Dear Clients and Friends, The third and fourth quarters of 2013 proved to be eventful and potentially prophetic as to the course the Foreign Corrupt Practices Act (“FCPA”) is likely to take in 2014 and beyond. The overall number of enforcement actions undertaken by the Department of Justice (“DOJ”) and Securities and Exchange Commission (“SEC”) declined for the fourth straight year [see table below], but the DOJ is nonetheless actively investigating over 150 cases and the SEC over 100. This decrease appears to be the result of proactive internal investigations and remediation by US companies that recognized the importance of retaining external resources to investigate FCPA issues in light of the substantial fines levied by the government over recent years. Additionally, the investigation and prosecution of cases evolved over the past year: the number of corporate enforcement actions decreased, while the number of individual enforcement actions rose. The agencies have increasingly adopted industry “sweeps” to identify corruption and have steadily been turning to hybrid monitors to ensure the future compliance of violators. Moreover, in an era of rapidly accelerating globalization, increased scrutiny is being placed, at home and abroad, on the actions of all international actors. With developments abroad, especially in China, and the very public 2014 Winter Olympics in Sochi, Russia, issues of foreign corruption and bribery are likely to be under a very public lens in 2014. A major trend seen in the FCPA context throughout 2013 was the DOJ and SEC’s use of “sweeps.” When a company was reported or discovered to have engaged in corruption (or had the opportunity for widespread corruption) the DOJ and SEC have begun scrutinizing not only that company, but related industries, companies, or even geographic regions abroad. In this way, the government conducts a broad – or sweeping – review of the industry or region, catching companies or individuals that might not otherwise have been detected. This means that 0 10 20 30 40 50 60 2010 2011 2012 2013 Number of Cases FCPA Cases 2010-2013 Total DOJ SEC2 companies doing business in a country or in an industry that has had recent FCPA investigations or enforcement actions within it are likely to be under closer-than-normal review by the government, and are advised to proactively consult with counsel to review both their compliance programs and internal review procedures. An area that might see increased oversight because of “sweeps” is the pharmaceutical industry. As reported infra, Chinese authorities allege that numerous multi-national drug companies have engaged in corruption and bribery in China. These companies, including Baxter International, Inc., Eli Lilly & Co., GlaskoSmithKline, Novartis AG, and Sanofi AG, are major international actors, all have a significant presence in the United States, and several are traded on major U.S. exchanges. Consequently, given the actions by the Chinese government and the high degree of media coverage, these companies are now almost certainly facing scrutiny by the DOJ and SEC. Additionally, because all are pharmaceutical companies, other drug companies, especially those doing business in China or Asia, are likely to face heightened oversight and review by the government. In addition to sweeps, another development in the arsenal of the DOJ is the increasing use of hybrid monitors. Monitorships have been a staple of FCPA enforcement actions for some time. In 2013, four of seven DOJ cases involved the implementation of monitorship. Unlike traditional three year monitorships, however, hybrid monitors provide the DOJ with increased negotiating power. Rather than a full three year monitorships, hybrid monitorships consist of an initial 18 month period, at which time the monitor has the option of certifying the organization as having met its compliance obligations and ending the oversight. Only if the monitor determines the company has failed to fully resolve its compliance issues does the monitorship continue for the full three year term. This gives the DOJ a powerful tool to induce settlement, negotiating a compromise with a company for a hybrid monitor for the company, rather than have the company risk a longer, drawn out, settlement or litigation that might result in a full, three year monitorship. This practice seems poised to further increase FCPA settlements, Deferred Prosecution Agreements or Non-Prosecution Agreements, rather than court based litigations. Finally, as 2014 begins and the Winter Olympics are underway, businesses and individuals are urged to be mindful of their compliance with the FCPA. Previous international sporting events have given rise to FCPA liability, and with the increase of anti-bribery laws abroad, clients are urged to be aware not only of the FCPA, but also the UK Anti-Bribery Act and similar foreign statues.3 Settlements4 Diebold Inc. On October 22, 2013, Diebold Inc. (“Diebold”) announced that it had resolved FCPA violations with both the DOJ and the SEC. The underlying conduct subject to investigation was the same for both the DOJ and SEC. The SEC’s complaint described the conduct as: [Concerning] violations of the anti-bribery, books and records, and internal controls provisions of the Foreign Corrupt Practices Act (“FCPA”) by Diebold, Inc. (“Diebold”), an Ohio company that is a global provider of automated teller machines (“ATMs”) and bank security systems. From 2005 through 2010, Diebold, through its agents and subsidiaries, lavished international leisure trips, entertainment, and other improper gifts on foreign officials to obtain and retain lucrative business with government owned banks in China and Indonesia. During that same period, Diebold, through its Russian subsidiary, paid bribes in connection with the sale of ATMS to private banks in Russia. In all, Diebold made approximately $3 million in illicit payments in China, Russia, and Indonesia. Diebold entered a Deferred Prosecution Agreement (“DPA”) with the DOJ, in addition to agreeing to pay a $25.2 million penalty. Under the terms of the DPA, Diebold will be required to hire a compliance monitor for a minimum of 18 months and to put into effect additional internal controls. Diebold settled with the SEC for $22.97 million in disgorgement and prejudgment interest. In total, Diebold agreed to pay more than $48 million to resolve its FCPA violations. IBM On July 25, 2013, after over two years in limbo, federal Judge Richard Leon approved IBM’s FCPA settlement with the SEC. Judge Leon initially rejected the $10 million settlement, but following increased reporting and disclosure obligations to be imposed on IBM, granted his approval. The settlement stems from improper payments for travel and entertainment in South Korea and China. Stryker Corporation Michigan-based medical technology company Stryker Corporation (“Stryker”) has entered a $13.2 million settlement with the SEC following revelations of bribery in at least five foreign countries. According the SEC’s Cease and Desist Order:5 From approximately August 2003 to February 2008 (the “relevant period”), Stryker made approximately $2.2 million in unlawful payments to various government employees including public health care professionals (collectively, the “foreign officials”) in Mexico, Poland, Romania, Argentina, and Greece. Stryker incorrectly described these expenses in the company’s books and records as legitimate consulting and service contracts, travel expenses, charitable donations, or commissions, when in fact the payments were improperly made by Stryker to obtain or retain business. Stryker earned approximately $7.5 million in illicit profits as a result of these payments. Since the corruption came to light, Stryker has implemented increased compliance programs and oversight, a fact that the SEC indicated it considered in agreeing to Stryker’s proposed settlement. In addition to retaining outside counsel and conducting an internal investigation, Stryker also implemented increased compliance on a company-wide level, and hired a “third-party consultant to perform FCPA compliance assessments and compile written reports.” The SEC noted, “[b] ased on the [compliance improvements], Stryker has demonstrated a commitment to designing and funding a meaningful compliance program in order to prevent and detect violations of the FCPA and other applicable anti-bribery laws.” Weatherford Weatherford International (“Weatherford”) and three of its subsidiaries, including Weatherford Services Limited (“WSL”) have settled FCPA related violations with the DOJ and SEC for $152.6 million – the ninth largest FCPA settlement to date. Additionally, Weatherford and four subsidiaries have also agreed to a $100 million settlement for violations of the International Emergency Economic Powers Act and the Trading with the Enemy Act. These latter charges were connected to export violations with Cuba, Iran, Syria, and Sudan. In settling with the DOJ, WSL pled guilty to criminal bribery, and Weatherford was charged in a one count criminal information with “violating the internal controls provision of the FCPA.” Weatherford resolved the charge against it with a DPA and agreed to an $87.2 million criminal fine. Weatherford also settled with the SEC, agreeing to increased compliance programs, the retention of an independent corporate monitor, and $65,6122,360 in disgorgement, prejudgment interest, and civil penalties. 6 According to the DOJ, “Weatherford International knowingly failed to establish an effective system of internal accounting controls designed to detect and prevent corruption, including FCPA violations.” In its press release, the DOJ pointed to several specific instances of corruption. First, in an African joint venture, Weatherford paired with two local entities. “The sole purpose of those local entities, in fact, was to serve as conduits through which Weatherford Services funneled hundreds of thousands of dollars in payments to the foreign officials controlling them.” Second, Weatherford employees bribed at least one foreign official to secure “the renewal of an oil services contract.” Third, “volume discounts” were offered to a middleman in the Middle East with the intent of funneling the money to leaders of a national oil company – and gaining a business advantage and more contracts. Finally, Weatherford’s “failure to implement effective internal accounting controls also permitted corrupt conduct relating to the United Nations’ Oil for Food Program to occur….” In its release announcing the settlement, the DOJ expressly pointed to the company’s internal investigation and remediation efforts as part of the explanation for the settlement. 7 Companies Facing Potential FCPA Exposure & Companies Already Under Investigation8 Agilent Technologies On September 6, 2013, Agilent Technologies (“Agilent”), which produces medical equipment, disclosed in its Form 10-Q that it had “initiated an internal investigation” based upon potentially improper actions undertaken by its employees in China. According to the disclosure, “the Company determined that certain employees of Agilent’s subsidiaries in China did not comply with the Company’s Standards of Business Conduct and other policies.” Agilent voluntarily disclosed its investigation to both the DOJ and SEC on September 5, 2013. As of December 6, 2013, no actions had been disclosed by the DOJ or SEC with regard to the company. Anheuser-Busch InBev In March 2013, Anheuser-Busch InBev (“InBev”) revealed that the SEC had begun an investigation into its Indian affiliates, including its joint venture, InBev Indian Int’l Private Ltd. On July 31, 2013, InBev announced in its Form 6-k filing with the SEC that the DOJ had commenced a parallel investigation. Avon Products, Inc. In its August 1, 2013, Form 10-Q, Avon Products, Inc. (“Avon”) revealed that its $12 million settlement offer to the DOJ and SEC had been rejected by both agencies. Then, in its October 31, 2013, Form 10-Q, the company revealed that the SEC had proposed settlement terms, which Avon rejected, that included “monetary penalties of a magnitude significantly greater than our earlier offer.” Furthermore, Avon revealed that it anticipated, but had not yet received, a similar settlement offer from the DOJ. “If the DOJ’s offer is comparable to the SEC’s offer and if the Company were to enter into settlement with the SEC and the DOJ at such levels, we believe that the Company’s earnings, cash flow, liquidity, financial condition and ongoing business would be materially adversely impacted.” To date, the company is believed to have spent $300 million on its internal investigation. Baxter International, Inc. Baxter International, Inc. (“Baxter”) has uncovered improper payments made by a joint venture, the Guangzhou Baxter Qioguang Health Co., of which it is a part. Following employee-provided tips, the company uncovered the improper payments, made to a Chinese travel agency. The company then took steps to remediate the issue, including disciplining employees and instituting new training programs. BHP Billiton BHP Billiton (“BHP”) revealed recently that the SEC and DOJ have disclosed the “issues they consider could form the basis of enforcement actions and discussions.” BHP has had an ongoing internal investigation into alleged FCPA violations, largely connected the company’s involvement with the 2008 Olympics and “exploration and development efforts,” since 2009. The investigation was sparked by a 2009 SEC request for information. Deutsche Bank AG Reuters reported on September 9, 2013, that “Japan’s securities market watchdog,” the Securities and Exchange Surveillance Commission (“SESC”), had begun investigating potentially improper expenditures by Deutsche Bank AG to entertain pension fund heads. As pointed out by the article, these pension fund heads are considered public employees and therefore issues of bribery are implicated by the expenditures. However, given that the bank has already begun mitigation efforts, the SESC may view the potential violations with increased leniency. Dumex Baby Food Co. Dumex Baby Food Co. (“Dumex”), which is owned by Danone S.A., has launched an investigation into claims that marketers have been paying 9 doctors and nurses to use their products on maternity wards throughout China. There is no word yet of the results of the investigation or on whether or not the SEC or DOJ are involved. Eli Lilly & Co. On August 22, 2013, Reuters reported that a Chinese newspaper that had recently published allegations that U.S. pharmaceutical manufacturer Eli Lilly & Co. (“Eli Lilly”) had paid physicians and nurses in China more than $4.9 million to use its drugs–in particular a “key insulin product in Shanghai and Anhui province.” The company acknowledged that it was first made aware of similar rumors in 2012, and has since that time been investigating past conduct and monitoring current practices. Eli Lilly responded to the current allegations stating that they had not yet confirmed the accusations, but were continuing to investigate Gold Fields Limited Gold Fields Limited (“Gold Fields”) announced via its website, on September 10, 2013, that it was under investigation by the SEC “relat[ed] to the Black Economic Empowerment transaction associated with the granting of the mining license for its South Deep [South Africa] operation.” At its core, the investigation is likely to focus on allegations of bribery and potential FCPA liability for ownership allocations made by Gold Fields to Baleka Mbete, the chairwoman of ANC party, to secure mining rights for the company.” GlaskoSmithKline The second half of 2013 saw major developments in the bribery and corruptions allegations, which continue to emerge, regarding GlaskoSmithKline (“GSK”) operations in China. By mid-July 2013, four GSK executives had been detained in China, and GSK was accused of paying more than $489 million in bribes to doctors to incentivize the use of their products. By July 22, 2013, GSK released a statement to the effect: “Certain senior executives of GSK China who know our system well, appear to have acted outside of our processes and controls which breaches Chinese law. We have zero tolerance for any behavior of this nature.” By the end of July, 22 people had been detained, and by September 2013, reports shifted from blaming individual salespersons to GSK China, at the company level. The allegations suggest that GSK, through over 700 travel agencies, made payments that ultimately went to influence doctors’ use of GSK’s pharmaceutical products. Such bribes likely constituted 20-30% of the drugs’ prices. Corruption in China, especially in the pharmaceutical industry, is increasingly coming to light. Among other companies that are or have faced charges similar to GSK are AstraZeneca and Eli Lilly. GSK previously disclosed that the SEC and DOJ first contacted it about potential FCPA violations in China as early as 2010. Hyperdynamics Corp. Hyperdynamics Corporation (“HC”) disclosed in its November 12, 2013, Form 10-Q that it was in receipt of a subpoena from the DOJ: … requesting [HC] produce documents relating to [its] business in Guinea. [HC] understand[s] that the DOJ is investigating whether [HC’s] activities in obtaining and retaining the Concession rights and our relationships with charitable organizations potentially violate the FCPA and anti-money laundering statutes. The investigation is in connection with HC’s seafloor rights off the coast of the Republic of Guinea. Tullow Oil Plc and Dana Petroleum E&P Ltd. are HC’s partners in the project. JPMorgan Chase & Co. JPMorgan Chase & Co. (“JPMC”) is currently under investigation based upon allegations that it potentially violated the FCPA by 10 hiring the children of prominent and well-connected Chinese leaders. The ongoing investigation involves both the DOJ and SEC and is likely to expand throughout Asia – where JPMC has a historic presence. Although the hiring of individuals with family or business connections is not by itself a FCPA violation, if employment decisions are intended to curry favor or win business for the company, then such actions might constitute a violation. In September 2013, the Wall Street Journal reported that JPMC offered to pay a total of $3 billion to resolve a number of civil and criminal cases, including any potential FCPA liability related to the DOJ and SEC’s investigations. The offer was reportedly not accepted. Mead Johnson Nutrition Company On October 24, 2013, Mead Johnson Nutrition Company (“Mead Johnson”) revealed that it was in receipt of a SEC document request for information related to potentially improper actions undertaken by a Chinese subsidiary. The company further indicated that it had begun an internal investigation, with the help of outside counsel, and was cooperating with the SEC. Microsoft Corporation The Wall Street Journal reveal on August 21, 2013, that Microsoft Corp. (“Microsoft”) is under investigation for potential FCPA violations made by its “business partners” in, among other places, Russia and Pakistan. The paper is reporting that kickbacks may have been made to Russian “executives of a state owned company to win a deal.” Additionally, improper travel may have been provided to a Pakistani official to secure business. Microsoft has reportedly opened an internal investigation into the matter. National Geographic Society When one generally thinks of individuals or entities facing FCPA scrutiny, what most frequently comes to mind are large, multinational companies, profit driven, publicly traded firms, and high profile CEOs. What does not typically come to mind are nonprofits. But in October 2013 it was revealed that the National Geographic Society (“NGS”) is under investigation by the DOJ for potential criminal bribery. The investigation is connected to NGS’s launch of the National Geographic Channel in 2001 and retention of Egyptian antiquities expert Dr. Zahi Hawaas. During his tenure with NGS, Dr. Hawaas was also an employee of the Egyptian Government. Through Dr. Hawaas, it is alleged, NGS obtained significant access to artifacts and archeological sites that it otherwise would not have been privy to. Although NGS always disclosed its payments, such payments and the access Dr. Hawaas provided and facilitated are being construed as bribes. NGS has denied any wrongdoing. Novartis AG Novartis AG (“Novartis”) has opened an internal investigation into potential wrongdoing by its employees in China. Specifically, the Wall Street Journal reported “an employee of the company offered money to doctors to boost sales of its drugs in the country, a practice it said led to higher pharmaceutical prices for consumers.” The Chinese government has reportedly begun an investigation, and has, in general, been increasing scrutiny of foreign drug companies doing business in China. Beside Novartis, both GSK and Sanofi, among others, are reportedly under investigation. Owens-Illinois Group Inc. Owens-Illinois Group Inc. revealed in its Form 10-Q on July 25, 2013, that the DOJ had declined to bring an enforcement action for potential FCPA violations by the company. The company began an internal investigation into allegations of wrongdoing in 2012, and voluntarily disclosed that information to the DOJ and SEC later that year, in October 2012. On July 18, 2013, the company learned of the DOJ’s decision not to bring charges. The SEC has 11 not yet revealed whether it will follow the DOJ, or whether it will bring its own charges. The Form 10-Q also stated that the company is cognizant that it could face scrutiny and potential legal action abroad. Park Ohio Industries Inc. Park Ohio Industries Inc. (“Park Ohio”) disclosed on November 14, 2013, that it was under investigation by both the SEC and DOJ due to a third party’s “payment on behalf of the Company to a foreign tax official that implicates the [FCPA].” The company, which has operations in several countries, did not reveal which operation was involved or the scale of the payment made. Park Ohio indicated it intends to cooperate with the government, but did not reveal further details. Qualcomm Scrutiny of foreign hiring practices, where they involved individuals who are well connected or related to government officials, seems to be on the rise. This facet of the FCPA has garnered increased attention as a result of the ongoing issues facing JPMC. Qualcomm has now also revealed in its July 24, 2013 Form 10-Q, that it too is now subject to investigation by the SEC and DOJ for potentially improper “instances in which special hiring considerations, gifts or other benefits (collectively, benefits) were provided to several individuals associated with Chinese stateowned companies or agencies.” A whistleblower complaint first drew the attention of the SEC in 2009-2010, and the DOJ became involved in early 2012. The company stated that it is continuing to conduct an internal investigation, and that it uncovered the improper payments, which it disclosed, through the internal review. Sanofi AG Like GSK, Novartis, and Baxter, Sanofi AG (“Sanofi”), a French pharmaceutical company, announced in August 2013 that it was looking into claims that employees in China paid over $277,800 in bribes to 503 doctors in Beijing, Shanghai, Guangzhou, and Hangzhou. Classified by the company as grants, reports indicate that the payments may actually have been bribes to induce the doctors to use Sanofi’s products. SNC Lavalin Canadian engineering firm SNC Lavalin (“SNC”), which has offices in 40 countries, employs 34,000 people, and does business in 100 countries, is facing further scrutiny over allegations of bribery abroad. In April 2013, the World Bank implemented a 10 year ban for the company after allegations of corruption by the company in Bangladesh, Cambodia, Libya, and Algeria were uncovered. Later in 2013, Canadian police announced that they suspected the company of paying $160 million to the Libyan regime of Moammar Gaddafi to win contracts. Internal audits have also uncovered over $50 million in bribes paid to middlemen to obtain work for the company. SNC has reportedly taken steps to correct and remediate its issues; it recently announced that it had issued an anti-corruption manual to all employees and was utilizing a monitor to interface with the World Bank. Vinci French company Vinci is facing scrutiny for alleged bribes paid to a Russian official to obtain a contract to build a highway connecting Moscow to St. Petersburg. The French investigation is ongoing. Wal-Mart Wal-Mart’s FCPA troubles continue to grow. What began as an internal investigation into possible bribes in Mexico in 2011, has turned into a multi-national investigation, involving both the DOJ and SEC. To date, Wal-Mart has spent over $300 million on the investigation, and in August 2013, indicated that the company expected to spend between $150-160 million through the third and fourth quarter of 2013 on the investigation. As part of the investigation, the company will 12 seek to determine the extent of the corruption abroad and to review and update its compliance programs. News of Wal-Mart’s FCPA troubles first broke in 2011, when reporters David Barstow and Alejandra Xanic von Bertrabof, of the New York Times, revealed that hundreds of improper payments had been made in Mexico to facilitate the company’s expansion in that country. The reporters, who went on to win a Pulitzer Prize for their work, found evidence that the payments totaled over $24 million, and to make matters worse, that Wal-Mart had intentionally sought to cover up the bribes. Following the New York Times article, Wal-Mart disclosed information it uncovered in an internal investigation in November 2011 to both the DOJ and SEC. Both government agencies continue to investigate the matter and have significantly expanded the scope of their investigation; Wal-Mart’s activities in China and India are now also being increasingly scrutinized.13 Indictments14 U.S. v. Alain Riedo Alain Riedo (“Riedo”) was indicted on October 15, 2013, for violations of the FCPA. The charges include Conspiracy, Bribery, Book and Records, and Internal Accounting Controls violations. Riedo, a Swiss citizen, was a former Vice President, General Manager, and officer of Maxwell S.A. (a wholly owned subsidiary of Maxwell Technologies, Inc.). According to the indictment, Riedo, with and through Maxwell S.A., sought to “make corrupt payments to Chinese government officials, including officials at the Pinggao Group.” The purpose of these payments was to “obtain and retain business, prestige, and increased compensation for Riedo, Maxwell, Maxwell S.A., and others.” The case is U.S. v Riedo, No. 13-3789 (S.D. Ca. 2012). U.S. v. Hoskins Lawrence Hoskins and William Pomponi were indicted via a Second Superseding Indictment on July 30, 2013, in the U.S. District Court for the District of Connecticut on charges of Conspiracy, FCPA violations, Conspiracy to Commit Money Laundering, and Money Laundering. The DOJ’s press release regarding Hoskins describes the underlying conduct: According to the charges, the defendants, together with others, allegedly paid bribes to officials in Indonesia – including a member of the Indonesian Parliament and high-ranking members of Perusahaan Listrik Negara (PLN), the state-owned and state-controlled electricity company in Indonesia – in exchange for assistance in securing a $118 million contract, known as the Tarahan project, for the company and its consortium partner to provide power-related services for citizens of Indonesia. The case is U.S. v. Hoskins, No. 12-00238 (D. Ct. 2012). 15 Potential Settlements16 Alumina In July 2013, Alumina Limited (“Alumina”), Alcoa’s joint venture partner in Alcoa World Alumina and Chemicals, announced that a possible FCPA settlement with the DOJ and SEC might be forthcoming. The settlement, which might resolve the entity’s FCPA liability connected to bribes paid to a Bahraini company, could total more than $300 million. Archer Daniel Midland Company In August 2008, Archer Daniel Midland Company (“ADM”) began an internal investigation into potential FCPA violations. The company notified the DOJ and SEC regarding these potential violations in March 2009, and the internal investigation continued through October 2013. In its August 7, 2013 Form 10-Q, ADM disclosed that it had significantly increased its settlement reserve from $29 million to $54 million. Then, in its November 1, 2013 Form 10-Q, the company announced that it had completed its annual review and was actively engaging in settlement discussions with SEC and DOJ. 17 Completed Monitorships18 Alliance One Alliance One International (“Alliance”) announced on October 1, 2013, that it had successfully completed a three year compliance monitorship. The monitorship was the product of August 2010 agreements between Alliance, the DOJ, and the SEC, stemming from violations of the FCPA in Kyrgyzstan and Thailand. An independent compliance monitor was hired by the company, and in May 2013, certified the viability of the company’s current compliance program. The monitor also indicated that all of his recommendations had been instituted. 19 Convictions20 Lujan, Hurtado, Bethancourt The DOJ announced on August 30, 2013, that Ernesto Lujan, Alejandro Hurtado, and Tomas Alberto Clarke Bethancourt pleaded guilty to six charges, including to violating the FCPA and to money laundering. The three individuals were former employees of a New York-based broker-dealer that were involved, according to the DOJ press release, in “a scheme to bribe a foreign official named Maria de los Angeles Gonzalez de Hernandez at Banco de Desarrollo Economico y Social de Venezuela (BANDES), a state economic development bank in Venezuela….” Sentencing is set for early 2014. Each of the counts carries a maximum five year prison sentence, except for money laundering, which has a maximum sentence of 20 years. If sentenced to the maximum prison time, the defendants each face 45 years in jail. 21 Notable Legal Developments22 Judge Bates Invalidates Extractive Industry Disclosure Requirements United States District Judge John Bates, in a July 2, 2013 Order, invalidated the SEC’s rules requiring certain public disclosures by entities in the oil, natural gas, and mining industries. Judge Bates characterized the rule at issue, which was promulgated under § 1504 of the DoddFrank Act, as “a Rule requiring certain companies to disclose payments made to foreign government in connection with the commercial development of oil, natural gas, or minerals.” The plaintiffs in the case, the America Petroleum Institute, argued that the rule’s public disclosure element was improper, especially in light of the fact that at least four countries, Angola, Cameroon, China, and Qatar, prohibit such public disclosures. The plaintiffs also contended, and the SEC did not dispute, that the rule’s initial implementation would cost American companies around $1 billion, and another $200-400 million in continued maintenance costs. Judge Bates sided with the plaintiffs, and invalidated the public disclosure requirements. Companies will still need to report their expenditures, but will not be required to have said information fully disclosed. As stated by Judge Bates: “Section 13(q) requires in subsection (2)(A) disclosure of annual reports but says nothing about whether the disclosure must be public or may be made to the Commission alone. Neither the dictionary definition nor the ordinary meaning of “report” contains a public disclosure requirement. And section 13(q) expressly addresses public availability of information in the follow subsection, (3)(A), establishing a different and ore limited requirement for what must be publicly available than for what must annually reported.” The case is American Petroleum Inst. V. SEC, No. 12-1668 (D.D.C. Jul. 2, 2013).23 Senator Jack Reed to Seek increase in Statute of Limitations In the wake of the Supreme Court’s decision in Gabelli v. SEC, wherein the court refused to allow the SEC to increase existing statutes of limitations, it has come to light that Senator Jack Reed may seek to pass legislation that would statutorily extend the statute of limitations for, among other statues, the FCPA. The current statute of limitations for the FCPA is five years, which is frequently extended through the discovery rule, fraudulent concealment allegations, continuing course of conduct, and tolling agreements. Senator Reed’s legislation would make the statute of limitations 10 years. Historic First – 11th Circuit to Weigh In on Definition of “Foreign Official” The 11th Circuit, seated in Miami, FL, heard oral argument on Friday, October 11, 2013, over the meaning of the term “foreign official” as utilized in the FCPA. This is the first time an appellate court has had the chance to weigh in on the issue. Joel Esquenazi and Carlos Rodriguez, both of whom were convicted of multiple criminal offenses related to FCPA violations, brought the appeal. At the core of their case is the assertion that state owned Telecommunications D’Haiti S.A.M. (“TDH”) is not a state instrumentality and that therefore, its personnel are not foreign officials. Should the court find for Esquenazi and Rodriguez, and find that TDH is not an instrumentality, then any alleged payment or bribes would not run afoul of the FCPA.24Recent FCPA Investigations and Enforcements in Brazil 26 BRIC Spotlight: Brazil Takes Anti-Corruption to a New Level There is an increasing trend world-wide, and in Latin America in particular, to combat corruption. Nowhere is this more evident than in Brazil – which passed the nation’s first anti-corruption statute just last year. On August 1, 2013, Brazilian President Dilma Vana Rousseff signed into law the AntiBribery Act or “Lei Anticorrupção.” The new law, effective January 29, 2014, for the first time, imposes strict liability on corporate entities for their involvement in acts of corruption in Brazil. Brazil’s Resources and Investment Opportunities Brazil is the largest country in South America – its over 3 million square miles contain a wealth of resources. On December 19, 2013, Petrobras, the publicly traded company whose majority stockholder is the Government of Brazil, announced the discovery of oil reserves off the coast of the state of Rio Grande do Norte, in the northeastern part of the country. This discovery followed an earlier finding of reserves off the northeastern coast of the state of Sergipe, which came on the heels of an announcement in October 2013 that a consortium including Petrobras, Shell, Total, and two Chinese firms won the right to develop a field off the coast of Rio de Janeiro that could hold up to 12 billion barrels of oil. After crude oil, the second largest commodity cargo in the world is iron ore – and Brazil has a lot of that, too. Home to one of the largest iron deposits in the world, Brazil, is the biggest producer of iron ore, accounting for about 31 percent of global iron ore exports. Brazil is also an agricultural leader. It is the largest sugar producer in the world – and over half of the hundreds of millions of metric tons of sugar produced in Brazil is used for ethanol production. With the fifth largest population in the world, another important resource in Brazil is its people, who work to produce a GDP that is seventh highest in the world – between $2.2 and $2.4 trillion. According to the Brazilian Institute of Geography and Statistics, last year Brazil’s population exceeded 200 million for the first time. According to the World Bank, foreign direct investment in Brazil increased over 40% from 2010 to 2012, when it reached over $76 billion. Given that Brazil will be hosting the World Cup games this year, and the 2016 Summer Olympics, foreign investment in Brazil will likely continue to rise. In short, business in Brazil is booming. Yet foreign investors must be aware of the corruption risks that may accompany business opportunities in a nation that now has broad power to hold corporations liable for corrupt payments to government officials. Background of Anti-Bribery Act A draft of the Anti-Bribery law was introduced in 2010, but it languished until mid-2013. In the months leading up to the passage of the Anti-Bribery Act, Brazil made international headlines because of social protests in which millions reportedly took to the streets of over a hundred Brazilian cities. Although these demonstrations were triggered by increased prices in public transportation, many protesters cited their frustration with corruption as one of the driving factors behind the protests. By this time, many members of former President Lula’s administration had been implicated in widespread corruption scandals. In fact, in November 2013, criminal charges stemming from corruption were brought against several former members of Lula’s administration. Overview of the Anti-Bribery Act The Brazilian Anti-Bribery Law prohibits corrupt payments to both foreign and domestic officials. Specifically, the Anti-Bribery Law prohibits (i) promising, offering, or giving, directly or indirectly, an undue advantage to a public official, or third person related to 27 him or her; (ii) financing, funding, or sponsoring or in any way subsidizing, the practice of illicit acts under the law; or (iii) using an intermediary legal entity or individuals to conceal or disguise its real interests or the identity of the beneficiaries of the wrongdoings. In the context of government contracts, companies are prohibited from (i) defrauding the competitive nature of a public bidding process; (ii) preventing, hindering, or defrauding the performance of any act of a public bidding procedure; (iii) diverting or attempting to divert a bidder by fraudulent means or by the offer of any type of advantage; (iv) defrauding a public bid or its resulting contract; (v) deceitfully forming an entity to participate in a public bid or contract; (vi) illegally benefitting from changes or extensions of government contracts; (vii) defrauding the financialeconomic balance of government contracts; or (viii) hindering or interfering with the investigations or audits of public agencies, entities, or agents. The new law imposes strict liability on both corporations and individual offenders. Importantly, absent a few very limited exceptions, Brazil does not impose criminal sanctions on corporations. These exceptions are limited to certain violations of environmental laws; thus, corporations cannot be criminally liable for engaging in the conduct prohibited under the new law. However, offenders may be subject to steep civil penalties and serious administrative sanctions. Fines permitted range from 0.1 percent (0.1%) to 20 percent (20%) of the violator’s gross revenues from the year preceding an enforcement action. If gross revenues cannot be estimated, the fine may be set within a range of R$6,000 to R$60,000,000 (approximately $2,600 to $26,000,000). In addition to fines, offenders face a number of other potential sanctions including (1) full disgorgement of illegally obtained benefits, (2) forfeiture of assets, rights, or other values obtained as a result of the wrongdoing; (3) partial or full suspension of corporate activities; (4) compulsory dissolution; or (5) debarment for one to five years, including prohibition from receiving incentives, subsidies, grants, donations or loans from public financial institutions during the debarment period. The new law enables companies to potentially mitigate penalties and sanctions through selfdisclosure and full cooperation with government investigations and proceedings. The Act authorizes the government to enter into “leniency agreements,” through which the Brazilian government may provide an offender with the following benefits: (i) up to a two-thirds reduction in fines; (ii) a waiver of debarment; and (iii) avoidance of government publication of its decision with regard to the conduct. Only the first violator to come forward to cooperate with an investigation will be eligible for a leniency agreement and even then, there is no guarantee that a cooperating offender who self-discloses will receive these benefits. In determining whether to entertain a leniency agreement, the Brazilian government will consider the seriousness of the violation as well as the benefits obtained by the company through the prohibited conduct. In addition, leniency agreements will depend upon whether the Brazilian government is convinced that the violative conduct has ceased and that the offending company has developed internal controls to prevent that the reoccurrence of such conduct. Corruption Outlook and Key Considerations for Investors Despite the passage of the AntiBribery Act last year, and charges for corruption and embezzlement against several public officials from the Lula Administration, Brazil has not made any gains on Transparency International’s Corruption Percentage Index. In fact, over the last four years, Brazil has remained at almost a standstill in terms of its ranking, which in 2013, was in a five-way 28 tie for 72 out of 177 countries. (Another large U.S. trading partner, China, tied with Greece for 80th.) Enforcement of the Anti-Bribery law may eventually drive movement in Brazil’s Corruption Percentage Index ranking; however, that will depend largely upon how effectively the new law is enforced. One challenge to effective implementation of the new law is the fact that the law does not assign enforcement of the law to a single specific government agency or body, so it remains unclear how aggressively enforcement actions will be pursued and whether the new law will deter improper behavior among companies’ local and international workforces, who have operated until now under a very different set of rules. U.S. companies with Brazilian subsidiaries, as well as those considering investments in Brazil must be aware that passage of the new law will not necessarily decrease corruption risks in Brazil. As evident in Brazil’s stagnant, not-so-favorable Transparency International ranking, corruption is no stranger to Brazil. There are many layers of government in Brazil – there are 26 states, and countless local governments, including the largest city in the Southern Hemisphere, São Paulo. Furthermore, the Brazilian government is heavily involved in the regulation of various major industries, including the energy sector. Subcontracting with third parties who deal with the government is commonplace. Companies with Brazilian operations should examine their current anti-corruption compliance policies and if they have not already done so, update them to ensure compliance with the new Anti-Bribery Law as soon as possible. Although many of the hallmarks of an effective FCPA compliance program will also address many of the requirements of the Anti-Bribery Act, training, policies and materials should be tailored to the new law and its specific provisions – in particular, the fact that the new law imposes strict liability requires an added level of vigilance. An effective FCPA policy should red flag subcontracts with third parties, and high risk areas such as government contracting; interactions with customs and tax authorities; and efforts to obtain government approvals necessary to secure required licenses, permits, and certifications. However, because the Brazilian law contains no element of intent, comprehensive, regular internal checks in these areas will be critical. Recent FCPA Enforcements in Brazil Eli Lilly In December 2012, Eli Lilly settled the SEC’s FCPA allegations into its Russian, Polish, Chinese, and Brazilian operations for $29.4 million, including $14 million in disgorged profits, $6.7 million in prejudgment interest, and an $8.7 million civil penalty. Eli Lilly must also obtain an independent consultant to review its anti-bribery policies and provide recommendations about its policies and procedures. The DOJ has, so far, refrained from bringing any related charges against the company. The SEC alleged that at least one employee of Lilly’s Brazilian subsidiary was aware of a 2007 scheme through which one of their third-party pharmaceutical distributors paid bribes of approximately $70,000 to government officials in a Brazilian state in order to assure sales of a Lilly product to state government institutions. According to the SEC complaint, Lilly-Brazil’s usual sales practice was to distribute drugs through third-party distributors who would then resell those products to private and government entities. Typically, Lilly-Brazil sold the drugs to distributors at a discount of between 6.5% and 15%, and the distributors then resold the drugs to the end users at a higher price, keeping the difference as their compensation. The SEC alleged that in 2007, at the request of a Lilly-Brazil sales and marketing manager, the 29 company granted a nationwide pharmaceutical distributor unusually large discounts of 17% to 19% for two of that distributor’s purchases of a Lilly drug, which were then sold to a Brazilian state government. The complaint includes language about deficient policies and procedures to flag unusual discounts and alleges that the Lilly-Brazil sales and marketing manager was aware of the distributor’s arrangement. Biomet, Inc. In March 2012, the DOJ filed a criminal information against Biomet. The company entered a three year deferred prosecution agreement under which it agreed to a penalty of $17.28 million. In addition, the company agreed to retain an independent corporate compliance monitor for at least 18 months and to self-monitor and report for the full three-year period. That same day, the SEC filed a complaint against Biomet. Biomet agreed to the entry of a court order permanently enjoining it from future FCPA violations. The company also agreed to disgorgement and prejudgment interest of $5.57 million. The SEC also ordered Biomet to retain an independent corporate compliance monitor for 18 months. The SEC complaint contained allegations related to activities in Argentina, China, and Brazil. In Brazil, Biomet was alleged to have, through its distributor, paid bribes to doctors employed by publicly owned and operated hospitals to encourage the sale of its products. The complaint alleged that the distributor “paid the doctors bribes in the form of ‘commissions’ of 10-20 percent of the value of the medical devices purchased.” These payments were, according to the SEC, discussed in documents between the distributor, a Biomet subsidiary, and Biomet’s executives and auditors in the United States. In 2002, the Director of Internal Audit sent a memorandum to two executives stating that the distributor’s payments to the doctors “may be considered as a kickback.” However, the payments continued until 2008, when accountants and outside counsel for Biomet engaged in due diligence raised the red flag. By this time, the SEC alleges, Biomet had paid approximately $1.1 million to doctors for their use of Biomet products. Conclusion Although no FCPA cases were filed in 2013 involving companies’ operations in Brazil, there are several pending investigations under the FCPA that have been disclosed in the press and in companies’ public filings. The upcoming World Cup and the 2016 Summer Olympic games will certainly put the spotlight on Brazil and will grow business in a country where foreign investment and resource development has already exploded over the last few years. Yet companies cashing in on this explosion must ensure that their internal controls are up to par to meet not only FCPA standards, but to also comply with Brazil’s new Anti-Bribery Act.