A series of recent developments at the Securities and Exchange Commission ("SEC") and the United States Department of Justice ("DOJ") signal an increased emphasis on the Foreign Corrupt Practices Act of 1977 (the “FCPA”)and anti-corruption enforcement.
The SEC has established a specialised FCPA task force, headed by an experienced enforcement attorney, increasing incentives for cooperation. The Senate has just passed the Financial Regulatory Bill, which among other things, creates a "whistleblower bounty" allowing whistleblowers who report securities violations to recover part of any settlement that exceeds $1 million.
On the DOJ side, the Fraud Section, which saw the departure of long-time Deputy Chief and head of FCPA enforcement, Mark Mendelsohn, has shown no signs of slowing down as they move to a new level of aggressive investigative techniques, targeting of individuals and increased hiring of new prosecutors.
CHANGES AT THE SEC
Robert Khuzami, the Director of Enforcement at the SEC, has set out to reengineer the division to encourage aggressive investigation and enforcement of the securities laws, and in particular the FCPA.
Khuzami has created a number of specialized task forces, most prominently a new FCPA Task Force that will look to step up FCPA enforcement at the Commission. In a January 13, 2010 statement accompanying the announcement of the new units, Khuzami said:
“[e]ach [unit] will utilize enhanced training, hiring of and consultation with individuals with industry experience or other specialized skills, targeted investigative approaches, and in some cases new technology, to conduct more efficient and comprehensive investigations.”
Khuzami appointed Cheryl Scarboro, a veteran enforcement attorney as head of the new FCPA unit. In her remarks, Scarboro signaled that the unit was likely to step up the SEC’s role in FCPA enforcement:
“A primary mission of this Unit is to devise ways for us to be more proactive in our enforcement of the FCPA. Members of the FCPA Unit will gain in-depth knowledge of industries and regional practices so we can uncover corrupt practices that might otherwise go undetected. We will also conduct more targeted sweeps and sectorwide investigations, alone and with other regulatory counterparts both here and abroad.”
At the same time as creating the new specialized units, the Enforcement Division announced that the Commission had approved the increased use of incentives for cooperation. Khuzami introduced three new tools that would be available to the FCPA unit and others within the SEC:
- Cooperation Agreements. They are formal written agreements in which the Division of Enforcement agrees to recommend to the Commission that a cooperator receive credit for cooperating in its investigations or related enforcement actions. Such credit will only be extended if the cooperator provides substantial assistance in those investigations and enforcement actions.
- Deferred Prosecution Agreements. These are formal written agreements in which the Commission agrees to forego an enforcement action against a cooperator -- if the individual or company agrees to cooperate fully and truthfully and to comply with certain reforms, controls and other undertakings.
- Non-prosecution Agreements. These are formal written agreements, entered into under very limited and appropriate circumstances, in which the Commission agrees not to pursue an enforcement action against a cooperator. Here too the agreement would only be entered if the individual or company agrees to cooperate fully and truthfully in connection with an investigation or enforcement action and to comply with express undertakings.
These tools are already widely used by DOJ and the U.S. Attorney’s office, but had been unavailable to the SEC staff. Their inclusion in the investigatory arsenal will likely give increased flexibility in encouraging cooperation between individuals and companies that engage in active cooperation. We are thus likely to see more cases where company insiders with real issues of culpability are seeking early cooperation in order to qualify for one of these programs.
Finally, FCPA enforcement would also be aided by proposals under the Financial Regulatory Bill, which expands the existing bounty program to pay tipsters who report on insider trading. The measure would apply to any securities violation including SEC investigations in FCPA cases. Recovery for whistleblowers would be limited to between 10 and 30 percent.
The Bill was passed by Senate on 20 May The measure will now move to a house senate conference,
INCREASED DOJ PRESSURE
In January of this year, the DOJ announced that they had arrested 22 individuals, 21 of them attendees at a Las Vegas gun show, in connection with a sting operation in which officers and owners of small arms and armor companies had been approached by an individual purporting to represent a foreign government.
The companies were offered lucrative contracts, if they were willing to pay under the table bribes to supposed government officials. In reality, this was an undercover operative, engaging in what was the first significant use of undercover and electronic surveillance techniques against companies suspected of engaging in illegal activity.
The DOJ utilized techniques such as wire taps and computer searches that had typically been reserved for major narcotics or racketeering investigations. The Department has made clear that it intends to continue this use of nontraditional, proactive law enforcement to combat corruption in the U.S. and overseas.
As part of this effort the Government has also stepped up its actions against individuals. The rise of prosecutions against individuals has grown dramatically in recent years. The 22 arrests in the Gun show case were just a part of the recent efforts to go after individuals suspected of violating the FCPA. The Government is also seeking longer prison sentences against individuals. Charles Jumet, a Virginia businessman, received an 87 month sentence on an FCPA case. Assistant U.S. Attorney General Lanny Breuer hailed the decision as “a milestone in our efforts to deter foreign bribery” and confirmation that “foreign corruption carries with it very serious penalties, which can include substantial prison time for individuals who violate the law".
Companies with ties to the United States, even if only though the capital markets, can expect to see renewed vigour from the SEC and DOJ in fighting international corruption. Long the leader in these areas, U.S. regulators seem determined not to let the emerging global interest in the fight against bribery and corruption take anything away from U.S. enforcement efforts. Especially given the recent revisions to the U.S. Sentencing Guidelines clarifying cooperation requirements, companies with ties to the U.S. will find it is now more important than ever to place additional resourced into their compliance and ethics programs, both to prevent wrongdoing in the first place, and to mitigate any penalties if it occurs despite best efforts.