Corruption poses significant legal and economic risks for companies conducting business around the world. The Foreign Corrupt Practices Act of 1977 (the “FCPA”) is a U.S. federal law which prohibits U.S. citizens and permanent residents, both public and private U.S. companies and certain non-U.S. individuals and entities from bribing foreign government officials in order to obtain a business advantage. The Department of Justice (the “DOJ”) and the Securities and Exchange Commission (the “SEC”) are jointly responsible for investigating, settling and prosecuting violations of the FCPA. Companies which operate directly or through affiliated or unaffiliated parties, particularly in developing countries, may be vulnerable to FCPA enforcement and should take steps to ensure compliance. This article discusses recent FCPA enforcement cases and trends.
Recent FCPA Enforcement:
Within the past decade, enforcement of the FCPA has been a top priority for U.S. enforcement agencies. In 2014 alone, the DOJ initiated 24 prosecutions and the SEC opened eight enforcement actions. In recent years, the DOJ and the SEC have continued to push for strong enforcement against both companies and individuals who violate the FCPA and are imposing large penalties. Recent notable cases include:
- Alcoa World Alumina LLC1: In January 2014, Alcoa’s subsidiaries paid over US$110 million in bribes to Bahraini officials to influence negotiations with a government- operated aluminium plant. Alcoa ended up paying a total of US$384 million to settle the case with the SEC and the DOJ. The SEC found that Alcoa did not conduct due diligence or otherwise seek to determine whether there was a legitimate business purpose for the use of a middleman in Bahrain, who was paying bribes on behalf of Alcoa to Bahraini government officials. This case constituted the fifth largest FCPA settlement in history.
- Avon Products Inc.2: In December 2014, Avon agreed to pay US$135 million to settle charges that it had failed to establish controls to detect and prevent US$8 million worth of payments and gifts from a subsidiary’s employees and consultants to Chinese government officials. Avon was required to retain an independent compliance monitor to review its FCPA compliance program for a period of 18 months, followed by an 18- month period of self-reporting on its compliance efforts. In reaching the settlement amount, the SEC considered Avon’s cooperation and significant remedial measures.
- Goodyear Tire & Rubber Company3: In February 2015, Goodyear paid over US$16 million to settle SEC charges that it violated the FCPA when its subsidiaries paid bribes to land tire sales in Kenya and Angola. Goodyear was also required to report its FCPA remediation efforts to the SEC for a three-year period. The settlement reflects Goodyear’s self-reporting, prompt remedial acts and significant cooperation with the SEC’s investigation.
Recent FCPA cases such as those mentioned above highlight several themes:
1) SEC Reliance on Administrative Actions:
The SEC is increasingly relying on administrative actions to enforce FCPA violations, due to the increased authority it has been given under the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act amendments to the Securities and Exchange Act of 1934, as amended. Such amendments enable the SEC to pursue civil penalties through administrative proceedings. In 2014, all eight SEC enforcement actions were resolved using the SEC’s administrative process rather than through the use of a civil complaint.
2) DOJ Focus on Corporate Executives:
It is not only companies which are the current target for FCPA prosecution and enforcement. The DOJ has been aggressively prosecuting corporate executives (both U.S. and foreign residents alike) who conspire to violate the FCPA. Therefore, individual responsibility for FCPA violations is becoming more widespread.
3) The DOJ’s Role as Quasi-Enforcer:
The DOJ continues to act as a quasi-regulator by imposing reforms, compliance controls and behavioural changes with regard to FCPA enforcement. It has done so via plea agreements, deferred prosecution agreements (“DPAs”) or non prosecution agreements (“NPAs”). There is a trend, however, towards bringing more and bigger cases under the FCPA and reduced use of DPAs.
4) Both the DOJ and SEC are Encouraging Self-Disclosure and Cooperation:
The DOJ and SEC continue to give meaningful credit to corporations who cooperate with regard to FCPA infractions. In January 2015, the SEC announced a deferred prosecution agreement with PBSJ Corporation4. The DPA defers SEC charges for a period of two years and requires the company to comply with certain undertakings, in addition to US$3.4 million in financial remedies. This agreement shows the SEC’s willingness to offer a significantly reduced penalty due to PBSJ Corporation’s actions in quickly ending the misconduct after self-reporting to the SEC, voluntarily making witnesses available for interviews, and providing factual chronologies, timelines, internal summaries and full forensic images to cooperate with the SEC’s investigation. In February 2015, at the PLI SEC Speaks session in Washington, DC, Ms. Kara N. Brockmeyer (Chief of the FCPA Unit) outlined the following means by which a company may obtain credit for cooperation with the SEC:
- Real-time reporting of the company’s investigation and findings, allowing the SEC to leverage these findings into its own investigation and interview witnesses contemporaneously;
- Translating witness interviews into English;
- Bringing foreign employees to the U.S. for interviews;
- When the wrongdoer is or was an employee, letting the SEC know that the employee has already left or will be terminated;
- Helping the SEC interview witnesses; and
- Thinking creatively to provide the necessary documentation to the SEC rather than using foreign data protection laws to block their production.
The SEC has also noticed a substantial uptick in self-reporting, and in particular, has observed that companies now report potential misconduct when it is nascent or recent. In these circumstances, the SEC may never conduct an investigation, suggesting that the SEC is willing to credit companies that are demonstrably serious about addressing FCPA issues and risks and imposing their own effective internal controls.
FCPA Enforcement Trends Expected to Continue:
We expect the following FCPA enforcement trends to continue in 2015:
- FCPA Hot Spots: The FCPA hot spots continue to be China, Russia and Africa (particularly Nigeria), but there has been an uptick in enforcement against activity in the Middle East and Southeast Asia for bribery schemes. There have also been some FCPA enforcement cases in less-traditional areas such as Europe and Latin America.
- Focus on Multinationals as well as SMEs: Going forward, FCPA enforcement will continue to focus on large, multinational companies. However, it will also focus on small and medium-size enterprises (“SMEs”) entering the international markets for the first time, to ensure that such SMEs have adequately considered their compliance risks and have adequate internal controls in place to address those risks.
- Heightened Scrutiny of Hiring Practices: It is likely that there will be continued scrutiny of hiring practices of the big banks. The SEC has reportedly been investigating the hiring practices of banks such as JP Morgan, Goldman Sachs, Citigroup, Credit Suisse and UBS AG to determine whether they have violated the FCPA by hiring relatives of government officials. For example, in 2013, the SEC reportedly inquired as to whether JP Morgan improperly hired children of Chinese officials in order to bolster its business in China.
- Increasing International Cooperation: The FCPA Unit at the SEC (the “Unit”) is increasingly working in tandem with foreign regulators and foreign prosecutors on FCPA enforcement matters. The Unit has also been collaborating with the SEC’s Office of International Affairs to train non-US law enforcement agents in detecting and prosecuting bribery and corruption. We expect this trend to continue.
- DOJ Enforcement of the FCPA as a Foreign Policy Tool: In a speech at Duke University School of Law in October 2014, Assistant Attorney General Leslie Caldwell of the Justice Department’s Criminal Division stated that the DOJ’s enforcement of the FCPA has not remotely reached its peak. She suggested that FCPA enforcement is not merely a means to punish and deter corporations that engage in anticompetitive overseas conduct, but rather the DOJ’s enforcement of the FCPA is being used as a broader foreign policy tool. This foreign policy rational for FCPA enforcement is not necessarily new, but is one that the DOJ rarely speaks publicly about. If the DOJ continues to utilize FCPA enforcement as a foreign policy tool, companies can expect increased scrutiny of corporate business dealings in politically unstable countries and an increased focus on detecting and prosecuting bribery schemes in countries where corruption has the potential to affect the United States’ long-term foreign policy interests.
It is clear that FCPA enforcement will remain a priority for the SEC and DOJ going forward. All companies conducting international business should be mindful of FCPA enforcement trends and ensure that they have considered their compliance risks and have adequate internal controls in place to address such risks. To be useful, a meaningful review of such controls and procedures should be conducted on a regular basis.