2010 proved to be another record year for Foreign Corrupt Practices Act (FCPA)1 enforcement actions by the Department of Justice (DOJ) and the Securities and Exchange Commission (SEC), the two agencies tasked with enforcing the FCPA. According to Assistant Attorney General Lanny Breuer in his remarks on November 17, 2010 at the American Conference Institute's FCPA conference, "FCPA enforcement is stronger than it's ever been – and getting stronger. To give you just one metric, in the past year, we've imposed the most criminal penalties in FCPA-related cases in any single 12-month period – ever. Well over $1 billion."
In 2010 the DOJ brought charges in 48 enforcement actions into FCPA wrongdoing of companies and individuals and the SEC handled 26 such actions. The DOJ is also currently conducting approximately 140 FCPA investigations, indicating that the trend towards aggressive investigation and enforcement of FCPA prosecutions will continue. In May of last year former Attorney General Eric Holder noted that the DOJ was targeting bribery activity carried out by "large corporations and small companies; powerful CEOs and low-level sales agents; U.S. companies and foreign issuers; citizens and foreign nationals; direct payers and intermediaries." This update addresses the following trends that emerged in FCPA prosecution in 2010:
- Penalties were high, with eight of the top ten largest FCPA settlements occurring in 2010 – many against non-U.S. entities;
- A record level of individual prosecutions took place and the longest prison term for an FCPA was imposed;
- FCPA enforcement was industry-focused; and
- Deferred prosecution and non-prosecution agreements became commonplace
A brief look at what to expect in 2011 for FCPA enforcement is also addressed at the end of this update.
Monetary settlements for FCPA violations reach all time high levels
Eight of the top ten largest FCPA enforcement settlements were assessed just in the last year, the majority against foreign companies, indicating that no company is immune from FCPA investigation and enforcement when bribes are being made. Estimates suggest that as much as ninety percent of FCPA fines and penalties are now being leveled against companies that are based outside the United States.2 The following chart summarizes the top ten FCPA penalties paid to date, including the year the penalties were assessed and the country where the company is based:
Please click here to view table.
The third largest FCPA settlement was with United Kingdom defense contractor BAE Systems plc. Although BAE did not actually plead guilty to an FCPA violation, it pled guilty to several related charges, including making false statements regarding its FCPA compliance program in relation to bribes allegedly paid to Czech, Hungarian, and Saudi Arabian government officials. BAE agreed to pay the statutory maximum of $400 million dollars in criminal fines in connection with these alleged false statements.
The second, fourth, and fifth largest FCPA settlements all relate to bribes made in connection with the same Nigerian joint venture. The SEC charged Technip, a Paris engineering and construction company, as part of a four-company consortium with having made improper payments over ten years to Nigerian government officials to facilitate construction contracts to build liquefied natural gas production facilities on Bonny Island, Nigeria. The joint venture is alleged to have paid $182 million in consulting fees over a 10-year period with the understanding that most of this money would be given to Nigerian officials. It is estimated that the payments led to $6 billion in contracts awarded to the group and profits for Technip estimated at approximately a $199 million. To settle the case, Technip entered into a 2-year deferred prosecution agreement and agreed to disgorge $98 million to the SEC and to pay a criminal fine of $240 million to the DOJ.
Italian company ENI, S.p.A. and its former Dutch subsidiary Snamprogetti Netherlands, B.V. were also charged by the SEC and DOJ in this Nigerian construction contract bribery scheme. The DOJ and SEC alleged that ENI and Snamprogetti paid more than $180 million in bribes. ENI and Snamprogetti disgorged $125 million to settle the SEC's charges and Snamprogetti also paid a $240 million criminal fine to settle charges brought by the DOJ.
The Technip and ENI/Snamprogetti settlements account for the fourth and fifth largest FCPA settlements in the history of FCPA enforcement. Previously, Technip's joint venture partner KBR, Inc. and former parent Halliburton Co. settled similar charges related to this joint venture for $579 million. The KBR/Halliburton settlement remains the second largest in FCPA history. The combined payment of all these companies for this bribery scheme is $1.28 billion, the largest combined sanction for an FCPA violation paid to date.
Another FCPA action with a sizable settlement in 2010 involved German automobile manufacturer Daimler AG. It was alleged that the company made at least $56 million in improper payments to foreign officials in at least 22 countries during a span of at least 10 years. The company agreed to disgorge $91.4 million and separately paid a criminal fine of $93.6 million to settle charges filed by the DOJ. Although the DOJ stated in its press release that Daimler was "brazen" in the bribes it offered and that bribery was a "way of doing business," the parent corporation was not charged with violating the FCPA's anti-bribery provisions because it signed a 2-year deferred prosecution agreement with the DOJ. The criminal fine was also below the low end of the sentencing guidelines recommended range due to Daimler's cooperation during the investigation, terminating and sanctioning many of the employees involved in the bribes, and making substantial efforts to improve its internal controls and compliance programs. Although Daimler received a lenient monetary settlement, it still represents the sixth largest FCPA penalty paid to date.
The SEC charged the French telecommunications company Alcatel-Lucent, S.A. with making payments over a period of almost five years to government officials in Costa Rica, Honduras, Malaysia, and Taiwan to obtain telecommunications contracts, with approximately $7 million being paid to officials in Costa Rica. Focus on the telecommunications industry for FCPA violations is discussed in greater detail below. It was alleged that the leaders of several Alcatel-Lucent subsidiaries knew or should have known that the payments were being made. The company settled, resulting in the seventh largest FCPA settlement when it agreed to disgorge over $45 million to the SEC and to pay a criminal fine of $92 million to the DOJ. Alcatel-Lucent is the second company to ever plead guilty to criminal internal controls charges.
The SEC also settled an FCPA civil action with Swiss corporation ABB Ltd. in the U.S. District Court for the District of Columbia. The SEC alleged that the power and automation production and service provider paid bribes to Mexican government officials through its subsidiaries to obtain business with Mexican-owned electric utilities and that it paid kickbacks to Iraqi government officials through the United Nations Oil-for-Food Program. Bribes paid in connection with the Oil-for-Food Program are described in more detail below. The SEC alleged that ABB subsidiaries paid at least $2.7 million in bribes in these two schemes and that ABB obtained contracts that resulted in over $100 million in revenue for ABB. ABB paid over $39 million to settle the SEC's action and over $30 million to settle the DOJ's related criminal proceeding. This appears to be one of the last settlements in the extensive Oil-for-Food probe over the past several years.
The eighth largest settlement against Panalpina and the tenth largest settlement against Pride International are discussed below.
Individual prosecutions were pursued vigorously and the longest prison term for an FCPA violation was imposed
The DOJ and SEC increasing focused on prosecuting individuals who were at the center of illegal payments that violated the FCPA in 2010.
2010 marked the first year that an undercover sting operation was carried out by the FBI to catch would-be FCPA perpetrators. What is commonly referred to as the Gun Sting Case, SHOT Show Sweep, or Africa Sting Cases involved the arrests of 22 people on January 18, 2010, most of them when attending the largest national gun industry trade show in Las Vegas, Nevada. These combined arrests are the largest single prosecution of individuals for FCPA violations and were the result of a two-and-a-half-year string operation. Those arrested worked for military and law enforcement supply companies. The sting involved FBI special agents and City of London police officers posing as a representative to an African defense minister and a procurement officer for Gabon's Ministry of Defense. Wire taps and video tapes captured the alleged conspiracy to bribe these officials and resulted in payments close $1.5 million in return for a $15 million contract. This case is interesting for the sheer number of people arrested and that the government, for the first time, sought to carry out a proactive, undercover operation more commonly associated with drug cartels. Several of these individuals are defending themselves by arguing entrapment and that the FCPA requires an actual foreign government official to be involved in the scheme.
Several lengthy sentences were imposed on individuals for FCPA violations in 2010. Charles Paul Edward Jumet was sentenced on April 19, 2010 to 87 months in prison, the longest prison sentence ever imposed in an FCPA prosecution. He also paid a $15,000 criminal fine and will have three years of supervised release after being released from prison. Jumet pled guilty in 2009 to conspiracy to violate the FCPA and making false statements in connection with the government's investigation of payments totaling over $200,000 to Panamanian officials to obtain maritime contracts for his employer, Ports Engineering Consultants Corporation.
Three U.S. telecommunications executives, two former Haitian government officials, and three consultants who facilitated making improper payments were indicted for participation in a bribery scheme to obtain business with Telecommunications D'Haiti (Haiti Teleco). Two of these individuals were sentenced in 2010 to significant prison time. The DOJ alleged that one Haitian official, Robert Antoine, received approximately $800,000 in bribes during this scheme. He was sentenced on June 1, 2010 to 48 months in prison and 3 years of supervised release, as well as required to pay $1,852,209 in restitution and to forfeit $1,580,771. Although officials who receive improper payments cannot actually be charged with violating the FCPA, Antoine and others were pursued for the related offense of money laundering. On July 30, 2010 Juan Diaz, a Miami businessman central to this conspiracy, was sentenced to 57 months in prison, in addition to receiving 3 years of supervised release, and forced to pay $73,824 in restitution and $1,028,851 in forfeiture. Diaz was a third party consultant who facilitated payments between the Haiti Teleco officials and the telecommunications executives. He pled guilty in 2009 to conspiracy to violate the FCPA and money laundering.
In contrast, other individual prosecutions for FCPA violations resulted in sentences below what the DOJ requested. For example, husband and wife film producers Gerald and Patricia Green were tried to a jury for FCPA violations in the summer of 2009, but not sentenced until 2010. The DOJ initially sought a 25 year sentence for Gerald Green, but ultimately requested 10 years for Gerald Green and 10 years for Patricia Green. The sentence imposed by the judge was only 6 months in prison for each of the Greens and asset forfeiture of the gains they made by violating the FCPA. The honorable George H. Wu of the U.S. District Court for the Central District of California judge focused on Gerald Green's failing health and the couple's clean criminal records in imposing these sentences. Although sentencing trends of individuals for FCPA violations have yet to emerge, it is clear that 2010 involved disparities in sentencing.
Many other individuals have pled guilty to FCPA charges and are awaiting sentencing, often with sentencing being delayed so that the individuals can cooperate in ongoing investigations in hopes of receiving a reduced sentence. Perhaps as these individuals are sentenced, more trends will emerge about the severity to be expected in sentencing for FCPA violations.
The DOJ and SEC investigated FCPA violations by industry
While the DOJ has made it clear that no company or individual is immune from its pursuit when engaging in behavior that violates the FCPA, 2010 showed a trend of investigations by industry. The industry-specific investigations explained in this section often involve multiple companies and individuals.
Perhaps the most notable example of an industry-wide FCPA investigation focus from 2010 involved the oil-and-gas services industry. On November 4, 2010 the DOJ and SEC announced a settlement with global freight provider Panalpina, Inc. and six oil and oil service firms, many of which were customers of Panalpina. These companies included Pride International, Inc., Tidewater, Inc., Transocean, Inc., Global Santa Fe Corp., Noble Corp., and Royal Dutch Shell plc. This was the first time this industrial sector was the specific focus of FCPA wrongdoing. The companies were charged with bribing custom officials in 10 countries to avoid duties, expedite importation of goods and equipment, extend drilling contracts, and lower tax assessments. The companies became the target of the DOJ and SEC's investigation when Vetco International Ltd., another oil services company, settled FCPA charges in 2007 related to payments allegedly made on their behalf by Panalpina. At that point, the DOJ began investigating whether Panalpina made such payments to other companies. The approach taken by the government seems to be that it will investigate specific known misconduct and then examine whether the practices are commonplace within that same sector and geographic region.
The total fines and penalties for all companies amounted to over $230 million, broken down as follows:
- Panalpina agreed to disgorge $11.3 million and to pay a criminal fine of $70.56 million
- Pride International and Pride Forasol S.A.S. agreed to disgorge $23.5 million and to pay a criminal fine of $32.625 million
- Tidewater agreed to disgorge $1 million and pay $217,000 civil penalty as well as criminal fine of $7.35 million
- Transocean agreed to disgorge $7.3 million and pay a criminal fine of $13.44 million
- Global Santa Fe agreed to disgorge $3.8 million and pay a $2.1 million civil penalty
- Noble agreed to disgorge $5.6 million and pay a criminal fine of $2.59 million
- Shell Nigeria Exploration and Production Company Ltd, a Nigerian subsidiary of Royal Dutch Shell, agreed to disgorge $18.1 million and pay a criminal fine of $30 million
The settlement with Swiss company Panalpina is the eighth largest monetary FCPA settlement. It is also interesting because the SEC lacked jurisdiction to enforce the FCPA's prohibitions against the company because it is not a domestic issuer or concern. The SEC did an end run by alleging that Panalpina aided and abetted and acted as an agent of its U.S.-issuer customers to violate the FCPA. The SEC will likely use this tactic in the future to reach more companies that currently cannot be enforced by the SEC. Other settlements, including GE and ENI/Snamprogetti discussed above, were similarly prosecuted by the SEC by charging the issuer parent corporation for the actions of its non-issuer subsidiaries.
At least four other companies are being investigated by the DOJ and SEC in the oil industry related to possible improper payments involving Panalpina. Another company was investigated, but the DOJ and SEC did not bring an enforcement action against it.
The United Nations Oil-for-Food Program in Iraq has resulted in many FCPA settlements over the past several years and 2010 was no different. 16 FCPA settlements related to the Oil-for-Food Program have occurred to date. The ABB case mentioned above was a result of contracts for this program. Settlements with Innospec, Inc. and General Electric Co. also arose out of the Oil-for-Food program and both cases settled in 2010.
The DOJ and SEC charged Innospec, Inc., a chemical company, with making or promising $9 million in bribes to Iraqi officials to obtain orders for agricultural equipment under the Oil-for-Food Program. The company agreed to disgorge profits of $11.2 million and to pay a criminal fine of $14.1 million to the DOJ, along with a $12.7 million fine to Great Britain's Serious Fraud Office and $2.2 million to the Treasury Department's Office of Foreign Assets Control. Innospec faced penalties between $100 and $200 million for the U.S. criminal charges under the sentencing guidelines, but these penalties were reduced because of Innospec's financial inability to pay.
The SEC charged General Electric Co. and two of its subsidiaries with paying $3.6 million in kickbacks to Iraqi officials to obtain contracts under the Oil-for-Food Program. In order to settle, GE agreed to disgorge $22.5 million in profits and to pay a $1 million civil penalty for violations of the FCPA's accounting provision. The SEC alleged that two GE subsidiaries and two companies which were acquired by GE provided in-kind and cash payments to the Iraqi government in 14 transactions involving the Oil-for-Food Program. The DOJ closed its investigation without charging GE.
The tobacco industry was also targeted by the SEC and DOJ in 2010 for FCPA violations. The SEC and DOJ charged two tobacco companies, Universal Corp. and Alliance One, with paying more than $5 million in bribes to government officials in Thailand, China, Greece, Indonesia, Kyrgyzstan, Malawi, and Mozambique in exchange for tobacco sales contracts, exclusive rights to purchase tobacco, and beneficial legislation. These payments were not properly recorded in the books or records of either company. Foreign subsidiaries for each company pled guilty to FCPA anti-bribery and books-and-records provisions and settled with the SEC over similar charges. Universal agreed to disgorge $4.5 million and pay a criminal fine of $4.4 million; Alliance agreed to disgorge $10 million and pay a criminal fine of $9.45 million. Both companies self-reported the FCPA violations and signed non-prosecution agreements.
The telecommunications industry was also a target for FCPA investigation in 2010. The settlement with Alcatel-Lucent and the individuals charged in connection with Haiti Teleco noted above are two examples. The SEC also charged California-based telecommunications company Veraz Networks, Inc. with making improper payments to government officials in China and Vietnam to obtain business from government-controlled telecommunications companies there. The company obtained no business in China because it declined a contract worth about $230,000 after discovering that a consultant had made gifts valued at approximately $40,000 to Chinese government officials. In Vietnam, the company sold products to the government controlled company during times that an employee made or offered payments, entertainment, and gifts to officials. The company agreed to pay a civil money penalty of $300,000. No parallel criminal action was filed by DOJ.
Other examples of industry-wide sweeps include the ENI/Snamprogetti and Technip cases mentioned above which related to a Nigerian joint venture and resulted in settlements in 2008, 2009, and 2010. One additional company involved in the consortium will likely resolve the matter in 2011.
FCPA settlements increasingly involve Deferred Prosecution Agreements and Non-Prosecution Agreements
The number of deferred prosecution agreements and non-prosecution agreements increased last year. These agreements allow the DOJ and SEC to either decline prosecuting a corporation or at least defer the prosecution. These agreements are increasingly becoming a tool used in FCPA actions, although the SEC has not used such an agreement in an FCPA action yet. The SEC first announced its intention to use such agreements on January 13, 2010 in a Cooperation Initiative and entered into one such agreement in 2010 for a matter unrelated to the FCPA. The DOJ entered into 14 deferred prosecution agreements and non-prosecution agreements in 2010 for FCPA violations, ranging from 2 years to 3 years and 7 days in length. Eight of these agreements mention self-disclosure of the FCPA violation as a justification for the deferred prosecution agreement or non-prosecution agreement. Many of these agreements require offending companies to institute corporate monitors and corporate compliance procedures to ensure future misconduct does not occur, particularly for deferred prosecution agreements.
The following all entered into a deferred prosecution agreement or non-prosecution agreement with the DOJ in 2010 in relation to FCPA charges: ABB Ltd.; Alliance One International Inc.; Daimler AG: Daimler Chrysler China Ltd.; Noble Corp.; Panalpina World Transport Ltd.; Pride International; RAE Systems Inc.; Shell Nigeria; Snamprogetti Netherlands B.V.; Technip S.A.; Tidewater Marine International; Transocean; and Universal.
Interestingly, in the Panalpina series of cases, Noble Corp. was the only one of the seven companies involved that voluntarily disclosed the alleged misconduct. It was also the only company that received a non-prosecution agreement as opposed to a deferred prosecution agreement and also received fines well below the sentencing guideline's low end.
Predictions for 2011
Enforcement of the FCPA should be as vigorous in 2011 as in recent years. Assistant Attorney General Lanny Breuer stated on November 17, 2010 at the American Conference Institute's FCPA conference that "[w]e are in a new era of FCPA enforcement; and we are here to stay." It has been reported that the SEC currently receives one tip a day from whistleblowers about alleged behavior that violates the FCPA. With the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 ("Dodd-Frank"),3 it is likely that the number of whistleblowers who come forward will increase even more this year, in part because of the potential financial gain for whistleblowers who report original information that leads to an FCPA sanction. Under the SEC's new bounty program in Dodd-Frank, successful whistleblowers would receive between 10 and 30 percent of any penalty over $1 million collected in SEC enforcement actions or related agency actions, including actions brought by the DOJ. Thus, in addition to providing various protections for whistleblowers, Dodd-Frank may also result in a substantial financial incentive to report possible FCPA violations considering the high monetary sanctions involved in recent FCPA settlements and examined throughout this update.
The potential financial inducement also could encourage reporting of weak or non-existent FCPA violations, but even if companies are ultimately cleared of any wrongdoing expensive government and internal investigations will still increase. Rules related to implementing Dodd-Frank are still not final, but it is clear that it will spur increases in the number of FCPA violations investigated as more whistleblowers come forward and companies increasingly self-report wrongdoing to gain any possible benefit in a settlement considering the increased likelihood that a whistleblower would report the same information anyway.
There was also a rise in collateral civil cases being filed by private plaintiffs in 2010. Although the FCPA does not contain a provision for a private right of action, plaintiffs' lawyers increasingly used other statutes to pursue companies accused of FCPA violations, including bringing securities class action and derivative suits and alleging breach of fiduciary duties, torts, and breach of contract. In these suits, a plaintiff alleges that a company misstated or inflated earnings by including the illegal sales made from improper payments. 2010 was a record year for such actions as it became standard for plaintiffs' law firms to announce private civil enforcement soon after an FCPA enforcement action was resolved or a new investigation began. This trend will likely continue in 2011.
The SEC will likely enter into more deferred prosecution and non-prosecution agreements in 2011. The SEC entered into its first non-prosecution agreement with Carter's Inc. on December 20, 2010 after announcing a Cooperation Initiative one year ago. In the Cooperation Initiative, the SEC made available deferred prosecution agreements and non-prosecution agreements. Although the Carter's matter involved financial fraud and not the FCPA, it is likely that the SEC will increasingly offer such agreements to corporations that cooperate with the SEC during FCPA investigations. The SEC cited the isolated nature of the unlawful conduct and Carter's self-reporting and cooperation as the reasons for offering the non-prosecution agreement. Under the agreement, Carter's is required to continue cooperating fully and truthfully in the SEC's investigation and in any related enforcement actions or proceedings with the SEC or with federal, state, or regulatory organizations. The agreement also requires Carter's to use its best efforts to obtain full and truthful cooperation of relevant directors, officers, employees, and agents. So long as the agreement is not violated, the SEC agreed not to bring an enforcement action or proceeding against Carter's in this matter. Carter's was not required to admit liability.
With the increase in FCPA actions and media attention surrounding them, companies can no longer be passive in thwarting possible violations of the FCPA. Companies should continue to improve compliance programs and training of foreign sales agents on the FCPA in 2011, particularly because companies who voluntarily disclose possible violations of the FCPA to the DOJ and SEC could receive leniency if penalties are ultimately assessed. To avoid FCPA pitfalls, companies should review compliance training programs, examine the books and records for any unusual payments, and investigate how foreign sales agents operate in practice. These steps should be taken for the parent company, subsidiaries, and any potential acquisitions.