What four-letter word is becoming an increasingly big headache for corporate directors and managers?
If you guessed FCPA, you’d be right.
The Foreign Corrupt Practices Act (FCPA), which prohibits the payment of bribes to foreign officials to assist in gaining or retaining business, has been around since 1977, but FCPA enforcement has really ramped up in recent years.
“There’s been a dramatic increase in FCPA activity. Now more than ever, it’s critical for companies to conduct adequate risk assessments, develop well-tailored compliance programs, and understand how best to respond to a government investigation.”
In the first half of this year alone, total criminal fines were close to $1.7 billion. Assuming1 the momentum continues, 2019 is on track to break last year’s record $2.89 billion paid out to resolve FCPA cases.
The magnitude of individual corporate fines has skyrocketed. Whereas in the past, a company may have paid a penalty of around $10 million, now fines are reaching hundreds of millions of dollars.
“There’s been a dramatic increase in FCPA activity,” said Ephraim “Fry” Wernick, a partner in V&E’s Government Investigations & White Collar Criminal Defense practice. “Now more than ever, it’s critical for companies to conduct adequate risk assessments, develop well-tailored compliance programs, and understand how best to respond to a government investigation.”
Wernick should know. He recently served as Assistant Chief of the DOJ Criminal Fraud’s FCPA unit, where he supervised four out of the six largest-ever corporate FCPA resolutions.
The former FCPA prosecutor shared five things corporate directors and managers need to understand about the shifting FCPA landscape:
The U.S. is devoting more resources to FCPA enforcement
The DOJ, which along with the SEC is responsible for enforcing the FCPA, is putting more time, money, and effort into investigating and prosecuting international corruption and money laundering cases.
In the last five years, the DOJ’s FCPA unit has nearly doubled in size, going from 19 to 35 full-time prosecutors.
“It’s not just that there are more prosecutors, there has been a strong effort to recruit experienced prosecutors into the unit,” Wernick said.
More than that, FCPA prosecutors now have a host of law enforcement agents at their disposal — four full-time FBI international corruption squads dedicated to investigating FCPA crimes around the world. Five years ago, there were none.
Rooting out corruption has become a global affair
The Feds have another increasingly powerful weapon in their anti-bribery arsenal: Cooperation between the U.S. and foreign authorities has never been stronger. In fact, many of the largest FCPA settlements of the last few years have involved coordinated cross-border investigations.
“There was a time where it was only the DOJ and the SEC enforcing these types of cases and they were limited in what they could do,” Wernick said. “Today there is a concerted effort by U.S. law enforcement to work closely with foreign prosecutors.”
The DOJ and the SEC are working hard to cultivate relationships, contacts, and referral networks with foreign authorities in a variety of ways.
The U.S. is incentivizing foreign countries to cooperate by offering generous portions of fines. In a number of recent cases, 50% of penalties — and sometimes even up to 90% — has been shared with foreign countries.
The training of prosecutors from around the world remains a high priority. Last year, the DOJ’s FCPA unit and the SEC offered training to foreign law enforcement personnel from 34 countries.
Think CEOs are immune from FCPA prosecution? Think again.
Both the DOJ and the SEC have been vocal about their commitment to prosecuting individuals. Sure enough, the number of individual prosecutions has been on the rise in recent years. In 2018, the DOJ charged a record 31 people with FCPA crimes, up from 24 in 2017. This year, the DOJ is on pace to break last year’s record.
With more prosecutorial firepower at its disposal, the U.S. is increasingly charging senior executives, including CEOs, general counsels and even directors. At stake: serious jail time and penalties.
Last year, for example, the former CEO of SBM Offshore N.V., a Dutch oil services company, was sentenced to three years in prison and was fined $150,000 for his role in in connection with a scheme to bribe foreign officials in Brazil, Angola and Equatorial Guinea. DOJ also recently charged other CEO’s, directors of corporate boards, senior bankers and even a high-profile hedge fund manager for crimes in FCPA cases.
“With more access to evidence and witnesses, the DOJ is better able to build cases against senior executives,” Wernick said.
The Feds have raised the bar on compliance even higher
On April 30, 2019, the DOJ released an updated version of its “Evaluation of Corporate Compliance Programs,” setting new standards for what would be considered an effective compliance program.
Specifically, the guidance focuses on three fundamental questions a prosecutor should ask when analyzing a company’s compliance set-up: Is it well designed? Is it implemented effectively? Does it actually work in practice?
The existence and effectiveness of a company’s pre-existing compliance program is a key factor the DOJ and the SEC take into consideration when deciding whether or not to charge a company that is under investigation.
Companies would be wise to focus on the new guidance to prevent corruption, and to ensure the authorities recognize their compliance practices, in the event they face scrutiny down the line.
Sellers beware: The DOJ is making it easier for acquirers to report your FCPA crimes
A little noticed expansion of the DOJ’s FCPA Corporate Enforcement Policy could have big implications for sellers in M&A transactions. The policy change offers new incentives for acquiring companies to self-report misconduct that is discovered after an acquisition has taken place.
Acquirers in M&A deals now have the opportunity to obtain a declination of criminal charges without publicity, and possibly without disgorging profits, which previously were required.
There are caveats. The remedy will only be available to self-reporting companies that fully remediate and cooperate with government investigations into culpable companies and individuals, and where the misconduct and financial impact is deemed to be “de minimis.”
The bottom line: Companies that are selling assets should be on notice that the DOJ intends to weaponize acquiring companies in order to build new cases against a predecessor entity and its executives, directors, and shareholders.
“This heightens the risk for companies and individuals who sell assets that are tainted by corruption,” Wernick said.
Private equity firms, which tend to buy and sell companies within relatively short windows of time, should pay particular attention to this policy change.
“A private equity firm might not think the FCPA is their problem,” Wernick said. “But if they owned a company that engaged in misconduct, and they sell that company, the chances that problem will follow them have now gone up.”