Recent revelations of a Foreign Corrupt Practices Act investigation into Major League Baseball, as well as statements from FCPA enforcement authorities, indicate that the U.S. Department of Justice and the U.S. Securities and Exchange Commission are employing a flexible, outside-the-box approach to FCPA enforcement, increasingly focusing on nontraditional targets and industries.
Indeed, in remarks at a November 2018 conference, the chief of the SEC’s FCPA enforcement unit suggested that the agency is scrutinizing industries that are not traditional FCPA enforcement targets, noting that “you are seeing some additional industries come to the front as far as getting enforcement action,” and “[t]here are other industries that perhaps haven’t gotten as close of a look in the past as they will in the future.”
The increasing focus on nontraditional targets and industries will have important implications for organizations that conduct business abroad, operate in foreign countries, or otherwise interact with foreign governments — particularly organizations that have not traditionally emphasized FCPA and anti-corruption compliance, such as sporting bodies and university systems.
This article explores this emerging trend in FCPA investigations and enforcement in an effort to help organizations anticipate what may lie ahead, and to take proactive steps to address potential business and compliance vulnerabilities.
Potential New Targets
The anti-bribery provisions of the FCPA prohibit certain persons (defined to include individuals and entities based in or operating in the U.S. and companies that list or trade stock on U.S. exchanges) from paying bribes or offering anything of value to foreign government officials to obtain or retain business or to secure an improper business advantage. The FCPA’s accounting provisions require issuers of U.S.-listed securities to: (1) maintain accurate books, records and accounts that fairly reflect business expenses; and (2) develop and maintain internal accounting controls designed to prevent and detect possible FCPA violations. Enforcement actions alleging FCPA violations may result in significant civil and criminal penalties, investigative expenses, business disruption, and reputational harm.
Within this framework, for years, the story of FCPA enforcement has largely been one of consistency. Year after year, the total number of FCPA actions tends to fall within a certain range, many of the schemes bear similar characteristics, and the companies whose bribery scandals spill onto newspapers tend to pool in a few predictable industries or sectors — like oil and gas, manufacturing, life sciences or pharma.
But there have been signals that FCPA enforcement is moving into uncharted waters, and therefore we expect to see a more varied body of FCPA enforcement matters in the future. The DOJ and SEC seem likely to cast a broader net, investigating or bringing actions involving nontraditional targets and industries. The reasons for this apparent shift are unknown, but it could be due to the maturation of FCPA compliance programs in certain higher risk industries, where increased enforcement activity and awareness have led companies to adopt more robust compliance measures in recent years.
Regardless of the reasons, organizations that conduct business abroad, operate in foreign countries, interact with foreign governments, or are considering business combinations with foreign companies or business units should note this change on the horizon — FCPA scrutiny is no longer a concern only for industries with characteristically high-risk profiles. Indeed, the financial services sector is a good example: Only four years ago the SEC brought its first FCPA action against a financial services firm. Each year since, however, there have been actions involving financial services firms or employees of financial services firms.
We believe the following industries or areas may increasingly attract attention from FCPA enforcement authorities. Organizations that operate in these spaces would be well advised to batten down the hatches before the storm arrives.
Sports teams, leagues and sporting bodies have drawn increasing regulatory scrutiny in recent years, and may become more frequent FCPA enforcement targets. These organizations often operate or recruit in high-risk jurisdictions, are subject to minimal regulatory oversight, and many have not traditionally focused on bribery and corruption risks. Sports teams, leagues and sporting bodies also garner intense media and public interest, making them extremely attractive to federal prosecutors and SEC enforcement attorneys given the potentially high deterrent value.
By way of example, Yahoo! Sports recently reported that a federal grand jury is investigating Major League Baseball for possible FCPA violations relating to teams’ dealings with immigration officials in the Caribbean and Latin America. An anonymous former MLB executive explained that the investigation may involve allegations that teams “brib[ed] [foreign] clerks or immigration officials to change dates of birth on identification documents, or to fabricate false identity documents. The reports indicate that the DOJ’s FCPA Unit is conducting the investigation with the Federal Bureau of Investigation, and that grand jury subpoenas have been issued to team officials.
Along these lines, while it did not involve FCPA charges, the corruption scandal involving soccer’s international governing body, FIFA, may also be a harbinger of FCPA enforcement actions to come. Fourteen individuals, including seven former FIFA executives, were indicted in 2015 for a variety of racketeering, money laundering, and wire fraud offenses in connection with “decades of bribery totaling more than $150 million.” Prosecutors alleged a scheme to “buy” votes for countries that hoped to host the 2018 and 2022 FIFA World Cup Championships, soccer’s highest-profile tournament; FIFA World Cup qualifying events; FIFA elections; sports clothing sponsorships; and other matters.
Similarly, in January 2018, the New York Times reported that a federal grand jury is investigating the United States Olympic Committee, the International Olympic Committee, the International Association of Athletics Federations, and FIFA in connection with possible illicit payments or improper influence in connection with the selection of host cities for various world championship events.
Consulting and Professional Services Firms
Although consulting and professional services firms often help companies develop and implement best practices to minimize bribery and corruption risks, they too may find themselves subject to FCPA enforcement scrutiny if they advise or seek business from foreign governments or government agencies.
Investigative journalists recently profiled global consulting firm McKinsey & Co.’s hiring of relatives of several high-ranking Saudi Arabian government officials at a time when the firm was advising Saudi Arabia’s government on economic transformation issues. The journalists intimated that McKinsey’s hiring practices may have run afoul of the FCPA. While there is no indication that the DOJ or SEC is actively investigating McKinsey in connection with those hires, the journalists noted that the firm’s practices resemble those of several financial services firms that offered jobs to relatives of high-ranking officials at sovereign wealth funds and other state-owned financial institutions in order to obtain or retain business, which resulted in FCPA enforcement proceedings commonly known as the “princeling” cases.
Colleges and Universities
U.S. colleges and universities often have extensive interactions with foreign governments and foreign schools, students, and faculties through exchange, visiting professor, and dual-degree programs; conferences and symposia; research efforts; grants; the development of foreign campuses; and other endeavors. Yet, U.S. colleges and universities often lack mature compliance structures, and may underemphasize FCPA compliance risks in their policies and procedures.
Interactions with foreign education ministries or foreign public universities, administrators, and faculty could implicate the FCPA if gifts or hospitality (e.g., travel expenses or conference fees) are provided to foreign education officials. Similarly, facilitating admissions or scholarships for relatives of foreign officials in such countries could draw FCPA enforcement scrutiny.
Donations and endowments also present bribery and corruption risks for colleges and universities, and the DOJ and SEC previously investigated a for-profit university system, Laureate Education Inc., for potential FCPA violations relating to an $18 million donation by a Turkish affiliate to a charitable foundation. U.S. colleges and universities that operate abroad or interact with foreign officials without implementing strong anti-corruption policies and procedures relating to travel and entertainment, gifts, procurement, and donations may face bribery and corruption risks.
Manufacturers and New Entrants
The sale of industrial or commercial goods to foreign governments or agencies is a perennial subject of FCPA scrutiny. But the manufacturing industries or sectors that have become the focus of such investigations are a diverse and ever-changing lot.
For example, in recent years the SEC has brought FCPA charges against a chicken processor, a manufacturer of metal packaging for food and beverages, a manufacturer of steel pipe products, an ATM manufacturer, a firearms manufacturer, an infant formula manufacturer, and a wire and cable manufacturer, among others. While there is FCPA enforcement risk for nearly any U.S. company that manufactures or sells goods abroad — particularly to government customers — smaller, privately held manufacturers with less robust compliance programs or even larger publicly traded companies with robust policies, procedures and internal controls in areas other than FCPA compliance, face acute FCPA risks.
For example, U.S. companies opening or acquiring manufacturing facilities in Asia or Latin America that have not previously operated abroad may neglect FCPA compliance as they contend with a multitude of fees, permits, licenses and other requirements that necessitate interaction with foreign government officials, often through an intermediary or agent. Recent FCPA charges against technology company Cognizant, its president and its chief legal officer over payments relating to the construction of its corporate campus in Chennai, India, serve as a reminder of the perils of such permitting and approval processes in high risk countries.
A Look at What Lies Ahead
As anti-corruption compliance efforts continue to mature at traditional FCPA targets like multinational publicly traded companies and companies in highly regulated industries, we expect the mix of organizations, industries, and business practices that face FCPA scrutiny to continue to grow and to diversify.
Looking ahead, there is no indication that FCPA enforcement will slow. On the contrary, the DOJ’s FCPA Unit continues to grow, and both the DOJ and SEC continue to prioritize identifying and prosecuting FCPA violations in coordination with their foreign counterparts. Therefore, nontraditional FCPA targets such as sports teams, leagues and sporting bodies, colleges and universities, consulting and professional services firms, and other organizations that interact with foreign government officials or whose business operations are expanding to foreign countries would be well-advised to take a hard look at their anti-corruption programs.
This article was originally published on Law360