February 7, 2007
This client update provides an overview of Foreign Corrupt Practices Act ("FCPA") enforcement activities in 2006, a discussion of the trends we see from that activity, and practical guidance to help companies avoid or limit FCPA liability.
The FCPA’s anti-bribery provisions make it illegal to make payments of money or anything of value to any foreign government official or foreign political party in order to obtain or retain business or secure any improper advantage. The anti-bribery provisions apply to "issuers," "domestic concerns," and "any person" that violates the FCPA while in the territory of the United States. The term "issuer" covers any business entity that is registered under 15 U.S.C. § 78l or is required to file reports under 15 U.S.C. § 78o(d). In this context, foreign issuers whose ADRs are traded on U.S. exchanges are "issuers" for purposes of this statute. The term "domestic concern" is even broader and includes any U.S. citizen and any business entity that is organized under the laws of a U.S. state or that has a principal place of business in the United States.
In addition to the anti-bribery provisions, the FCPA’s books and records provision requires issuers to make and keep accurate books, records, and accounts, which, in reasonable detail, accurately and fairly reflect the issuer’s transactions and disposition of assets. Finally, the FCPA’s internal controls provision requires the issuer to devise and maintain reasonable internal accounting controls aimed at preventing and detecting FCPA violations.
2006 marked one of the busiest years in FCPA enforcement and further evidenced the recent proliferation of FCPA enforcement activity. Several high-profile FCPA enforcement actions, including charges against four companies and numerous individuals, were brought by either the Department of Justice ("DOJ") or Securities and Exchange Commission ("SEC"). Along with this explosion of enforcement activity comes warnings from the DOJ and the Federal Bureau of Investigation of "increased vigilance" in pursuing FCPA cases. For example, in a speech on October 16, 2006, Assistant Attorney General Alice Fisher made clear that the FCPA is a "high priority":
Do we care about the FCPA? Is the FCPA relevant in today’s global business climate? Is enforcing the FCPA a high priority? The answer to all of those questions is yes. Prosecuting corruption of all kinds is a high priority for the Justice Department and for me as head of the Criminal Division. That includes public corruption, corruption in the procurement process, and the Foreign Corrupt Practices Act.
Among the most important enforcement actions against corporations are:
On April 27, 2006, the SEC announced that Oil States International, Inc., a Houston-based oil drilling service provider, had consented to the entry of an administrative order requiring the company to cease and desist from committing any future books and records or internal controls violations. The SEC did not impose any financial penalties on Oil States.
This case involved alleged improper payments made by a Venezuelan subsidiary of Oil States International to officials of Venezuela’s state-owned oil company, Petroleos de Venezuela, S.A. ("PDVSA"). The Venezuelan subsidiary had hired a consultant to interface with the PDVSA. The consultant, together with three of the subsidiary’s employees, then engaged in a kickback scheme whereby the subsidiary paid approximately $348,000 in improper payments to PDVSA employees. After discovering the kickback scheme, Oil States undertook extensive corrective and remedial measures and voluntarily reported its findings to the SEC and DOJ. In declining to impose financial penalties, the SEC noted that it considered Oil States’ extensive remedial acts and its cooperation with the SEC staff.
On October 16, 2006, the DOJ and SEC announced a plea and settlement with Schnitzer Steel Industries, Inc., based in Portland, Oregon, and its foreign subsidiary, SSI Korea. In the plea documents, SSI Korea admitted that it violated the FCPA’s anti-bribery provisions by making more than $1.8 million in corrupt payments over a five-year period to government-owned steel mill managers in China. SSI Korea made the payments to induce the steel mill managers to purchase scrap metal from Schnitzer Steel. The bribes, which took the form of commissions, refunds, and gratuities via off-book bank accounts, led to a substantial increase in business. In addition, the SEC also alleged that Schnitzer Steel violated the FCPA’s books and records and internal controls provisions.
To settle the criminal and administrative charges levied against it for violating the FCPA, Schnitzer Steel agreed to pay a total of $15.2 million. In the criminal proceeding, the company’s wholly owned subsidiary, SSI Korea, pleaded guilty to violations of the FCPA’s anti-bribery and books and records provisions. SSI Korea agreed to pay a $7.5 million criminal fine. The DOJ deferred prosecution against Schnitzer Steel, the parent corporation. In the deferred prosecution agreement, Schnitzer Steel accepted responsibility for the conduct of its employees and agreed to enhance its internal compliance measures. The deferred prosecution agreement also provided for the appointment of an independent compliance consultant to review Schnitzer Steel’s compliance program and monitor the implementation of new internal controls related to the FCPA. In the parallel SEC administrative proceeding, Schnitzer Steel consented to the entry of a cease-and-desist order and agreed to pay a $7.7 million civil penalty.
On October 13, 2006, the DOJ and SEC announced that Statoil ASA, an international oil company in Norway whose ADRs are traded on the New York Stock Exchange, had agreed to pay a total of $21 million to settle criminal and administrative charges for violating the FCPA’s anti-bribery and accounting provisions. Pursuant to a deferred prosecution agreement, Statoil agreed to a $10.5 million criminal penalty and the appointment of an independent compliance consultant who will review and report on Statoil’s FCPA compliance. In the parallel SEC administrative proceeding, Statoil consented to the entry of an administrative order requiring the company to cease and desist from committing any future FCPA violations, and to pay disgorgement of an additional $10.5 million.
The DOJ and SEC also aggressively pursued individuals last year who were alleged to have violated the FCPA:
The four employees consented to the entry of final judgments that (1) permanently enjoined them from future FCPA violations, (2) ordered each to pay a civil penalty ($50,000 as to Samson, and $40,000 each for Munro, Campbell, and Whelan), and (3) ordered Samson to pay $64,675 in disgorgement and prejudgment interest.
This action derived from another proceeding in 2004, in which ABB subsidiaries pleaded guilty to violating the anti-bribery provisions of the FCPA and ABB entered into a cease-and-desist order with the SEC.
On December 8, 2006, the Second Circuit issued an opinion in U.S. v. James H. Giffen, 473 F.3d 30 (2d. Cir. 2006). This case involved an interlocutory appeal by the DOJ from the district court’s order in the FCPA trial denying the government’s motion to preclude Giffen from raising a defense that he was authorized to act by public officials ("public authority defense"). Giffen had argued that he was a government informant, acting on behalf of "an agency of the U.S. government," and therefore he lacked the corrupt intent necessary to sustain an FCPA violation. The district court had ruled previously that Giffen was entitled to review classified government documents to assess the viability of his public authority defense. But when Giffen proffered the classified documents to use at trial in support of his public authority defense, the government objected and moved to preclude the defense. The district court overruled the objection and permitted Giffen to present evidence of a public authority defense at trial. The government appealed. The Second Circuit refused to hear the appeal, however, after determining that the government’s interlocutory appeal was premature. Nevertheless, in dicta, the Court opined that the district court may have misunderstood the requirements of the public authority defense. According to the Second Circuit, the defense would not apply in this case because the evidence proffered by Giffen showed only that he may have been a government agent charged with "stay[ing] close to the President [of Kazakhstan]" and reporting possible criminal activity to U.S. authorities. This authority did not authorize Giffen to violate the FCPA as alleged in the indictment.
A review of FCPA actions pending in 2007 suggest that the trend of increasing enforcement will continue. Following are several examples:
The district court dismissed the indictment, holding that the statutory language "to obtain or retain business" applied only to payments that lead directly to the obtaining of new or the retaining of old business, which, the district court held, had not occurred here. United States v. Kay, 200 F. Supp. 2d 681 (S.D. Tex. 2002). The Fifth Circuit, however, reversed the district court’s decision. United States v. Kay, 359 F.3d 738 (5th Cir. 2004). Relying on the legislative history of the FCPA and its amendments, the court held that Congress intended the "obtain or retain business" language to apply to any payments to foreign officials intended to either directly or indirectly assist the payor in obtaining or retaining business. The Fifth Circuit noted that bribes to foreign officials to secure illegally reduced customs and sales taxes, if intended to assist someone in obtaining or retaining business, could fall with the FCPA’s anti-bribery provisions.
After remand, a jury found Kay and Murphy guilty of violating the anti-bribery provisions of the FCPA. In June 2005, the Court sentenced Kay to 37 months imprisonment and Murphy to 63 months imprisonment. Both defendants have appealed their convictions and sentences; the appeals are currently pending in the Fifth Circuit. One of the issues before the Fifth Circuit will be whether the district court properly instructed the jury on the mens rea element of an offense under the FCPA. The DOJ acknowledged that the district court failed to properly instruct the jury that the FCPA has both "willfulness" and "corruptly" elements. Nevertheless, the parties disagree about the meaning of "willfulness" under the FCPA, and, specifically, whether the FCPA requires a showing by the government that the defendant acted with intent to violate the FCPA.
On October 16, 2006, the DOJ issued its first FCPA Opinion Procedure Release since September 3, 2004. The DOJ stated that it would not take enforcement action against a company proposing to contribute $25,000 to the customs department of an African country. In approving the transaction, the DOJ noted that there was no corrupt intent associated with the payment and that the payment was to the government and not to a foreign official. In commenting on the release, Assistant Attorney General Alice Fisher remarked that "the FCPA opinion procedure has generally been under-utilized" and that she wants it "to be something that is useful as a guide to business."
With the increase in enforcement activity, we see several important trends developing in the arena of FCPA enforcement, many of which were directly addressed by Assistant Attorney General Fisher in her recent speech.
The number of voluntary disclosures continued to rise in 2006. Seventeen of the twenty newly disclosed FCPA investigations during the past two years were voluntarily disclosed to the DOJ or SEC following internal investigations by the companies. In the early 2000s, by contrast, the government initiated most of the reported investigations. In encouraging companies to voluntarily disclose transgressions, Assistant Attorney General Fisher noted that, although the result of voluntary disclosure is uncertain, it will result "in a real, tangible benefit." As explained below, there are various factors a company must consider when deciding whether to voluntary disclose an FCPA violation.
In several of the most recent FCPA dispositions, the DOJ and SEC have required the company to appoint monitors or consultants to ensure FCPA compliance. In addition to ABB, Diagnostic Products Corporation, DPC (Tianjin) Ltd., InVision, Micrus, Monsanto, and Titan, all of which were required to make such appointments in the past few years, in 2006 both Schnitzer Steel and Statoil were required to hire a compliance consultant to review the company’s system of FCPA internal controls. Notwithstanding this recent trend, however, Assistant Attorney General Fisher explained that "there is no presumption that a compliance consultant is required in every FCPA disposition." According to Ms. Fisher, when considering whether to require a compliance consultant, the DOJ will consider "the strength of the company’s existing management and compliance team, the pervasiveness of the problem, and the strength of the company’s existing FCPA policies and procedures."
Enforcement activity in 2006 continued the trend of increasing the severity of penalties. Looking back, the SEC first required a company to disgorge the profits of its unlawful FCPA activities in 2004. Today, the practice appears to have become standard fare. In October 2006, for example, Statoil ASA agreed to a DOJ fine of $10.5 million and SEC disgorgement of an additional $10.5 million. Schnitzer Steel’s Korean subsidiary agreed to a DOJ fine of $7.5 million while Schnitzer Steel agreed to pay the SEC $7.7 million in disgorgement and prejudgment interest.
U.S. enforcement authorities have shown a willingness to reach far and wide outside traditional jurisdictional boundaries and think creatively when assessing the connection that the company or activity has with the United States. The Statoil matter marked the first time that the DOJ has taken criminal enforcement action against a foreign issuer for violating the FCPA. Assistant Attorney General Fisher noted that the criminal enforcement action against Statoil was intended as "a clear message" to foreign companies trading on the American exchanges that they must comply with U.S. laws. Ms. Fisher added that "[t]his prosecution demonstrates the Justice Department’s commitment vigorously to enforce the FCPA against all international businesses whose conduct falls within its scope."
Although the FCPA does not grant a private right of action, 2006 may have created a glimmer of promise for hopeful securities, class-action plaintiffs under the FCPA. Following Immucor’s announcement of a formal SEC investigation into allegations of an improper payment under the FCPA, a shareholder class filed a complaint under §§ 10-b and 20(a) of the Exchange Act. In re Immucor Inc., No. 1:05-CV-2276-WSD, 2006 WL 3000133 (N.D. Ga. Oct. 4, 2006). The suit alleged that Immucor’s statements in securities filings, two of its press releases, and an analyst teleconference — all of which tended to underplay the severity of the potential FCPA violations — constituted material misstatements and omissions. Notably, similar shareholder suits against InVision Technologies and Syncor International Corporation had been dismissed by district courts for failure to meet the pleading requirements of the Private Securities Litigation Reform Act ("PSLRA"). On October 4, 2006, the District Court for the Northern District of Georgia denied Immucor’s motion to dismiss the shareholder claim. The court found that the plaintiffs had adequately alleged false or misleading statements, that the facts alleged regarding the various statements (notably an attribution of the payments’ costs to "bookkeeping" errors) did support the heightened pleading requirements as to scienter under the PSLRA. In other words, for the first time, a federal court held that plaintiffs had met the heightened pleading requirement for fraud under the PSLRA in an FCPA case.
Currently, more than 24 other major corporations are under SEC investigation for FCPA violations. This landscape may provide fertile ground for plaintiffs’ counsel in search of a class to fashion FCPA-based suits. Though corporate defendants historically have succeeded in challenging the standing of FCPA-based shareholder actions, cases like Immucor suggest that, especially in the current environment of heightened scrutiny, such claims may start to gain traction. Regardless of outcome, however, one thing is clear: the legal road towards resolving an FCPA violation in the U.S. now stretches far beyond achieving peace with the SEC.
Also of special note is the United Nations Convention Against Corruption, which requires member states to provide a private right of action for those who suffer damages as a result of an "act of corruption." The U.S. Senate provided its Advice and Consent to the U.N. Convention on September 15, 2006, but in so doing, specifically made the reservation that U.S. law would remain unchanged and that no new private right of action was created in the U.S. Nevertheless, to date 140 countries have become signatories to the U.N. Convention and it has been ratified by 80 countries. Thus, although U.S. law remains unchanged, U.S. companies should be aware that other countries may provide for a private right of action, which could subject U.S. companies to increased litigation in foreign jurisdictions.
In light of developments over the past year concerning the FCPA, we offer the following guidance to our clients and friends.
Although not mandated by the FCPA, voluntary disclosure of an FCPA violation to the DOJ and/or SEC, as appropriate, may help a company avoid prosecution or obtain partial mitigation of civil and criminal penalties. Although there is no way to quantify the mitigation impact of a voluntary disclosure, a review of the Statoil, Schnitzer Steel, and Oil States International cases suggests strongly that voluntary disclosure and exceptional cooperation can result in relatively lenient criminal and administrative sanctions. Schnitzer Steel, for instance, voluntarily disclosed its wrongdoing to the DOJ, conducted an extensive internal investigation, shared the results of the investigation promptly, cooperated extensively with the DOJ’s ongoing investigation, took appropriate disciplinary action against wrongdoers, replaced senior management, and took additional significant remedial actions, including the implementation of a robust compliance program. Assistant Attorney General Fisher explained that Schnitzer’s "exceptional cooperation" … "was critical to its ability to obtain a deferred prosecution agreement" and a DOJ recommendation that it pay a fine "well below what it would otherwise have received." Ms. Fisher added that "voluntary disclosure followed by extraordinary cooperation with the Department results in a real, tangible benefit to the company."
Notwithstanding Ms. Fisher’s comments, however, the "credit" given for voluntary disclosure and cooperation in any particular case remains uncertain. Perhaps disposition of cases pending in 2007 will enlighten this further. In the meantime, however, corporations must weigh the potential benefits of a voluntary disclosure, including mitigation, against the costs of such disclosure, including the expense and resources required to cooperate with a government investigation, the uncertain scope of civil and criminal penalties, the risk and expense of private litigation, and the public relations and business consequences, both in the U.S. and overseas.
In the merger and acquisition context, and because of the substantial civil and criminal penalties possibly imposed for violations of the FCPA, corporations must remain focused on proper diligence before, during, and after the proposed acquisition. Of note, three recent FCPA enforcement actions (ABB, GE/InVision, and Titan Corporation) came to light during M&A due diligence.
Although the type and scope of FCPA due diligence required before an acquisition will vary depending on the particular risks involved, most pre-acquisition FCPA due diligence should contain the following elements:
To minimize exposure to penalties under the FCPA, companies should establish, implement, and maintain an effective FCPA compliance program. This program must be designed to deter violation of the FCPA and detect possible violations of the FCPA before they occur. An effective FCPA compliance program also must be tailored to a company’s size, line of business, scope of international operations, and associated risk of violating the FCPA, among other factors. At the very least, an effective compliance program should contain the following:
Given the continued proliferation of FCPA enforcement activity in 2006, we expect U.S. authorities to initiate an increasing number of enforcement actions in the next few years and to seek more severe penalties for FCPA violators. A company’s investment in an effective FCPA compliance program could help it avoid liability altogether or reduce the severity of penalties imposed against the company if it or one of its officers, directors, employees or agents violates the FCPA.
Gibson, Dunn & Crutcher lawyers are available to assist in addressing any questions you may have regarding these issues. We have more than ten attorneys with substantive FCPA expertise. Please contact the Gibson Dunn attorney with whom you work, or F. Joseph Warin (202-887-3609, [email protected]), Daniel J. Plaine (202-955-8286, [email protected]), Judith A. Lee (202-887-3591, [email protected]), Jim Slear (202-955-8578, [email protected]), Andrew S. Boutros (202-887-3727, [email protected]), or Jeremy A. Bell (202-887-3508, [email protected]) in the firm’s Washington, D.C. office, Robert C. Blume (303-298-5758, [email protected]) or J. Taylor McConkie (303-298-5795, [email protected]) in the Denver office, Nicola T. Hanna (949-451-4270, [email protected]) in the Orange County office, or Debra Wong Yang (213-229-7472, [email protected]), the former United States Attorney for the Central District of California, in the Los Angeles office.
© 2007 Gibson, Dunn & Crutcher LLP
The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.