Forget about fines and penalties to settle a Foreign Corrupt Practices Act investigation; simply conducting one can run into the hundreds of millions of dollars.
In just the last few months, several companies, including Weatherford International and News Corp., have disclosed in filings with the Securities and Exchange Commission that they have spent well beyond $100 million in FCPA-related investigation costs alone. So even if regulators don't ultimately find any FCPA violations, launching a probe comes with a financial penalty of its own.
The costliest FCPA investigations are the ones that grab the headlines, says Kimberly Parker, a partner at law firm WilmerHale, “but not all FCPA investigations are expensive.”
Investigations that can be contained to one country or area will prove less expensive, but costs quickly escalate if the same issues start cropping up at other locations. “The important question at the outset of the investigation is the scope, because that drives the cost,” says Claudius Sokenu, a partner with law firm Arnold & Porter.
Containing an investigation, however, can be difficult. An FCPA investigation in one country almost always leads to FCPA investigations in others where the company does business, Sokenu says. “I don't think I've been involved in an investigation that involves fewer than three countries,” he says.
Of the companies that have reported high FCPA investigation costs, all have experienced multinational probes. Oilfield services company Weatherford, for example, disclosed in its March 15 annual report that it has incurred $123 million for legal and professional fees, and an additional $40 million in costs for ceasing operations in certain sanctioned countries.
“This amount excludes the costs we have incurred to augment and improve our compliance function,” the company stated. The costs stem from several ongoing investigations of alleged bribery payments to government officials in Europe, Weatherford's participation in Iraq's oil-for-food program, and its past operations in certain sanctioned countries, including Sudan and Iran.
Media giant News Corp. has reported incurring a total of $191 million so far on legal and professional fees related to allegations of bribery payments that emerged last year in connection with its now-infamous phone hacking scandals. Enforcement authorities in Britain and the United States continue to investigate whether similar conduct occurred at News Corp.'s subsidiaries outside of Britain.
Then there is cosmetics giant Avon, which disclosed in its 2011 annual report that it has spent a whopping $247 million since 2009 on professional and related fees associated with a global FCPA investigation and compliance reviews. A breakdown of those costs shows the company spent $93.3 million in 2011, $95 million in 2010, and $59 million in 2009. “While these fees are difficult to predict, they are expected to continue and may vary during the course of this investigation,” Avon's annual report stated.
In June 2008, Avon commenced an internal investigation after hearing claims that travel, entertainment, and other expenses may have been improperly incurred in connection with the company's China operations. In July 2009, Avon reported that it had widened its investigations into possible FCPA violations into other countries, including Latin America.
Keeping a Lid on Costs
In any FCPA investigation, legal experts agree, government regulators will always ask one critical question: Where else do you have a bribery problem?
“The important question at the outset of the investigation is the scope, because that drives the cost.”
—Claudius Sokenu,
Partner,
Arnold & Porter
Not having a good answer to that question at the outset of a probe could lead to the company having to investigate in several more countries, even if management thinks it unnecessary. “To do a credible investigation, you want to follow all the credible leads, but that doesn't always mean having to investigate beyond the country that you're in,” says Parker.
“Look at the facts that are in front of you,” advises Sokenu. For example, an employee caught paying bribes in one country, who previously worked in other countries, “raises the question of whether the employee was engaged in similar conduct in those countries,” he says.
Another red flag may be if that employee manages a regional office, which raises the question of how many potential bribes that employee may have authorized, Sokenu adds. Getting to the bottom of such possibilities early on can save investigation expenses later on. If a company can demonstrate to regulators that an incident was an isolated event done by a rogue employee, who had no responsibility outside that particular country or region, they are more likely to keep the investigation from spreading and costs from spiraling.
AVON & WEATHERFORD RACK UP COSTS
The following excerpts are from Avon's annual report and Weatherford International's 10-K regarding the costs associated with their FCPA investigations:
From Avon:
Total Global expenses declined during 2011 from 2010 primarily due to lower expenses associated with management incentive programs, lower professional fees associated with acquisitions and divestitures, and lower costs to implement restructuring initiatives. Amounts allocated to segments increased in 2011 primarily due to an increase in costs associated with initiatives more specifically benefiting the segments as compared to global initiatives. Professional and related fees associated with the FCPA investigation and compliance reviews described in Note 16, Contingencies, to the consolidated financial statements included herein, amounted to approximately $93.3 in 2011. While these fees are difficult to predict, they are expected to continue and may vary during the course of this investigation. These fees were not allocated to the segments. Please see Risk Factors and Note 16, Contingencies, to the consolidated financial statements included herein, for more information regarding the FCPA investigation and other related matters.
The increase in Net Global expenses for 2010 as compared to 2009, was primarily attributable to significant professional and related fees associated with the FCPA investigation and compliance reviews of approximately $95.3 (up approximately $59.0 from 2009). The increase in Net Global expenses for 2010 as compared to 2009 was also due to higher costs associated with global initiatives and costs associated with business acquisitions.
From Weatherford:
The DoJ and SEC are investigating our compliance with the Foreign Corrupt Practices Act and other laws worldwide. We have retained legal counsel, reporting to our audit committee, to investigate these matters and to cooperate fully with the DoJ and SEC. As part of our investigations, we have uncovered potential violations of U.S. law in connection with activities in several jurisdictions. We have been in negotiations with the government
agencies to resolve these matters for more than a year, but we cannot yet anticipate the timing, outcome or possible impact of the ultimate resolution of the investigations, financial or otherwise.
The DoJ, SEC and other agencies and authorities have a broad range of civil and criminal penalties they may seek to impose against corporations and individuals for violations of trade sanctions laws, the FCPA and other federal statutes including, but not limited to, injunctive relief, disgorgement, fines, penalties and modifications to business practices and compliance programs. In recent years, these agencies and authorities have entered into agreements
with, and obtained a range of penalties against, several corporations and individuals in similar investigations, under which civil and criminal penalties were imposed, including in some cases fines and other penalties and sanctions in the tens and hundreds of millions of dollars. These agencies are seeking to impose penalties against us for past conduct, but the ultimate amount of any penalties we may pay currently cannot be reasonably estimated. Under trade sanctions laws, the DoJ may also seek to impose modifications to business practices, including immediate cessation of all business activities in specific countries or other limitations that decrease our business, and modifications to compliance programs, which may increase compliance costs. Any injunctive relief, disgorgement, fines, penalties, sanctions or imposed modifications to business practices resulting from these investigations could adversely affect our results of operations, and the cost of our investigations have been significant. In addition, our historical activities in sanctioned countries, such as Sudan and Iran, could result in certain investors, such as government-sponsored pension funds, divesting of, or not investing in, our shares. Based on available
information, we cannot predict what, if any, actions the DoJ, SEC or other authorities will take in our situation or the effect any such actions will have on our consolidated financial position or results of operations. To the extent we violated trade sanctions laws, the FCPA, or other laws or regulations, fines and other penalties may be imposed. Because these matters are now pending before the indicated agencies, and we currently cannot reasonably estimate the ultimate amount of any penalties we may pay, there can be no assurance that actual fines or penalties, if any, will not have a material adverse effect on our business, financial condition, liquidity or results of operations.
To date, we have incurred $40 million for costs in connection with our exit from sanctioned countries and incurred $123 million for legal and professional fees in connection with complying with and conducting these on-going investigations.
Sources: Avon; Weatherford International.
In other cases, the company may be able to show that the incident was an outlier because it was limited to a unique customer, product, or business unit, Parker says.
Legal experts agree that self-reporting an internal investigation to enforcement agencies isn't always necessary, and the decision needs to be weighed carefully. Sometimes it could just be a matter of promptly implementing remedial measures and revising and enhancing compliance policies and procedures.
“Only in very rare circumstances would I recommend to a client that self-disclosure is the way to go, because no good deed goes unpunished,” Sokenu says. Such rare circumstances include:
Awareness of a potential whistleblower reporting an incident to the government. “You want to go to government before that whistleblower does,” says Sokenu. “With the new whistleblower rules, that becomes more important.”
The conduct in question is systemic and involves senior management—such as the chief executive, chief financial officer, general counsel, or the heads of business units.
The incident involves a material disclosure, such that disclosure of the incident would be required under securities laws anyway.
Auditors will not sign off on filings with the Securities and Exchange Commission.
Another way to contain potential FCPA investigation costs is to insure against them. With FCPA enforcement activity growing more prevalent, insurance companies are getting creative in ways to serve that need. Last year insurance broker Marsh released “Corporate Response,” a new insurance product that specifically covers legal and professional fees and other expenses incurred during the course of an investigation into potential violations of the FCPA, U.K. Bribery Act, or any other anti-corruption law. Property-casualty insurer Chartis launched a similar insurance product for coverage of FCPA-related investigation costs last year as well. Neither the Marsh nor Chartis policy covers penalties, fines, or disgorgement.
Machua Millett, senior vice president in Marsh's financial professional group, says the idea for Corporate Response came from the realization that coverage for FCPA investigations under director and officer policies, in general, is very limited. Since introducing the product, “the interest has been overwhelming,” he says.
So far, however, that interest hasn't translated into policy sales. Marsh has met with upward of 600 potential buyers from companies of all sizes and industries, but has yet to complete a deal. “It's a new expenditure for companies,” says Millett. “Going through the process to determine whether the insurance will be cost-effective takes time.”
One common assertion clients make is that, “‘we have a strong compliance program in place, so we don't really see the need for insurance,” says Millett. “I always say no matter how strong your compliance program is you can still have rogue activity by employees and independent agents that you can't control.”
“The insurance is a back up; it's certainly not an alternative to a strong compliance program,” Millet adds. “We fully expect that buying FCPA investigation cost insurance will become a standard part of international companies' risk-management approach in the next few years.”
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