Two recent developments highlight the broad reach of the U.S. Foreign Corrupt Practices Act (“FCPA”).
On September 11, 2008, Mark F. Mendelsohn, Deputy Chief of the Fraud Section at the DOJ, and Gerald W. Hodgkins, Assistant Director of the Division of Enforcement at the U.S. Securities and Exchange Commission (“SEC”) spoke at an American Bar Association (“ABA”) sponsored luncheon addressing emerging trends in FCPA enforcement. Because issues arising under the FCPA are rarely the subject of litigation, public statements by U.S. Department of Justice (“DOJ”) and SEC officials offer a valuable perspective for understanding the FCPA and appreciating trends in FCPA enforcement. Topics discussed during the event were wideranging and included: (1) recent increases in DOJ enforcement activity; (2) increases in the prosecution of individuals; (3) the rise in industry-wide investigations; (4) increased scrutiny of certain corporate activity, including mergers and acquisitions and IPOs; (5) the importance of pre-merger due diligence; (6) successor liability; (7) disgorgement; (8) the components of an effective compliance program; and (9) the DOJ’s FCPA opinion release procedure program.
A few weeks later, in one of the relatively rare court decisions in this area, the Supreme Court denied certiorari in an appeal from the Fifth Circuit’s decision in Kay v. United States, which expansively interpreted the FCPA’s scope. Although the Supreme Court’s denial of certiorari does not mean that the Court agreed with the Fifth Circuit’s decision, it had the effect of leaving that expansive interpretation intact, meaning that corporations will be well advised to ensure that their compliance activities are in accord with it. That conclusion is only reinforced by Mr. Mendelsohn’s and Mr. Hodgkins’ remarks.
Increased DOJ Enforcement
Mendelsohn stated that the DOJ brought 16 criminal enforcement actions in 2007, which is double the number of enforcement actions brought in 2006. He expects this trend to continue “given the significant number of matters that [are] under investigation.” Additionally, the DOJ has “come up [with] some creative ways to try to resolve cases involving companies,” including “non-prosecution agreements, deferred prosecution agreements, [and] corporate compliance monitors.” Mendelsohn characterized these mechanisms’ impact on the number of companies willing to disclose potential FCPA problems to the DOJ as “enormous.”
Increased Prosecution of Individuals
According to Mendelsohn, “the number of individual prosecutions has risen – and that’s not an accident.” In fact, the recent increase is “quite intentional” and has a “credible deterrent effect” on future FCPA violations. “People have to be prosecuted where appropriate,” said Mendelsohn, because “[t]his is a federal crime; this is not fun and games.” As evidence of this, the DOJ announced new charges against Gerald and Patricia Green on October 3, 2008, for bribing Thai officials in exchange for lucrative contracts.1 According to Hodgkins, the SEC is also pursuing individuals, including foreign nationals, for FCPA violations.
Mendelsohn identified “industry-wide initiatives” by the DOJ/ SEC as a current enforcement priority. Of note are recent DOJ enforcement actions with several medical device makers2 and an ongoing investigation into freight-forwarder Panalpina and its clients. Mendelsohn stated that the DOJ will broaden its investigation when a foreign official’s financial records indicate that multiple corporations were bribing the official, or when an involved employee has worked at several competitors. Corporations need to be especially diligent if a competitor is under investigation—if the DOJ finds that one company has violated the FCPA, it is likely to look at the conduct of the company’s competitors.
Increased Scrutiny of M&A Activity and IPOs
A new trend Mendelsohn identified is “increased attention to foreign payments issues in the context of transactions,” such as mergers and acquisitions and IPOs. Mendelsohn attributed this to increased due diligence as a result of Sarbanes-Oxley.3 According to Mendelsohn, Sarbanes-Oxley “has brought a new focus on corporate internal controls. It made corporate officers and directors personally responsible for those controls. That in turn has brought increased attention and scrutiny by legal and accounting to foreign payments issues.” Hodgkins confirmed that “lots” of SEC reviews of foreign payments “are coming in as a result of M&A activity.”
Importance of Pre-Merger Due Diligence
Pre-merger FCPA due diligence is “one of the most critical factors we consider,” Mendelsohn said, in making charging decisions related to merger activity. He affirmed that the “nature and quality” of pre-merger due diligence are important. If a company were unable to conduct effective pre-merger due diligence, Mendelsohn stated that it would be very important for that company to respond “aggressively and quickly” postmerger. While he did not establish a bright line, he stated that waiting for one year to look for and fix FCPA problems would not be adequate.
In a statement that might well portend a change in enforcement practices, Mendelsohn argued that the DOJ could prosecute an acquiring company for past acts of an acquired company that would have violated the FCPA, had the acquired company been subject to the FCPA. He referred to a “whole body of case law” supporting this approach, and he characterized past decisions to only prosecute the acquired company as exercises of discretion. Mendelsohn noted that when exercising such discretion, one of the most critical factors is always the nature, extent, and quality of the pre-acquisition due diligence conducted by the acquiring company.
This is a potentially explosive issue for U.S. companies making acquisitions in business cultures where corrupt payments may be common but local law either does not prohibit business bribery or, even if it does, it is not well enforced. We believe the government’s position on this issue is not well founded and can be challenged, but companies would be well advised to keep this in mind during the acquisition stage, as steps taken at that point may be important to any subsequent defense and challenge.
According to Hodgkins, the SEC made a determination several years ago that disgorgement is an important remedy, and as a result, the SEC has sought disgorgement in a number of recent cases. For example, in March 2008, AB Volvo disgorged $8.5 million in ill-gotten gains and pre-judgment interest as part of a consent agreement with the SEC.4 Hodgkins also cautioned that disgorgement is not limited to ill-gotten gains; the SEC staff will “think creatively” about disgorgement and consider whether disgorgement should also include the value of the bribe paid, regardless of whether the SEC would have jurisdiction over the bribe itself.
Impact of a Pre-Existing, Effective Compliance Program
Mendelsohn stated that the quality of a pre-existing compliance program was “hugely important” to the DOJ when it exercises prosecutorial discretion. Beyond the guidance provided in the U.S. Sentencing Guidelines, Mendelsohn personally considered an “effective” compliance program to be one that takes a “living and breathing approach” to compliance, meaning one that is supported by the top management and actually followed. Mendelsohn suggested that a particularly persuasive way to signal that an organization has an “effective” compliance program is to tie executive compensation and performance evaluations to compliance.
Underuse of Opinion Procedures Releases
Mendelsohn encouraged more companies to avail themselves of the DOJ’s Opinion Procedures Release process. “[I]n almost any other arena, [the Department] is not going to give you an advisory opinion on whether what you are about to do is a crime or not,” Mendelsohn said. “They are just going to let you do it. If it’s a crime, we’ll bring charges. Under [the DOJ Opinion Procedures Release] program, you actually can . . . get a binding legal opinion that will protect you and will give you some guidance as to how you can conduct your business.” He noted that this process is especially valuable for “more sophisticated questions” beyond “routine travel and entertainment” issues.
Kay v. United States
On October 6, 2008, the Supreme Court denied a petition for writ of certiorari in the case of Kay v. United States. As a result, the Fifth Circuit’s decision to interpret broadly the phrase “obtaining or retaining business” in the context of the FCPA remains in place. The Fifth Circuit determined that payments to government officials to obtain a reduction in import taxes and duties violated the FCPA. At trial, the defendants argued that such benefits did not constitute “obtaining or retaining business” as required by the statute. After a jury conviction, the Fifth Circuit held that payments to government officials that allow a company “to keep up with competitors” constitute FCPA violations.
The Supreme Court’s failure to take up this challenge to the meaning of “obtaining or retaining business” portends further government enforcement of business activities that, while not intended to secure a particular contract or sale, provide a benefit to the company or reduce operating costs. As a result, companies will need to be more diligent about government interactions and broaden compliance programs to include activities that meet the Fifth Circuit’s interpretation. Recent FCPA dispositions between companies and the enforcement authorities based on the Fifth Circuit’s decision indicate that the government will use this expansive definition aggressively. Such dispositions involved payments that resulted in expedited refunds in previously paid taxes, favorable government inspections, and efforts to repeal or amend regulations.
The Fifth Circuit had concluded that while “obtaining or retaining business” may be ambiguous, the ambiguity did not rise to the level of vagueness and unfair notice that would violate due process. The court also stated that:
Although ARI did not make corrupt payments to guarantee one particular contract’s success, ARI ensured, through bribery, that it could continue to sell its rice without having to pay the full tax and customs duties demanded of it. Trial testimony indicates that ARI believed these payments were necessary to compete with other companies that paid lower or no taxes on similar imports—in other words, in order to retain business in Haiti, the company took measures to keep up with competitors.