January 4, 2008
2007 – A "Landmark Year" in FCPA Enforcement
"2007 is by any measure a landmark year in the fight against foreign bribery." When Mark F. Mendelsohn, Deputy Chief of the Fraud Section in the Department of Justice’s Criminal Division ("DOJ") and the government’s top criminal Foreign Corrupt Practices Act ("FCPA") enforcer, opened the 2007 ACI FCPA Conference with this bold statement, not a single eyebrow rose across the ballroom filled with members of the ever-growing FCPA Bar. Nor was anyone surprised to hear Fredric D. Firestone, an Associate Director in the Securities and Exchange Commission’s Division of Enforcement ("SEC"), which shares enforcement responsibility under the FCPA with the DOJ, utter moments later "ditto from the SEC." For Messrs. Mendelsohn and Firestone spoke only what everyone in the room already knew: as the statute celebrated its thirtieth birthday, FCPA enforcement, already trending steeply upward in recent years, exploded in 2007.
This client update provides an overview of the FCPA and other foreign bribery enforcement activities in 2007, a discussion of the trends we see from that activity, and practical guidance to help companies avoid or limit liability under these laws. A collection of Gibson, Dunn & Crutcher LLP ("Gibson Dunn") publications on the FCPA, including prior enforcement updates and more in-depth discussions of the statute’s complicated framework, may be found on Gibson Dunn’s FCPA website.
The FCPA’s anti-bribery provisions make it illegal to provide money or anything of value to officials of foreign governments or foreign political parties with the intent to obtain or retain business. The anti-bribery provisions apply to "issuers," "domestic concerns," and "any person" that violates the FCPA while in the territory of the United States. The term "issuer" covers any business entity that is registered under 15 U.S.C. § 78l or is required to file reports under 15 U.S.C. § 78o(d). In this context, foreign issuers whose American Depository Receipts ("ADRs") are traded on U.S. exchanges are "issuers" for purposes of this statute. The term "domestic concern" is even broader and includes any U.S. citizen, national, or resident, as well as any business entity that is organized under the laws of a U.S. state or that has a principal place of business in the United States.
In addition to the anti-bribery provisions, the FCPA’s books-and-records provision requires issuers to make and keep accurate books, records, and accounts, which, in reasonable detail, accurately and fairly reflect the issuer’s transactions and disposition of assets. Finally, the FCPA’s internal controls provision requires that issuers devise and maintain reasonable internal accounting controls aimed at preventing and detecting FCPA violations.
2007 in Review
The explosion of FCPA enforcement activity in 2007 is best captured in the following chart and graph, which each track the number of FCPA enforcement actions filed by the DOJ and SEC during the past five years:
FCPA Prosecutions 2003 — 2007
The thirty-eight FCPA enforcement actions brought by the DOJ and SEC in 2007 substantially more than doubled the fifteen governmental actions in 2006, which was until this year itself the busiest year ever in FCPA enforcement. And it is clear that the recent surge will not soon abate. Mr. Mendelsohn recently stated that the enforcement activity throughout the past few months represents "just the tip of the iceberg," noting that the DOJ has "many more matters under investigation." Mr. Firestone concurred, indicating that the SEC is engaging in "a full-court press on FCPA investigations." From our representation of corporations and individuals, our network of relationships, and our constant review of public disclosures, Gibson Dunn has identified approximately 100 companies that are the subject of open FCPA investigations.
2007 Enforcement Trends
Not only did the DOJ and SEC bring record numbers of FCPA enforcement actions in 2007, they brought cases with record-setting penalties. In the largest criminal FCPA resolution to date, on February 6, 2007, three wholly owned subsidiaries of Vetco International pleaded guilty and a fourth entered into a deferred prosecution agreement. These four subsidiaries (collectively "Vetco Subsidiaries") agreed to pay a total of $26 million in criminal fines. According to the plea agreements, the Vetco Subsidiaries engaged in a scheme to authorize corrupt payments to officials in the Nigerian Customs Service. From 2001 through 2003, the Vetco Subsidiaries made at least 378 corrupt payments totaling approximately $2.1 million to customs officials in Nigeria through an "international freight forwarding and customs clearance company." The purpose of the payments was allegedly to gain preferential treatment in the customs clearance process and to secure an improper advantage in the importation of goods and equipment into Nigeria. Notably, the charges did not allege that the payments were to "obtain or retain business." The deferred prosecution agreement also requires that Vetco International hire an independent compliance monitor to oversee the formation and maintenance of a robust FCPA compliance program.
In the largest combined FCPA settlement to date, on April 26, 2007, the DOJ and SEC announced settlements with Texas-based oilfield services provider Baker Hughes, Inc. and its wholly owned subsidiary, Baker Hughes Services, International ("BHSI"), worth a combined $44 million. According to the settlement documents, between 2001 and 2003, Baker Hughes and BHSI paid approximately $5.2 million to two agents operating in Kazakhstan with the knowledge that some or all of that money would be funneled to officials of Kazakhstan’s state-owned oil company. Additionally, between 1998 and 2004, Baker Hughes and BHSI allegedly paid or authorized more than $15 million in commission payments to agents operating in Angola, Indonesia, Kazakhstan, Nigeria, Russia, and Uzbekistan "under circumstances in which the compan[ies] failed to adequately assure [themselves] that such payments were not being passed on, in part, to [government] officials."
To resolve the SEC’s complaint, which alleged violations of the FCPA’s anti-bribery, books-and-records, and internal controls provisions, Baker Hughes agreed to pay approximately $23 million in disgorgement and prejudgment interest and to pay a $10 million civil penalty for purportedly violating a 2001 SEC cease-and-desist order prohibiting future violations of the FCPA. This $10 million penalty, the first of its kind in FCPA enforcement, underscores that an injunction should never be entered into nonchalantly as it may form the basis for an increased penalty should the party become involved in a subsequent FCPA matter.
In the DOJ action, BHSI pleaded guilty to violating and conspiring to violate the FCPA’s anti-bribery provisions and aiding and abetting the falsification of Baker Hughes’s books and records, and it agreed to pay an $11 million criminal fine. Baker Hughes also entered into a deferred prosecution agreement alleging the same three violations to which BHSI pleaded guilty. Both the DOJ and SEC resolutions require the company to retain a compliance monitor for three years.
Commenting on the Baker Hughes settlements, Assistant Attorney General Alice S. Fisher, head of the DOJ’s Criminal Division, noted that "[t]he record penalties leveled in this case leave no doubt that foreign bribery is bad for business." And from the SEC side, Director of Enforcement Linda Thompson noted that the $10 million civil penalty for violating a prior cease-a-desist order "demonstrates that companies must adhere to Commission Orders and that recidivists will be punished."
Leveraging Isolated Cases into Worldwide & Industry-Wide Investigations
Two other trends that emerged in FCPA enforcement in 2007 were investigations involving worldwide activities of single companies and industry-wide investigations of multiple companies. Traditionally, most FCPA investigations involved corrupt payments to government officials in a single country by a single company (and occasionally one or more of its employees). But today it is not uncommon for multinational companies that identify FCPA concerns in one locale to expand their internal inquiry to examine their operations around the globe. And where they do not, they can expect to receive the "So where else have you looked?" inquiry should they ever find themselves across the table from the DOJ or SEC. Prominent examples from 2007 of single-company FCPA resolutions spanning multiple countries include the following:
In 2007, the DOJ and SEC also took clear aim at leveraging single-company inquiries into industry-wide probes. The most recent example involves orthopedic implant manufacturers Biomet, Inc.; Medtronic, Inc.; Smith & Nephew plc; Stryker Corp.; and Zimmer Holding, Inc.; all of which publicly disclosed receiving letters from the DOJ or SEC requesting information concerning payments to government-employed physicians in various foreign countries, including Germany, Greece, and Poland. The letters followed on the heels of each of the companies, except Medtronic, entering into settlements with the New Jersey U.S. Attorney’s Office on September 27, 2007 alleging violations of the domestic anti-kickback statute relating to their sales of orthopedic implants to physicians in the United States. And in February 2007, Johnson & Johnson, the parent company of DePuy Orthopedics, which was also a party to the domestic physician anti-kickback settlement, publicly reported having voluntarily disclosed to the DOJ and SEC potential improper payments to government-employed physicians in foreign countries.
In another prominent example of an industry-wide probe from 2007, on July 2, the DOJ sent letters to eleven oil and oil services companies requesting information about their dealings with Panalpina Welttransport Holding AG, a Swiss logistics and freight forwarding company. Panalpina is widely believed to be the "major international forwarder and customs clearance agent" implicated in the February Vetco International FCPA settlement that allegedly made improper payments to officials of the Nigerian Customs Service. The DOJ is investigating Panalpina’s activities in Nigeria, Kazakhstan, and the Middle East. Most of the eleven companies that received the DOJ letter, as well as several other oil services companies, have publicly disclosed internal investigations concerning potential improper payments made through Panalpina and other agents to government officials in various countries, including Nigeria. Panalpina has announced that it is and will continue to cooperate with the DOJ’s investigation and that it has suspended its services in Nigeria. This investigation demonstrates the risks of doing business in countries where corruption is rampant, and it also emphasizes the need for companies to conduct adequate due diligence before hiring agents or consultants and to monitor the activities of those third parties post-retention to ensure FCPA compliance.
The mother of all 2007 industry-wide investigations has to be that arising from the Oil-for-Food Program ("OFFP"). Likely the largest international corruption investigation ever — involving a U.N.-commissioned international investigative body, four congressional committees, the DOJ, two U.S. Attorney’s Offices, the SEC, the Manhattan District Attorney’s Office, the Department of Treasury’s Office of Foreign Assets Control ("OFAC"), and at least six foreign governments — OFFP spawned six SEC and four DOJ FCPA enforcement actions in 2007. This all began when the U.N. Independent Inquiry Committee ("IIC"), commonly known as the Volcker Committee after its Chairman (and former Chairman of the Federal Reserve) Paul A. Volcker, published its final report detailing the results of its sixteen-month investigation into alleged corruption surrounding the OFFP. When the smoke cleared, the IIC had named 2,253 companies worldwide as having made more than $1.8 billion in "kickbacks" to the Iraqi government. More than two dozen companies have since publicly disclosed that they are under investigation by the DOJ and/or SEC, suggesting there may be more OFFP prosecutions to come in 2008.
First to settle FCPA-related OFFP charges was El Paso Corp., a Houston-based energy company. On February 7, 2007, El Paso agreed to settle with the SEC on charges that it violated the FCPA’s books-and-records and internal controls provisions, and at the same time entered into a non-prosecution agreement with the U.S. Attorney’s Office for the Southern District of New York ("SDNY") on non-FCPA (wire fraud and OFAC) charges. According to the SEC’s complaint, El Paso purchased oil from third parties while knowing that the third parties had themselves made approximately $5.5 million in illegal kickback payments in connection with their purchase of the oil from the Iraqi government. El Paso allegedly reimbursed the intermediary purchasers for their kickback payments through higher commission payments and then improperly recorded the whole of the commissions as "cost of goods sold." El Paso agreed to pay a $2.25 million civil penalty to the SEC and agreed to forfeit $5.48 million — the SEC refers to the forfeiture as disgorgement of "profits," while the SDNY refers to the figure as reflecting the value of the kickback payments — to the SDNY for ultimate transfer to the Development Fund for Iraq.
For the first half of 2007, El Paso remained the only company to settle FCPA charges arising from the OFFP. Then, on August 23, the DOJ and SEC announced FCPA books-and-records settlements (the SEC’s complaint also alleged internal controls violations) with Textron, Inc. According to the settlement documents, two relatively recently acquired French subsidiaries of Textron — which participated in the "Humanitarian" side of the OFFP, unlike El Paso, which was an "Oil" side participant — used a third-party agent to funnel $580,000 to ministries of the Iraqi government in connection with the sale of industrial pumps and related spare parts under the OFFP. Textron’s subsidiaries allegedly funded the payments, which equaled 10% of the contracts’ values, by inflating the value of their contracts by 10%, thereby receiving an extra 10% from the U.N.’s escrow account. Textron’s subsidiaries then increased the value of their agents’ commissions by 10%, reimbursing the agents for making the payments, and improperly recorded the whole of the payments to the agents as "commissions" and "consultation fees." To resolve the allegations concerning the OFFP, as well as other allegedly improper payments made in several countries outside the OFFP, Textron paid a $1.15 million fine to the DOJ as part of a non-prosecution agreement, and paid an $800,000 civil penalty to the SEC along with approximately $2.7 million in disgorgement with prejudgment interest. Both the DOJ and SEC acknowledged Textron’s early discovery and self-reporting of the improper payments, as well as the company’s remedial actions and significant cooperation in the government’s investigation of it and other companies.
Rounding out the ranks of companies to settle OFFP FCPA charges (thus far) are the following:
The OFFP investigation has also highlighted another topic of great interest to those involved in FCPA matters: the increasingly inconsistent usage of non-prosecution and deferred prosecution agreements by the DOJ and the many United States Attorneys’ Offices. Thus far, Akzo Nobel, Chevron, El Paso, and Textron have received non-prosecution agreements from the DOJ and SDNY, while for essentially the same conduct, York International and Ingersoll-Rand received deferred prosecution agreements, widely believed (and for good reason) to be a more harsh sanction.
DOJ and SEC Target Individual Defendants
This year, of thirty-one FCPA defendants, fifteen were individuals, by far the highest annual total in the statute’s thirty-year history. Asked at a recent American Bar Association event whether the prosecution of individuals in 2007 is a trend or an aberration, SEC Assistant Director Cheryl J. Scarboro said that the SEC will "continue to focus on individuals." Mr. Mendelsohn, also a panelist at this event, added that the trend of individual enforcement is "part of a very concerted effort" intended to "deter the conduct." And as if this were not disconcerting enough for individuals with potential FCPA liability, Donald W. Freese, the head of the Federal Bureau of Investigation’s new FCPA unit, recently expressed his view that the only way to deter FCPA conduct is to put people in jail.
Perhaps the highest profile FCPA prosecution of an individual in 2007 is that of sitting United States Congressman William J. Jefferson. On June 4, 2007, a grand jury in the Eastern District of Virginia returned a sixteen-count indictment charging Jefferson with violating the FCPA’s anti-bribery provisions, solicitation of a bribe by a public official, wire fraud, money laundering, obstruction of justice, and violating the Racketeer Influenced and Corrupt Organizations Act. The FCPA charges stem from Jefferson’s alleged promise to make a $500,000 "front-end payment" to a high-ranking Nigerian official, widely believed to be former Vice President Atiku Abubakar, to induce the official to assist Jefferson in obtaining regulatory approvals from the Nigerian state-owned telecommunications company for a joint venture between a Nigerian company and iGate, Inc., a Kentucky-based company for which Jefferson was acting as agent. Jefferson also allegedly offered the Nigerian official a "back-end payment" of 50% of the joint venture’s future profits. When the FBI raided Jefferson’s Washington, D.C. home, acting on the tip of a confidential informant, they discovered $90,000 cash in Jefferson’s freezer, which the indictment alleges was to be used in partial satisfaction of the $500,000 front-end payment. Jefferson has pleaded not guilty to all charges and is presently scheduled to go to trial in February 2008.
Although lacking the media cachet of the Jefferson indictment, another particularly interesting 2007 FCPA individual enforcement action was the SEC’s settlement with Monty Fu, the founding Chairman of Syncor International Corp., a California-based provider of radiopharmaceutical products. Otherwise relatively standard FCPA fare, what makes this case truly significant is that the resolution was reached nearly five years after Syncor International and its foreign subsidiary Syncor Taiwan settled FCPA charges with the DOJ and SEC in December 2002. The SEC’s complaint charged Fu only with FCPA books-and-records and internal controls violations. According to the complaint, from 1985 through 2002, Syncor Taiwan made more than $1.1 million in improper commission payments to both private and state-employed physicians in Taiwan to influence them to purchase Syncor Taiwan’s products. The SEC alleged that Fu, as the Chairman of Syncor International, had the authority to implement a system of internal controls within Syncor Taiwan, yet failed to do so. Additionally, the SEC alleged that he either knew, or was reckless in not knowing, that the improper payments were being falsely recorded on Syncor Taiwan’s books and records, which were then incorporated into Syncor International’s books and records. Interestingly, given the nature of the charges and the lengthy time period to reach a settlement, it does not appear that Mr. Fu will be criminally prosecuted.
Other corporate officials to be charged in 2007 after their respective employers settled FCPA charges in prior years include Robert W. Philip (SEC) and Si Chan Wooh (DOJ and SEC), formerly the CEO and Executive Vice President, respectively, of Schnitzer Steel Industries, Inc., which together with its Korean subsidiary settled criminal and administrative FCPA charges with the DOJ and SEC in October 2006, and Charles M. Martin (SEC), formerly the Asian Governmental Affairs Director of Monsanto Co., which itself settled civil and administrative FCPA charges with the SEC in January 2005.
International Enforcement and Cooperation
One can’t help but suspect that Mark Mendelsohn chose carefully his words featured at the outset of this Update — "2007 is by any measure a landmark year in the fight against foreign bribery." For not only did FCPA enforcement reach unprecedented levels in 2007, but this year also featured never-before-seen vigor among foreign prosecutors in at least investigating, if not yet prosecuting, international graft. Chiming in on this point, Alice Fisher recently described the DOJ’s efforts to work "more effectively with foreign authorities around the world to investigate and prosecute FCPA offenses," resulting in "an increase in the number of joint investigations." Representative of this increased multinational cooperation, on November 20 and 21, 2007, Ms. Fisher, Mr. Mendelsohn, and William B. Jacobson, Assistant Chief of the DOJ’s Fraud Section and the DOJ’s second-most senior FCPA prosecutor, participated in an international conference to celebrate the tenth anniversary of the OECD Anti-Bribery Convention. Together with the DOJ representatives, prosecutors from Brazil, Chile, France, Germany, Hong Kong, Hungary, Italy, South Africa, and Switzerland gave presentations on the status of international bribery enforcement in their own countries. This coordination between U.S. and foreign anti-bribery enforcement agencies may subject multinational companies to dual enforcement actions in the United States and foreign countries, much as we saw in the 2006 prosecutions of Statoil ASA and expect to soon see for Akzo Nobel N.V.
Several recent cases highlight this trend toward more aggressive international enforcement of foreign anti-bribery laws.
On October 5, 2007, German conglomerate Siemens AG announced that it had accepted a German court’s order to pay a EUR 201 million ($284 million) fine in connection with alleged bribes paid by Siemens’s telecommunications unit to win contracts in a number of countries, including Russia. Siemens also agreed to pay German tax authorities EUR 179 million ($253 million) in back taxes related to improper deductions taken for the unlawful payments. In addition, the German authorities indicted at least one executive from the telecommunications unit in connection with the alleged bribery, and press reports indicate that additional indictments are expected. These significant fines came on the heels of a EUR 38 million ($51 million) fine levied against Siemens’s power-generation unit in May 2007, and Siemens has confirmed that it is continuing to investigate suspicious payments made by several other units. Both the DOJ and SEC have open FCPA investigations related to the alleged bribery, which many speculate will lead to even more sizeable penalties than those imposed in Germany, which already dwarf the highest FCPA settlement on record, Baker Hughes, Inc. with $44 million. China, Greece, Hungary, Indonesia, Italy, Japan, Norway, and Switzerland also have reportedly launched investigations into the same conduct.
In one of the most highly publicized and controversial international corruption investigations in recent memory, BAE Systems PLC, a major British defense contractor, is suspected of having paid billions of dollars to members of the Saudi royal family over several decades to secure lucrative contracts to provide fighter jets and other military equipment to Saudi Arabia. The British Serious Fraud Office ("SFO") had reportedly been investigating BAE for several years when then-Prime Minister Tony Blair intervened to halt the inquiry in December 2006, invoking national security concerns when Saudi Arabia threatened to withdraw from cooperative anti-terrorism efforts. But that would not be the end of BAE’s troubles, for on June 26, 2007, BAE announced that the DOJ had opened its own investigation into the Saudi payments. While British authorities have reportedly resisted cooperating with the DOJ, the Swiss authorities have agreed to provide relevant financial records to assist the DOJ’s investigation. And according to media reports, the DOJ recently flew a BAE employee to the United States for interviews, routing him through Paris so as to avoid attention. Accordingly, the BAE investigation highlights the fact that the level of international cooperation may vary greatly, depending on the particular countries involved. In early December, the SFO announced a new investigation of BAE, focusing on potentially improper payments made to secure contracts with the governments of Romania, South Africa, and Tanzania.
In November 2007, the former chief legal officer for the Samsung Group, the largest conglomerate (chaebol) in South Korea, publicly reported that the company and its affiliates paid billions of dollars to various government officials to ensure that the son of Samsung’s current chairman would succeed his father as the head of the chaebol. The whistleblower claimed that the money was kept in slush funds that were concealed through unlawful bookkeeping practices. State prosecutors in South Korea are investigating the allegations, and President Roh Moo-hyun recently approved legislation mandating the launch of a separate, independent, investigation. Several commentators have speculated that the negative press arising from the bribery allegations may trigger changes in Samsung’s business practices, but skeptics have noted that the culture of bribery is deeply rooted in South Korea, where the chaebols wield significant political influence.
The Only Way to (Sponsor) Travel
Company-sponsored travel by government officials was clearly an area of focus for the DOJ and SEC in 2007. The FCPA’s anti-bribery provisions provide for an affirmative defense permitting companies to pay for the "reasonable and bona fide" expenses of foreign government officials, "such as travel and lodging expenses," incurred in connection with either (1) the "promotion, demonstration, or explanation" of the payer’s products or services or (2) "the execution or performance of a contract with a foreign government or agency thereof." But as the DOJ and SEC made clear in 2007, there is a right way and a wrong way to go about sponsoring travel for foreign government officials.
The "right way" is exemplified in two very similar FCPA Opinion Procedure Releases issued by the DOJ in July and September, respectively (the FCPA Opinion Procedure Release process is described in greater detail below). In FCPA Op. Proc. Rel. 2007-01, the DOJ wrote that it would not take enforcement action against a company that wished to cover domestic travel expenses — including transportation, lodging, and meals — expected to be incurred by a six-person delegation of a foreign government in connection their visit to one of the requestor’s U.S. sites (the foreign government agreed to pay the officials’ international travel expenses). The Opinion highlighted the following facts as relevant to the DOJ’s conclusion that the requestor’s contemplated conduct would fall within the FCPA’s "promotional expenses" affirmative defense:
In FCPA Op. Proc. Rel. 2007-02, the DOJ issued very similar advice to a requestor contemplating the payment of domestic travel and lodging expenses for foreign government officials already in the United States on business unrelated to the requestor. The only significant differences between FCPA Op. Proc. Rels. 2007-01 and 2007-02 are that the requestor in this instance additionally sought:
The DOJ again concluded that payment of the foreign officials’ travel expenses under these circumstances would fall within the FCPA’s "promotional expenses" affirmative defense.
On the "how not to" side of the government official travel sponsoring ledger, on December 21, 2007, the DOJ and SEC announced FCPA books-and-records and internal controls settlements with Lucent Technologies, Inc., a global telecommunications provider that merged with Alcatel SA in November 2006. The settlement documents allege that, between 2000 and 2003, Lucent spent more than $10 million sponsoring 315 trips for approximately 1,000 Chinese government officials. The majority of these trips were ostensibly designed to allow officials before whom Lucent had pending or expected tenders to inspect Lucent’s factories or to train Chinese officials with whom Lucent had ongoing contracts on how to use Lucent equipment. In fact, the Chinese government officials spent little to no time visiting Lucent’s facilities — indeed, for much of the relevant period Lucent had relocated its production facilities to countries, including China, other than where the travel was provided — and instead spent the majority of these trips visiting popular tourist destinations in Australia, Canada, Europe, and many locations within the United States, including Disney World, the Grand Canyon, Hawaii, Las Vegas, and Niagara Falls. Each trip typically lasted fourteen days and cost Lucent between $25,000 and $55,000. In connection with some of these trips, Lucent additionally provided between $500 and $1,000 per day to the traveling foreign officials as a "per diem," even though Lucent was already funding all of the officials’ travel expenses. And Lucent’s funding of these trips was so transparently gratuitous to at least one Chinese official, that he even requested (and Lucent agreed) that Lucent pay $21,000 to cover the costs of him obtaining his MBA in lieu of paying for him to attend one of the trips.
Although the conduct described in the settlement documents arguably implicates the FCPA’s anti-bribery provisions — the DOJ and SEC have previously charged corporate largesse through gratuitous travel sponsorship as anti-bribery violations — Lucent was only alleged to have improperly recorded the expenses and to have failed to maintain a system of internal controls. For example, Lucent allegedly booked many of the trips to a "Factory Inspection Account," even where the officials did not visit a Lucent factory at any time during the trip. With regard to Lucent’s internal controls, the settlement documents allege that Lucent "failed, for years, to properly train its officers and employees to understand and appreciate the nature and status of its customers in China in the context of the FCPA."
Lucent’s settlements, through which it will pay a $1.5 million civil penalty to the SEC and a $1 million fine to the DOJ, resolve a longstanding investigation into Lucent’s travel practices in China. According to Lucent’s public filings, the company nearly went to the mat on this investigation, receiving a "Wells" notice from SEC Staff in September 2006 and submitting a written response to the Commission in late 2006. Another interesting aspect of the settlement is that the DOJ’s non-prosecution agreement, which typically resolves all of a company’s outstanding FCPA liabilities, expressly provides that it does not cover the DOJ’s ongoing investigation of pre-merger Alcatel SA activities in "Costa Rica and elsewhere." Alcatel’s former Country Manager for Costa Rica, Edgar Acosta, was indicted on FCPA charges in March 2007, and its former Director of Latin American Sales, Christian Sapsizian, who was originally indicted on FCPA charges in 2006, pleaded guilty in June 2007.
Transactional Due Diligence
With the recent upsurge in global M&A activity coinciding with that of FCPA enforcement, the FCPA has become a central issue in transactional due diligence. So much so that Alice Fisher made the topic a centerpiece of a recent speech she gave on the FCPA, advising that there are five questions that every acquirer will want to know, at a minimum, about a prospective target before it closes on an acquisition:
Nearly half of the corporate FCPA enforcement actions of 2007 implicated some aspect of M&A activity. For example, Delta & Pine Land Co. and York International Corp. each settled FCPA enforcement actions in 2007 shortly after being acquired by, respectively, Monsanto Co. and Johnson Controls, Inc. Interestingly, Delta & Pine’s pre-merger SEC filings suggest that it had identified the FCPA issue forming the basis for the SEC’s administrative cease-and-desist order — the provision of approximately $43,000 in cash, travel expenditures, and office furniture, among other items, to Turkish Ministry of Agriculture officials to influence them in providing Delta & Pine with regulatory approvals — years prior the Monsanto acquisition. But Delta & Pine determined that the payments did not violate the FCPA, perhaps because it believed that they fit within the "facilitating payments" exception to the FCPA’s anti-bribery provisions, and accordingly did not report the conduct to the DOJ or SEC. But when Monsanto discovered these payments in the course of pre-acquisition due diligence, it required Delta & Pine to report the conduct to the DOJ and SEC, ultimately leading to a post-closing FCPA settlement.
Commenting on the York International settlement, Mark Mendelsohn recently noted that counsel for Johnson Controls actively participated in settlement negotiations with the DOJ and SEC, and that while there was "recognition around the table" that the matter would be settled, the "big issue was to ensure York was the settling party; not Johnson Controls." Mr. Firestone added that the SEC is likewise sensitive to issues such as who the settling party will be in the context of a merger.
For additional guidance on the topic of transactional due diligence, please see the article by F. Joseph Warin, et al., Acquisition Due Diligence: A Recipe to Avoid FCPA Enforcement, TEXAS STATE BAR OIL, GAS, & ENERGY RESOURCES LAW SECTION REPORT 2 (June 2006).
The Pain Continues — FCPA-Inspired Civil Litigation
Although the FCPA does not grant a private cause of action, several federal district courts have recently refused to dismiss § 10(b) actions based on allegedly false and misleading statements regarding FCPA violations made in companies’ financial statements. These courts have held that the plaintiffs met the heightened pleading requirement for fraud under the Private Securities Litigation Reform Act ("PSLRA").
Continuing this trend, on September 18, 2007, the U.S. District Court for the Middle District of Florida decided two motions to dismiss a securities class action arising, in part, from alleged FCPA violations by FARO Technologies, Inc. The class action complaint named as defendants FARO, several individual FARO employees, and FARO’s auditor, Grant Thornton ("GT"). The complaint made various allegations of fraud, including a claim that the company overstated income by including sales resulting from FCPA violations and a claim that the company falsely stated that its system of internal controls was adequate.
In the court’s decision, it adopted a magistrate judge’s recommendation to deny FARO’s motion to dismiss the plaintiffs’ second amended complaint. The magistrate judge found that the complaint sufficiently alleged that the individual employees’ knowledge of unlawful payments should be imputed to FARO and that FARO and the individual defendants "knowingly or recklessly attested to the adequacy of the internal controls system, when they knew that the system was, in fact, seriously inadequate." In contrast, the magistrate judge recommended that the court grant GT’s motion to dismiss because GT did not actively participate in the fraudulent activities alleged against FARO, nor did GT have knowledge of FARO’s inadequate internal controls. In addition, despite the existence of some "red flags," the magistrate judge found that GT was not reckless in failing to detect FARO’s inadequate controls and fraudulent activity. Accordingly, the court granted GT’s motion to dismiss on the magistrate judge’s recommendation.
In May 2007, following a denial of its motion to dismiss, Georgia-based medical equipment manufacturer Immucor, Inc. agreed to settle a similar class action for $2.5 million. In denying Immucor’s motion to dismiss, the district court held that the "weaknesses [in Immucor’s internal controls] could have lead [sic] . . . to liability under the FCPA and impacted the value of Immucor’s stock. The Court cannot rule as a matter of law that Immucor’s misstatement of those weaknesses was not material." Then on September 27, 2007, just one day after the district court approved the class action settlement, Immucor and its President, Gioacchino De Chirico, entered into administrative settlements with the SEC charging them with violating the FCPA’s anti-bribery, books-and-records, and internal controls provisions and ordering them to cease-and-desist from future violations of the same. There was no financial penalty imposed upon Immucor or De Chirico.
On September 19, 2007, in the U.S. District Court for the District of Columbia, a public pension system based in Michigan filed a derivative lawsuit related to alleged FCPA violations against BAE Systems PLC. The lawsuit claims that BAE’s officers and directors encouraged and permitted the company’s managers to make and authorize more than $2 billion in bribes and kickbacks to win lucrative contracts in violation of the FCPA and other foreign anti-corruption laws. The complaint alleges that this conduct constituted an intentional, reckless, and negligent breach of the directors’ and officers’ fiduciary duties to the company. In addition, the plaintiff shareholder claims that the defendants misrepresented the quality and effectiveness of the company’s compliance program.
Litigation continues in two shareholder derivative suits filed in May 2007 against certain of Baker Hughes, Inc.’s current and former directors and officers. The plaintiffs allege that the defendants failed to implement adequate internal controls, policies, and procedures to prevent the conduct that gave rise to the company’s April 2007 settlements with the DOJ and SEC.
Another recent civil case, one with a particularly peculiar fact pattern, demonstrates yet another way in which civil liability can follow from alleged FCPA violations. In March 2006, the Government of the Dominican Republic and the Secretariat of State for the Environment and Natural Resources of the Dominican Republic filed a lawsuit in the U.S. District Court for the Eastern District of Virginia against AES Corporation ("AES"), which is based in Virginia, several of its subsidiaries, and an independent contractor. The complaint alleges that the defendants conspired to dump hazardous coal ash on two beaches in the Dominican Republic, resulting in ecological destruction and undermining the physical and economic health of local communities. In addition to allegations that the defendants violated various environmental laws and the Basel Convention on the Control of Transboundary Movements of Hazardous Wastes and Their Disposal, the Dominican Government asserted that the defendants violated the FCPA and the Racketeer Influenced and Corrupt Organizations Act by approving the payment of bribes to Dominican officials to allow the dumping to occur. Further, the complaint alleges that after a Dominican District Attorney attempted to halt the dumping, he was himself offered a bribe and, when he refused, subjected to an attempted physical assault, an attempted firebombing of his car, and death threats before ultimately being fired by corrupt Dominican officials. The complaint asserts that the defendants all knew about and ratified these activities. Interestingly, the Dominican government conceded that corruption was so problematic in its own judiciary that it sought relief in a U.S. court because of concerns that the defendants would purportedly resort to further bribery to win a case brought in its home country. In February 2007, one week before trial, AES settled the case for $6 million.
In short, corporations and their directors and officers must not overlook the third member of the FCPA Trifecta: the DOJ, the SEC, and the civil litigant.
2007 DOJ Opinion Procedure Releases
By statute, the DOJ is required to provide a written opinion at the request of an "issuer" or "domestic concern" as to whether the DOJ would prosecute the requestor under the FCPA’s anti-bribery provisions for prospective conduct that the requestor is considering taking. These opinions are published on the DOJ’s FCPA website, but only a party who joins in the request may officially rely upon the opinions.
In the FCPA’s thirty-year history, the DOJ has issued but forty-seven such written opinions, including three in 2007. In 2006, Alice Fisher commented that "the FCPA opinion procedure has generally been under-utilized" and noted she wants it "to be something that is useful as a guide to business." The three opinion releases issued in 2007 are the most issued in a single year since 2004, when the DOJ issued four releases. The first two of these releases were described above in the Sponsoring Travel Section; the third is described below.
FCPA Op. Proc. Rel. 2007-03
The DOJ issued its final FCPA Opinion Procedure Release of 2007 on December 21. In this Opinion, the requestor sought to make a $9,000 "advance payment" required by a family court judge in a foreign country to cover administrative costs expected to be incurred by the court in administering a dispute over the estate of a deceased relative of the requestor. The requestor represented that she had obtained a written opinion from a lawyer with law degrees in both the United States and the foreign country that the payment she sought to make was not only not contrary to, but explicitly provided for, under the foreign country’s laws. The requestor further represented that the payment would be made directly to the clerk’s office of the family court, not to the foreign judge presiding over the dispute. The DOJ concluded that the proposed payment would be lawful under two grounds: (1) the payment "will be made to a government entity, the court clerk’s office, rather than a foreign official" and "there is nothing to suggest that the presiding judge . . . will personally benefit from the funds after they are paid into the government account"; and (2) the payment is contemplated under the local law of the foreign country so it falls under the FCPA’s "lawful under the written laws and regulations" of the foreign country affirmative defense.
2007 FCPA Enforcement Litigation
United States v. Kay
On October 24, 2007, the United States Court of Appeals for the Fifth Circuit issued a much awaited opinion concerning the scope of the FCPA. In United States v. Kay, the court held that payments to foreign officials made to reduce customs duties and taxes, thereby helping the payer gain a competitive advantage in the marketplace, may violate the FCPA’s prohibition on payments made to "obtain or retain business."
During the 1990s, David Kay and Douglas Murphy, executives at American Rice, Inc. ("ARI"), paid bribes to various Haitian officials, allowing ARI to avoid paying certain customs duties and taxes on its rice imports. In 2002, following a disclosure to the SEC, Kay and Murphy were indicted, but the district court granted their motion to dismiss the indictment, "concluding that payments to foreign government officials made for the purpose of reducing customs duties and taxes do not fall under the scope of obtaining or retaining business pursuant to the text of the FCPA." In 2004, the Fifth Circuit reversed that decision, holding that "bribes paid to foreign officials in consideration for unlawful evasion of customs duties and sales taxes could fall within the purview of the FCPA’s proscription" provided that the "bribery was intended to produce an effect — here, through tax savings — that would assist in obtaining or retaining business." (Emphasis in original). After Kay and Murphy were found guilty at trial, they moved to dismiss and arrest judgment, renewing their argument based on lack of fair warning. The district court judge denied the motion, and Kay and Murphy appealed to the Fifth Circuit on the ground that application of the Fifth Circuit’s prior opinion on the scope of the FCPA violated the Due Process Clause by denying them fair notice that their conduct was illegal.
The Fifth Circuit considered four standards for fair notice, ultimately concluding that Kay and Murphy’s convictions met each standard. First, the court noted that although the FCPA’s "obtain or retain business" provision was "imprecise general language," the FCPA did not violate the prohibition against vagueness because the defendants viewed their payments as measures necessary to keep up with competitors — i.e., to obtain or retain business — and thus a man of common intelligence would have understood that the defendants were "treading close to a reasonably-defined line of illegality." Second, the court explained that when the district court determined that the facts of the case fell within the FCPA’s prohibitions, it did not extend the FCPA beyond its explicit terms and thereby violate the prohibition on retroactive application of a novel interpretation of a statute, because "[t]he explicit terms of the FCPA do not include either language relating specifically to contracts or defining more general business practices that may fall under the [FCPA’s] business nexus test." Third, the court held that the mere fact that the FCPA "contained an ambiguous provision" did not mean that it was void for vagueness, and the relative dearth of prosecutions under the FCPA of individuals for the "narrow type of payment" at issue in the case did not permit Kay and Murphy to argue that they "were unaware of the boundaries of illegality under the [FCPA] in the 1990s." Finally, the court held that the rule of lenity, which "ensures fair warning by so resolving ambiguity in a criminal statute as to apply it only to conduct clearly covered," did not apply, because the rule permits use of legislative history to resolve ambiguity, and "the mere possibility of articulating a narrower construction of an act . . . does not by itself make the rule of lenity applicable."
The Fifth Circuit also held that the district court’s jury instructions, which required that the defendants have committed the act "voluntarily and intentionally" and "with a bad purpose or evil motive of accomplishing either an unlawful end or result, or a lawful end or result by some unlawful method or means," met the common law definition of "willfully," by requiring that a defendant know he is committing the act itself, and know that it is "in some way wrong." The court expressly declined to include a third requirement — that the defendant "knew that he was violating the specific provisions of a law" — thus agreeing with prior Second Circuit precedent in limiting the requirement of such specific knowledge to "highly technical exceptional statutes" such as federal tax laws, reiterating the traditional rule for criminal willfulness: "ignorance of the law is no excuse." The Fifth Circuit affirmed the convictions of both defendants.
The Kozeny Cases
On June 21, 2007, Judge Shira Scheindlin of the U.S. District Court for the Southern District of New York dismissed all FCPA counts pending against Frederic Bourke and David Pinkerton on statute-of-limitations grounds. Along with Viktor Kozeny, Bourke and Pinkerton were indicted on May 12, 2005 for allegedly participating in a massive scheme to bribe government officials in Azerbaijan. The three men allegedly bribed government officials to ensure that they would privatize Azerbaijan’s state-owned oil company, thus allowing Kozeny, Bourke, Pinkerton, and others to share in the anticipated profits arising from that privatization. Judge Scheindlin later reinstated several of the FCPA counts on July 16, 2007, though the reasoning for her opinion did not change.
Pinkerton and Bourke had moved to dismiss the FCPA counts as time-barred (Kozeny, who has thus far refused to submit to U.S. jurisdiction, did not join in the motion). The DOJ had previously sought and received a court order tolling the statute of limitations under 18 U.S.C. § 3292, which permits the United States to obtain such orders for up to three years while it pursues an official request to obtain evidence located in a foreign country. Although the DOJ filed the official request at issue in this case with the governments of the Netherlands and Switzerland within the five-year statute-of-limitations period, it did not obtain the § 3292 court order until after the statute of limitations had run. Judge Scheindlin held that it is the court order, not the application with the foreign government, that tolls the statute of limitations under 18 U.S.C. § 3292. The DOJ has appealed Judge Scheindlin’s decision to the Second Circuit, which has yet to schedule oral argument.
As noted above, Kozeny has thus far refused to appear in U.S. court to answer the charges against him. He was arrested in the Bahamas and the DOJ filed an extradition application with the Bahamian courts. On October 25, 2007, after a lower Bahamian court approved the application, an intermediate appellate court overturned the extradition order, basing its decision, in part, on the failure of the U.S. government to disclose Judge Scheindlin’s decision dismissing the FCPA charges against Kozeny’s co-defendants. Kozeny has been released on $300,000 bail as the prosecution appeals the intermediate court’s ruling to the highest court in the Bahamas.
In another related case from 2007, on July 6, following the district court’s dismissal of the FCPA charges against Bourke and Pinkerton, the DOJ and SDNY jointly announced a non-prosecution agreement with hedge fund Omega Advisors, Inc. to resolve allegations surrounding its participation in the Azeri oil privatization effort. According to the agreement, Omega invested more than $100 million in companies controlled by Kozeny while knowing that he had entered into corrupt arrangements with Azeri officials giving them a financial interest in the privatization effort. Omega agreed to forfeit $500,000 in connection with its FCPA settlement.
2007 Legislation Relevant to the FCPA
Two pieces of legislation relevant to the FCPA are currently pending in Congress. If either bill passes, the implications for companies subject to the FCPA could be far-reaching.
On August 3, 2007, Representative Gene Green (D-TX) introduced H.R. 3405, a bill that would require all government contractors to certify, before any Executive Agency may contract with it, that they, their employees, and their agents have not violated the FCPA or analogous foreign international corruption statutes. The legislation arises from a concern that U.S. companies are at a disadvantage when competing against foreign competitors who are not bound by the FCPA. The intent of H.R. 3405 is to level that playing field somewhat by requiring all companies to certify their compliance with the FCPA before bidding on contracts with the U.S. government. Several companies have criticized the bill because it would render them unable to make the requisite certification and bid on a U.S. government contract if they have ever violated the FCPA in the past, even if the past violations were voluntarily disclosed, fully investigated, and prosecuted by the government. The bill could also require all government contractors to notify the government of previously undisclosed past violations of the FCPA. H.R. 3405 remains in the House Subcommittee on Government Management, Organization, and Procurement, where it was referred in September 2007.
On November 13, 2007, the House passed H.R. 3013, a bill that would prohibit federal prosecutors and agents from demanding, requesting, or conditioning treatment based on a company’s disclosure of, or refusal to disclose, privileged attorney-client communications or attorney work product. H.R. 3013 would also prohibit federal prosecutors and agents from conditioning a charging decision on such disclosures or using any such disclosures as a factor in determining whether a company has cooperated with the government. This legislation is a response to the "culture of waiver" that has been created by recent policy guidance issued by the DOJ that treats companies more harshly if they do not waive the attorney-client privilege and work product protections.
H.R. 3013 would apply in all situations in which the government investigates and prosecutes a company, but the issue of waiver arises frequently in the context of FCPA investigations. In many cases, a company that has voluntarily disclosed allegedly improper payments to the DOJ or the SEC will conduct its own internal inquiry of the conduct and then cooperate with the government’s investigation to receive favorable treatment. In the past, the government expected that companies in such a position would waive privilege to gain the full benefits of cooperating with the government. The House Report discussing H.R. 3013 discusses the importance of the attorney-client privilege and the work product doctrine, concluding that "[t]he clear thrust of [the DOJ’s] new policies is that waiver is required to get ‘cooperation’ credit, a crucial element in charging decisions." Accordingly, H.R. 3013 tries to "strike a balance between the promotion of effective law enforcement and compliance effort . . . and the preservation of essential legal protections."
On November 14, 2007, H.R. 3013 was referred to the Senate Judiciary Committee. In September 2007, the Senate Judiciary Committee held hearings on S. 186, a bill that is identical to the version of H.R. 3013 that was first introduced in the House, but there has been no further action.
2008 Litigation Docket
A collateral consequence of the drastic upswing in the prosecution of individual defendants for alleged FCPA violations is almost certain to be an increase in litigated FCPA cases, of which there are but a handful in the statute’s thirty-year history. Without the same complex mix of public relations and other collateral concerns that pressure many corporate defendants to settle — call it the Arthur Andersen Effect — not to mention the motivation of literally fighting for their freedom, individual defendants have traditionally been more willing to put the government to its burden at trial. Look for at least one of the below pending cases to see a jury in 2008:
China, China, China — The Perils of Doing Business
China remains a high-risk environment for conducting business in compliance with the FCPA. In 2007 alone, the DOJ and SEC brought FCPA cases against Si Chan Wooh and Robert W. Philip, both formerly of Schnitzer Steel Industries, Inc. (which itself settled FCPA charges in 2006); Lucent Technologies, Inc.; York International Corp.; and Paradigm B.V.; all stemming from allegedly improper conduct in China. These five FCPA actions in 2007 nearly doubled the number involving China from the previous three years combined.
Ranked seventy-second on Transparency International’s 2007 Corruption Perceptions Index, corruption is rampant in China, and Chinese government officials routinely seek free meals, gifts, entertainment, cash-equivalent vouchers, and sponsored travel opportunities. According to the U.S.-China Business Council, "[s]o tightly knit are corrupt practices into the fabric of modern Chinese society that they are almost invisible. . . . For businesspeople, corrupt practices have layered cost upon cost, as each government organization with any say over a given deal has to be negotiated with, cajoled, and managed in order to fend off the rent-seeking behavior."
China’s layered government enhances this already corrupt environment. Businesses seeking licenses are forced to deal with several layers of government and several agencies within each layer. Recent central government anti-corruption reforms have not affected local customary practice. Moreover, in China, the intersection of private and governmental business makes it difficult to identify foreign officials. For instance, many businesspeople also hold governmental positions; and many major businesses are state-owned or state-controlled. It is typical for an ex-government official who remains a Communist Party member and maintains continuing ties to the government to serve as a "consultant." Further, as a multitude of cases and settlements have made clear, the definition of "foreign official" is broad indeed, encompassing airport officials (InVision Technologies, Inc.), physicians and lab employees at government-owned hospitals (Diagnostic Products Corp.), and employees of China National Offshore Oil Company (Paradigm B.V.).
China is especially dangerous because the line between bona fide business expenses and corruption is not well-defined. For instance, the network of connections built on personal relationships (guanxi) is essential for successful business in China. Yet, access to that network often requires providing gifts, meals, and entertainment. Additionally, gifts for Chinese holidays, like Chinese New Year and the Mid-Autumn Festival, can also blur the line. The difference between traditional gifts (e.g., mooncakes) and cash gifts — even those of lesser value — can mean the difference between a mere symbolic gesture and a bribe. Of more recent note, officials are increasingly requesting "good works" marketing, in which funds are redirected to community projects in exchange for business. These cultural and community pressures make doing business in China a precarious proposition.
As the mix of revenues for U.S. corporations increasingly shifts abroad, and as foreign corporations increasingly take advantage of U.S. securities markets, the challenges of navigating foreign environments in compliance with the FCPA continually increase. The pitfalls for even the most compliance conscious corporations are substantial. A quick "top-ten" checklist to bolster FCPA compliance should include:
1. Clearly articulated policy against violations of the FCPA and foreign anti-bribery laws;
2. Appropriate disciplinary procedures to address compliance violations;
3. Regular FCPA training for, with mandatory compliance certifications by, employees and third-party representatives;
4. Careful pre-retention scrutiny of all third-party representatives;
5. Senior management oversight of third-party representatives post-retention;
6. Inclusion of anti-corruption representations and undertakings, with audit and termination rights, in all third-party representative agreements;
7. Anonymous "Helpline" reporting system;
8. Centralization of accounting systems to achieve corporate headquarters-review of all financial transactions (i.e., follow the money);
9. Thorough pre-acquisition due diligence of prospective targets, with a particularized focus on the FCPA and analogous foreign anti-bribery laws; and
10. Immediate integration of recently acquired subsidiaries to assure that the new entity is effectively bathed in the compliance culture of the acquirer.
Gibson, Dunn & Crutcher lawyers are available to assist in addressing any questions you may have regarding these issues. We have more than 20 attorneys with substantive FCPA expertise. Joe Warin, a former federal prosecutor, currently serves as a compliance consultant pursuant to a DOJ and SEC enforcement action. The firm has 20 former Assistant U.S. Attorneys and DOJ attorneys. Please contact the Gibson Dunn attorney with whom you work, or any of the following:
F. Joseph Warin (202-887-3609, firstname.lastname@example.org)
Daniel J. Plaine (202-955-8286, email@example.com)
Judith A. Lee (202-887-3591, firstname.lastname@example.org)
David P. Burns (202-887-3786, email@example.com)
Jim Slear (202-955-8578, firstname.lastname@example.org)
Michael S. Diamant (202-887-3604, email@example.com)
John W.F. Chesley (202-887-3788, firstname.lastname@example.org)
Patrick F. Speice, Jr. (202-887-3776, email@example.com)
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