With a much-publicized increased focus on Foreign Corrupt Practice Act (FCPA) enforcement, the U.S. Department of Justice and the U.S. Securities and Exchange Commission (SEC) have attempted to catalyze a global crusade against public corruption. Specifically, U.S. enforcers have increasingly looked to share evidence with foreign prosecutors and, where those foreign prosecutors show no appetite for criminal action, launched U.S. investigations of non-U.S. entities acting abroad. Recent high-profile U.S. enforcement activity against companies such as Siemens and BAE highlight the willingness of American prosecutors to reach out and take action where their foreign counterparts are unwilling to do so. This globalization of FCPA enforcement only raises the stakes for companies already confronted by a perilous enforcement environment.
FCPA in a Nutshell
The FCPA prohibits U.S. issuers and concerns from paying anything of value to a foreign government official, directly or indirectly, for the purposes of obtaining or retaining business. While the statute is sweeping in its terms, it is even broader in its application. The Act includes an almost limitless array of individuals and entities in its definition of "foreign official," from candidates for political office to doctors at state-affiliated hospitals. Moreover, enforcers have taken a liberal view of the FCPA’s "obtain or retain business" requirement, applying the statute not only to traditional instances of bribe-tainted public contracts, but also to companies that make corrupt payments to receive better tax treatment or customs tariffs.
The statute also allows anything to be considered a "thing of value" – even a payment as seemingly innocuous as a charitable donation – and lacks any safe harbor for de minimus violations: Picking up the tab for a cup of coffee technically can violate the FCPA in the same way as a large and sinister bribe. Further adding to the indigestion of corporate counsel is the FCPA’s application to independent actors far beyond the watch of corporate headquarters, entities such as newly acquired subsidiaries and third-party contractors around the globe.
Increased Enforcement Efforts
Although the FCPA celebrated its 30th birthday in November 2007, the U.S. Department of Justice and SEC have only recently elevated the FCPA to a top enforcement priority. Consequently, 2007 marked a high point in FCPA enforcement activity. In fact, there has been more FCPA enforcement activity in the past five years than in the statute’s initial 25 years.
Government regulators in the U.S. have made no secret of these increased FCPA enforcement efforts. The Department of Justice and the SEC have both significantly ramped up staffing dedicated to FCPA issues, even forming a task force of specialized FBI agents exclusively for FCPA investigations.
The increased number of investigations has been accompanied by a staggering increase in the amount of criminal and civil penalties, fines and disgorgement. In 2007, enforcers assessed the largest combined sanction in FCPA history when Baker-Hughes agreed to pay over $42 million for its FCPA violations.
In addition, the U.S. government has promised even more investigations, even more aggressive prosecutions, and even more strident criminal and civil penalties in 2008 and beyond.
The Policy of Global Enforcement
Assistant U.S. Attorney General Alice Fisher recently told a national conference that the U.S. government views FCPA enforcement as a central tool in its worldwide effort to stamp out public corruption and to ensure the integrity and transparency of all financial markets, both domestic and international. Noting that public corruption destabilizes markets and disadvantages honest American companies, Assistant Attorney General Fisher pronounced that the U.S. government would attempt to create a level playing field, not by allowing U.S. companies to make corrupt payments, but by attempting to police the corrupt payments of foreign actors in foreign jurisdictions.
In keeping with Assistant Attorney General Fisher’s sweeping policy pronouncement, the U.S. government has aggressively attempted to catalyze this global fight against public corruption by prodding foreign law enforcement officials to step up prosecution of their own anti-corruption laws, which almost all countries have, but few regularly enforce.
Marc Mendelson, Chief of the Department of Justice’s Fraud Unit and the department’s top FCPA enforcer, has described instances in which the U.S. government has made a so-called "spontaneous production of evidence" to foreign prosecutors. This involves simply packaging evidence of public corruption received by U.S. enforcers – perhaps even the fruits of a company’s own internal investigation – and sending that evidence overseas with the hope that the receiving country will decide to prosecute within its borders.
While the effect of this practice, if any, is unknown, there has been an undeniable increase in investigations conducted concurrently by the U.S. and a foreign government. In the past five years alone, more than a dozen FCPA investigations in the U.S. have been mirrored by parallel foreign investigations. These include, among others, German investigations of Bristol Meyers and DaimlerChrysler, French investigations of Halliburton and Total SA, and Indonesian investigations of Freeport and Monsanto. The Siemens matter has singularly spawned anti-corruption investigations by government enforcers in Germany, Greece, Hungary, Italy, Norway, Sweden and Liechtenstein.
While the Department of Justice may strive for such a cooperative international approach, these parallel investigations are bad news for companies already feeling the intense burden of legal fees resulting from U.S.-based investigations, which are by design already conducted in concert by the Department of Justice and the SEC.
Prosecuting Foreign Corporations
In addition to parallel investigations, U.S. enforcers have also shown little hesitation in launching their own investigations into non-U.S. entities acting abroad. A number of recent cases have highlighted this push for strict international enforcement of the FCPA; with investigations into Siemens and BAE representing two of the most widely publicized examples.
In October 2007, Siemens AG, the engineering group at the centre of one of the biggest bribery scandals in German corporate history, announced that it had reached a settlement with German prosecutors after a corruption probe uncovered hundreds of millions of euros in illicit payments made by its telecommunications unit. Siemens agreed to pay a $284 million fine as well as $253 million in additional taxes as a result of improper deductions taken from the unlawful payments. In addition, German authorities indicted one Siemens executive, with more indictments expected to follow. As these fines were preceded by a $51 million fine already imposed against another Siemens unit in May 2007, Siemens is now conducting thorough internal investigations into questionable payments throughout various business.
These significant fines and costly internal investigations, however, do not signal the end of this matter for Siemens. The U.S. Department of Justice and SEC have recently announced that they have reached out to launch Siemens investigations of their own. This is in addition to pending enforcement activity in China, Greece, Hungary, Indonesia, Italy, Japan, Norway and Switzerland. While it is still unclear what action the Department of Justice and SEC might take, Siemens likely faces massive fines, perhaps exceeding the billion dollar benchmark, as well as the possibility of being excluded from future public sector contracts. Certainly, the Department of Justice and SEC could impose criminal and civil sanctions even more severe than those emanating from German enforcers.
Facing similar difficulties is UK defense giant BAE Systems, which currently faces a probe by U.S. enforcers for allegedly paying billions of dollars to members of the Saudi royal family over several decades in return for assistance retaining contracts for fighter jets and other military equipment in Saudi Arabia. Significantly, the U.S. probe comes only after UK prosecutors controversially decided to abandon a similar investigation last year.
BAE is believed to be bracing for one of the largest investigations in FCPA history and some reports suggest that the U.S. Department of Justice and SEC are gathering a growing dossier of evidence against the company. Resolution of the BAE matter is likely to provide some indication of just how aggressively U.S. enforcers will push anti-corruption initiatives on a global platform, particularly in nations that have historically taken little action to combat public corruption. What is clear from investigations such as BAE and Siemens, however, is that U.S. authorities are increasingly and vigorously applying the FCPA to conduct and entities far from U.S. soil.
What Companies Can Do
Thankfully, companies in the U.S. and abroad are not without some mechanisms for protecting themselves against FCPA exposure, even geographically diverse companies operating around the world by and through a large number of employees, subsidiaries, and independent contractors.
A meaningful compliance program is the primary safeguard for any company facing potential FCPA exposure. Mr. Mendelson recently remarked that the Department of Justice has never prosecuted a company with a meaningful compliance program. Compliance programs can, of course, take a variety of forms, and companies lack concrete, practical guidance as to what enforcers view as necessary or appropriate. Notwithstanding this, certain elements of such programs are looked upon with particular favor by the Department of Justice and the SEC, including a strong anti-corruption policy; training for employees and independent contractors; contractual protections in third-party agreements, including audit and termination rights; transaction due diligence; and high-level oversight of compliance efforts. This list, however, is neither required nor exhaustive. Each company must tailor a compliance program which is both meaningful in the eyes of the government as well as feasible from a business perspective. The bottom line: If FCPA trouble crops up and enforcers ask what a company did to prevent it, "nothing" has become a dangerous answer.
Another means by which companies can avoid or at least mitigate FCPA exposure is through a process of remediation and self-disclosure. The Department of Justice has promised that every company affirmatively disclosing FCPA violations to the government will receive a "real and tangible benefit" when it comes to charging decisions. While this "benefit" is more likely a deviation from the worst-case scenario, the Department of Justice has entered into deferred prosecution agreements with certain companies, forged non-prosecution agreements with others, and even taken no enforcement action at all in instances where a company would have received a more significant sanction had it not self-reported. However, the decision of what to report and when remains a vexing question for companies.