In recent years, US and Western European military spending has decreased as military spending in other parts of the world has risen. As a result, aerospace, defence and government (ADG) services companies increasingly rely on sales to foreign governments to grow business revenue and are thus at a more significant risk of investigation for violations of the Foreign Corrupt Practices Act.
On February 16 2017 newly-installed Deputy Assistant Attorney General Trevor McFadden noted that:
"The fight against official corruption is a solemn duty of the Justice Department, each generation of Department leaders and line prosecutors takes up this mantle from their predecessors, regardless of party affiliation."(1)
His remarks confirmed the Department of Justice's (DOJ) continued commitment to enforcing the act under the leadership of Attorney General Jeff Sessions and did not announce any significant changes in enforcement practices or priorities – although such changes may be on the horizon. McFadden noted that the DOJ Foreign Corrupt Practices Act unit has added 10 prosecutors over the last 18 months, and that the Federal Bureau of Investigation (FBI) has also established three new squads of special agents in New York, Washington DC and Los Angeles devoted to investigating violations of the act. These additional resources – coupled with the increase in US enforcement action in 2016, compared to 2015 – suggest that robust enforcement of the act will continue. The risk that such enforcement actions present to ADG corporations is significant. Since 2008, at least 10 corporations have agreed to pay more than $300 million in penalties to resolve such investigations. This update outlines the most significant issues likely to shape enforcement activity of the Foreign Corrupt Practices Act in the ADG industry in 2017.
Top 10 Foreign Corrupt Practices Act enforcement actions of all time(2)
In April 2016 the DOJ released the Foreign Corrupt Practices Act Enforcement Plan and Guidance. This plan outlines a one-year pilot programme that allows for fine reductions in enforcement actions beyond what is available under the US Sentencing Guidelines (for further details please see "The problems that the Justice Department pilot programme is trying to solve"). DOJ officials have explained that the programme's requirements aim to enhance the DOJ's ability to prosecute individuals by motivating companies to self-disclose violations of the act and cooperate with investigators.(3)
Under the pilot programme, companies that do not self-disclose will receive no greater than a 25% reduction from the bottom of the US Sentencing Guidelines fine range. In contrast, corporations that meet the programme's other requirements and self-disclose may qualify for a reduction of up to 50% from the bottom of the US Sentencing Guidelines fine range or a declination of prosecution. McFadden recently noted that the pilot programme will be "up for review this spring", and that the DOJ will at that time consider whether any "modifications should be made to encourage companies and individuals to comply voluntarily" with the act's requirements.(4) The pilot programme also provides that prosecutors may issue declinations of prosecutions to corporations that self-disclose and meet the programme's other cooperation and remediation requirements. Under the Obama administration, DOJ officials indicated that a declination was unlikely if:
- executive management was involved in the wrongdoing;
- the company made a significant profit from the misconduct in relation to its size and wealth;
- the company has a history of non-compliance; or
- the company has resolved a separate matter with the DOJ within the last five years.
The DOJ issued five declination letters in 2016.(5) It remains to be seen whether the DOJ under the Trump administration significantly increases the pace of declinations or articulates new criteria for securing a declination.
Functional, implemented and tested compliance programmes
In February 2017 the DOJ Fraud Section issued guidance entitled "Evaluation of Corporate Compliance Programs".(6) This long-awaited guidance follows the appointment of Hui Chen as the DOJ's first compliance counsel expert in November 2015. It explains that factors – commonly referred to as the 'Filip factors' – which prosecutors must consider when determining whether to bring charges or when negotiating a plea or other agreement include:
- the existence and effectiveness of a corporation's pre-existing compliance programme; and
- any remedial efforts to implement an effective compliance programme or improve an existing programme.
The guidance acknowledges that the DOJ's expectations for an effective compliance programme may vary based on the company's risk profile and identifies a series of questions organised into 11 topics that may be asked in the course of evaluating such programmes. Compliance programmes may be evaluated in accordance with this new guidance to determine eligibility for full remediation credit under the Foreign Corrupt Practices Act pilot programme, which requires that corporations implement an effective compliance programme in order to secure full remediation credit.
Cooperation with law enforcement agencies
Securities and Exchange Commission (SEC) and DOJ officials have recently explained that cooperation with their foreign counterparts is increasingly crucial to fighting bribery and corruption. Former Assistant Attorney General Leslie R Caldwell explained that "[c]ollaboration and coordination among multiple regulators in cross-border matters is the future of major white collar criminal enforcement". Caldwell also noted that some DOJ investigations have relied heavily on cooperation not only from prosecutors, but also from law enforcement officials in other countries. Corporations coordinating investigations in multiple jurisdictions face numerous challenges. Chief among them is attempting to avoid paying penalties to regulators in multiple countries for the same conduct. A recent settlement with Embraer – the world's largest manufacturer of medium-sized jets – illustrates an attempt to address such a concern. Embraer, a major Brazilian exporter, agreed to pay more than $107 million in US fines and to disgorge $98 million in profits in order to resolve allegations that its payments to various third parties disguised bribes to government officials in the Dominican Republic and Saudi Arabia. Embraer's settlement with the SEC allows that the company may receive up to a $20 million credit for disgorgement paid to Brazilian authorities in a parallel civil investigation. Embraer also agreed to appoint a compliance monitor that will report jointly to the SEC and the Brazilian Securities and Exchange Commission. Similarly, Odebrecht SA and Braskem SA resolved a multinational corruption investigation by agreeing to pay penalties and disgorgement totalling approximately $3.5 billion. Through the settlement, US authorities agreed to credit the criminal penalties paid to Brazilian and Swiss authorities. The agreement also reflected an agreement to distribute disgorgement between the three countries involved in the investigation. Increased global cooperation has enabled US enforcement agencies to share the labouring oar on investigations that generated more than $2.4 billion for the US Treasury in 2016. A growing global commitment to enforcing bribery and corruption laws may also begin to quiet critics of the Foreign Corrupt Practices Act who have long asserted that enforcement of the act puts US corporations at a competitive disadvantage in the global marketplace. These facts further suggest that US officials are unlikely to decrease enforcement of the act in 2017.
The Trump administration is likely to continue aggressive enforcement of the Foreign Corrupt Practice Act despite the president's previous negative comments about the law. A growing commitment to combating fraud and corruption from other countries and increased global cooperation between law enforcement and regulatory agencies has expanded the risk that ADG corporations' business with foreign governments will come under scrutiny. One FBI veteran has explained that the FBI is likely to focus its resources in geographical regions where it has the best chance of building a strong case.(7) The same official reported that the FBI works most closely with countries in Europe and Latin America – including Brazil and Mexico – and has strong relationships with Australia, Japan, Hong Kong and Singapore. Therefore, steady enforcement efforts are to be expected in these regions. The DOJ may also implement significant changes to the Foreign Corrupt Practices Act pilot programme this month, when the current programme expires.
For further information on this topic please contact Lillian S Hardy or Rebecca Umhofer at Hogan Lovells US LLP's Washington DC office by telephone (+1 202 637 5600) or email (firstname.lastname@example.org or email@example.com). Alternatively, contact Stephanie Yonekura at Hogan Lovells US LLP's Los Angeles office by telephone (+1 310 785 4600) or email (firstname.lastname@example.org). The Hogan Lovells US LLP website can be accessed at www.hoganlovells.com.
(1) Trevor N McFadden, deputy assistant attorney general, US Department of Justice, remarks at Global Investigations Review Conference (February 16 2017). (2) www.fcpablog.com. (3) The specific requirements for full credit under the pilot programme are discussed here. (4) McFadden supra note 1 at 6. (5) See US Department of Justice pilot programme declinations. (6) US Department of Justice, Criminal Division, Fraud Section, "Evaluation of Corporate Compliance Programs". (7) Richard Satran, "International Graft Crackdown Takes Hold, FBI Official Says, Citing Brazil", Reuters Financial Regulatory Forum (August 5 2016).
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