Latest FCPA Action Spotlights Foreign Units

Another day, another enforcement action against bribery.

The latest stern message from government prosecutors using the Foreign Corrupt Practices Act to scare companies into compliance is to police your foreign subsidiaries. In October, the Justice Department settled an FCPA investigation against Ingersoll-Rand, the heavy equipment maker, forcing it to pay a total of $6.7 million in penalties for bribery and fraud abuses by its Irish and Italian units.

They are just the latest examples of U.S. prosecutors’ appetite for expanding the FCPA’s jurisdiction as much as possible, legal observers say.

Brown

“Enforcers are viewing their jurisdictional reach as being virtually unlimited,” says Sharie Brown, a partner in the law firm Foley & Lardner. Even companies not based in the United States or listed on U.S. stock exchanges but using any American resources, right down to Internet servers, might find themselves in the spotlight, she says.

Alexandra Wrage, president of the anti-bribery organization TRACE International, put it more succinctly: “More, and more aggressive, enforcement actions; more voluntary disclosures; more and greater penalties.”

Ingersoll’s malfeasance pertained to payments that two subsidiaries, Thermo King Ireland and Ingersoll-Rand Italia, made in connection with the now-tarred U.N. Oil for Food Program. According to court documents, from October 2000 to August 2003, employees of the subsidiaries paid roughly $600,000 and offered to pay an additional $250,000 in kickbacks to the Iraqi government by inflating the price of contracts.

The company paid a $2.5 million fine, entered into a three-year deferred prosecution agreement with the Justice Department, and consented to a civil injunction by the Securities and Exchange Commission where it paid $1.95 million in penalties and disgorged $2.27 million in profits and interest. Ingersoll also agreed to hire a compliance monitor.

Wrage

Wrage says the settlement highlights the growing popularity of disgorgement of profits as part of the penalty. “It’s chilling for corporations to contemplate the possibility of disgorgement of profits on a contract that is tainted … by a bribe,” she says. “This, together with the increased interest in pursuing individuals, should get the attention of the corporate world.”

In a statement, the Justice Department said it agreed to defer prosecution because the company conducted a “thorough” review of the improper payments and implemented enhanced compliance policies and procedures. The SEC also said it considered the company’s remedial acts and cooperation with its staff.

The SEC complaint alleged that during the same period, Ingersoll subsidiaries entered into contracts involving roughly $1.5 million in kickbacks in connection with sales of industrial equipment to Iraqi government entities under the Oil for Food Program that violated FCPA books-and-records and internal controls provisions.

Henning

Wayne State University law professor Peter Henning says the agreement demonstrates that deferred prosecutions “are becoming the norm in FCPA cases, which wasn’t the case as recently as a year or two ago.” He also notes that the agreement includes a provision allowing Ingersoll-Rand to assert the attorney-client privilege and work-product doctrine to resist producing records prosecutors might request, “at the cost of possibly being viewed as uncooperative.” That provision, which Henning says is becoming more common, “is probably a response to the push on Capitol Hill to prohibit [prosecutors] from demanding privilege waivers.”

Lessons to Learn

While the settlement terms aren’t unusual, experts say the agreements highlight a number of important lessons for companies. Foremost, they illustrate the compliance risks faced by U.S.-based multinationals and the need to ensure that anticorruption policies and procedures cover operations at both U.S. and overseas business operations.

Richard Cassin, of Cassin Law, says the tendency is “to let distances and time zones overwhelm global compliance efforts.” That attitude, he warns, can lead to compliance disasters, since historically, most prosecutions have been based on violations caused by overseas subsidiaries. Examples of other recent actions involving foreign subsidiaries include York International, Textron, and A.T. Kearney.

Cassin

“Compliance efforts should be proportionate to compliance risks, and clearly the risk of violations occurring through foreign subsidiaries is very large,” Cassin says.

Gary DiBianco, a partner at the law firm Skadden, Arps, Meagher and Flom, agrees. “Companies often have pretty rigorous [anticorruption] training for their domestic U.S. employees, but that doesn’t always get communicated or translated outside of the U.S.,” DiBianco says. “It’s important when they do anticorruption training in non-U.S. subsidiaries for companies to make sure that the training is understandable to people, by using local language and legal concepts that they’re familiar with.”

Cassin points out that foreign subsidiaries may have some connection to the United States that brings them within reach of the FCPA, such as U.S.-based board members or executive management, shared U.S. bank accounts, or quarterly review meetings held in the United State. All can trigger jurisdiction under FCPA anti-bribery provisions.

In addition, some jurisdictional aspects of the statute are “technical and not obvious, so the learning curve for foreign managers is steep,” he says. What’s more, under the principles of vicarious liability, the acts of foreign subsidiaries can be attributed to domestic parent companies, putting them in violation of the statute. And the FCPA’s accounting standards apply to all majority-owned foreign subsidiaries of U.S. public companies, whether or not they have any other connection with the United States.

Experts say more Oil for Food Program enforcement actions may come, since the Justice Department and SEC opened broad inquiries into the program following the publication of a 2005 report citing more than 2,000 companies allegedly involved in illicit payments.

DiBianco

“Based on the number of companies that have either disclosed an investigation or receipt of subpoena in connection with the Oil For Food investigations, and recent trends and comments from government officials, we can expect more settlements to come in this area,” DiBianco says.

Meanwhile, Lucinda Low of the Steptoe & Johnson law firm says the settlement underscores how much the FCPA “is a tool that’s not limited to foreign bribery, but lends itself to use across a range of monetary and financial transactions” that enforcement agencies may consider improper.

Low

“What we’re seeing in this and other prosecutions of “Oil for Food” is that, when the government sees any type of payments they don’t like, they use all the tools they have in their quiver, including the FCPA, to go after them,” she says. “The lesson is that companies should be focused on much broader issues of improper conduct, not just things they may have put in an ‘FCPA box’ in the past.”

The case also shows the trend toward voluntary disclosure continues. “However much companies complain about getting too little benefit for disclosing, they’re still not prepared to risk having the DOJ or SEC hear about their problems from someone else,” Wrage says.

Meanwhile, Brown notes that the defense bar has been discussing whether the focus on voluntary disclosure in many recent actions is putting pressure on companies to disclose issues that “aren’t yet ripe for disclosure.”

“Voluntary disclosure is something that should be carefully thought about, with the consequences and benefits deliberated,” she says. When companies do decide to self-disclose, she says, they need “a real plan for what they hope to achieve and a proposal for how to achieve it.”