Foreign Corrupt Practices Act (FCPA)

In recent remarks, Deputy Attorney General Rod Rosenstein announced significant revisions to the Department of Justice’s (DOJ) policies for enforcing the Foreign Corrupt Practices Act.  The policy revisions make permanent many of the aspects of the FCPA Pilot Program which began in 2016 and sought encourage voluntary self-disclosures of FCPA violations by formalizing the benefits to corporations for doing so.  The recent policy revisions even went a step farther than the Pilot Program, announcing that if company voluntarily discloses FCPA violations, fully cooperates in the government’s investigation, and makes timely and appropriate remediation, there will be a presumption that the DOJ will resolve the company’s case through a declination to prosecute.

This policy revisions reinforce that the DOJ is focused on prosecution culpable individuals.  Indeed, Deputy Attorney General Rosenstein noted that “[i]t makes sense to treat corporations differently than individuals, because corporate liability is vicarious; it is only derivative of individual liability.”

While the DOJ appears to have made it even easier for companies to insulate themselves from liability if they turn over the individual bad actors, there are still many difficult decisions to be made by companies contemplating self-disclosure. Each of the requirements for unlocking the benefits of corporate disclosure – voluntary disclosure, full cooperation, and appropriate remediation – have specific criteria and pose nuanced questions for executives and directors to consider.

First, under the revised FCPA enforcement policy, the self-disclosures must be genuinely voluntary (i.e., prior to the “imminent threat” of disclosure or government investigation) and must be made within a “reasonably prompt time” after discovery of the violation.  This creates some potential issues for directors and officers who may learn of potential violations and seek to conduct an internal investigation to gather more information.  The policy revisions do not further define an “imminent threat” or “reasonably prompt” period, but company must be aware that protected investigations may jeopardize their ability to make an effective voluntary disclosure.

Second, full cooperation may be onerous.  Although the policy revisions do not contain an exhaustive list of the types of cooperation that the DOJ will expect, it does instruct that companies should “proactively” disclose all relevant facts and evidence.  Accordingly, companies must determine the appropriate scope of their disclosures (and may need to do so even if an internal investigation is not complete because concerns regarding the timeliness of the disclosure have arisen).  Moreover, the instruction that the companies take a proactive approach to disclosures appears to add additional pressure on companies to make broad disclosure (but not data dumps which could frustrate DOJ investigations) or risk failing to meet the full cooperation criterion.

Third, remediation efforts must be genuinely aimed at and capable of correcting the source of the violation.  The DOJ acknowledges that there will be variances based on the size of the company and the nature of the underlying violation; however, companies should be prepared to commit necessary resources to develop and implement ethics and compliance programs that will demonstrably improve the company’s ability to stop future violations.

Finally, another condition that has been made permanent is the requirement that the company pay all disgorgement, forfeiture, and/or restitution in full.  Depending on the amount in question, the ability to pay in full may be a difficult practical issue for a company.  Nevertheless, as part of the gateway to non-prosecution, a company must address the issue and develop a strategy for obtaining the necessary funds as it approaches voluntary self-disclosure.

Robust compliance programs remain the critical first step for companies seeking eradicate FCPA violations from their corporate culture.  As Deputy Attorney General Rosenstein noted, criminals try to evade law enforcement, but must first evade internal controls and compliance programs, therefore, “[h]onest companies pose a meaningful deterrent to corruption.”  Fostering a culture of compliance, dedicating sufficient resources, and ensuring that compliance personnel have access to management and the board were all cited by Deputy Attorney General Rosenstein as hallmarks of effective compliance and should be at the core of any compliance program.

In its recent decision in United States v. Allen, 16-cr-898, the Second Circuit Court of Appeals held that testimony which is compelled pursuant to laws of foreign jurisdictions violates the Fifth Amendment right against self-incrimination when used as part of a U.S. prosecution.  The ruling may have a far-reaching impact on the U.S. Department of Justice’s (DOJ) enforcement of the Foreign Corrupt Practices Act, which often rely on evidence obtained by foreign investigators.

In US v. Allen, the defendants were accused of being part of a conspiracy to manipulate the London Interbank Offered Rate (LIBOR), a benchmark interest rate underlying financial instruments around the world. The LIBOR scheme and the defendants, U.K. nationals, were originally investigated by U.K. authorities.  As part of that investigation, the defendants were compelled to give testimony to the U.K.’s Financial Conduct Authority (FCA). The FCA is duly authorized to compel the testimony of those under investigation and there is no allegation that the circumstances under which the defendants’ testimony was compelled violated of U.K. law.  The defendants’ testimony before the FCA became the centerpiece of charges in the United States for wire fraud and conspiracy to commit wire fraud.

The Second Circuit voiced its concern that, even though the statements were obtained in accordance with U.K. law, the statements still constituted compelled statements under the Fifth Amendment to the United States Constitution.  Therefore, the Court found that the use of any such compelled statement  against the defendants in a criminal matter was a facial violation of the Fifth Amendment.  Accordingly, the Court overturned the defendants’ convictions and dismissed the indictment

The Court was unmoved by the DOJ’s arguments that their FCPA investigations and prosecutions, many of which rely on evidence obtained from foreign governments and compelled statements, would be undermined by an adverse ruling from the Court.  While it appears clear that FCPA prosecutions cannot rely on the contents of compelled statements as the basis for a U.S. prosecution, it remains to be seen how extensively Courts may apply the fruit of the poisonous tree doctrine.  Indeed, while confronting a defendant with compelled statement may run afoul of the Fifth Amendment, Court’s could question the admissibility other evidence collected by foreign authorities following or as a direct result of a defendant’s compelled statements.  While Constitutional Law scholars could likely fill volumes regarding such a debate, the practical effect on FCPA may unfold quickly as prosecutors will need to sure up their ongoing cases with admissible evidence if compelled statements are no long permissible.

Copyright: ginasanders / 123RF Stock Photo

On June 16, 2016, Teva Pharmaceutical’s Russian subsidiary (Teva LLC) pled guilty to one count of conspiring to violate the Foreign Corrupt Practices Act (FCPA).  Judge Kathleen M. Williams of the United States District Court for the Southern District of Florida hesitated, however, in entering a final judgment under which Teva LLC would pay no fine.  While there is no doubt that Teva LLC’s parent entity will pay over a half-billion dollars for violations of the FCPA, the proposed sentence for Teva LLC did not include any obligation to pay fines or civil claims.

The claims against Teva LLC stem from payments made to a Russian official who also ran a pharmaceutical distribution company.  Between 2010 and 2013, Teva LLC offered the official’s company favorable pricing terms in exchange for his push to have Russian government entities purchase more Teva drugs for the national health care system.  Notably, Teva LLC’s transactions passed internal FCPA checks because Teva LLC omitted key facts such as the official’s ownership of the distribution company and a Russian investigation of possible corruption within the distribution company.  The facts of Teva LLC’s violations are not what raise questions at this phase.

Rather, potential cause for concern in the contemporaneous settlement of numerous FCPA against Teva Pharmaceuticals and its subsidiaries in Europe and Mexico.  Collectively, Teva Pharmaceuticals and federal prosecutors have agreed to settle all of the outstanding claims in exchange for (i) a $238 million criminal penalty, (ii) a deferred prosecution agreement and (iii) $236 million to settle civil claims.  Significantly, while Teva LLC agreed to plead guilty as part of the settlement, Teva Pharmaceuticals has been given a deferred prosecution agreement and is not admitting guilt. Teva Pharmaceuticals, however, will pay the criminal penalty and civil claims.  As a result, Judge Williams was presented with the prospect of a guilty plea accompanied by no punishment.  In particular, the Court expressed concern regarding what would happen if Teva Pharmaceuticals did not pay its fine and final judgment had already been entered against Teva LLC.

While there is no concern that the Court and counsel will work out the nuts and bolts of the the overall settlement and component pleas in the near future, the potential complexities of FCPA litigation should give practitioners and their clients pause.  Further, with directives in place focused on individual liability and strict parameters on cooperation credit, counsel must keep an eye on the broader liability landscape because, ultimately, the Court will demand that violators are held responsible.

 

In 2008, global technology giant Siemens Aktiengesellschaft (“Siemens”) pleaded guilty to violations of the books and records provision of the Foreign Corrupt Practices Act (“FCPA”).  Siemens paid approximately $450 million in fines for its alleged violations and another $350 million to settle a civil suit brought by the US Securities and Exchange Commission.  In addition, as part of the plea agreement, Siemens agreed to hire Monitor to evaluate and report on its FCPA compliance efforts to the US Department of Justice. The Monitor submitted numerous work plans and annual reports to the DOJ over the next several years.

In 2013, 100Reporters LLC (“100Reporters”), a non-profit organization focused on investigative journalism, submitted Freedom of Information Act (“FOIA”) requests seeking the Monitor’s reports and related documents. The DOJ denied the requests and the administrative appeal.  Accordingly, 100Reporters brought suit in the United States District Court for the District of Columbia.  The DOJ subsequently produced some redacted documents but continued to withhold other documents based on certain Exemptions, including privileged and confidential information, attorney-client and attorney work product (“deliberative process”) privileges, personal privacy, and a lack of segregability due to the intertwined nature of the public and protected information.

In a recent 73-page opinion, the D.C. District Court denied, in part, motions for summary judgment filed by the DOJ, Siemens, and the Monitor and requested in camera review of representative documents.  The Court will now determine what aspects of the Siemens’ post-plea FCPA compliance program should be available for public consumption.  If the Court determines that substantive portions of Siemens’ FCPA compliance efforts should be produced under FOIA, it could offer an unprecedented look inside the FCPA program of a major multi-national corporation.  Further, and while not suggesting that Siemens has anything to hide, the public airing of post-plea compliance efforts could cause a stir if the Monitor’s are less robust than the public might anticipate.   Nevertheless, the mere potential that one’s FCPA compliance efforts could be in the public domain should give companies large and small pause and they should consider whether their policies and training would withstand the trial by public opinion.

 

 

Copyright: bedo / 123RF Stock Photo
Copyright: bedo / 123RF Stock Photo

In a complaint recently filed in Delaware Chancery Court, a shareholder of General Cable Corp. (“General Cable”) has asked the Court to compel the release of documents related to General Cable’s $82 million settlement of claims under the Foreign Corrupt Practices Act (FCPA).

In January, General Cable, a Kentucky-based industrial cable manufacturer, agreed to the $82 million settlement with the US Department of Justice and the US Securities and Exchange Commission. The DOJ and SEC alleged that between 2002 and 2013 General Cable paid approximately $13 million in bribes to secure more than $50 million in contracts in Africa and Asia.  General Cable’s penalties were reduced based its voluntary disclosure of the payments and the SEC noted that there was no evidence of personal misconduct by the former CEO and CFO who had already returned millions in compensation.

In the recent shareholder complaint, the shareholder alleges that he has been improperly denied access to corporate records regarding the investigation and settlement of the FCPA claims.  The shareholder previously requested, and was provided, board meeting transcripts and materials from 2011 to 2015.  The shareholder alleges that General Cable has refused his subsequent requests, including requests for internal audit reports, emails, and other document related to the improper payments and the settlement with authorities.  The shareholder asserts that the documents are necessary to evaluate potential steps to improve corporate governance.

Potential shareholder litigation is yet more collateral damage extending from FCPA violations.  Should the shareholder be successful, there may be significant new precedent as to what investigative and settlement documents a shareholder has the right to review.  Well documented compliance policies and education remain the best way to avoid FCPA violations and the ancillary challenges that so often follow.

 

In written responses released earlier this week, Senator Jeff Sessions of Alabama reaffirmed that he will enforce the Foreign Corrupt Practices Act and the International Anti-Bribery Act of 1988 if he is confirmed as US Attorney General.  Sen. Sessions was responding to the questions of Sen. Sheldon Whitehouse (D-RI), and others, following Sen. Session’s nomination hearing before the Senate Judiciary Committee.  Sen. Whitehouse’s question focused on a comment by President Trump during a 2012 interview in which President Trump referred to the FCPA as a “terrible law.”  [Editor’s note, President Trump refered to the FCPA as a “horrible law,” not a “terrible law,” during the 2012 interview].  Sen. Whitehouse asked:

13) President Trump has called the Foreign Corrupt Practices Act a “terrible law.” But the Act, as amended by the International Anti-Bribery Act of 1998, is the cornerstone of federal efforts to prevent and prosecute bribery of foreign officials by U.S. corporations, and to maintain a fair and level playing field for small and mid-size corporations doing business overseas. Since 2008, the federal government—DOJ, SEC, and the FBI—have maintained about 150 active investigations at any given time, resulting in $1.56 billion in fines in 2014.

Will you commit to continued vigorous enforcement of the Foreign Corrupt Practices Act and the International Anti-Bribery Act of 1998?

Sen. Sessions responded:

Yes, if confirmed as Attorney General, I will enforce all federal laws, including the Foreign Corrupt Practices Act and the International Anti-Bribery Act of 1998, as appropriate based on the facts and circumstances of each case.

One must take Sen. Sessions at his word and assume that the FCPA and Anti-Bribery Act will enforced to the letter of the law until there is an indication of a shift of DOJ priorities to the contrary.  As always, training and compliance programs remain the as a critical foundation for any company doing business abroad.

Earlier today, the Department of Justice announced that construction conglomerate Odebrecht SA and its affiliate Braskem SA have pleaded guilty to their maintenance of an elaborate bribery scheme which paid out approximately $788 million in bribes to government officials around the world since 2001.

To facilitate its massive bribery scheme, Odebrecht established its “Division of Structured Operations,” which federal prosecutors dubbed the “Department of Bribery.” The Division of Structured Operations operated on its own floor and used its own communication and computer networks. Code names and secure emails were used by those requesting bribes, bribe recipients, and financial institutions to make payments out of a ‘shadow budget.’ The shadow budget, which accounted for and tracked all bribe payments in complex spreadsheets, was comprised of funds funneled by Odebrecht into off-shore entities and then back into the Division of Structure Operations.

Under their respective plea agreements, Odebrecht and Braskem agreed to pay, at least, a combined $3.5 billion in penalties.  Odebrecht agreed with the DOJ that $4.5 billion would be an appropriate criminal fine, but has claimed that is unable to pay a fine of that amount.  Accordingly, the plea agreement states that Odebrecht will pay at least $2.6 billion, however, an ongoing review of Odebrecht’s ability to pay may result in Oberbrecht paying an amount closer to $4.5 billion. Braskem will pay approximately $957 million in criminal fines.  Brazil, where both of the companies are headquartered, will receive 80% of the fines and the United States and Switzerland will each receive 10%.  Notably, Oderbrecht was credited with 25% reduction in the fine sought based on its cooperation with investigators. Braskem was credited with a 15% reduction based on its partial cooperation.

This blockbuster plea agreement highlights the growing trend of global enforcement. While few companies will ever consider implementing a bribery scheme of the magnitude Odebrecht’s, even small acts to grease the wheels create a slippery slope and companies of all sizes must take precautions — through compliance and training programs — to make sure that a culture where bribery is condoned and supported never begins to gain momentum.

In a recently released report, TRACE International, an international anti-bribery business association, ranked 199 countries based on the risk of encountering bribery within the country’s public sector.

trace-map

Go to Interactive Map (credit: TRACE International)

The TRACE Matrix’s rating are based on four core domains: business interactions with government, anti-bribery laws and enforcement, government transparency, and capacity for civil oversight.  As part of the part of the business interactions with government domain, the report examines the extent to which business must interact with government officials and weight of regulatory burden which may increase the number of bribery opportunities as well as the reported expectation of businesses that they will have to pay a bribe somewhere along the way.  As part of the second domain, the report considers both enacted anti-bribery laws as well as the actual level of enforcement of any anti-bribery statutes. Government transparency is measured by indicators such as the public availability of government budgets and conflict of interest training conducted with civil servants.  Finally, the civil oversight domain examines the freedom of the press and social development.

Topping the list of least-bribery-prone countries were: (1) Sweden, (2) New Zealand, (3) Estonia, (4) Hong Kong, and (5) Norway.  The United States ranked 20th on the list, just behind Australia and Luxembourg and just ahead of Mauritius and Latvia.  Nigeria was ranked the most bribery prone country with Angola (198) and Yemen (197) rounding out the bottom three.

Assessing the potential risk of conducting business or routing supply chains through certain countries is the first step in managing potential liability under the Foreign Corrupt Practices Act. Even in the least risky countries, training and compliance programs are a necessity. However, in high risk countries, trainings must be tailored to anticipate the level of bribery and other corruption pressures which officers and employees will face with regularity.

In a pair of recent articles (available here and here), practitioners have been crunching the numbers, and 2016 is on near-record pace for Foreign Corrupt Practices Act (FCPA) enforcement action dispositions.  Through October, 2016 has seen 39 FCPA enforcement actions resolved, a pace that would have government agencies end the year with 48-plus dispositions and would be second only to the 72 dispositions in 2010.  Even if the number of enforcement action dispositions stays at 39, 2016 would still have as many or more dispositions than every other year since 2006.

The numbers are staggering, but what is driving this dramatic rise enforcement? A key contributing factor to this enforcement trend has been a significant increase in standalone FCPA enforcement actions brought by the SEC.  In fact, thus far in 2016, the SEC has resolved twice as many FCPA enforcement actions (26) than the DOJ (13). The SEC has not outpaced the DOJ in FCPA enforcement actions since 2007 when it resolved 20 actions to the DOJ’s 19.  Interestingly, the recent articles demonstrate that the SEC’s involvement in FCPA investigations is not a new phenomenon as the agency has been involved in 70% to 90% of FCPA investigations since 2006, though many of these were dubbed ‘parallel’ enforcement actions alongside the DOJ.  It also appears that the DOJ has recently turned its resources to pursuing high-value enforcement actions, potentially explaining the dramatic shift in the volume of actions resolved.

With enforcement at near record levels, companies must be more vigilant than ever with their FCPA compliance programs.  Further, as the SEC takes the lead in investigations and prosecutions, its agents may ask new questions and press compliance officers and their programs in new ways.  Therefore, it is imperative that companies continue to update and improve their FCPA compliance and training programs as there is no indication that this trend of enhanced enforcement is waning.

In an recent article on Law360, Robert W. Kent, Jr. looked at lessons to be learned from the first six months of the Department of Justice’s Foreign Corrupt Practices Act (FCPA) Pilot Program. Announced in April 2016, the year-long pilot program is designed to up the ante for companies during FCPA investigations by offering sentencing reductions or declinations (with disgorgement of all profits from the alleged misconduct) to companies that voluntarily disclose misconduct and cooperate fully while ostensibly restricting any cooperation credit for companies that no not meaningfully participate in an investigation.

Mr. Kent offers a number of insightful observations on the first six months of the pilot program. Among his many insights are a few key take-aways for companies of all sizes.

First, FCPA enforcement actions have increased dramatically. As of October, there have already been more enforcement actions announced in 2016 than in any full year prior. Whether this surge will continue remains to be seen, but companies must assume that this heightened level of vigilance is the new standard.

Second, the DOJ is publicizing the details of alleged misconduct with more detail in the past. The factual recitations of the alleged conduct, even in letters declining further investigation or prosecution, clearly outline the alleged schemes and those involved, and may tarnish a company’s relationship with partners and the public.

Third, the Yates Memo’s focus on individual accountability appears to be taking root as the DOJ and SEC have appeared to coordinate efforts, leading to SEC enforcement actions against four individuals in the past six months. The specter individual enforcement actions or criminal charges is a powerful deterrent and one the DOJ and SEC seem ready to use as part of the current enforcement push.

Finally, a bit of good news for companies in the midst of the government’s enforcement surge, the DOJ and SEC are recognizing and crediting the value of robust FCPA compliance programs. In numerous releases regarding FCPA resolution, the DOJ and SEC have focused on the responsiveness of compliance programs when allegations of misconduct arise internally. Subsequent internal investigations which include the strict preservation of evidence and aid from internal investigators to government agencies in deciphering global financial data are similarly lauded. Nevertheless, the ability to identify and report potential misconduct will always require training employees and executives at every level. Therefore, while the yield from the internal investigations may garner leniency from the DOJ or SEC, training which will allow the company to identify misconduct and start the process of internal investigation and self-disclosure must not be understated.

At the half-way point, the FCPA pilot program is proving to be a genuine catalyst for changing how FCPA violations are reported and investigated. In April, the DOJ said that it would re-evaluate the need to continue the pilot program after a year. However, another six months like this and we may have arrived at a new FCPA enforcement status quo, pilot program or none.