The surge of Foreign Corrupt Practices Act (FCPA) enforcement activity seen in recent years continued in 2010 and added some unique developments of its own. Perhaps most notably, the year saw the highest aggregate penalty figures on record—some $1.8 billion dollars. And of the top ten penalties levied since the FCPA’s inception, eight of them occurred in 2010. The past year also saw US enforcement agencies targeting foreign companies to an unprecedented degree, with about half of all corporate prosecutions involving foreign entities. In doing so, the enforcement authorities expanded their playbook and employed novel theories of liability and jurisdiction. The Securities and Exchange Commission (SEC), for example, brought books and records charges against a non-issuer, the Swiss freight forwarder/customs broker Panalpina, for serving as an agent of issuers. The government’s creativity extended to foreign individuals who received bribes as well, employing money laundering laws to reach the demand side of corruption otherwise outside the scope of the FCPA itself. Similarly, one of the largest anti-corruption settlements of the year, the $400 million settlement of BAE, did not even involve the FCPA but rather charges of conspiracy to make false statements. Heightened transnational cooperation and foreign enforcement actions also were noteworthy trends—and are likely only in their infancy compared to what will come.
All the while, the government’s vigorous enforcement efforts once again passed with minimal judicial review. However, several judges did take issue with the Department of Justice’s (DOJ) positions on a number of issues, possibly foretelling greater scrutiny in the future. Congress too held a hearing on FCPA enforcement, with several legislators offering amendments to the act. At the same time, major players such as the US Chamber of Commerce issued robust critiques of the Act’s enforcement and also proposed a series of amendments to the statute. Other developments, such as the mandatory whistleblower awards enacted in mid-2010 as part of financial reform legislation, make it ever more likely corruption allegations will come to light, and have significant implications for how companies approach FCPA issues that may arise in their operations.
In sum, 2010 showed us that the “new era” of FCPA enforcement is well underway. As Assistant Attorney General Lanny Breuer noted in a late 2010 address, “FCPA enforcement is stronger than it’s ever been—and getting stronger.” All said, the emerging global anti-corruption regime, spearheaded but by no means limited to the FCPA, saw another banner year in 2010. There are no signs this trend will slow in 2011. Though the compliance challenges are daunting, those who can effectively manage risks can improve their odds of avoiding or minimizing legal trouble. In doing so, they may become better positioned to take advantage of the growing opportunities offered across the globe.
- FCPA Enforcement Activity in 2010: The Big Picture
As the below graph shows, 2010 saw a slight increase in combined FCPA prosecutions by both the DOJ and the SEC, with 56 total cases initiated or settled versus 51 the previous year.
Click here to see FCPA Prosecutions by Year: 2005-2010
Broken down further, we can see that the overall trend for individual prosecutions has remained on an upward trajectory over the past six years (although we must account for the “artificial” spike that occurred as a result of the 22 individuals indicted in the “SHOT show” matter in 2009). In total, 12 individuals pleaded guilty in 2010, with some 40 more awaiting trial. Some of these trials are scheduled to begin in 2011, although preliminary motions, such as those in the CCI case (discussed below) may result in delays.
Click here to see FCPA Prosecutions of Individuals and Companies by SEC/DOJ: 2010
It appears, however, that the pace and quantity of individual prosecutions has been unsatisfactory to some in Congress. Whether this pressure will result in an increased likelihood of targeting individuals remains to be seen, though we should be aware of Assistant Attorney General Breuer’s words when he said that “prosecuting individuals … [is one of the] best ways to capture the attention of the business community.”
The other most effective way to “capture attention” in Breuer’s view is to levy substantial corporate fines. The DOJ and SEC did this with enthusiasm in 2010, levying a total of $1,782,052,583 in criminal fines and disgorgement. This figure represents a more than 70% increase since 2009. As noted above, eight of the top ten corporate fines in FCPA history occurred in the past year, with BAE (strictly speaking a non-FCPA charge) leading the pack at $400 million. This was followed by ENI/Snamprogetti at $365 million, Technip at $338 million, and Daimler at $185 million. The all-time highest penalties on individual companies were in previous years (Siemens’s $800 million in 2008 and KBR/Halliburton’s $579 million in 2009), but the aggregate penalties against members of the TSKJ consortium (KBR/Halliburton, Technip, and Snamprogetti) reached a project record of $1.282 billion, even with resolution with the final consortium member still pending.
Click here to see FCPA Fines and Penalties: 2005-2010
Notably, of the 21 corporations charged in 2010, the highest number yet, 10 of them were foreign companies. Of the top penalty payers in 2010, seven out of eight were foreign companies subject to the FCPA by virtue of the act’s expansively interpreted territorial nexus. The DOJ and SEC have made abundantly clear that they consider companies operating abroad fair game and will pursue aggressive theories of enforcement. Under this broad view, DOJ counts money passing through the United States as sufficient to provide US jurisdiction, as does being an “issuer” or an agent of an issuer (as with Panalpina). There is widespread belief that part of this focus is to prompt other countries to embark on more aggressive anti-corruption enforcement efforts themselves.
Click here to see FCPA Prosecutions Against Foreign Headquartered Corporations: 2005-2010
- Theories of Enforcement
The DOJ and the SEC continued to pursue enforcement theories—including statutory interpretations, jurisdictional hooks, charging strategies, and investigative methods—that continually push the limits of the FCPA’s reach. In 2010 these approaches included the interpretation of government “instrumentalities,” the meaning of “obtaining or retaining business,” the scope of territorial jurisdiction, conspiracy charges over substantive offenses, use of successor liability, SEC charges against companies that do not issue shares on any US stock exchange, “demand side” prosecution, and the application of undercover investigative methods.
- Definition of “Foreign Officials”
The DOJ and the SEC have consistently considered employees of state-owned enterprises (SOEs) to be “foreign officials” for purposes of the FCPA. The FCPA applies to payments to foreign officials, which it defines as officers and employees of government departments or agencies and government “instrumentalities.” However, the statute does not define the term “instrumentality,” which has allowed the DOJ and SEC to interpret this provision broadly.
In November 2010, Joel Esquenazi challenged the FCPA’s application to employees of SOEs and filed a motion to dismiss his 2009 indictment (in connection with the Haiti Teleco case), which alleged that Esquenazi had bribed employees of a government-owned and -controlled telecommunications company. Esquenazi argued that interpreting the term “foreign official” to include employees of SOEs was inconsistent with the purpose of the FCPA, which is to criminalize improper payments to officials performing public functions. Esquenazi further alleged that the FCPA’s definition of “foreign official” was unconstitutionally vague. Without providing elaboration, Judge Jose Martinez of the Southern District of Florida denied Esquenazi’s challenge, finding that the government had sufficiently alleged that the SOE employees were “foreign officials,” and that “persons of common intelligence would have fair notice of this statute’s prohibitions.”
2011 may see a court finally address the merits of this issue in greater depth. On February 21, 2011, the individual defendants in the Control Components matter filed a motion to dismiss the charges against them brought in reliance on this definition, along with a 152-page declaration by business law professor Mike Kohler (of the “FCPA Professor” blog) arguing that the legislative history and plain meaning of the term “foreign official” does not encompass employees of state-owned companies. The judge has not yet indicated how he will rule or if he will allow oral argument, but there is little question that this issue will be one of the most closely watched of the year.
- “Obtaining or Retaining Business”
The FCPA prohibits payments to any foreign official made in order to assist a firm in “obtaining or retaining business.” In recent years, following the landmark litigation in the Kay case, this so-called “business purpose” test has been interpreted broadly to include almost any bribe that improves a company’s profitability. In the August 2010 SEC enforcement action against Joe Summers, for example, Summers was accused of bribing a mid-level accounts payable employee at Venezuela’s state-owned oil company, Petroleos de Venezuela, S.A. (PDVSA), in order to get that employee to release a payment that Summers’s employer, Pride International, was entitled to receive under its contract with PDVSA. The case is eerily reminiscent of the Vitusa case of 1994, when a US company sought to obtain a balance due on a contract with the Dominican government and paid a government official to help obtain it. As was the case then, it is unclear how such a payment could be interpreted as helping the firm obtain or retain business—the facts strongly suggest that the payment would have been better categorized as a facilitating payment allowed under the Act. Whether the government’s expansive view of this term will also face more serious judicial scrutiny in the near future will be another salient issue for the business community and FCPA practitioners.
- “Correspondent Account” Jurisdiction
The DOJ and the SEC have long claimed that they possess territorial jurisdiction over foreign companies based on activities with only a tangential connection to the United States, including overseas financial transactions involving US dollars because such transactions clear through correspondent bank accounts in the United States. In the Siemens and Halliburton/KBR cases, this “correspondent bank account” jurisdiction was alleged, but it was not central to either of these cases because there were other, firmer jurisdictional grounds. In the Technip case in 2010, however, the substantive FCPA bribery counts explicitly claimed jurisdiction based on US dollar bank transfers. In a trip around the world, the DOJ charged that Technip caused “corrupt US dollar payments to be wire transferred” from Amsterdam “via correspondent bank accounts in New York” to bank accounts “in Switzerland for use in part to bribe Nigerian government officials.”
In the Alcatel-Lucent case which we have analyzed in depth separately (click here), DOJ took a similar position, alleging that the co-conspirators to the bribery offenses “committed or caused to be committed” certain acts within the territory of the United States. DOJ specifically cited meetings, e-mails, and phone calls that personnel of subsidiaries had with individuals in Florida regarding improper payments, and also described a series of wire transfer payments drawn on US dollars that were from or that passed through accounts at US banks. We may expect to see such “correspondent bank account” jurisdiction more frequently in FCPA enforcement actions in the future, as a way to pull foreign companies further within the FCPA’s grasp.
- Conspiracy in Lieu of Substantive Charges
DOJ enforcement actions frequently involve conspiracy counts rather than substantive FCPA violations, a phenomenon that is becoming more pronounced in recent years. This trend came to a head in 2010 in the Daimler case. There, despite the DOJ’s characterization of Daimler’s bribery as “brazen,” only conspiracy violations were alleged. An advantage of pursuing a conspiracy charge rather than a substantive FCPA violation is that it is a way to avoid certain statute of limitations problems. While the statute of limitations for substantive FCPA offenses is five years, conspiracy allows the DOJ to reach criminal behavior that is more than five years old, as long as the last overt act in furtherance of the conspiracy occurred within the past five years. But it is also a way for the DOJ to establish jurisdiction without proving a territorial nexus when an FCPA defendant is neither an issuer nor a domestic concern. Under the conspiracy statute, there is no requirement that a territorial nexus be demonstrated, and so the DOJ has a potentially broader reach. Further, conspiracy charges offer a way for companies to potentially avoid the additional penalty of debarment from government procurement opportunities, making it an attractive ground for settlement. While the use of conspiracy charges in FCPA cases is not new, the practice is likely to increase as the risk of collateral consequences grows.
There are also indications that the DOJ may more aggressively parse conspiracies in cases to come, bringing multiple instead of single charges where there is more than one distinct set of conduct.
- Successor Liability
Successor liability also continues to be a major method for the DOJ and SEC to expand a company’s potential FCPA exposure, as both the Alliance One and General Electric (GE) cases demonstrated in 2010. Alliance One was formed in 2005 by the merger of two companies, Dimon and SCC. Prior to the merger, employees and agents of foreign subsidiaries of both companies committed FCPA violations, and those violations were the basis of the 2010 criminal case that the DOJ brought against Alliance One on the theory of successor liability. Alliance One ultimately had to pay a $4.2 million fine for the pre-acquisition conduct and had to disgorge $10 million in profits.
Similarly, in July 2010, GE agreed to pay a $1 million fine and to disgorge $22.5 million in order to settle an SEC complaint in which GE was accused of bribing Iraqi government officials in order to procure contracts under the United Nation’s Oil for Food Program. The complaint alleged that two foreign subsidiaries of GE, and two companies that GE later acquired, made kickback payments to the Iraqi Health Ministry in order to secure contracts with Iraqi government agencies to supply medical and water purification equipment. As GE noted, 14 of the 18 contracts at issue in the SEC’s complaint were with companies that GE did not own at the time of the alleged misconduct. Cheryl J. Scarboro, chief of the SEC’s FCPA Enforcement Unit, explained that, “[c]orporate acquisitions do not provide GE immunity from FCPA enforcement of the other two subsidiaries involved.” In acquiring the two companies, GE acquired both their liabilities and their assets, underscoring the importance of pre-acquisition FCPA due diligence.
- Non-Issuer SEC Charges
The year’s biggest cases, involving the freight forwarder Panalpina, also exhibited the US enforcement authorities’ jurisdictional reach. Panalpina World Transport (Holding) Ltd., a Swiss company (Panalpina) and its US-based subsidiary Panalpina Inc. both entered into settlement agreements with the DOJ in connection with payments to customs officials in numerous countries around the world. The DOJ also settled charges with Panalpina’s oil and gas industry customers arising from their knowledge and authorization of such payments. Panalpina also reached a settlement with the SEC, which alleged that Panalpina Inc., acting as an agent of its issuer customers, committed violations of the FCPA’s anti-bribery provisions, aided and abetted its customers’ violations of the anti-bribery provisions, and aided and abetted its customers’ violations of the FCPA’s books and records and internal controls provisions. Panalpina agreed to disgorge $11.3 million in profits from the charged conduct. Panalpina, Inc., however, is not an issuer itself and therefore is not required to comply with the SEC’s books and records regulations.
- “Demand Side” Prosecution
FCPA enforcement actions typically are aimed at the supply side of bribery, i.e., those who promise, offer, or pay bribes to foreign officials. This past year, however, saw the DOJ target foreign officials who receive the bribes as well. To do so, the DOJ relied on money-laundering charges rather than the FCPA’s anti-bribery provisions, which do not themselves cover the recipients of bribes.
In the Haiti Telecom case, DOJ charged Robert Antoine, a former director of international affairs at Telecommunications D’Haiti (Haiti Telecom), with violating a US anti-money laundering statute for channeling bribes amounting to more than $800,000 he received through a US company, J.D. Locator Services. According to the Government, he disguised the origin of the bribes by passing them through intermediary companies in the United States, thereby providing the United States with criminal jurisdiction. Bribery is a predicate offense for money laundering under US law.
Under the same money laundering statute, the DOJ also indicted the former head of the Tourism Authority of Thailand, Juthamas Siriwan, with seven counts of money laundering as well as related conspiracy and aiding and abetting counts for her receipt of bribes connected to the activities of Hollywood producer couple the Greens. The couple was sentenced in 2010 for bribing foreign officials, including Ms. Siriwan, to obtain lucrative film festival and other such contracts. In addition to indictment, the DOJ is seeking forfeiture of the approximately $1.8 million in funds that the Greens paid Ms. Siriwan and her daughter. The US claims jurisdiction based on its allegation that Siriwan conspired with and persuaded the Greens to transfer money from the United States to a foreign country for the purpose of paying a bribe.
- Threat of the “Sting Operation”
In early 2010, DOJ announced the arrest and indictment of 22 executives and employees of police and military product supply companies for conspiring to bribe foreign officials to obtain or retain business. The indictments represent the largest FCPA investigation and prosecution to date. Twenty-one defendants were arrested in Las Vegas while attending the SHOT Show, an annual firearms exhibition, and multiple premises in both the United States and the United Kingdom were searched by law enforcement officials.
Unlike many FCPA investigations which are sparked by corporate voluntary disclosures, the SHOT Show indictments are the product of a sting operation. According to the indictments, the defendants agreed to sell undercover law enforcement agents military and police equipment for the Gabon Ministry of Defense and to pay the Ministry a 20 percent sales commission with half of the commission paid directly to the minister. The defendants also allegedly agreed to produce two price quotations for the contracts, one reflecting the true cost of the sale and one reflecting an inflated cost containing the 20 percent commission. The defendants also allegedly agreed to execute “test deals” designed to demonstrate that 10 percent of the commission would actually pass to the minister.
Although the SHOT Show sting is not the first time DOJ has used undercover operations in an FCPA investigation, this is the first time a sting operation of this magnitude has been used to combat foreign bribery. The resources required to execute such an operation evidences the zeal with which the government intends to target the FCPA in the future. Assistant Attorney General Lanny Breuer emphasized the operation’s deterrent effect, stating, “From now on, would-be FCPA violators should stop and ponder whether the person they are trying to bribe might really be a federal agent.” 
- Heightened Judicial Scrutiny
Several enforcement actions in 2010 prompted heightened judicial scrutiny of the type that rarely has appeared in recent years. In light of heightened enforcement activity, Congressional concerns, and private sector and academic pushback, it is possible that the government’s relatively free hand may encounter some resistance in the future.
- Penalty Reduction in ABB Inc. Settlement
In ABB Inc.’s settlement of charges that it had paid some $1.9 million in bribes to employees of Mexico’s state-owned electric companies Comisión Federal de Electridad, US District Judge Lynn Hughes cut the company’s proposed $28.5 million criminal penalty by some $11.4 million dollars, levying a fine of $17.1 million at the settlement hearing. Judge Hughes based his reasoning for the significant reduction of ABB Inc.’s criminal penalties on his refusal to use the FCPA to punish an entire company for the acts of a few rogue employees, labeling the DOJ’s attempt to paint ABB as a corrupt company a “misstatement of reality.” Judge Hughes reached the final sum by removing the portion of the penalty associated with repeat offenses from the settlement. Throughout the sentencing hearing, Judge Hughes emphasized that the fault fell at the individual level, and that it was unfair to punish the entire company for the failure of a few employees. Judge Hughes went so far as to chastise the DOJ for being “hypocritical” in expecting ABB to abide by a higher standard of conduct than DOJ, in his view, would have been able to achieve within its own organization. Few judges have responded to proposed fines in this manner, particularly where the company itself has already agreed in principle to the amount, but Judge Hughes’ scathing criticism may encourage others to follow suit where they believe the DOJ overreaches.
- US and UK Courts Criticize Innospec Settlement
Also coming in for severe judicial criticism were settlements reached with Innospec Inc. and Innospec Ltd., in both the United States and the United Kingdom. On March 18, 2010, Innospec Inc. pleaded guilty to a 12-count criminal information charging wire fraud, FCPA anti-bribery provisions, and conspiracy to violate the FCPA provisions for payments connected to the UN Oil for Food Program and other improper payments.  In the settlement agreement, Innospec agreed to pay a $14.1 million criminal fine and to retain an independent compliance monitor for a minimum of three years. Although Innospec’s plea agreement did not set a specific fee for the compliance monitor, US District Judge Ellen Segal Huvelle declared it “an outrage that people get $50 million to be [compliance] monitors” and criticized the plea agreement’s failure to name the compliance monitor or place a cap on the monitor’s salary. Ultimately, Huvelle accepted Innospec’s plea but requested that the DOJ inform her of the details of the compliance monitor plan.
On the same day in the United Kingdom, Innospec’s British subsidiary, Innospec Ltd., also pleaded guilty in connection with corrupt payments to Indonesian and Iraqi officials. After two UK judges declined to hear or endorse the plea agreement Innospec Ltd. had reached with the Serious Fraud Office (SFO), the parties presented the agreement to Lord Justice Thomas, the UK’s number two criminal judge. Although Lord Justice Thomas did not overturn the plea bargain, he opined that the SFO did not have the power to enter into such plea bargains, and declared that “no such arrangements should be made again.” The justice also believed that the SFO overstepped its authority in negotiating the penalty amounts, stating that the “SFO cannot enter into an agreement … with an offender, as to the penalty in respect of the offence charged.”
Justice Thomas’s also condemned the deal itself, finding the penalty to be “wholly inadequate as a fine to reflect the criminality displayed.” Lord Justice Thomas believed that the $160 million Innospec made in profits in the United Kingdom should have been subject to disgorgement, and also took issue with the unequal split between the penalty to be paid in the United Kingdom and the United States. Additionally, he indicated that the SFO’s motives in allocating the penalty between the confiscation and fine amounts may have been self-serving since the SFO was entitled to the entire confiscation amount, as opposed to the fine. He further criticized the plea agreement for the approval authority it gave Innospec for press statements released by the SFO. Justice Thomas mirrored US District Judge Ellen Segal Huvelle’s concerns over the appointment of the compliance monitor in the case, suggesting that the expense would be better spent on fines, confiscation, or compensation.
- Ten-Year Sentence Denied – DOJ Gets Six Months
Judicial scrutiny extended also to criminal sentencing. On September 11, 2009, a jury convicted Gerald and Patricia Green of one count of conspiring to violate the FCPA, nine counts of violating the FCPA, and seven counts of money laundering. The DOJ alleged that the Greens paid approximately $1.8 million in bribes between 2002 and 2007 to the former governor of the Tourism Authority of Thailand (TAT) in exchange for receiving contracts to manage and operate Thailand’s yearly Bangkok International Film Festival as well as contracts to provide a tourist “privilege card.” These contracts resulted in more than $135 million in revenue for the Greens. The Greens made the illicit payments in the form of “commissions” through the foreign bank accounts of intermediaries. The DOJ sought a 10-year sentence for each. US District Judge George Wu sentenced the couple to six months imprisonment, in one of the most lenient prison sentences imposed for an individual FCPA conviction. In declining to abide by the DOJ’s 10-year sentencing recommendation, Judge Wu noted the lack of injury both to Thailand and to competitors for the film festival contracts, as well as Mr. Green’s poor health. Judge Wu did, however, grant the DOJ’s request for asset forfeiture, under which each of the Greens owes $1,049,365 plus their shares in their company, Artist Design Corp. and its pension plan.
- Compliance Monitors
In 2010, six corporate settlements required compliance monitorships. The BAE, Innospec, Daimler, Technip, Universal Leaf, and Alcatel-Lucent settlements required the engagement of a compliance monitor. Not surprisingly, these represented some of the largest settlements of 2010. What is surprising, however, is the number of settlements that did not require monitorships. Twelve corporate settlements in 2010 did not require the engagement of a compliance monitor, including Snamprogetti, Panalpina, and Shell, which escaped the burdensome requirement despite the large scale nature of the conduct upon which they settled. Not surprisingly, however, GE and Alliance One, who both inherited their FCPA issues, were not required to engage a compliance monitor.
While it appears that DOJ is reserving the compliance monitor requirement for only the worst offenders (as they did for BAE, Alcatel, and Technip, for example), it is difficult to explain why some offenders were not asked to engage a compliance monitor as part of their settlements. It is possible that this demonstrates the early stages of a trend away from compliance monitors for all but the most severe FCPA offenders. It is also possible that the DOJ has taken criticism of the expense and utility of compliance monitors, such as that expressed by the judges in the Innospec case, to heart.
In many of the cases in which no monitors were required, the settling companies were required in their Deferred Prosecution or Non-Prosecution Agreements to sign up to ongoing self-reporting programs, typically over a three-year period.
- International Enforcement and Transnational Cooperation
The rise in FCPA enforcement in recent years has been made possible in substantial part by the DOJ and SEC’s increased cooperation with their counterparts abroad. The Siemens case of 2008 is the marquee example of this trend, involving coordinated enforcement actions and a jointly allocated penalty by the DOJ, SEC, and the Munich Public Prosecutor’s Office. It is possible that this cooperation resulted in large part from Germany’s own relatively aggressive posture against bribery. According to a Transparency International report, Germany came in second only to the United States in the number of anti-corruption enforcement actions it undertook, for a total of 117. The UK’s efforts were significantly less, but it is increasingly partnering with the United States. In 2010, the SHOT Show indictments, BAE, and Innospec all involved coordinated actions by UK and US authorities (notably, the US prosecution involved trade controls subject to OFAC regulation, not just corruption issues). Once the United Kingdom implements its Bribery Act (discussed below), expected to occur sometime in 2011, it is likely that this level of cooperation will increase.
Further facilitating cooperation between US and European authorities will be the slew of 56 mutual legal assistance treaties (MLATs) between EU member states and the United States that entered into force in February 2010. The MLATs will facilitate judicial cooperation by facilitating the identification of financial information in criminal investigations; allowing the provision of evidence, including testimony, by video conferencing; and authorizing US and European criminal investigation and prosecutorial teams to join forces in matters of mutual interest. US cooperation with European authorities other than the United Kingdom can be seen, for instance, in ongoing investigations with Germany into Allianz and Hewlett Packard Co.
Given the increased propensity of investigations into one company to yield leads into others similarly situated, and in light of the increasing trend towards follow-on enforcement actions in host-nation states, there is a high likelihood that the cooperative activity eased by the new spate of MLATs will have a multiplier effect that goes beyond facilitating law enforcement cooperation. Information that came to light in the Vetco Grey investigation that settled in 2007, for example, led to the Panalpina investigations. As a result, companies with global interests will need to consider how to manage their own transnational cooperative efforts, both internally and with their legal counsel.
- World Bank
2010 represented a year of aggressive World Bank enforcement, and indications of heightened cooperation between the bank and US authorities. The DOJ’s new standard deferred prosecution agreement calls for companies to cooperate not just with foreign authorities but also with personnel of multilateral development banks.
Taking a leaf out of US enforcement practice, the World Bank’s investigative and prosecutorial agency, the Department of Institutional Integrity (INT), established a new voluntary settlement program. New Sanctions Procedures issued in September 2010 also established a new officer position within INT to work with debarred companies whose compliance with certain conditions (typically compliance and disclosure-related) will allow them to reduce their sanction. These developments will be addressed in more detail in a future alert.
- UK Bribery Act
One of the most highly anticipated developments in the anti-corruption world for some time now has been the promulgation of the UK Bribery Act, which received Royal Assent in April 2010 and was anticipated to enter into force in April 2011. As described in our prior analysis of the act, the new law comprehensively redefines the substantive criminal elements of bribery under UK law. It does so through a new general offence that covers domestic and foreign bribery, and a separate foreign bribery offence that resembles the OECD Anti-Bribery Convention and FCPA. Of great concern to companies that are headquartered in or even do business in the United Kingdom, given the broad jurisdictional reach of the statute, the law imposes liability on organizations whose employees or representatives engage in bribery in the United Kingdom or abroad. Companies may, however, be able to take advantage of an affirmative defense to avoid prosecution if they can prove that they have implemented “adequate” anti-corruption compliance procedures.
A draft set of guidance on the meaning of such procedures was released in September 2010, but the UK Government has not yet published a final version and has said that the act will only go into effect three months after it does so. Practical arrangements to bolster cooperation between US and UK authorities are also underway, with the FBI reportedly allowing London police access to its files when there is a connection to the United Kingom. The DOJ has also invited UK authorities to join its international organized crime intelligence center.
Maintaining adherence to the FCPA when doing business in China presents one of the greatest challenges companies face under the law. The reason, as is well known, is partly cultural; personal relationships, often underwritten by gift-giving, entertainment, and outright payments, have long been “how business is done” in the country. The prevalence of state-owned enterprises in China, coupled with the FCPA’s broad definition of “public official” to include SOE employees and the frequent requirement that foreign companies partner with local ones, make bribery risks seem almost unavoidable. In 2010, Transparency International ranked it 78, beneath Colombia, El Salvador, and Romania. This ranking, as useful as it is, only hints at the scale of the problem given the immense amounts of foreign investment that China attracts.
In 2010, companies continued to assume, and pay for, these risks. In June 2010, for instance, Veraz Networks, Inc. settled SEC civil charges with a $300,000 penalty for violating the FCPA's books-and-records and internal controls provisions when a third-party consultant gave some $4,500 in gifts to officials of a telecommunications SOE and offered to pay a $35,000 bribe to receive a contract award (the settlement figure also contained a penalty for similar activity in Vietnam). And RAE Systems, Inc., a chemical and radiation detection system maker, settled criminal and civil charges with the DOJ and SEC for allegedly paying some $400,000 to Chinese officials on behalf of two of RAE's majority-owned joint ventures there. RAE entered into a non-prosecution agreement with DOJ, agreeing to pay a $1.7 million fine, and disgorged $1.3 million in profits as part of its SEC settlement. Such cases, of course, are but the tip of the iceberg in China where FCPA and corruption risks will be a staple of doing business for years to come.
On the demand side, China took steps in 2010 to tighten the rules governing acceptable hospitality by officials of SOEs. These developments, and the PRC’s new foreign bribery legislation passed in late February 2011, will be the subject of a separate alert.
- Dodd-Frank Whistleblower Incentives and Protections
On July 21, 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act. Among the most significant features of the legislation are new financial incentives and protections for whistleblowers who report violations of securities laws to the SEC, including violations of the FCPA. The legislation requires the SEC to pay qualifying whistleblowers between 10 percent and 30 percent of the monetary sanctions collected out of an investor protection fund it is directed to maintain. These sanctions include not only civil penalties and prejudgment interest, but also disgorged profits in every case where these amounts exceed $1 million.
Except for excluding certain auditing firm and law enforcement personnel, the legislation does not categorically restrict the types of persons who can receive an award (or even exclude the possibility of granting an award to an entity). Even whistleblowers involved in the underlying conduct remain eligible for awards, unless they are convicted of a criminal violation related to their involvement.
The SEC is in the process of finalizing regulations for this provision. One major concern that has surfaced regarding the provision, which the proposed regulations issued in December 2010 attempt to address, is the incentive this provision creates for individuals to bypass corporate compliance program reporting mechanisms.
When coupled with an initiative announced earlier in 2010 to encourage cooperation by witnesses in SEC actions, the new whistleblower program likely will stimulate continued growth in FCPA investigations and enforcement actions. Because the act also grants protection from retaliation for whistleblowing to employees of public company subsidiaries and affiliates, potentially including employees of foreign subsidiaries and affiliates, companies need to be prepared for an increase in bounty-hunting within their ranks. This has a number of implications for companies’ anti-corruption compliance programs and FCPA risk-management strategies (including disclosure) when an issue does arise.
- DOJ Opinion Releases
2010 also saw the release of three DOJ Opinion Procedure Releases providing the department’s views on factual scenarios presented by companies through the lens of FCPA compliance. The three releases do not present surprising positions, but are notable for the way in which they avoid categorical or highly aggressive postures with respect to hiring or working with government officials or their agents, and the way in which they credit extensive due diligence efforts. While limited to their facts, they present useful hypothetical guidance to companies that may find themselves in similar circumstances.
In Opinion 10-01, the DOJ issued an Opinion Release stating that it would not bring an enforcement action against a US company that hired a foreign government official to fulfill a contract with a US government agency. Although the prospective hire was a “foreign official,” the company hired the employee entirely at the direction of the US government agency pursuant to an agreement between the US government agency, and the foreign country selected the employee based on his qualifications. The official, furthermore, would not have influence over matters affecting the US company.
In another release, Opinion Release 10-02, the DOJ stated that it would not bring an enforcement action against a US-based nonprofit microfinance institution (MFI) that sought to change the status of a wholly-owned subsidiary to a licensed bank. In order to do so, the foreign government regulator required the subsidiary to grant a local MFI approximately 33 percent of the subsidiary’s original grant capital. In conducting due diligence on the local MFI, the subsidiary discovered that a board member was a government official. The DOJ’s position was based on the subsidiary’s extensive due diligence on the potential grant recipients, substantial internal controls, including the staggered payment of grant funds; ongoing monitoring and auditing; earmarking of funds for financial capacity-building of the local MFI; a prohibition on the compensation of the local MFI’s board members; and institution of an anti-corruption compliance program.
The DOJ also issued Opinion Release 10-03 stating that it would not bring an enforcement action against a US entity that hired a US consultant to assist it in negotiations with a foreign government. The consultant was a foreign government agent under the US Foreign Agents Registration Act. The majority of the consultant’s earnings would be contingent on the company’s success in doing business with the foreign government, and the consultant and the partnership took steps to eliminate any potential conflicts of interest. The DOJ’s opinion emphasized that the FCPA does not per se prohibit business relationships with, or payments to, foreign officials. In determining whether a business arrangement with individuals who act on behalf of foreign governments is acceptable under the FCPA, the government looks at signs of corrupt intent, transparency of the agreement, conformity with local law, and safeguards against the foreign official using his office to benefit the US company.
2011 will be the first full year in which the SEC’s new specialty FCPA unit is operational. It will likely be a year that continues both agencies’ enforcement emphasis on individuals, industry sweeps, and a continuation of trends seen in previous years. The impact of the Dodd-Frank whistleblower provisions on disclosures will merit particular attention. We will continue to provide you with alerts on significant anti-corruption developments in 2011.