January 5, 2009
By any measure, 2008 was a monster year in Foreign Corrupt Practices Act ("FCPA") enforcement. With thirty-three enforcement actions between the Department of Justice ("DOJ") and Securities and Exchange Commission ("SEC"), the statute’s dual enforcers, 2008 was the second busiest numerical year on the books, trailing only 2007. But beyond the numbers (after all, with the massive Siemens resolution, 2008 dwarfs all other years combined in fines and disgorgement), 2008 saw the FCPA’s enforcement regime mature like never before. There were no unimportant FCPA enforcement actions this year. Whether the trend was increasingly aggressive enforcement against individuals, ramped up international coordination, the joining of FCPA prosecutions with prosecutions for distinct federal crimes, or others trends discussed herein, every case fits an important trend in foreign bribery enforcement that we expect to continue into 2009 and beyond.
This client update provides an overview of FCPA and other anti-corruption enforcement activity from the past year and a discussion of the trends that we see emerging from that activity. A collection of Gibson Dunn’s publications concerning 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 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 for an anti-bribery prosecution or as a mechanism for compromise in settlement negotiations. 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 provisions can lead to prosecution under the accounting provisions if inaccurately recorded or attributable to an internal controls deficiency.
2008 in Review
The recent trend of increased FCPA enforcement activity is best captured in the following chart and graph, which each track the number of FCPA enforcement actions filed by DOJ and the SEC during the past five years:
For some time, we have been reporting – based on our representation of corporations and individuals, our network of relationships, and our constant review of public disclosures – that there are approximately 100 companies that are the subject of open FCPA investigations. This figure was recently confirmed by Mark Mendelsohn, the Deputy Chief of the Fraud Section in DOJ’s Criminal Division and DOJ’s top-FCPA enforcer, at an FCPA enforcement conference. With so many active matters in the pipeline, we expect that U.S. enforcement agencies will continue their aggressive pursuit of companies and executives suspected of international bribery for the foreseeable future.
Top Five Trends in FCPA Enforcement
The past year in FCPA enforcement activity bore out many of the key enforcement themes that we have observed in recent years. Although there are many important trends that can be drawn from last year’s prosecutions, we have identified below the top five that we believe best highlight the myriad risks facing companies and their employees doing business internationally. These significant trends are:
1. Escalating corporate financial penalties;
2. Increasing focus on individual prosecutions;
3. Internationalization of foreign anti-corruption enforcement;
4. DOJ’s coupling of FCPA prosecutions with other charges; and
5. Continuing upswing in FCPA litigation.
Escalating Corporate Financial Penalties
Scott Friestad, Deputy Director of Enforcement for the SEC, recently forewarned the FCPA community, "The dollar amounts in the [FCPA] cases that will be coming within the next short while will dwarf the disgorgement and penalty amounts that have been obtained in prior cases." When Friestad made this statement, Baker Hughes, Inc.’s 2007 joint DOJ/SEC resolution of approximately $44.1 million held the record for the largest FCPA settlement. But, on December 15, 2008, DOJ and the SEC eclipsed this record by nearly twenty times in announcing their long-anticipated resolution with Siemens AG.
Siemens pleaded guilty to FCPA books-and-records and internal controls charges brought by DOJ and consented to the filing of a civil complaint by the SEC charging Siemens with anti-bribery, books-and-records, and internal controls violations. Three of Siemens’s "regional operating companies" also pleaded guilty to conspiring to violate various provisions of the FCPA. Under the plea agreement and civil settlement, Siemens and its subsidiaries agreed to pay a total criminal fine of $450 million to DOJ and to disgorge $350 million in illicit profits to the SEC. Siemens consented to an SEC injunction against future violations of the FCPA and agreed to retain an FCPA compliance monitor for up to four years.
In addition to the U.S. settlements, Siemens on the same day settled the balance of its liabilities in the long-running Munich Public Prosecutor’s corruption probe (Siemens’s communications business reached a settlement with that office in 2007). Siemens agreed to pay €395 million (~ $569 million), consisting of €394.75 million in profit disgorgement and €250,000 in administrative penalties, to resolve this investigation. If you add to these settlements the roughly $287 million in fines and disgorgement imposed in connection with the 2007 Munich Public Prosecutor settlement with the company’s communications business, and Siemens’s approximately $255 million settlement with German tax authorities in 2007, Siemens has paid well over $1.9 billion to resolve the U.S. and German corruption probes.
The scope of illicit conduct alleged by DOJ and the SEC covers thousands of corrupt payments, totaling approximately $1.4 billion, to foreign government officials in ten countries in connection with hundreds of individual projects or sales. At the press conference announcing the settlement, DOJ’s Acting Assistant Attorney General, Matthew Friedrich, went so far as to say that bribery was, for Siemens, "nothing less than standard operating procedure." SEC Director of Enforcement Linda Thomsen described Siemens’s "pattern of bribery" as "unprecedented in scale and geographic reach." The DOJ and SEC settlements allege that Siemens corruptly influenced contracts and tenders in Argentina, Bangladesh, China, Iraq, Israel, Mexico, Nigeria, Russia, Venezuela, and Vietnam.
The DOJ and SEC settlements detail "systematic efforts" to falsify Siemens’s books and records and circumvent Siemens’s system of internal controls, including the use of off-book accounts as pools of money for corrupt payments, signing approval forms for corrupt payments with removable Post-It notes, thereby concealing the identity of the signors, and operating "cash desks" where employees could withdraw up to €1 million at a time for use in corrupt payments. Siemens’s internal controls failures were substantial and widespread enough to merit the first ever criminal FCPA internal controls charge filed by DOJ.
But the settlement papers also tell a remarkable story of corporate remediation and an internal investigation of unparalleled magnitude. Papers filed by both sides in support of the agreed-upon sentence in the criminal case detail more than $1 billion in investigative and remediation costs incurred by Siemens in the just over two years since German authorities raided Siemens in late 2006. Some of the eye-popping figures include:
DOJ concluded in its sentencing memorandum that the "reorganization and remediation efforts of Siemens have been extraordinary and have set a high standard for multi-national companies to follow." DOJ’s Friedrich succinctly summarized this point at the press conference announcing the Siemens resolution, referring to Siemens’s cooperation as, "in a word, . . . exceptional."
Not only does the Siemens FCPA resolution dwarf the prior record FCPA settlement, but the combined U.S. settlements (not to mention the German settlements) substantially exceed the aggregate of every dollar ever collected by the U.S. government in connection with FCPA settlements over the statute’s thirty-one year history. Still, the fact remains that Siemens’s settlement figures could have been much higher. For example, DOJ’s sentencing guideline calculation called for a criminal fine of between $1.35 and $2.7 billion. Clearly, DOJ and the SEC gave Siemens significant credit for its remediation efforts and for the substantial settlements it paid abroad.
Although many orders of magnitude smaller than the Siemens resolution, in May 2008, Willbros Group, Inc., agreed to pay the then-second (now third) highest combined fine/disgorgement figure to DOJ and the SEC to settle FCPA charges arising out of Willbros’s operations in Bolivia, Ecuador, and Nigeria. The allegations against Willbros Group, which are described in greater detail in our 2008 Mid-Year FCPA Update, involve claims that the company, acting through various subsidiaries and employees, made $3.8 million in corrupt payments, and agreed to make another $8 million in payments, to influence the assessment of taxes, judicial processes, and the award of more than $630 million in pipeline contracts. To settle the SEC’s complaint, Willbros agreed to pay $10.3 million in disgorgement plus prejudgment interest. To resolve the criminal charges, Willbros entered into a deferred prosecution agreement with DOJ, agreeing to pay a $22 million fine, to have a criminal information filed against its subsidiary Willbros International, Inc., and to retain an independent compliance monitor for three years.
The Willbros settlement underscores the difficulty of conducting business in Nigeria, which as we note below was the most frequent locale for FCPA violations alleged in 2008 settlements. Some companies have found it so difficult to operate in this nation without running afoul of the FCPA that they have withdrawn their business operations altogether.
And demonstrating that enormous foreign bribery settlements are certain not to be a fluke of 2008, ABB Ltd. recently announced that it has reserved $850 million for "potential costs related to the . . . investigations by the U.S. and European authorities into suspect payments and alleged anti-competitive practices" and business restructuring costs. Market analysts have pegged the expected legal share of this reserve at between $650 and $700 million, although it is not clear how much is attributable to the anticipated corruption settlement(s) vis-à-vis the anticipated antitrust settlement(s). The corruption investigations reportedly stem from ABB’s operations in Iraq, Kazakhstan, and Nigeria. This would be ABB’s second brush with the FCPA, its now-divested Vetco Gray business having been the subject of a $16.4 million settlement in 2004.
Increasing Focus on Individual Prosecutions
Although the FCPA is commonly perceived – and perhaps, historically speaking, with good reason – to be a statute of predominantly corporate enforcement, 60% of the FCPA defendants in 2008 were individuals. DOJ’s Mendelsohn recently said of the continuing trend of holding individuals to answer for foreign bribery, "The number of individual prosecutions has risen – and that’s not an accident. . . . It is our view that to have a credible deterrent effect, people have to go to jail." SEC Associate Director Fredric Firestone, speaking at a separate engagement, expressed a similar sentiment: "The Commission very clearly has stated to us that enforcement actions against individuals as well as companies is a priority."
The landmark case in individual FCPA prosecutions in 2008 has to be the joint DOJ/SEC prosecution of Albert Stanley, the former Chairman and Chief Executive Officer of former Halliburton subsidiary Kellogg, Brown & Root, Inc. ("KBR"). On September 3, 2008, Stanley pleaded guilty to criminal charges of conspiring to violate the FCPA’s anti-bribery provisions and of conspiring to violate the mail and wire fraud statutes in a separate kickback scheme. Stanley also entered into a civil settlement with the SEC charging him with violating the FCPA’s anti-bribery provisions and enjoining him from future violations of the FCPA.
The charging documents allege that Stanley was KBR’s senior representative on the steering committee of a four-company joint venture formed to obtain and administer more than $6 billion in contracts to build liquefied natural gas production facilities in Bonny Island, Nigeria. Stanley and his co-conspirators allegedly authorized more than $182 million in payments to third-party agents with the expectation that the agents would pass most of those payments on to senior officials of a Nigerian state-controlled oil company. In connection with the kickback scheme, Stanley pleaded guilty to a mail and wire fraud conspiracy premised on his receipt of approximately $10.8 million in kickbacks from a former KBR employee to whom Stanley directed as much as $65 million in KBR consulting contracts.
Although he has not yet been sentenced, Stanley has agreed to serve seven years in prison and to pay $10.8 million in restitution to KBR. Stanley is cooperating with DOJ in its continuing investigation in hopes that DOJ will file a motion to reduce his sentence pursuant to § 5K1.1 of the U.S. Sentencing Guidelines. Announcing Stanley’s guilty plea, DOJ’s Friedrich commented, "Today’s plea demonstrates that corporate executives who bribe foreign officials in return for lucrative business deals can expect to face prosecution."
In another significant development in individual FCPA prosecutions in 2008, on December 19, DOJ unsealed the January 2008 indictment of James Tillery, the former President of Willbros International, Inc., and Paul Novak, a former Willbros International consultant. DOJ made the indictment public after arresting Novak when he arrived at Houston’s George Bush Intercontinental Airport on a flight from South Africa. Novak returned to the United States after the revocation of his U.S. passport. Tillery remains a fugitive with a warrant outstanding for his arrest.
Tillery and Novak are each charged with violating the anti-bribery provisions of the FCPA, conspiring to do the same, and conspiring to commit money laundering. The indictment alleges that Tillery and Novak conspired with other Willbros International employees, including Jim Brown and Jason Steph, who themselves pleaded guilty to FCPA charges in 2006 and 2007, respectively, to pay more than $6 million in bribes to Nigerian government officials in return for the award of more than $380 million in gas pipeline contracts. The co-conspirators allegedly delivered approximately $2 million of these bribes to employees of various Nigerian state-owned gas companies, to a senior official in the executive branch of the Nigerian government, and to officials of the dominant political party in Nigeria. The indictment further alleges that Tillery and Novak agreed to make approximately $300,000 in corrupt payments, and delivered $150,000 of this amount, to officials of the Ecuadorian state oil company in return for the award of a $3 million gas pipeline project. Finally, Tillery and Novak are alleged to have conspired with other Willbros International employees to transmit money from within the United States to places outside of the United States with the intent to promote violations of the FCPA, a "specified unlawful activity" within the money laundering statutes.
The Tillery/Novak indictment makes seven former Willbros employees and representatives, in addition to the company, who have been charged with FCPA violations by either or both DOJ and the SEC. As noted above, Brown and Steph pleaded guilty to criminal FCPA charges in 2006 and 2007. Brown also consented to an SEC injunction from future FCPA violations in 2006. Then, on May 14, 2008, Jason Steph and three other former Willbros International employees – Lloyd Biggers, Carlos Galvez, and Gerald Jansen – settled civil FCPA charges with the SEC and agreed to permanent injunctions from future FCPA violations. Additionally, Galvez and Jansen agreed to pay civil penalties of $35,000 and $30,000, respectively.
Another 2008 corporate FCPA prosecution in which DOJ charged multiple individuals is the Nexus Technologies, Inc. matter. On September 4, 2008, DOJ filed an indictment charging Nexus Technologies and four employees – An Nguyen, Kim Nguyen, Nam Nguyen and Joseph Lukas – with one count of conspiring to violate the FCPA and multiple substantive FCPA counts, in connection with alleged corrupt payments to officials of various Vietnamese government agencies. According to the indictment, over a ten-year period the defendants paid at least $150,000 in bribes, styled as "commissions," to Vietnamese government officials in order to secure contracts for the supply of a wide variety of equipment, ranging from helicopter parts to underwater mapping equipment to chemical detectors. Federal agents arrested the four individual defendants on September 5, 2008, and both they and their employer are presently awaiting trial.
Rounding out the cadre of individual FCPA defendants in 2008 are Misao Hioki, Shu Quan-Sheng, Martin Self, and Mario Covino. We discuss the Hioki and Quan-Sheng prosecutions below as evidence of DOJ’s movement towards charging FCPA crimes in conjunction with violations of unrelated criminal statutes.
Self, the former President and part owner of Pacific Consolidated Industries ("PCI"), pleaded guilty to two counts of violating the anti-bribery provisions of the FCPA on May 8, 2008, and was subsequently sentenced to pay a $20,000 fine and serve a probationary sentence. Self was alleged to have executed a "marketing agreement" with a relative of a United Kingdom Ministry of Defence ("UK-MOD") official and subsequently causing the payment of approximately $70,350 to the relative pursuant to the agreement. According to the charging documents, Self was not aware of any genuine services that the relative provided to PCI and, in fact, 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, 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. Another former PCI executive, Leo Winston Smith, was indicted on FCPA charges in 2007 and is currently awaiting a May 2009 trial date.
Covino was the Director of Worldwide Factory Sales for an unnamed Rancho Santa Margarita, California-based manufacturer of service control valves for the nuclear, oil and gas, and power generation industries. On December 17, 2008, DOJ filed a plea agreement by which Covino agreed to plead guilty to charges of conspiring to violate the FCPA’s anti-bribery provisions. The plea agreement and accompanying criminal information allege that Covino conspired with his former colleagues to implement a sales approach that encouraged the company’s salespeople to cultivate "friends-in-camp" at the company’s government customers. Covino and his co-conspirators allegedly made more than $1 million in corrupt payments to friends-in-camp employed by state-owned entities in Brazil, China, India, Korea, Malaysia, and the United Arab Emirates so that the foreign officials would either award Covino’s employer contracts or influence the technical specifications of competitive tenders in a manner that would favor Covino’s employer. Covino’s plea agreement does not specify an agreed upon sentence, but does include a Sentencing Guidelines calculation that calls for a sentence of five-years imprisonment, the statutory maximum for conspiracy.
Internationalization of Foreign Anti-Corruption Enforcement
Speaking at an FCPA conference, DOJ’s Mendelsohn called 2008 the year of "foreign coordination." Similarly, in connection with the Siemens settlement described above, in which DOJ, the SEC, and the Munich Public Prosecutor coordinated announcement of their resolutions, DOJ’s Friedrich echoed this sentiment: "We are now working with our foreign law enforcement colleagues in bribery investigations to a degree that we never have previously." And, as reported in the Wall Street Journal, anti-bribery prosecutors from around the globe gathered in Paris during the summer of 2008 for an "informal, roll-up-your sleeves meeting" as part of a first-of-its kind effort to increase collaboration in international investigations. Mendelsohn, in his speech, leveraged this increased international collaboration into advice on self-reporting violations to foreign regulators, noting that if DOJ speaks with prosecutors in a foreign country, companies under investigation by DOJ for conduct in that country should consider disclosing the conduct to the foreign regulator as well.
Putting some statistical meat on the bone, Mendelsohn reported that DOJ sent out at least forty-five letters rogatory invoking Mutual Legal Assistance Treaties in 2008. DOJ’s prosecutors also took at least sixteen international trips to locations including Greece, Hungary, Panama, Romania, and the United Kingdom. And DOJ is now involved in at least twenty-three multi-jurisdictional investigations, including matters with anti-corruption authorities in the Czech Republic, Finland, Germany, Greece, Japan, Norway, Sweden, Switzerland, and the United Kingdom.
Not only have anti-corruption prosecutors from around the globe been assisting U.S. authorities, they are now beginning to increase their own enforcement efforts. The combined 2007 and 2008 Siemens resolutions with the Munich Public Prosecutor, at $856 million, topped the $800 million combined DOJ and SEC resolutions with Siemens. And, pursuant to a new multinational cooperation initiative known as Eurojustice, Munich prosecutors invited their Greek counterparts to question Siemens officials in Munich about Greek transactions. The Munich authorities also gave their Greek counterparts broad access to Swiss financial records in their possession.
Moving to the United Kingdom, prosecutors there obtained their first foreign bribery conviction with the guilty plea of Niels Tobiasen, the Managing Director of CBRN Team Ltd., a U.K. security-consulting firm, for bribing two Ugandan officials to obtain a security-consulting contract with the Ugandan Presidential Guard. And when one of these two Ugandan officials, Ananais Tumukunde, happened to fly into Heathrow Airport, U.K. authorities were waiting to arrest him. Using the authority under U.K. law to prosecute foreign government officials who receive bribes – a power that does not exist under the FCPA – U.K. authorities successfully prosecuted Tumukunde and obtained a twelve-month jail sentence as well as forfeiture of the corrupt payment.
In another significant U.K. case, borrowing from the now widespread U.S. model of deferred and non-prosecution agreements, the U.K.’s Serious Fraud Office ("SFO") sought and obtained judicial authorization to employ a Civil Recovery Order ("CRO") against Balfour Beatty plc in connection with Balfour Beatty’s self-reported admission to payment irregularities in connection with a $130 million contract to rebuild the Alexandria Library in Egypt. The CRO, the first of its kind in U.K. foreign bribery prosecutions, allows authorities to recover a monetary penalty without a corresponding criminal prosecution and represents a powerful new tool for U.K. anti-corruption regulators. That Balfour Beatty self-reported its conduct to the SFO is itself quite noteworthy. Historically, the U.K. criminal law regime has given prosecutors little discretion in charging decisions once they discover a violation of law, which in turn has limited the motivation of companies to turn themselves in. The Balfour Beatty non-prosecution agreement might begin to change this calculus.
In other anti-corruption news out of the United Kingdom, the SFO has created a new position for Head of Anti-Corruption, filled by Keith McCarthy, and reallocated resources within the office to increase the number of anti-corruption investigators from sixty-five to one hundred. And in a fascinating "reverse-FCPA" prosecution, the SFO obtained several guilty pleas for conspiracy to commit corruption from U.K. nationals who conspired to bribe the U.S. Attorney General in an attempt to persuade him to unfreeze assets seized by the SEC in a Ponzi scheme investigation.
Of course, the story of foreign corruption prosecutions in the United Kingdom was not all pro-enforcement in 2008. On July 30, the U.K. House of Lords reversed the decision of the High Court of London, which had ordered the SFO to reopen its investigation of allegedly corrupt payments by BAE Systems plc to senior Saudi government officials. The SFO terminated its investigation of BAE’s Saudi operations, citing national security concerns, after the Saudi government threatened to stop sharing counter-terrorism intelligence. The House of Lords declared the SFO’s decision to terminate its investigation to be within the anti-corruption agency’s authority. Nonetheless, U.S. enforcers continue to pursue the BAE investigation, including by, according to press reports, briefly detaining senior BAE executives at a U.S. airport until they could be served with grand jury subpoenas.
In other 2008 foreign anti-corruption prosecutions of note, Japanese prosecutors obtained guilty pleas from Pacific Consultants International and four of its senior executives under that nation’s Unfair Competition Prevention Law. The defendants admitted bribing senior Vietnamese government officials to obtain infrastructure development contracts in Ho Chi Minh City. Elsewhere in Asia, Chinese authorities are currently investigating two American law firms with offices in Hong Kong and Beijing for alleged corrupt payments tied to business and investment licenses granted to foreign businesses seeking to operate in China. It has been reported that this investigation is linked to an October 2008 disclosure by cosmetic retailer Avon Products, Inc., in which Avon announced an internal investigation into possible FCPA violations in China. Finally, the Dutch, Italian, and Swiss governments all filed foreign corruption cases in 2008 against corporations relating to their participation in the United Nations Oil-for-Food Program.
This uptick in international anti-corruption enforcement activity makes clear that, as DOJ’s Friedrich put it when announcing the Siemens settlement, the "United States is not the only player at the table" when it comes to "fighting global corruption." But just what this increased anti-corruption enforcement abroad will mean for companies under investigation by DOJ and the SEC remains to be seen. Both DOJ and SEC officials have said that they will pay heed to the foreign investigations of those also under investigation in the United States. For example, the SEC’s Firestone, speaking at an FCPA conference, said that, although the SEC might not decline an enforcement action simply because a company is subject to prosecution in a foreign jurisdiction, neither will the SEC "turn a blind eye" to any foreign action: "We certainly will take that into account in terms of what we are going to do." And DOJ’s Mendelsohn, speaking at an American Bar Association event, said that although the United States does not recognize the concept of "international double jeopardy," DOJ’s resolutions will "reflect . . . what’s going on in [the foreign] jurisdiction in some way." Mendelsohn cited the 2006 Statoil and 2007 Akzo Nobel prosecutions as examples in which DOJ has credited penalties paid in foreign jurisdiction against those to be paid in the United States. And he further noted:
There are other cases that are not public where we have elected to do nothing in deference to ongoing foreign investigations – or to sit back and wait to see what the outcome of that foreign investigation will be. . . . If that foreign investigation results in some enforcement action, we may elect to do nothing. On the other hand, if . . . that foreign prosecution never gets off the ground, we may step in and proceed with our investigation.
International coordination and non-U.S. enforcement will be a hugely important part of the global fight against corruption in 2009 and beyond.
DOJ’s Coupling of FCPA Prosecutions with Other Charges
DOJ has long charged FCPA defendants with other crimes incidental to the improper payments (e.g., wire fraud, mail fraud, money laundering, tax evasion, violations of the Travel Act, etc.). But 2008 saw DOJ join FCPA charges with prosecutions for violations of federal statutes that have distinct patterns of conduct and criminal elements in a way that it has seldom done before.
In 1999, then-Deputy Assistant Attorney General of DOJ’s Antitrust Division (and now Gibson Dunn partner) Gary Spratling gave a speech at an FCPA conference in which he noted that "in today’s global economy there is a recurring intersection of conduct that violates both the Sherman Antitrust Act and the Foreign Corrupt Practices Act. A payment to a foreign official in violation of the FCPA may also be an act by an international bid-rigging, price-fixing, or market allocation cartel . . . ." Spratling went on to observe that an improper payment detected by a corporate FCPA compliance program can lead to the discovery and report of related antitrust violations, potentially allowing the company to take advantage of the Antitrust Division’s Corporate Leniency Policy.
It took some time, but on December 10, 2008, DOJ’s Antitrust and Criminal Divisions announced the first ever joint FCPA/antitrust prosecution. Misao Hioki, the former General Manager of Bridgestone Corporation’s Japanese marine hose business, pleaded guilty to one count of conspiracy to rig bids in violation of the Sherman Act and one count of conspiracy to violate the FCPA’s anti-bribery provisions. According to the charging documents, Hioki authorized and approved contracts with government agencies throughout Latin America, in particular in Mexico, that included commissions for third-party agents, which commissions included a percentage to be given to officials of those government agencies. Hioki was sentenced to serve two years in prison and pay an $80,000 criminal fine.
Hioki is the ninth individual to plead guilty in the Antitrust Division’s long-running marine hose investigation (which began in May 2007 with a headline-grabbing sweep of arrests coinciding with an alleged cartel meeting), but the first to be charged with FCPA violations. His former employer, Bridgestone, has publicly announced that it too is under investigation for potential violations of both the FCPA and antitrust laws. Bridgestone announced that it discovered the improper payments during its internal investigation into the alleged antitrust violations and reported these payments to U.S. and Japanese authorities. Other ongoing, publicly announced joint FCPA/antitrust investigations include those of ABB Ltd., Innospec, Inc., and Halliburton, Inc.
In another example of a case involving alleged violations of both the FCPA and of a distinct criminal regime, on September 24, 2008, DOJ announced the arrest of Shu Quan-Sheng, a renowned physicist and naturalized U.S. citizen who was born in China. Quan-Sheng was charged with two counts of exporting defense services and articles to China without a license in violation of the Arms Export Control Act and one count of offering bribes to Chinese government officials in violation of the FCPA. According to the charging documents, Quan-Sheng offered to pay three bribes, totaling $189,300, to officials of a Chinese space research agency in connection with a $4 million procurement for the development of a liquid hydrogen tank system. Quan-Sheng was acting as an agent of an unnamed French company in offering to make these payments, which do not appear to have ever been delivered. On November 17, 2008, Quan-Sheng pleaded guilty to all three counts of the criminal information and is scheduled to be sentenced in April 2009.
Continuing Upswing in FCPA Litigation
For a statute now in its fourth decade, the dearth of FCPA litigation is remarkable. But two trends that we have noted in this and past FCPA updates – the rise of private litigation collateral to government enforcement actions and the increase in individual prosecutions – are slowly adding to the body of judicial precedent. This is a welcome addition to private practitioners who still oftentimes find themselves arguing precedent from settled enforcement actions drafted by the government and untested before neutral judicial bodies.
Although there is no private right of action under the FCPA, enterprising plaintiffs’ lawyers have been creative in parlaying alleged FCPA violations into alleged violations of securities laws that do allow for private redress. As a result, and as described in more detail in our 2008 Mid-Year FCPA Update, FCPA investigations have increasingly spurred a variety of collateral civil suits, including securities fraud actions, shareholder derivative suits, and lawsuits initiated by foreign governments or business partners. Accordingly, companies can no longer assume that making peace with DOJ and the SEC will end the pain associated with their alleged FCPA violations.
To date, the most common type of collateral civil litigation has come in the form of securities fraud class actions or derivative shareholder suits against publicly traded corporations. Such cases typically involve claims that the defendant issuer misled investors by understating the risks associated with an FCPA investigation or overstating the quality of its bookkeeping policies and internal controls, which ultimately caused financial losses for the company. In recent years, courts have been trending towards finding that plaintiffs adequately alleged false or misleading statements, thereby meeting the heightened scienter pleading requirements under the Private Securities Litigation Reform Act ("PSLRA") and enabling plaintiffs to survive the motion to dismiss. But a recent decision by the U.S. Court of Appeals for the Ninth Circuit makes clear that there are limits on the types of allegations that will meet this threshold.
On November 26, 2008, the Ninth Circuit affirmed the dismissal of a securities fraud class action filed against InVision Technologies, Inc. The plaintiff shareholders claimed that InVision misled investors by making three misstatements in a merger agreement that the company filed in conjunction with its March 2004 annual report. In particular, the plaintiffs alleged that InVision misstated in its regulatory filing announcing its proposed merger with the General Electric Company that InVision was in compliance with all applicable laws, that the company was in compliance with the books-and-records provision of the FCPA, and that neither the company nor its employees knew of any violations of the FCPA’s anti-bribery provisions. This report was filed just a few months before InVision announced that it had uncovered potential FCPA violations and reported those violations to DOJ and the SEC, ultimately resulting in InVision settling FCPA charges with both enforcement agencies. The announcement of the FCPA investigation caused InVision’s stock price to drop significantly and nearly undermined the pending merger.
In early 2006, the district court dismissed the shareholders’ complaint, triggering the appeal to the Ninth Circuit. The Ninth Circuit upheld the district court’s dismissal, holding that plaintiffs must plead that the senior officials who prepared the company’s allegedly misleading disclosures were aware of the unlawful conduct – and therefore knew that the statements at issue were false – in order to survive a motion to dismiss under the PSLRA. Because the plaintiffs had not pled that InVision’s Chief Executive Officer or Chief Financial Officer, who prepared the statements at issue in the merger agreement, knew about the improper payments in March 2004, the scienter pleading requirements of the PSLRA were not met.
Three other recently filed cases demonstrate new categories of collateral civil litigation arising in conjunction with potential FCPA violations. On June 27, 2008, eLandia International, Inc. filed an action in Florida state court against Jorge Granados, the former Chief Executive Officer of Latin Node, Inc., and others relating to eLandia’s acquisition of the Latin Node business in 2007. The complaint, which asserts claims for, among other things, breach of contract, breach of the obligation of good faith and fair dealing, and fraudulent inducement, alleges that Granados and others failed to disclose during the acquisition process that Latin Node had made payments to various governmental parties in violation of the FCPA. eLandia discovered the potentially corrupt payments by Latin Node employees after completing the acquisition and reported the same to DOJ and the SEC. eLandia noted in a recent quarterly filing that it has offered $2 million to DOJ in an effort to settle the successor liability claims arising from the Latin Node business.
Next, on October 21, 2008, Supreme Fuels Trading FZE filed a complaint in Miami federal court against its competitor, International Oil Trading Co. ("IOTC"), alleging that IOTC bribed Jordanian government officials to ensure that only IOTC would receive a letter of authorization from the Jordanian government allowing IOTC to transport fuel through Jordan into Iraq. Contractors that do not have such a letter are ineligible to win certain U.S. government contracts. The complaint asserts that, but for IOTC’s bribes, Supreme Fuels Trading would have been able to obtain the necessary letter of authorization from Jordan and would have won certain U.S. government contracts. Supreme Fuels Trading claims that IOTC’s conduct tortuously interfered with Supreme Fuels Trading’s business relations and violated the Racketeer Influenced and Corrupt Organizations Act, the Sherman Act, and the Florida state law equivalents of those federal acts.
And on December 23, 2008, Willbros International filed suit against its former executive James Tillery and several of its former consultants, including Paul Novak and Hydrodive International, Ltd., some of the parties allegedly responsible for Willbros International’s own guilty plea to FCPA charges in May 2008. Willbros International alleges that Tillery purchased an approximately 30% interest in Hydrodive International four months before causing Willbros International to enter into a consulting agreement with Hydrodive and without disclosing this ownership interest to Willbros. Tillery and Novak, who themselves were indicted on FCPA charges in 2008 (Willbros International’s complaint was filed only four days after the Tillery/Novak indictment was unsealed), allegedly then used Hydrodive International and other consulting entities "as a conduit to make corrupt payments to foreign officials in Nigeria" in violation of the Racketeer Influenced and Corrupt Organizations Act.
Moving to the criminal litigation front, on October 6, 2008, the U.S. Supreme Court denied David Kay and Douglas Murphy’s petition for certiorari, leaving the Fifth Circuit’s 2007 decision in place and finally bringing to a conclusion one of the FCPA’s longest-running and highest-profile cases. The underlying decision of the Fifth Circuit, as well as the protracted and winding history of this case, is described in detail in our 2007 Year-End FCPA Update. Speaking shortly after the Supreme Court’s cert denial, DOJ’s Mendelsohn proclaimed that this action confirms DOJ’s long-held interpretation of the FCPA as more than "just a procurement fraud statute."
2008 also saw significant judicial decisions in what is perhaps now the FCPA’s longest running prosecution: that of Frederic Bourke, David Pinkerton, and Victor Kozeny. The three were indicted in 2005 on charges of bribing senior Azeri government officials to influence the officials’ decision to privatize Azerbaijan’s state-owned oil company. As reported in our 2007 Year-End FCPA Update, Bourke and Pinkerton (Kozeny has never appeared to answer his charges and is still a fugitive living in the Bahamas) moved to dismiss their charges on statute-of-limitations grounds. Their argument turned on whether 18 U.S.C. § 3292, which permits DOJ to toll the statute-of-limitations in FCPA cases for up to three years while it pursues an official inter-governmental request to obtain evidence located in a foreign jurisdiction, requires DOJ to file the § 3292 tolling application within the five-year statue-of-limitations period. DOJ argued that it was sufficient for it to simply file the foreign legal assistance request within the statute-of-limitations period, as it had in this case, and then file the § 3292 tolling order after the limitations period expired.
Judge Shira Scheindlin of the U.S. District Court for the Southern District of New York granted Bourke and Pinkerton’s motion to dismiss on most of the FCPA counts, leading DOJ to seek review in the U.S. Court of Appeals for the Second Circuit. On August 29, 2008, the Second Circuit affirmed Judge Sheindlin’s decision, holding that "the plain language of [18 U.S.C. § 3292], and the structure and content of the law by which it was enacted, require the government to apply [to the district court] for a suspension of the running of the statute of limitations before the limitations period expires." DOJ had voluntarily dismissed the charges against Pinkerton after the case was argued in the Second Circuit but before the decision had been rendered, and the Second Circuit’s decision removed all but one FCPA count against Bourke.
The single remaining FCPA count against Bourke was then the subject of a second opinion by Judge Scheindlin, issued on October 21, 2008. Bourke filed a motion to dismiss his remaining FCPA charge on the ground that the alleged payments were lawful under the written laws of Azerbaijan, and thus fell within the FCPA’s "local law" affirmative defense. Bourke argued that Azeri law relieves from criminal liability those who pay bribes under duress of extortionate demands as well as those who self-report their bribes to Azeri authorities, both of which Bourke claimed applied to him.
Following a hearing at which Judge Scheindlin heard from dueling Azeri law experts testifying pursuant to Rule 26.1 of the Federal Rules of Criminal Procedure, the Court rejected Bourke’s argument, reasoning that the FCPA focuses on the legality of the payment, not the foreign government’s ability to prosecute the payer. So with respect to Azeri law’s absolution for bribes self-reported to the government, the payments are never themselves lawful, they are simply barred from prosecution, much as the majority of Bourke’s alleged improper payments were barred from prosecution by the U.S. statute of limitations. Similarly, Judge Scheindlin held that with respect to Bourke’s extortion argument, a "payment to an Azeri official that is made under threat to the payer’s legal interests is still an illegal payment, though the payer cannot be prosecuted for the payment."
Because the FCPA is not meant to apply to cases of "true extortion" (e.g., payments to prevent the dynamiting of an oil rig), which generally do not meet the statute’s corrupt intent requirement in any event, Judge Scheindlin instructed Bourke to prepare jury instructions on extortion that he may present to the jury if he can lay an evidentiary foundation that the alleged extortion was "true extortion" and not merely economic coercion (e.g., payments to gain entry to a market). Bourke’s trial is currently scheduled for March 2009.
Two other FCPA cases went up to the circuit courts of appeal in 2008 on non-FCPA issues. In the high-profile prosecution of U.S. congressman William Jefferson, described in detail in our 2007 Year-End FCPA Update, a three-judge panel of the United States Court of Appeals for the Fourth Circuit affirmed the district court’s denial of Rep. Jefferson’s motion to dismiss his indictment on Speech or Debates Clause grounds on November 12, 2008. Rep. Jefferson had argued that the grand jury’s consideration of evidence unlawfully seized from his congressional office tainted his indictment. The Panel observed that "there are limits to the protection afforded to legislators by the Speech or Debate Clause" and concluded that the district court properly decided that the evidence in question was not properly Speech or Debate Clause material protected by the Constitution. The full Fourth Circuit then denied Rep. Jefferson’s petition for rehearing en banc on December 12, 2008. There is presently no trial date set and Rep. Jefferson may still seek certiorari on the Speech or Debate Clause issue from the U.S. Supreme Court.
The other FCPA case to find its way into the federal appellate courts on non-FCPA grounds is the prosecution of husband and wife film producers Gerald and Patricia Green. We first profiled this case in our 2007 Year-End FCPA Update, after the Greens were arrested in December 2007 on charges of conspiring to pay more than $1.7 million in bribes to the former governor of the Tourism Authority of Thailand in return for lucrative contracts to administer the annual Bangkok International Film Festival. But on October 1, 2008, the grand jury returned a superseding indictment adding new charges alleging bribery of the same Thai official in return for contracts related to the introduction of an "elite privilege card" service marketed to wealthy foreigners. Additionally, the superseding indictment added money laundering charges and allegations that Mrs. Green knowingly subscribed two false corporate income tax returns that included deductions for "commissions" as business expenses while Mrs. Green knew that these commissions represented "a false and overstated amount including bribes to a foreign official . . . ." Collectively, the Greens now face twenty-one counts on the superseding indictment.
The Greens’ docket sheet is shrouded in a veil of "under seal" filings. But the publicly available entries show that the Greens have sought interlocutory review by the Ninth Circuit of a district court order for the production of grand jury testimony and documents that the Greens argue is protected by the attorney-client privilege. The district court ruled that the documents and testimony were subject to the "crime fraud" exception to the attorney-client privilege and therefore are not protected. The case appears to have been argued in front of the Ninth Circuit, though a decision has not yet been released.
Other Significant Enforcement Developments
Four More Oil-for-Food Prosecutions Make Ten
In 2008’s final FCPA enforcement action, DOJ and the SEC jointly announced that Fiat S.p.A. had agreed to a settled FCPA resolution in connection with the company’s participation in the Oil-for-Food Program. This made Fiat the fourth company of 2008 – Flowserve Corp., AB Volvo, and Siemens AG being the first three – and the tenth company overall to settle FCPA charges with DOJ and/or the SEC arising out of this United Nations program.
We described the Oil-for-Food scheme in greater detail in our 2007 Year-End FCPA Update, but 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 settlement documents allege that Fiat violated the FCPA’s books-and-records and internal controls provisions through the incorporation into its ledger of $4,379,657 in inaccurately recorded ASSF payments made (and $312,198 in additional ASSF payments agreed to but not paid) by the company’s Dutch, French, and Italian subsidiaries. To settle these allegations, Fiat agreed to pay a $7 million criminal penalty to DOJ and more than $10.8 million in civil penalties, disgorgement, and prejudgment interest to the SEC. Fiat also (i) entered into a deferred prosecution agreement with DOJ, (ii) consented to the filing of criminal informations charging the three implicated subsidiaries with various FCPA books-and-records and wire fraud conspiracy charges (which will be dismissed in three years assuming compliance with the deferred prosecution agreement’s terms), and (iii) consented to the filing of an SEC injunction permanently enjoining it from future violations of the FCPA.
Aibel Group’s Deferred Prosecution Agreement Revoked
On November 21, 2008, DOJ for the first time ever revoked a deferred prosecution agreement and filed criminal charges against the previously protected party. As reported in our 2007 Year-End FCPA Update, in February 2007, Aibel Group entered into a deferred prosecution agreement with DOJ in connection with the payment of approximately $2.1 million in alleged bribes to Nigerian customs officials in return for preferential treatment in customs clearance matters. But twenty-one months later, DOJ announced that Aibel Group had breached its deferred prosecution agreement and had agreed to plead guilty to a two-count superseding information re-alleging the same conduct underlying the deferred prosecution agreement. DOJ did not specify the reason for its revocation of the 2007 agreement, except to say in the plea agreement that despite Aibel’s commitment of "substantial time, personnel, and resources to meeting the obligations of its DPA," Aibel "failed to meet its obligations."
Pursuant to the plea agreement, Aibel Group paid a $4.2 million criminal fine and will serve a two-year term of organizational probation requiring the company to submit annual reports on the implementation of anti-bribery compliance measures within the business. This revocation and prosecution demonstrate DOJ’s willingness to hold companies accountable for violations of deferred and non-prosecution agreements, which should grab the attention of every corporation now serving a term of DOJ probation pursuant to one of these agreements.
Trouble Spots Still Troubled
Compliance professionals know that a select number of foreign locales have historically proven especially difficult to navigate for U.S.-based multinationals and others subject to the FCPA’s reach. 2008 was no exception in this regard, with Nigeria, Iraq, and China pulling down to the "top" three slots for the dubious distinction of being the most-referenced setting for FCPA allegations.
What Facilitating Payments Exception?
For years, we have advised our clients on the pitfalls of the "facilitating payments" exception to the FCPA’s anti-bribery provisions. Pursuant to this exception, payments to "expedite or to secure the performance of a routine government action" are not considered bribes within the scope of the anti-bribery provisions. But DOJ and the SEC have long been openly skeptical of the reach of this exception. For example, speaking at an FCPA conference, DOJ’s Mendelsohn advised that simply because the statute contains the exception does not mean that DOJ encourages such payments as a good business practice.
In the first FCPA settlement of 2008, DOJ took perhaps its strongest stance yet against facilitating payments in a non-prosecution agreement with Westinghouse Air Brake Technologies Corp. ("Wabtec"). On February 14, Wabtec entered into a joint resolution with DOJ and the SEC whereby it consented to the filing of an SEC complaint and entered into a non-prosecution agreement with DOJ, both alleging that the company violated the FCPA’s anti-bribery and accounting provisions. The SEC’s complaint focused on $137,400 in improper payments made by Wabtec’s Indian subsidiary, Pioneer Friction, Ltd., to officials of the Indian Railway Board in order to influence the Board to award it new contracts for the supply of 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.
But DOJ’s non-prosecution agreement is of particular interest. There, DOJ alleged that Pioneer made improper payments to various 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.
DOJ’s non-prosecution agreement paints a sobering picture of 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 the lessons to be drawn from this settlement.
2008 DOJ FCPA Opinion Procedure Releases
By statute, DOJ is required to provide a written opinion at the request of an "issuer" or "domestic concern" as to whether 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 DOJ’s FCPA website, but only a party who joins in the request may officially rely upon the opinions. The SEC does not itself issue FCPA opinion procedure releases, but has opted as a matter of policy not to prosecute issuers that obtain clean opinions from DOJ.
DOJ has issued fifty such written opinions in the statute’s thirty-one years, including three in 2008. In 2006, then-Assistant Attorney General 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 2008 equal the number of releases issued in 2007 and continues a slight upward trend. We detailed the first two FCPA Opinion Procedure Releases of 2008, including the landmark 2008-02 opinion that is a must read for any company undertaking an international acquisition, in our 2008 Mid-Year FCPA Update. Here we will tackle the third release.
FCPA Opinion Procedure Release 2008-03
The third DOJ opinion procedure release of 2008 involves the FCPA’s second affirmative defense (in addition to the "local law" defense discussed above in connection with the Bourke prosecution) – that for "reasonable and bona fide expenditures" related to "the promotion, demonstration, or explanation of products or services" or "the execution or performance of a contract with a foreign government or agency thereof." Global anti-corruption watchdog TRACE International, a domestic concern under the FCPA, submitted the request in advance of an FCPA conference held in Shanghai, China. TRACE sought clearance to pay travel-related expenditures for Chinese journalists (most media outlets in China are state-owned, rendering the journalists foreign officials under the FCPA) to attend a TRACE press conference timed to coincide with the FCPA conference.
TRACE represented that it would provide the journalists with modest cash stipends – approximately $28 for in-town journalists and $62 for out-of-town journalists – to cover meals, local transportation costs, and, in the case of the out-of-town journalists, would reimburse the journalists for economy rate inter-city travel and pay directly for their overnight lodging in the hotel where the conference was to take place. TRACE further represented, among other things, that members of the state-owned media in China are not typically reimbursed for work-related travel expenses, that TRACE would not condition the stipends and expense reimbursements on the journalists’ coverage of TRACE’s press conference, that TRACE would send letters to the journalists’ employers advising them of the proposed stipends and expense reimbursements, and that TRACE had obtained "written assurance from an established international law firm that TRACE’s payment of the stipends is not contrary to [Chinese] law."
Based on these representations, DOJ concluded that the proposed payments would "fall within the FCPA[’]s promotional expenses affirmative defense in that the expenses are reasonable under the circumstances and directly relate to ‘the promotion, demonstration, or explanation of [TRACE’s] products or services.’" DOJ explicitly disclaimed any reliance on TRACE’s representations "that it may be a common practice for companies in [China] to provide such benefits to journalists attending a press conference."
2008 also saw the introduction of several pieces of legislation that, if passed, could have substantial ramifications for companies subject to the FCPA.
As reported in our 2008 Mid-Year FCPA Update, on June 4, 2008, Rep. Ed Perlmutter (D. Colo.) introduced H.R. 6188, 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 efforts to "level the playing field" of FCPA enforcement worldwide. The bill was referred to the House Judiciary and Energy and Commerce committees, but no action was taken in the 110th Congress.
On May 16 2008, Rep. Barney Frank (D. Mass.) introduced H.R. 6066, the Extractive Industries Transparency Disclosure Act, in the House. This bill would amend the ’34 Exchange Act to require issuers to disclose in their annual SEC filings all payments to foreign governments, including their agencies and instrumentalities, in connection with the extraction of natural resources. Long advocated by human rights groups, the purpose of this legislation is to increase the transparency of funds flowing into the coffers of oppressive Third World regimes that sit on great natural wealth while their citizens live in poverty. Of course, a side effect of the law would be mandatory disclosures of certain payments that may implicate the FCPA. Unlike the Foreign Business Bribery Prohibition Act, this bill has seen movement. The House Financial Services Committee held hearings on the bill in June 2008 and then, in July, Sen. Charles Schumer (D. N.Y.) introduced a companion bill (S. 3389) in the Senate. The Senate and House bills have collectively gathered forty co-sponsors and, according to a recent article in the Houston Chronicle, additional committee hearings are scheduled for 2009 with a goal of passing the law in 2010.
Finally, although technically neither legislation nor relating specifically to the FCPA, we would be remiss not to mention this year’s major compliance development in the Federal Acquisition Regulation ("FAR"). On November 12, 2008, the FAR Council amended the FAR with FAR Case 2007-006, which requires mandatory disclosure by federal government contractors of certain violations of federal criminal law and the civil False Claims Act and requires many government contractors to create a business ethics awareness and compliance program. The push for this rule originated with DOJ’s Criminal Division, which has long criticized what it sees as a lack of voluntary disclosure by federal contractors of legal and ethical violations.
FAR Case 2007-006 requires government contractors to disclose all violations of criminal law involving fraud, conflict of interest, bribery, and gratuities connected to any aspect of a federal government contract or subcontract, as well as violations of the civil False Claims Act and "significant" overpayments on a contract. A knowing failure to timely disclose "credible evidence" of such violations may result in suspension or debarment. The rule also requires contractors, other than those classified as small business concerns or contracting solely for commercial items, to implement a business ethics awareness and compliance program as well as a system of internal controls. And even small business concerns are covered to the extent that they work on federal government contracts valued in excess of $5 million and with performance periods longer than 120 days. These compliance and control systems must be reasonably calculated to, among other things, facilitate timely discovery of improper conduct related to a federal government contract and guarantee that effective corrective measures are taken once such conduct has been discovered.
Although FAR Case 2007-006 applies only to U.S. government contracts, and its criminal disclosure obligations do not on their face apply to the FCPA (the criminal law disclosure obligations are limited to Title 18 of the U.S. Code whereas the FCPA is contained in Title 15), one could easily spin a hypothetical in which this development becomes very relevant to companies with FCPA concerns. For more on FAR Case 2006-007, please see Gibson Dunn’s November 13, 2008 Client Alert, New Federal Regulation Requires Mandatory Disclosure and Amplified Compliance Programs for Government Contractors.
Although the number of FCPA enforcement actions brought in 2008 was slightly down from 2007’s record pace, the FCPA enforcement agencies have continued to prosecute violators aggressively. In doing so, DOJ and the SEC have taken an expansive view of the scope of the FCPA’s prohibitions and continue to seek increasingly large penalties against both corporate and individual defendants. With approximately 100 pending FCPA investigations, we expect this trend of aggressive enforcement to continue in 2009
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