During an October webinar hosted by the Journal of Commerce and moderated by Susan Ross of Mitchell Silberberg & Knupp, Chuck Duross, Department of Justice (Justice) Deputy Chief, Fraud Section, Criminal Division, observed this will be a record year in terms of both the fines collected and the number of cases brought by Justice under the Foreign Corrupt Practices Act (FCPA). While the number of FBI and ICE teams working closely with Justice in bringing anti corruption cases remains basically the same, Justice is adding more prosecutors and other resources. The day of the webinar, the Phase 3 report issued by the international Organisation for Economic Co-operation and Development (OECD) Working Group on Bribery was released and is now posted on the Justice website; see http://www.oecd.org/dataoecd/10/49/46213841.pdf. The U.S. responses to the underlying questionnaire can be found at: http://www.justice.gov/criminal/fraud/fcpa/docs/response3.pdf and its supplemental responses at: http://www.justice.gov/criminal/fraud/fcpa/docs/response3-supp.pdf.
The FCPA applies to U.S. and foreign companies that trade shares on a U.S. exchange or take corrupt action within the U.S., plus officers, directors, employees, and agents who act on behalf of a U.S. company. Justice will impose criminal consequences and has the power to also impose civil fines, while it is the U.S. Securities and Exchange Commission that fines public companies when they record bribes inaccurately on their books and records, thereby masking the true value of the company's shares. It is the combined action of these two agencies that has led to the significant fines prominently publicized on the pages of most newspapers and many websites in recent years.
The OECD report makes clear that the U.S. has a number of laudable best practices, such as specialized resources for investigations and prosecutions, and innovative methods of resolution, including deferred prosecutions and non prosecutions. At the same time, the report found a lack of transparency and a lack of effective means to deal with small-and medium -size enterprises. The U.S. was represented during the OECD review process by personnel from Justice, Commerce, and State, along with the SEC. The U.S. and Finland are the only countries to have undergone a Phase 3 review. Since the Phase 2 review of the U.S. was completed in 2002, 88 enterprises and 71 individuals have been held accountable, with more than $3 billion in criminal and civil fines, criminal forfeitures, and civil disgorgements having been collected.
Mendelson and Halpern Weigh In
The JOC webinar also featured Mark Mendelsohn, Mr. Duross' immediate predecessor at Justice, and Jonathan Halpern, both white-collar counsel, who addressed questions regarding facilitation payments, voluntary self-disclosures, and the benefits of cooperation. Not surprisingly, Mr. Duross cautioned that, if you file a voluntary self-disclosure, you should be prepared to be fully cooperative. Areas of particular concern to Justice were mentioned as export control and money-laundering violations. Additionally, there was the reminder that third-party dealings must be carefully managed.
Due Diligence Required
In much the same way that CBP and the export control agencies point out a company may not self-blind, i.e., ignore red flags, the same is true with respect to the FCPA and particularly third-party agents. A company must have a due diligence program in place to make sure its agents are not making inappropriate payments. Questions to ask include: What sort of payments is the agent making to government officials? Are those payments seeking to secure routine ministerial actions by the government official? Would the company otherwise be entitled to the relief being sought through the bribe being paid? Is the agent paying a bribe to get a benefit for the company that comes from an act arising out of an exercise in discretion by the government official? Is the agent paying a bribe seeking an outcome to which the company is not otherwise entitled? Is there an improper advantage being sought by the third party for the company? How are the bribes being recorded in the accounting records of the company? Who in management knew what was going on and when? What, if any, corrective action did management take upon discovering the irregularity?
Facilitation payments are of the highest concern (see also comments re hospitality below). The U.S. is the only jurisdiction that allows facilitation payments, save one. While bribes seem a routine part of doing business in the world, the fact is, under the laws to which most countries are signatories, bribes and facilitation payments are not allowed, with the notable exception of Thailand, which is said to allow bribes to an equivalent of approximately US$37.00. Nonetheless, the law on the books and how things work in the real world are often quite different. In the end, the question is how strong is the company's due diligence program? What does it say on paper versus what are its true actions? What oversight exists over agents? Are those procedures on the books being enforced? Are agents truly really properly managed?
There is no question that customs brokerage/freight forwarding, medical devices, and big pharma are industries that continue under the microscope at Justice. Given the Green case, film-making may also be on that list, or will be added soon. At the same time, as Mr. Duross confirmed, the outcome of a case generally turns on knowledge. What did the company know and when? Did it conduct audits and promptly act on the resulting findings?
U.K. Bribery Act of 2010
Of course, one cannot discuss the FCPA without acknowledging the recently enacted U.K. Bribery Act of 2010 which can be found at: http://www.legislation.gov.uk/ukpga/2010/23/contents. An analysis of the Act by the U.K. Ministry of Justice is posted at: http://www.justice.gov.uk/publications/docs/bribery-bill-ia.pdf, and for even more details, see also http://www.justice.gov.uk/publications/bribery-bill.htm. The Act covers entities in the U.S., Scotland, Wales, and Northern Ireland. The criminal fines are potentially unlimited, and a sentence of up to ten (10) years is possible for each defendant.
The Act applies to U.K. companies, including conduct wherever it occurs that impacts those companies, and also to entities that conduct business in the U.K. So even a small subsidiary operating in any part of the U.K. could subject a foreign company to the Act.
The U.K. Act defines offenses as: 1) to give, promise, or offer a bribe, 2) agree to receive or accept a bribe, 3) bribe a foreign public official, and 4) failing to prevent a bribe. Similar to the FCPA, the corrupt action need not occur on U.K. soil to subject a company to enforcement; it only need impact the U.K. company. On the other hand, while the FCPA is focused on the bribery of government officials, the U.K. Act seeks to eliminate both the bribery of government officials and also private acts of bribery. It focuses on both the one offering the bribe and the one accepting it. Additionally, there is a corporate offense under the U.K. Act for failing to prevent bribery, which is a strict liability offense.
Much like the FCPA, the U.K. Act focuses on "associated persons," which likely includes employees, agents, partners, intermediaries, introducers, subsidiaries, and probably also consultants. While the U.K. has yet to issue implementation regulations, one concern is there appears to be no knowledge requirement. Providing some clarity, the U.K. Act states that having adequate company policies and internal controls in place is a defense. While that broad principle stands, we have yet to see whether any form of internal controls will be deemed adequate if bribery of any magnitude occurs.
Just as facilitation payments remain of great concern, so are hospitality payments. Whether under the FCPA or the U.K. Act, improper hospitality is as much an offense as an outright bribe. If a government official comes to the U.S. to inspect an operation, it is not acceptable to host him/her and family at an outing at one of the Disney or Universal theme parks. Similarly, validating data under a government audit in Scotland does not allow payment for the trip of that government official (with or without his family) to Euro Disney. While that might seem obvious, what about extravagant dinners? Surely they could become equally inappropriate under the right circumstances.
In the end, the necessary oversight program is the same whether the issue is trade compliance or anti bribery and in the U.S. or U.K. Has the Board adopted an appropriate resolution to set the tone from the top? Has that top-level leadership tone filtered down to other levels of management? Does the company have appropriate risk-management methods in place that consider products and countries among their relevant factors? What industries (e.g., high- versus- low risk, government-controlled or- licensed, etc.) is the company in? What is the method of international business (direct sales, distributorships, agency, etc.)? Are the policies well reasoned and widely distributed and known throughout the country? How are those policies and procedures implemented and enforced? How are the Dodd-Frank whistle-blower provisions factored into the companies policies and procedures?
At the same time, the U.K. Ministry of Justice has raised six (6) questions in its September 14, 2010, consultation guidance, see http://www.justice.gov.uk/consultations/docs/bribery-act-guidance-consultation1.pdf:
- Are there principles other than those set out in the draft guidance that are relevant and important to the formulation of bribery prevention in commercial organizations? If so, what are they and why do you think they are important?
- Are there any procedures other than those set out in the draft guidance that are relevant and important to a wide range of commercial organizations? If so, what are they and why do you think they are important?
- Are there any ways in which the format of the draft guidance could be improved in order to be of more assistance to commercial organizations in determining how to apply the guidance to their particular circumstances?
- Are there any principles or procedures that are particularly relevant and important to small -and medium -size enterprises that are not covered by the draft guidance and that should be? If so, what are they and why do you think they are important?
- In what ways, if any, could the principles in the draft guidance be improved in order to provide more assistance to small- and medium- size enterprises in preventing bribery on their behalf?
If you have any further comments on the form or content of the draft guidance, please enter them in the space provided. A survey seeking feedback in a uniform format has been posted at http://survey.euro.confirmit.com/wix5/p476673099.aspx. Additional comments may be sent to Bribery.Act@justice.gsi.gov.uk. The deadline to comment is November 8.
The Ministry of Justice has also published 6 broad categories for entities to populate when implementing their own internal controls:
- Risk assessment and mitigation;
- Top-level commitment to bribery prevention;
- Due diligence;
- Clear, practical, and accessible policies and procedures;
- Effective implementation; and
- Monitoring and review.
Enforcement will, of course, be taken through the Serious Frauds Office, where guidelines for prosecution are still being formulated by its Director in concert with the Director of Public Prosecutions. In Scotland, the Lord Advocate is responsible for the issuance of guidance for prosecutors in that country, whereas in Northern Ireland, the process will be overseen by the Director of Public Prosecutions for Northern Ireland.
Bribery of Foreign Customs Officials
At the end of the JOC webinar, the most interesting question was: When will an investigation be started that deals with the bribery of foreign customs officials? It is one thing to look at the brokerage/forwarding industry and keep in mind that Panalpina is reported to have set a reserve of $110+ million to cover potential fines by Justice and SEC for possible FCPA violations. But, indeed, when is the bribery of foreign customs officials going to fall under the glare of a global spotlight, and not just that of U.S. authorities?