July 7, 2008
The frenetic pace of Foreign Corrupt Practices Act ("FCPA") enforcement set in 2007 has carried through the first half of 2008. Mid-year prosecutions are up – substantially so – from last year’s record-setting totals. And corporate disclosures and media reports of ongoing investigations evidence that this trend of continually increasing enforcement is here to stay for the near future.
This client update provides an overview of the FCPA and other foreign bribery enforcement activities during the first half of 2008, 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’s publications on the FCPA, including prior enforcement updates and more in-depth discussions of the statute’s complicated framework, may be found on our FCPA website.
The FCPA’s anti-bribery provisions make it illegal to offer or 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 that is required to file reports under 15 U.S.C. § 78o(d). In this context, the approximately 1,500 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. Regulators have frequently invoked these latter two sections – collectively known as the accounting provisions – in recent years when they cannot establish the elements of an anti-bribery prosecution. Because there is no requirement that a false record or deficient control be linked to an improper payment, even a payment that does not constitute a violation of the anti-bribery provision can lead to prosecution under the accounting provisions if inaccurately recorded or attributable to an internal controls deficiency.
2008 Mid-Year Figures
The continuing explosion of FCPA prosecutions during the first half of 2008 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. In these first six months, there have been more FCPA prosecutions than in any other full year prior to 2007. And although the careful reader will notice that year-to-date numbers are less than half of 2007’s record numbers, by this point last year the DOJ and SEC had filed 5 and 4 enforcement actions, respectively, substantially fewer than we have seen thus far in 2008.
2008 Mid-Year Enforcement Docket
Westinghouse Air Brake Technologies Corp.
On February 14, the DOJ and SEC announced settlements with Westinghouse Air Brake Technologies Corp. ("Wabtec") resolving allegations that Wabtec violated the anti-bribery and accounting provisions of the FCPA. The SEC’s complaint and administrative order allege that Wabtec’s Indian subsidiary, Pioneer Friction Ltd., made $137,400 in improper payments to officials of the Indian Railway Board. Pioneer allegedly made these payments to influence the Board to award it new contracts to supply brake blocks and to approve Pioneer’s pricing proposals for existing contracts. Pursuant to the SEC settlement, Wabtec agreed to pay an $87,000 civil penalty, to disgorge $288,351 in profits plus prejudgment interest, and to retain an independent compliance monitor to review and make recommendations concerning the company’s FCPA compliance program for two years.
The DOJ’s non-prosecution agreement with Wabtec additionally alleges that Pioneer made improper payments to various railway regulatory boards to facilitate the scheduling of product inspections and the issuance of compliance certificates and to the Central Board of Excise and Customs to put an end to excessively frequent audits. Although these payments totaled more than $40,000 over the course of one year, individual payments were as miniscule as $67 per product inspection and $31.50 per month to lower the frequency of Pioneer’s audits. To resolve these allegations, Wabtec agreed to pay a $300,000 fine and conduct an internal review of its FCPA compliance program.
The Wabtec case, in particular the non-prosecution agreement, paints a sobering picture of the DOJ’s view of the facilitating payments exception to the FCPA, arguably to the point of reading the exception out of the statute. Companies that permit facilitating payments as a matter of corporate policy should carefully consider this settlement.
On February 21, Flowserve Corp. became the seventh company to settle with the DOJ and SEC for its conduct under the United Nations Oil-for-Food Program. Although we have described the Oil-for-Food scheme in greater detail in prior updates, the essential allegations (as they concern the "Humanitarian" side of the Program) are that the Iraqi government imposed a 10% "after sales service fee" ("ASSF") as a condition of sales under the Program. To fund these mandatory payments, contractors typically increased the value of their contracts by 10%, thereby receiving an additional 10% from the United Nations escrow account, and passed the increase on to the Iraqi government through third-party agents and Iraqi-controlled bank accounts.
The SEC’s complaint alleges that Flowserve violated the FCPA’s books-and-records and internal controls provisions through the incorporation into its ledger of $646,487 in inaccurately recorded ASSF payments made (and $173,758 in additional ASSF payments agreed to but not paid) by its French and Dutch subsidiaries, Flowserve Pompes SAS and Flowserve B.V. To settle these allegations, Flowserve agreed to pay a $3 million civil penalty and to disgorge $3,574,225 in profits plus prejudgment interest.
Flowserve’s settlement with the DOJ was limited to the conduct of its French subsidiary, Flowserve Pompes, as the DOJ (in a fascinating move described in greater detail below) declined prosecution of Flowserve B.V. in recognition of a pending home state prosecution of that subsidiary in the Netherlands. Flowserve entered into a deferred prosecution agreement with the DOJ, paying a $4 million criminal penalty, and consented to the filing of a criminal information charging Flowserve Pompes with conspiracy to commit wire fraud and to violate the books-and-records provision. Assuming Flowserve’s successful compliance with the deferred prosecution agreement’s terms, the DOJ will defer prosecution of Flowserve Pompes for the agreement’s three-year term and ultimately dismiss the charges.
One month later, on March 20, AB Volvo became the eighth company to settle with the DOJ and SEC on Oil-for-Food charges. Alleging essentially the same scheme as with Flowserve, the SEC’s complaint charges AB Volvo with violations of the books-and-records and internal controls provisions through the incorporation into its ledger of $6,309,695 in inaccurately recorded payments made (and $2,388,419 in additional payments agreed to but not paid) by its French and Swedish subsidiaries, Renault Trucks and Volvo CE. To settle these allegations, AB Volvo agreed to pay a $4 million civil penalty and to disgorge $8,602,649 in profits plus prejudgment interest.
To resolve the DOJ’s investigation, AB Volvo entered into a deferred prosecution agreement and agreed to pay a $7 million criminal fine. It also consented to the filing of criminal informations against its two implicated subsidiaries, each alleging a conspiracy to commit wire fraud and to violate the books-and-records provision. As with the Flowserve settlement, assuming AB Volvo successfully completes the three-year term of its deferred prosecution agreement, the DOJ will dismiss the charges against Renault Trucks and Volvo CE.
It is a virtual certainty that AB Volvo’s will not be the last of the Oil-for-Food settlements – likely not even the last of 2008. At least a dozen other companies have publicly disclosed ongoing Oil-for-Food investigations by the DOJ and SEC in their securities filings. And in announcing this most recent settlement, then-Assistant Attorney General Alice Fisher noted that the DOJ "will continue its pursuit of companies that abused the U.N. Oil for Food program."
On May 2, Martin Self pleaded guilty to a two-count criminal information charging him with violating the anti-bribery provision of the FCPA. Mr. Self was the President and a part owner of Pacific Consolidated Industries ("PCI"). According to the plea agreement, Mr. Self caused PCI to execute a "marketing agreement" with a relative of a United Kingdom Ministry of Defence ("UK-MOD") official and subsequently caused the payment of approximately $70,350 to the relative pursuant to the agreement. The problem, according to the charging documents, was that Mr. Self was not aware of any genuine services that the relative provided for PCI and, in fact, Mr. Self believed that the payments were truly for the benefit of the UK-MOD official, who was in a position to influence the award of equipment contracts to PCI. Holding these beliefs, Mr. Self purposely failed to investigate and deliberately avoided becoming aware of the full nature of PCI’s relationship with the UK-MOD official’s relative.
Mr. Self is not scheduled to be sentenced until September 29, 2008, but the DOJ has publicly announced that he has agreed to serve eight months in prison as part of the plea deal. This case is the second prosecution of a former PCI executive, the first being the 2007 indictment of Leo Winston Smith. Mr. Smith has not settled the charges against him and is presently set to go to trial on October 7, 2008. Additionally, the U.K. government prosecuted the U.K.-MOD official, who is now serving a two-year prison term.
Willbros Group, Inc., Lloyd Biggers, Carlos Galvez, Gerald Jansen, and Jason Steph
On May 14, Willbros Group, Inc. and four of its former employees entered into a joint civil settlement with the SEC, and Willbros additionally settled criminal charges with the DOJ. According to the SEC’s complaint, Willbros, acting through various subsidiaries and employees, including the individual defendants:
In summary, Willbros made approximately $3.8 million in corrupt payments, and agreed to make another $8 million in payments upon which it did not deliver, to influence the assessment of taxes, the judicial process, and the award of more than $630 million in pipeline contracts.
To settle the SEC’s complaint, which charged violations of the anti-bribery, books-and-records, and internal controls provisions of the FCPA in addition to violations of the antifraud provisions of § 10(b), Willbros agreed to disgorge $10.3 million in profits plus prejudgment interest. Willbros additionally entered into a deferred prosecution agreement with the DOJ by which it agreed to pay a $22 million criminal penalty and consented to the filing of criminal informations against both it and its subsidiary, Willbros International, charging violations of the anti-bribery and books-and-records provisions. Willbros will also retain an independent compliance monitor for the three-year term of the agreement. Willbros’s combined $32.3 million settlement is thus far the largest of 2008, as well as the second largest in the FCPA’s thirty-one year history.
The SEC’s complaint also permanently enjoins the four Willbros employee defendants from future violations of the FCPA. Additionally, Messrs. Galvez and Jansen agreed to pay civil penalties of $35,000 and $30,000, respectively. Mr. Steph, who pleaded guilty to criminal FCPA violations arising from the same conduct in 2007, will have his civil penalty, if any, determined in conjunction with his sentencing for the criminal case later this year. And in addition to these four Willbros defendants, a fifth, Jim Bob Brown, settled criminal and civil FCPA charges with the DOJ and SEC in 2006 and, like Mr. Steph, is awaiting sentencing.
One final noteworthy aspect of the Willbros settlement is that this case includes a criminal books-and-records prosecution unrelated to corrupt payments. The allegations stemming from Willbros’s Bolivian tax fraud scheme are predicated on the company’s falsification of its accounts to avoid tax liability. This potentially foreshadows a broad expansion of the DOJ’s FCPA enforcement practice.
AGA Medical Corp.
On June 3, AGA Medical Corp. entered into a deferred prosecution agreement with the DOJ and consented to the filing of a two-count criminal information charging it with violating the anti-bribery provision of the FCPA as well as conspiring to violate the same. According to the information, a high-ranking AGA officer authorized the company’s distributor to make corrupt payments to government-employed physicians in China to induce them to buy AGA products and Chinese patent officials to induce them to approve AGA patent applications. AGA agreed to pay a $2 million criminal penalty and retain an independent compliance monitor for the three-year term of the agreement.
FARO Technologies, Inc.
Exemplifying the perilous challenge of FCPA compliance in China, two days later, on June 5, the DOJ and SEC announced another China-based FCPA settlement, this one with FARO Technologies, Inc. FARO consented to the filing of an administrative cease-and-desist order by the SEC and entered into a non-prosecution agreement with the DOJ alleging that FARO violated the anti-bribery, books-and-records, and internal controls provisions of the FCPA through the actions of its wholly owned Chinese subsidiary, FARO Shanghai Co., Ltd. The settlement documents allege that FARO Shanghai’s country manager made $444,492 in corrupt payments, disguised as "referral fees," to various employees of Chinese state-owned or state-controlled businesses in order to obtain sales contracts. FARO’s regional sales director for the Asia-Pacific region approved the payments, despite knowing that they were bribes and that they exposed FARO to liability, and despite explicit instruction from other FARO officers not to make such payments.
Pursuant to the non-prosecution agreement, FARO agreed to pay a $1.1 million criminal penalty and retain an independent compliance monitor for the two-year term of the agreement. The SEC’s cease-and-desist order requires FARO to disgorge $1,850,943.32 in profits plus prejudgment interest.
Although not a 2008 enforcement action – David Pinkerton was indicted for his alleged role in an Azeri bribery scheme in 2005 – defense victories in FCPA cases must be celebrated when they come. On June 30, the U.S. Attorney’s Office for the Southern District of New York moved to dismiss (which motion was granted on July 1) the charges against Mr. Pinkerton, advising, "further prosecution . . . in this case would not be in the interests of justice." As we reported in our last update, Mr. Pinkerton and his co-defendant, Frederic Bourke, were successful in persuading Judge Shira Scheindlin to dismiss most of the charges in the indictment on statute-of-limitations grounds. The DOJ appealed Judge Scheindlin’s decision to the Second Circuit, where the case has been briefed, argued, and is awaiting a decision, but ab initio elected to dismiss the remaining charges against Mr. Pinkerton in this motion. The charges against Mr. Bourke, as well as his fugitive co-defendant, Victor Kozeny, are still pending.
2008 FCPA Opinion Procedure Releases (through June 30, 2008)
By statute, the DOJ must 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. The DOJ publishes these opinions on its FCPA website, but only a party who joins in the request may authoritatively rely upon the opinions. That said, opinion releases provide excellent – perhaps the best – insight into the DOJ’s views on the scope of the statute.
In the FCPA’s thirty-one year history, the DOJ has issued only forty-nine such opinions, including three in 2007 and two thus far in 2008. In 2006, then-Assistant Attorney General Alice Fisher commented that "the FCPA opinion procedure has generally been under-utilized" and noted that she wants it "to be something that is useful as a guide to business."
FCPA Opinion Procedure Release 2008-01
On January 15, the DOJ issued its first FCPA opinion release of 2008. This Opinion is unusually lengthy as compared to prior releases, and contains a myriad of details specific to the Requestor’s proposed transaction.
According to the Opinion, the Requestor sought to make an investment in a joint venture, majority-owned (56%) by an unnamed foreign government, that provides public services to foreign municipalities. The foreign government wished to completely divest its interest in, and thereby privatize, the joint venture. The Requestor agreed to purchase the government’s 56% interest in the joint venture, but only after the interest was first purchased by the private foreign entity that owned the minority (44%) share. Thus, the private foreign entity would form a new company with the foreign government’s shares and then sell those shares to the Requestor.
The Requestor conducted extensive pre-acquisition due diligence focused on FCPA compliance. It considered the owner of the foreign private company to be a "foreign official" under the FCPA because he also served as general manager of the then still government-controlled joint venture. This concerned the Requestor because it planned to purchase the shares from the general manager at a substantial premium over purchase price. Accordingly, the Requestor sought an opinion from the DOJ that neither the projected payments to the owner of the private foreign entity nor any shares received by the owner from the divesting government entity would violate the FCPA. It made certain representations to the DOJ, including that the foreign private company owner’s purchase of the foreign government’s shares would be lawful under the foreign country’s laws and that the owner will cease to be a "foreign official" once the private company purchased the government’s majority stake in the joint venture (i.e., before the Requestor would pay the premium purchase price).
The DOJ concluded that it would not pursue an enforcement action with respect to this proposed transaction based on a number of factors. First, the Requestor conducted reasonable due diligence of the anticipated seller of the privatized shares and would maintain the relevant documentation in the United States. Second, the Requestor required complete transparency in the transaction and that adequate disclosures be made to the foreign government. Third, the Requestor plans to obtain from the private foreign entity owner representations and warranties regarding past and future compliance with anti-corruption laws. Fourth, the Requestor agreed to retain contractual rights to discontinue the business relationship if the joint venture agreement were breached for any reason, including for a violation of anti-corruption laws.
FCPA Opinion Procedure Release 2008-02
The DOJ’s second FCPA opinion release of 2008, issued on June 13, is a groundbreaking statement on an acquiror’s successor liability for FCPA violations by a target company. The Opinion creates a framework through which U.S. acquirors might seek amnesty for pre- and even post-acquisition FCPA violations by the target, particularly in deals negotiated under the laws of foreign jurisdictions (such as the U.K.) where pre-acquisition due diligence is less open than in the United States.
The requestor, Halliburton Corp., sought to acquire Expro International Group, a publicly traded British oilfield services provider. Halliburton’s principal competitor in the bidding, Umbrellastream, had made an unconditional bid to Expro (neither Expro nor Umbrellastream is identified in the Opinion, but both are named in numerous media accounts of the bidding war). Halliburton represented to the DOJ that, "as a result of U.K. legal restrictions inherent in the bidding process for a public U.K. company, it has had insufficient time . . . to complete appropriate FCPA and anti-corruption due diligence." Further, under the U.K. Takeover Code, an acquiror has no legal ability to insist upon a specified level of due diligence until after the acquisition is completed. Accordingly, if Halliburton conditioned its bid upon satisfactory completion of pre-acquisition FCPA due diligence, Expro would be free to reject this conditional offer in favor of Umbrellastream’s unconditional bid, even if Umbrellastream offered a lower price.
Accepting the restrictive nature of U.K. due diligence procedures, the DOJ agreed to grant Halliburton a 180-day grace period post-closing during which Halliburton could self-report pre- and post-acquisition FCPA violations without itself being prosecuted, provided Halliburton adhered to a stringent post-acquisition due diligence and integration plan (described below). Although reserving the right to proceed against Expro for any FCPA violations, the DOJ stated that it does not intend to pursue any enforcement action against Halliburton in connection with (1) the acquisition of Expro in and of itself; (2) any pre-acquisition unlawful conduct by Expro that Halliburton discloses to the DOJ within 180 days of closing; and (3) any post-acquisition unlawful conduct by Expro that Halliburton discloses to the DOJ within 180 days of closing (or within one year if, in the judgment of DOJ, the conduct cannot be fully investigated in 180 days).
Five Key Takeaways from the First Half of 2008 FCPA Enforcement
Beyond the frenzied nature of the prosecution environment, there are five developments in FCPA enforcement from the first half of 2008 that every general counsel of a business with international operations and every lawyer practicing in this area must key into. They are:
1. The outburst of civil litigation collateral to FCPA investigations;
2. The introduction of legislation that would provide for a private right of action under the FCPA;
3. The increasing number of foreign corruption investigations;
4. The growing importance of FCPA due diligence in business transactions, particularly acquisitions; and
5. Substantial jail terms for individual defendants convicted under the FCPA.
Civil Litigation Collateral to FCPA Investigations
Like a broken record, our recurring advice to clients and friends has been to expect and prepare for "tag along" civil litigation when a governmental FCPA investigation becomes public. In the first half of 2008, we have witnessed this admonition borne out as never before, with a new diversity of FCPA-inspired civil litigation theories. Over the last few months we have seen four distinct types of collateral litigation emerge: (1) § 10(b) securities fraud actions; (2) shareholder derivative suits; (3) lawsuits brought by foreign governments; and (4) lawsuits brought by business partners.
As we have previously reported, the first two categories – § 10(b) securities fraud and shareholder derivation actions – are not new to the FCPA world. But FARO Technologies, Inc. has the unfortunate distinction of facing both arising from the same investigation – on top of criminal and administrative settlements with the U.S. government. As noted previously, on June 5, FARO entered into dispositions with the DOJ and SEC through which it agreed to pay just over $2.95 million. Only three days earlier, the U.S. District Court for the Middle District of Florida gave preliminary approval to a $6.875 million settlement resolving a § 10(b) suit filed on behalf of purchasers of FARO stock alleging that FARO "knowingly or recklessly attested to the accuracy of [its] internal controls system, when [it] knew that the system was, in fact, seriously inadequate." And as if that were not enough, FARO is additionally in settlement negotiations with a plaintiff shareholder who filed a derivative suit on January 11, 2008.
Other companies currently engaged in shareholder derivative litigation stemming from FCPA investigations include BAE Systems PLC and Chevron Corp. A Michigan public pension system filed suit in 2007 in federal district court in the District of Columbia against BAE’s officers and directors alleging that they breached their fiduciary duties by permitting the company’s managers to make and authorize more than $2 billion in bribes and kickbacks in violation of the FCPA and other foreign anti-corruption laws. The defendants have moved to dismiss the complaint arguing that plaintiffs lack personal jurisdiction over the leadership of the British company and that, in any event, English law grants plaintiffs neither standing to sue nor a cause of action against BAE’s officers and directors. The plaintiff shareholder in the Chevron matter filed suit in California state court in May 2007, just two weeks after the New York Times reported that Chevron was in settlement negotiations with the U.S. government concerning its conduct under the Oil-for-Food Program (Chevron would ultimately settle its U.S. government liability in November 2007 for $30 million). The plaintiff ultimately converted his suit to a shareholder demand on Chevron’s Board of Directors, but a Special Committee of the Board recently declined, after investigation, to file suit against the directors. The plaintiff shareholder has since refiled his lawsuit.
Chevron has also found itself part of a new wave of FCPA-inspired civil litigation: one where foreign governments sue U.S. companies that allegedly corrupted the foreign government’s own officials. On June 27, 2008, the Republic of Iraq filed suit in Manhattan federal district court against ninety-one companies and two individuals alleging that the defendants conspired with Saddam Hussein’s regime to corrupt the Oil-for-Food Program by diverting as much as $10 billion in funds intended for the humanitarian use of the Iraqi people to the illicit use of Hussein’s government. Iraq claims, inter alia, that the defendants violated the Racketeering Influenced Corrupt Organizations ("RICO") Act, with mail fraud, wire fraud, money laundering, and violations of the Travel Act constituting the necessary predicate violations. In addition to Chevron, ten other defendants named by the Republic of Iraq have already settled with U.S. government regulators for allegations arising from the Oil-for-Food Program.
Iraq’s Oil-for-Food lawsuit follows closely on the heels of another RICO action filed by a foreign government, that brought by the Kingdom of Bahrain against Alcoa, Inc. Bahrain’s state-owned aluminum smelter, Aluminum Bahrain ("Alba"), filed suit in federal district court in Pittsburgh on February 27 alleging that Alcoa and its affiliates conspired to corrupt one or more of Alba’s senior officials, influencing the officials to cause Alba to pay inflated prices for Alcoa’s products and to favor the sale of a controlling interest in Alba to Alcoa. Alba is seeking more than $1 billion in damages, including punitives, but the court has stayed the suit on motion of the DOJ as an intervener. DOJ sought the stay of proceedings, which neither party opposed, so that it might conduct its own criminal investigation – which does not appear to have been open prior to the civil suit – without the ongoing distraction of civil litigation. But the DOJ’s stay of Alba’s lawsuit did not stay all of the civil litigation arising from this matter, for on May 1, 2008 a Hawaiian pension fund filed a shareholder derivative action. Interestingly, the DOJ has not (yet) moved to stay those proceedings, which are presently at the stage of defendants moving to dismiss for failure to make a pre-suit demand upon Alcoa’s Board of Directors.
The final category of FCPA-inspired civil litigation emerging in 2008 is commercial litigation brought by a private plaintiff against its business partners. On February 21, 2008, Jack Grynberg filed a RICO suit against BP plc and StatoilHydro ASA alleging that they bribed Kazakh officials to win oil rights for joint ventures in which he had an interest, thereby diverting his share of the joint venture profits. Bringing the classic aphorism "the best defense is a good offense" to the FCPA context, Mr. Grynberg recently told the Daily Telegraph that he brought this suit in an effort to head off a potential prosecution by the DOJ, stating, "Unless I assert that I am an unwilling participant in this, my neck could be on the line."
Another recent example of such a business partner lawsuit with FCPA connotations is that brought by Agro-Tech Corp. against its Japanese distributor, Yamada Corp. Yamada is presently under investigation by Japanese government authorities for its dealings with Japan’s Ministry of Defense, an investigation that has led to the arrest of a senior Yamada executive as well as the former Vice Minster of Defense. On March 24, 2008, Agro-Tech filed suit in the U.S. District Court for the Northern District of Ohio seeking a declaratory judgment that it may now lawfully terminate its distributor agreement with Yamada on the grounds that Yamada has breached its contractual obligations to use "ethical means" and to "obey the letter and spirit" of anti-bribery laws, including the FCPA. Yamada has since counter-sued Agro-Tech, claiming that Agro-Tech’s lawsuit is just a ploy to terminate unlawfully the fifty-year exclusive distributorship arrangement Yamada has with Agro-Tech.
Foreign Business Bribery Prohibition Act of 2008 (H.R. 6188)
In a pending development related to our collateral civil litigation discussion above – yet significant enough to warrant individual mention – on June 4, 2008 Rep. Ed Perlmutter (D. Colo.) introduced in the House of Representatives the Foreign Business Bribery Prohibition Act of 2008. This bill would provide for a limited right of private action under the FCPA; such a right does not presently exist. Rep. Perlmutter’s bill would amend the FCPA to permit issuers and domestic concerns to bring suit seeking treble damages against "foreign concerns" for FCPA violations that both assist the foreign concern in obtaining or retaining business and prevent the plaintiff from obtaining or retaining that business. The bill would provide a right of action only against "foreign concerns," defined as any person other than an issuer or domestic concern, and even then only where the foreign concern’s actions violate the FCPA. Therefore, the class of potential defendants under this bill would be limited to foreign persons and businesses unaffiliated with U.S. stock exchanges and who corruptly use instrumentalities of interstate commerce within the United States in furtherance of their bribes. Still, this would be an important development in the effort to "level the playing field" of FCPA enforcement worldwide. The bill is presently awaiting consideration in the House Judiciary and Energy and Commerce committees.
FCPA Acquisition Due Diligence and Post-Acquisition Compliance Integration
One of the most pressing issues facing the FCPA bar right now is how to assess successor liability of an acquiror for pre-acquisition FCPA violations by a target company. The government’s right to impose successor liability as a matter of law is difficult to challenge. Yet as a policy matter, such prosecutions can have a perverse effect: discouraging the "race to the top" created where companies with superior FCPA compliance programs acquire those with less thorough programs, inculcating the latter into the former’s culture of compliance. At the end of the day, everyone, including the U.S. government, benefits when companies with superior compliance programs acquire companies with less effective programs, even when they come with warts.
The DOJ’s focus on this issue in the two FCPA opinion releases issued this year is encouraging. Particularly so is the DOJ’s acknowledgement in FCPA Op. Proc. Rel. 2008-02 that providing Halliburton with a limited safe harbor in which to conduct post-acquisition due diligence without fear of prosecution "advances the interests of the Department in enforcing the FCPA and promoting FCPA due diligence in connection with corporate transactions."
In detailing the procedures that Halliburton must follow in order to avail itself of the protection afforded by 2008-02, the DOJ has set forth its view on "best practices" for post-acquisition compliance integration. Halliburton agreed to take the following steps:
Although not all of these measures will be practical in all acquisitions, companies should take note of these procedures and structure their integration measures in line with these steps where possible. 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).
Parallel Foreign Proceedings
Another key trend that we have been following during the first half of 2008 is that the enforcement of foreign bribery statutes is increasingly becoming a global enterprise. After years of not-too-subtle nudging by international anti-corruption watchdogs, most notably the Organization for Economic Cooperation and Development ("OECD") and Transparency International ("TI"), foreign jurisdictions are finally beginning to launch their own investigations that parallel those brought by U.S. enforcement agencies. Although some jurisdictions have not pursued bribery investigations aggressively and none can claim to match the torrid pace set by the DOJ and SEC, we believe that the trend of parallel foreign enforcement actions and investigations will only intensify in the future.
Investigations arising out of the Oil-for-Food Program comprise a significant portion of the foreign parallel proceedings. For example, the United Kingdom’s Serious Fraud Office (“SFO”) is actively pursuing Oil-for-Food investigations against several major companies, including at least one (GlaxoSmithKline plc) that has publicly disclosed being under investigation by the DOJ and SEC. Other foreign countries with open Oil-for-Food investigations include Italy, which has initiated preliminary court proceedings against a number of companies and their employees, Ireland, and Switzerland, which has already imposed $17 million in fines against eight unnamed companies.
Although international anti-corruption activity is increasing overall, not all countries have been consistent in investigating and prosecuting corruption offenses. As we have reported previously, in 2006 the SFO controversially dropped on national security grounds its investigation concerning allegedly corrupt payments made by BAE Systems plc to senior Saudi governmental officials. On April 10, 2008, the High Court of London declared the SFO’s decision to close the investigation illegal and ordered the agency to reopen the investigation. The British government is now appealing that decision to the House of Lords, the U.K.’s highest court.
A fascinating development in the interplay between foreign and domestic corruption investigations is the DOJ’s recent decision to forgo – in two Oil-for-Food cases – criminal sanctions against foreign businesses in light of pending actions against the companies in their home states. In our last FCPA review, we reported that the DOJ elected not to impose a criminal fine in connection with its December 2007 non-prosecution agreement with Akzo Nobel provided that Akzo Nobel caused one its Dutch subsidiaries to enter into a criminal disposition with the Dutch Public Prosecutor and pay a fine of at least €381,602 ($549,419) within six months. And during the current reporting period, on February 21, 2008, the DOJ completely declined prosecution of a Dutch subsidiary of Flowserve in return for Flowserve agreeing to cause that subsidiary to enter into a criminal disposition with the Dutch Public Prosecutor. Although these prosecutions in the Netherlands are not publicly reported, a Dutch representative recently informed TI that Dutch prosecutors have filed seven Oil-for-Food cases.
It took the United States many years to reach its current state of enforcement and we expect that other nations will experience growing pains as well. But with an enhanced commitment on the part of many nations, coupled with pressure from non-governmental organizations and a newfound willingness by the DOJ to defer to home state prosecution in appropriate circumstances, we expect anti-corruption enforcement to take on an increasingly global character in the future.
Substantial Jail Time for Individual Defendants
As we have reported previously, efforts to prosecute individuals for violations of the FCPA have skyrocketed in the past few years. Focusing on criminal prosecutions, we have identified forty-six individual defendants charged by the DOJ over the last ten years for allegedly participating in foreign bribery schemes, including many former senior executives and other high-ranking employees. Approximately 91% of the individuals to resolve their charges – thirty-three of thirty-six – have pleaded guilty or been convicted at trial of at least one charge. Only three defendants has been acquitted at trial or have had their charges dismissed.
Resolution of Criminal FCPA Anti-Bribery Cases Brought Against Individuals from 1998 to the Present.
Of the thirty-three convicted individual defendants, only twenty have gone to sentencing. This reflects the DOJ’s common practice in FCPA prosecutions of postponing sentencing for lengthy periods – even years – as the convicted defendant cooperates with the government’s investigation. Of the twenty sentenced defendants, thirteen have received jail terms, ranging from several months to more than five years. This figure includes sentences of incarceration for all four defendants to have been convicted at trial and sentenced.
These figures are not trending more favorably to individual FCPA defendants. In the past five years, eight out of ten individuals sentenced for their role in a foreign bribery scheme have been sentenced to a term of imprisonment.
|Sentences for Individual Criminal Defendants Convicted in FCPA Cases from 1998 to the Present.||Sentences for Individual Criminal Defendants Sentenced in FCPA Cases from 2003 to the Present.|
This trend is unmistakable: incarceration is becoming a near certainty for individuals convicted of violating the FCPA. One recent example is Ramendra Basu, a former World Bank official, who on April 22, 2008 was sentenced to 15 months incarceration for assisting consultants in bribing a Kenyan official. Additionally, sentencing is pending for thirteen defendants, all of whom face the prospect of at least several months’ imprisonment. We anticipate that many, if not all, of these individuals will receive jail time. Given the zeal with which the DOJ has pursued FCPA cases in recent years, it does not appear that the trend toward aggressive prosecution of individuals and imposition of severe penalties will soon abate.
As breathtaking as the pace of FCPA enforcement was in 2007, the first half of 2008 has proved a worthy successor. With many large matters pending in the investigative stage, we expect more of the same for the second half.
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, email@example.com)
Daniel J. Plaine (202-955-8286, firstname.lastname@example.org)
Judith A. Lee (202-887-3591, email@example.com)
David P. Burns (202-887-3786, firstname.lastname@example.org)
Jim Slear (202-955-8578, email@example.com)
Michael S. Diamant (202-887-3604, firstname.lastname@example.org)
John W.F. Chesley (202-887-3788, email@example.com)
Patrick F. Speice, Jr. (202-887-3776, firstname.lastname@example.org)
Lee G. Dunst (212-351-3824, email@example.com)
James A. Walden (212-351-2300, firstname.lastname@example.org)
Alexander H. Southwell (212-351-3981, email@example.com)
Robert C. Blume (303-298-5758, firstname.lastname@example.org)
J. Taylor McConkie (303-298-5795, email@example.com)
Nicola T. Hanna (949-451-4270, firstname.lastname@example.org)
Debra Wong Yang (213-229-7472, email@example.com),
the former United States Attorney for the Central District of California,
Michael M. Farhang (213-229-7005, firstname.lastname@example.org)
Douglas M. Fuchs (213-229-7605, email@example.com)
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