On 18 January 2010, 22 business executives were arrested and over 100 FBI agents conducted related searches. These actions were based on sealed federal indictments handed down by a grand jury several weeks earlier, which in turn stemmed from a two-and-a-half year undercover operation.
The indictments claimed that the defendants believed that they were involved in a scheme to acquire a US$15 million defense contract to outfit the presidential guard of an unnamed country. They allegedly agreed to pay a 20 percent bribe to a sales agent, supposedly representing the defense minister but really an undercover FBI officer. This was the first large-scale use of undercover law enforcement techniques to investigate Foreign Corrupt Practices Act (FCPA) violations.
With those indictments, federal law enforcement officials announced to the world that the FCPA landscape has changed. Although perhaps the most dramatic shift, the use of undercover operatives is only one of several new FCPA enforcement techniques. The legal and business communities now know that the U.S. Department of Justice (DOJ) is making good on its promise to crack down on companies which seek to bribe foreign officials in the course of business.
What is the FCPA?
The FCPA makes it illegal for any person acting on behalf of a domestic or foreign company listed on a United States stock exchange to give anything of value to a foreign government official in order to obtain or retain business, or to secure an improper business advantage. Under certain circumstances and in some countries, nearly every aspect of the approval, manufacture, import, export, pricing, sale, or marketing of a product will involve a “foreign official” as defined by the Act.
While the FCPA’s record-keeping and internal control provisions apply only to “issuers” – companies with securities traded on a United States stock exchange or otherwise required
to file periodic reports with the Securities and Exchange Commission (SEC) – its anti-bribery provisions apply equally to “domestic concerns.”
These include “any corporation, partnership, association, joint-stock company, business trust, unincorporated organization, or sole proprietorship” with a principal place of business in the United States or organized under its law. Thus, these provisions apply to public and private companies. Indeed, several recent FCPA enforcement actions targeted foreign activities by private American firms.
The FCPA came into force in 1977, but was initially rarely used. Since 2005, though, several enforcement trends have appeared. First, the DOJ and SEC have increased the number of FCPA prosecutors and investigators and brought more cases. Second, the investigations have grown more aggressive, targeting individuals as well as companies. Third, companies have begun to disclose potential violations to law enforcement officials before an investigation has begun. Finally, and more recently, officials are looking more at small and mid-sized companies.
More cases: Since 2005, the DOJ has brought over 60 FCPA cases – more than the total between 1977 and 2005. The Fraud Section of the DOJ’s Criminal Division has developed a group of experienced prosecutors who specialize in this work. Separately, in 2007 the FBI created in its Washington Field Office a squad of dedicated FCPA agents which has since grown in size and experience. The SEC has also created a specialized FCPA unit to focus on new and proactive approaches to identifying violations.
At the end of 2009, the DOJ and SEC combined were pursuing more than 120 FCPA investigations. The penalties can sometimes be dramatic, such as the US$1.6 billion in fines, penalties, and profit disgorgement that Siemens paid in 2008 for FCPA and bribery violations.
Federal officials are not only bringing cases for FCPA violations; they are also charging firms with lying to federal officials about compliance programs. For example, in early 2010 BAE Systems entered separate settlements with the DOJ and Britain’s Serious Fraud Office to settle long-standing investigations of improper payments. The criminal information filed in the American case claimed, in particular, that the company had made certain false and incomplete statements to the US government and failed to honor its undertakings to scrutinize payments to consultants, consistent with the FCPA.
On 1 March 2010, a federal judge approved the settlement in which BAE pleaded guilty to conspiracy and false statements about its FCPA compliance plan. The company agreed to pay US$400 million to the US and US$47 million to British authorities.
More aggressive enforcements: As the example at the beginning of this article shows, law enforcement is not simply waiting for a whistleblower or competitor to inform on a company’s overseas activities. The DOJ is employing tactics usually reserved for drug or organized crime investigations. After this success, prosecutors and agents will likely maintain this proactive stance, and undercover operations, wiretaps, and other covert law enforcement tools will be brought into more investigations.
Officials are also increasingly targeting individuals. The number of individuals prosecuted by DOJ under the FCPA has increased 700% from 2006. Acting Assistant Attorney General Matthew Friedrich has emphasized that “corporate executives who bribe foreign government officials in return for lucrative business deals can expect to face prosecution.”
Indeed, the list of executives going to prison after FCPA convictions is growing. Mark Mendelsohn, Deputy Chief of the DOJ’s Fraud Section, noted in 2008 that the number of individuals prosecuted “has risen – and that’s…quite intentional on the part of the Department. It is our view that to have a credible deterrent effect, people have to go to jail... This is a federal crime. This is not fun and games.”
The damage to companies does not end with high fines and jailed executives. Shareholders have begun to bring civil actions against companies based upon FCPA violations. They alleged that poor oversight and lack of internal controls enabled a pervasive environment of misdeeds and corruption, resulting in enforcement actions and substantial government penalties that have severely damaged investors’ holdings.
Other counties are also stepping-up their enforcement. The United Kingdom has just passed a new Bribery Law. The legislation is broader in scope with stiffer penalties than the FCPA.
More self-disclosure: Law enforcement officials have stated that companies self-disclosing potential FCPA violations will be treated favorably when prosecution and fines are determined. While the US Sentencing Guidelines allow for mitigation of a sentence based upon a company’s self-disclosure, a firm cannot predict what benefit it will receive.
The goal is a deferred prosecution agreement with the DOJ. This allows a company to enact reforms in exchange for the case being dismissed after a period of time. There have been few such agreements related to FCPA cases, but they do exist. In 2005, for example, Monsanto settled FCPA charges by agreeing to pay US$1.5 million in criminal and civil fines and penalties and to be bound by a three-year deferred prosecution agreement.
Despite these uncertainties, companies are better off coming forward once a violation is discovered – usually through pre-merger or other due diligence efforts – rather than waiting for a federal grand jury subpoena. Since 2005, approximately 70% of FCPA cases initiated by the DOJ have been based on self-disclosure. The number of self-reported FCPA violations will rise as law enforcement continues its focus on the FCPA and as small and mid-sized companies begin to scrutinize their overseas work.
Court-enforced monitor relationships may also increase. On 12 January 2010, the US Sentencing Commission voted to propose changes to the Sentencing Guidelines when probation is ordered.
These include not only the retention of an independent corporate monitor to be paid for by the organization, but also unannounced examinations of corporate books, and an amendment to the Guidelines’ application notes – which can be relied upon by a court – to clarify the expectation that, in order to avoid any legal liability, high-level personnel must conform to any policy that is part of an effective compliance program. In short, the proposals indicate a renewed spotlight on corporate compliance arrangements and their ability to uncover violations.
More focus on small and mid-sized companies: As part of their increased FCPA-related efforts, the DOJ and SEC are expected to look more at small and mid-sized firms which do business overseas. The majority of such companies have a small established compliance program, or none at all, yet some may conduct billions of dollars in foreign transactions.
Companies that are not household names have long believed that they were under law enforcement’s radar. Smaller firms have also thought that the DOJ would not expend the resources to investigate their overseas sales. That comfortable illusion no longer exists. The companies involved in the January sting operation described above, for example, are not well known.
In another recent case, John W. Warwick and Charles Jumet pleaded guilty to conspiring to make corrupt payments to foreign government officials in order to secure business for Ports Engineering Consultants Corporation (PECC). The company, incorporated under Panamanian law, was affiliated with a U.S engineering firm.
According to the indictment, PECC was created so that Warwick, Jumet, the firm itself, and others could corruptly obtain certain maritime contracts from the Panamanian government. Court documents claim that the defendants – participated in a conspiracy to pay money secretly to Panamanian government officials in return for a no-bid 20-year concession to maintain lighthouses and buoys along Panama’s waterway.
What makes this prosecution interesting is the small amount of money involved. For six years, the conspirators made corrupt payments totaling approximately $331,000 to the former administrator and deputy administrator of the Panama Maritime Authority and to a former high-ranking elected executive official of the Republic of Panama. That figure pales in comparison with other FCPA cases the DOJ has brought. It clearly demonstrates that the authorities are prepared to seek criminal indictments for individuals and companies that violate the FCPA, regardless of the size of the company or the suspected illegal payment.
American law enforcement officials have signaled to the world that they will aggressively combat FCPA violations. More investigations, indictments, and corporate executives being sent to prison are certain to follow. Companies that do not ensure compliance with the FCPA run a great risk to their organizations, as well as to their executives and directors.
About the Author
Jeffrey Cramer is a Managing Director and head of Kroll’s Chicago office. He was previously a prosecutor in New York and Chicago and has investigated several FCPA cases during his 13 years in law enforcement. This article first appeared in the April 2010 issue of Kroll's Global Fraud Report.