How to Size Up, and Manage, FCPA Investigation Costs

Corporations worried about compliance with the Foreign Corrupt Practices Act—which would be, like, all of them—have a few more glimpses into the costs of investigating and settling FCPA probes that might prove to be useful benchmarks.

FCPA headlines tend to be dominated by large corporations settling large corruption problems, with large fines and penalties in tow. The standard example is Siemens, the giant German engineering firm that paid $1.6 billion in 2008 to settle FCPA charges after a two-year internal investigation that spanned 30 countries and cost the company $850 million.

Most FCPA probes aren’t anywhere near that magnitude, but they can still impose significant costs to a company in relative terms. Just this month, for example, Alvin, Texas-based industrial services company Team, Inc. disclosed that it spent $3.2 million on an investigation into possible bribes paid by its Trinidad unit—more than six times the $50,000 in alleged bribes in question.

Maxwell Technologies also disclosed on July 29 that it has set aside nearly $13 million to settle FCPA charges with the Securities and Exchange Commission, and General Electric last month settled FCPA charges for $23 million. Neither company said how much it spent internally to investigate the bribery allegations.

Determining the cost of an FCPA investigation or a settlement (at least for compliance officers) is more art than science. Specific investigations can hinge on any number of factors: the amount of the bribes that were paid, the number of countries involved, and whether the company self-discloses the infraction or regulators discover it first, to name just a few.

Wolff

“It all depends on how high and how wide the issue is,” says Jacqueline Wolff, a former federal prosecutor now at the law firm Covington & Burling. “That’s the first question a company has to ask in any investigation, because it’s the first question the Justice Department will ask if you end up there.”

Early intervention helps. The sooner a company grasps how serious its FCPA problem might be, the sooner it can try to manage the cost, says Homer Moyer, a lawyer at law firm Miller & Chevalier.

“If you can determine early on whether something is a non-issue or a small, tightly confined issue, you can shape your investigation accordingly,” Moyer says. “Every FCPA issue doesn’t have to trigger a global investigation.”

In some circumstances, a company might even be able to avoid the expense of an outside investigation, says Paul McNulty, a former deputy U.S. attorney general who now heads up the business investigations practice at law firm Baker McKenzie. “If the facts aren’t especially egregious, a company may be able to hold costs down by doing the work in-house or with some assistance from a law firm using mostly internal resources,” he says.

Still, Moyer points to two factors that drive costs up. First is having regulators dictate the scope of an investigation, which usually broadens it. Second is electronic discovery, which dramatically expands the realm of information that must be collected and reviewed. Probes that involve multiple enforcement agencies, or that reach multiple countries, are also going to see higher costs.

Sabin

“If you can determine early on whether something is a non-issue or a small, tightly confined issue, you can shape your investigation accordingly.”

—Homer Moyer,

Lawyer,

Miller & Chevalier

A company might even get a “hello letter” from regulators asking it to investigate an issue that hardly relates to the company at all, says Barry Sabin, a partner at the law firm Latham & Watkins. In such cases, the government might be investigating some other company in your industry, or be trying to understand the extent of bribery in a region where your company does business. Even if your own company has a strong compliance program and no apparent FCPA problems, that won’t cut your legal bills to obey the government’s orders.

Where Fees Come From

Legal fees are, of course, a large portion of most investigations’ cost. Some issues are small enough to be investigated internally, but others—especially issues that suggest some failure of internal control or management’s participation—require an outside law firm to do an independent review. Cue the billable hours.

Document review, both to determine the facts and to see whether any documents need attorney-client privilege, can be “an extraordinarily expensive piece of the cost,” McNulty warns. And if the government is requesting documents, “the scope can get pretty broad.”

McNulty

One solution may be to structure the document review in stages, McNulty says, so the review can be curbed once the necessary information is found. Outside vendors can also sometimes cost less than doing the review in-house or with outside counsel.

Forensic accountants might also be necessary to trace improper payments, and such specialists can be expensive too. Wolff says audit rights included in contracts with your third parties, such as agents or consultants, may prove helpful.

TEAM, INC. RESULTS

The following excerpt from Team, Inc.’s press release details the company’s 4th-quarter FY 2010 earnings and provides an update to the FCPA investigation.

Team, Inc. today announced increased revenues and profits for the fourth quarter ended May 31, 2010. Revenues for the fourth quarter ended May 31, 2010 were $125.5 million, an increase of $4.3 million, or 4 percent, from the same quarter of fiscal year 2009. Operating income in the fourth quarter of fiscal year 2010, adjusted for non-routine charges, was $10.7 million, an increase of $1.0 million or 10 percent, from the same quarter of fiscal year 2009. Adjusted net income and diluted earnings per share for the fourth quarter were $6.1 million or $0.31 per share.

Full fiscal year 2010 revenues of $453.9 million resulted in adjusted net income and adjusted diluted earnings per share of $15.6 million or $0.80 per diluted share. This compares to fiscal year 2009 revenues of $497.6 million, net income of $22.9 million and diluted earnings per share of $1.16. Fiscal year 2009 benefitted from the best first half financial results in Team history, as the effects of the recession did not begin to affect Team until the third quarter of fiscal 2009.

Adjusted results for fiscal year 2010 exclude charges related to three non-routine matters: (1) costs related to the previously disclosed FCPA investigation ($3.2 million); (2) non-cash foreign currency losses related to the previously disclosed Venezuelan currency devaluation ($1.7 million); and (3) non-routine severance charges incurred during the fourth quarter ($0.7 million). The severance costs, related to initiatives designed to reduce operating costs and improve efficiency, will result in the elimination of approximately $6 million of indirect and SG&A costs to be realized in fiscal year 2011. GAAP fully diluted earnings per share, fully reflecting all of these non-routine charges, were $0.29 for the fourth quarter and $0.63 for the full fiscal year.

With strong operating cash flows during the year, Team reduced its total net debt (total debt less cash) by $33 million during the fiscal year. At May 31, 2010, Team’s net debt was $36 million and unused borrowing capacity was $78 million.

Business Outlook/Guidance for Fiscal Year 2011

Team expects its revenues for the coming full fiscal year (the fiscal year ending May 31, 2011) to be in the range of $470 million to $500 million. For the same time period, net income is expected to be in a range of $1.00 to $1.15 per fully diluted share. The revenue projections reflect the company’s view that the economic environment will remain challenging with only modest market demand recovery. The earnings expectations reflect the benefit of the expected revenue growth plus the full year impact of cost reduction actions taken by Team. Consistent with its past practice, Team does not provide specific guidance for individual quarters, but will confirm or update annual guidance at least quarterly.

“We are poised to continue with and build upon the business growth and momentum that began in the second half of our last fiscal year. While we expect only modest improvement in market conditions in the near term, we have taken, and are taking, the steps necessary to be successful in this environment,” said Phil Hawk, Team’s CEO and Chairman.

FCPA Investigation Update

As previously reported, Team’s Audit Committee completed its independent investigation regarding possible violations of the Foreign Corrupt Practices Act in its TMS Trinidad branch. The results of the FCPA investigation were communicated to the SEC and Department of Justice in May 2010 and the company is awaiting their response. The results of the independent investigation support management’s belief that any possible violations of the FCPA were limited in size and scope. The total professional costs associated with the investigation were approximately $3.2 million.

Source

Team, Inc. Press Release on FY 2010 Results (Aug. 3, 2010)

“All of the reps, warranties, and certifications that we recommend companies put in their third-party contracts to protect them can also be important if a company gets in trouble,” Wolff says, because those provisions can help the company get access to third parties’ books and records—which is much better than the Justice Department doing so first. In some countries, however, such provisions may be illegal or unenforceable.

Moyer

Moyer also warns that audit rights might not be much help. “Many companies have audit rights but don’t exercise them, which may actually hurt them” if an issue arises, he says. They also may not be much use if a third party doesn’t keep separate books and records for each client and won’t open all of its books to scrutiny.

Finally, one potentially huge influence on cost is simply deciding when you want to stop investigating. “There’s a point at which you have a good sense of your compliance weaknesses and failures and when your time is better spent on remediation,” Moyer says.

Penalty Costs

As expensive as an investigation can be, settlement costs can be even higher. The high end of any criminal fine is determined by the amount of business obtained through the improper payments—which means it can go through the roof. (That was the case for FCPA settlements involving Siemens, Daimler, and BAE Systems.) Companies may also face disgorgement of profits and possible civil fines.

Numerous other factors influence the size of penalties. That can include whether a voluntary disclosure was made, any past enforcement actions, application of the U.S. Sentencing Guidelines, the level of knowledge within the company of the alleged misconduct, and whether the infraction was isolated or systemic, Sabin says.

As with any investigation, having multiple enforcement agencies involved may increase settlement amounts, although prosecutors may award credit for any penalties paid overseas. And in a deferred or non-prosecution agreement, there’s a chance the company may have to foot the bill for a monitor, Wolff says.

Companies may also face legal costs of defending or settling litigation stemming from an FCPA investigation. For example, shareholders of Houston-based Parker Drilling Co. filed a derivative suit against the company’s directors in June, alleging that the directors breached their fiduciary duty by conducting business in countries with higher-than-normal risk of corruption without implementing strong FCPA controls.

Companies also take the hit of lost tax deductions on the improper payments. Federal contractors can be debarred and lose lucrative contracts. And of course, there are other costs that are harder to quantify, such as reputational damage or risk.