and records violations,” Hochberg says. “They also send the message that they can reach acts by foreign subsidiaries through books and records violations.”

Alcoa Criminal Probe

Meanwhile, the FCPA world is abuzz about a criminal probe at aluminum maker Alcoa. News of the investigation surfaced in press reports last month, after Aluminum Bahrain BSC, a longtime Alcoa customer known as Alba, filed a civil lawsuit in a Pennsylvania federal district court alleging that Alcoa and its affiliates bribed Bahraini officials, and Alba is seeking more than $1 billion in damages.

The criminal inquiry came to light when prosecutors sought to delay the civil case while they conduct their criminal investigation. That request was granted. Alcoa has said it is not aware of any misconduct but is conducting an internal investigation and is cooperating with the Justice Department, according to published reports.

“It’s very unusual,” Cassin says of the Alcoa matter. “I don’t recall another sovereign going into U.S. court to allege it’s a victim of bribery. Most governments avoid appearing in a U.S. court because they don’t want to subject themselves to discovery. It’s a process they can’t control.”

The Alcoa case is also attracting attention because of the huge amounts of money supposedly involved. The Justice Department’s largest FCPA settlements are in the $20 million to $30 million range, but Alba is alleging it was defrauded of $1 billion. “If the allegations are proven, it could force the Justice Department to examine how it calculates damages,” Hochberg says.

While the trend in FCPA global settlements is disgorgement and penalties usually based on some calculation of profit, Hochberg notes that damages in securities fraud cases are often based on how much the victims have lost.

In addition, he says, if Alcoa does settle with prosecutors, the government usually requires an admission of guilt. Alba would certainly use any such admission against Alcoa in its civil suit.