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Issue 2 - April 2010

Understanding the Foreign Corruption Dragnet

The Foreign Corrupt Practices Act (FCPA) has been in effect for more than 30 years and similar anticorruption legislation in many other countries has been in force for more than a decade. Recently, however, the U.S. Department of Justice (DOJ), the U.S. Securities and Exchange Commission (SEC) and regulators around the world have pursued aggressive and collaborative enforcement to produce a rising tide of indictments, civil enforcement actions, fines, and other penalties.

This new landscape has altered the way corporations conduct international business, bringing serious long-term consequences for violations. Boards and executives who are unprepared to deal with this challenge are increasingly finding themselves in the crosshairs of regulators – and paying a steep price.

Over the past several years, government authorities have extended the focus of their investigations and prosecutions beyond corporate entities to include individual executives. Indeed, in 2009 nearly 70% of the 40 FCPA actions brought by the DOJ and SEC targeted individuals, resulting in fines, jail time, and other penalties – a noticeable increase compared with recent years (see table overleaf). In 2009, the DOJ prosecuted 44 individuals, significantly more than 2008 (11 individuals), 2007 (10), and 2006 (three) combined. The trend of targeting and prosecuting individuals has continued into 2010: in January, the DOJ arrested and indicted 22 individual defendants as a result of a wide-ranging sting operation focused on overseas bribery in the military and law enforcement products industry. Speaking in February this year, Lanny Breuer, Assistant Attorney General for the DOJ, stated: “The prospect of significant prison sentences for individuals should make clear to every corporate executive, every board member, and every sales agent, that we will seek to hold you personally accountable for FCPA violations.”

These developments have given corporate executives the added incentive to exert more oversight and due diligence regarding their company’s operations. Boards and senior executives must get up to speed quickly to protect their corporations – and themselves – from the effects of overseas business corruption and related enforcement actions. To be effective, forward-thinking and responsible board members and senior executives must gain a basic understanding of the FCPA, its application, and the repercussions of violations. Once equipped with this knowledge, board members should verify that their company has implemented the necessary steps to ensure compliance. By taking these actions, a company can avoid the costs associated with violations and, if corruption occurs, have more flexibility to navigate a government investigation.

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A Spike in Multinational Enforcement

Until the past several years, the prosecution of overseas business corruption was viewed as a U.S. phenomenon, and principally through the prism of the FCPA. Today, however, some 38 countries have adopted FCPA-like statutes, and many countries have domestic anticorruption legislation that applies to a foreign company and its employees doing business in their country. While the level of commitment to enforcement and collaboration varies among international jurisdictions, there’s no question that countries around the world have taken a more concerted and coordinated international interest in combating commercial corruption, as evidenced by multinational investigations and prosecutions of Alcatel, Siemens, and Statoil. Indeed, in May, a new bribery bill is expected to become law in the UK, which will be even stricter than the U.S. FCPA and will provide for more serious penalties.

In general, the FCPA and similar statutes have three essential elements. First, employees or representatives of companies are prohibited from offering money or anything of value to officials of foreign governments to obtain or retain business. Second, companies are required to keep books and records that are an accurate reflection of their transactions and payments (for example, a payment to a foreign government official must be reflected as such). Third, companies must design and implement internal controls to uncover and prevent FCPA violations. The first element, known as the antibribery provisions, are criminal violations enforced in the U.S. by the DOJ; and the remaining two, known as the books and records provisions, are principally enforced by the SEC.

While enforcement actions under the FCPA by government authorities against global corporations have been rising steadily for several years, prosecutions and penalties reached an all-time high in 2009. The DOJ brought a record 26 actions in 2009, the highest number ever, and the SEC brought another 14. Several recent trends have pushed overseas business corruption and fraud to the forefront:

• There is a growing global awareness that engaging in corrupt activity is an improper way to conduct business.
• Effective FCPA enforcement in the U.S. has required companies to do more to deter and detect overseas business corruption and investigate allegations of improper activity.
• Increased resources for enforcement combined with better cooperation among government agencies around the world have led to more vigorous prosecution.
• Law enforcement is now explicitly targeting individual executives, in addition to companies.
• Regulators are undertaking more creative legal theories to pursue and charge companies and executives.
• Law enforcement agencies are using more aggressive investigative tactics, such as sting operations and wiretaps, to detect and prosecute corrupt behavior.

As a result, government regulators are imposing higher fines while still committing comparatively modest (but growing) resources. Ten years ago, fines and penalties might have ranged from $100,000 to $10 million; they are now much larger. Siemens settled a case for $1.6 billion in 2008, and Halliburton paid a penalty of $559 million in 2009 to settle a case involving its former subsidiary KBR.

The Impact of an FCPA Investigation

Boards and senior executives have an opportunity – and the responsibility – to protect their companies and themselves in the face of increasing global investigation and enforcement of anticorruption legislation. The costs of being unaware or underprepared are substantial: as noted above, the penalties resulting from an FCPA investigation have increased exponentially.

Recent developments have only added to the total financial impact on companies. Government regulators are able to force companies to “disgorge” profits related to corrupt activity, and regulators are pursuing broader, more creative methods to calculate these profits and exact a higher price from companies. Furthermore, companies found guilty of bribery are barred from bidding on contracts with U.S. and European Union governments. (See sidebar, right, “Proactive compliance.”)

Beyond the already formidable fines and penalties, the organizational disruption of mounting a defense against FCPA or similar allegations can be significant, and the legal fees astronomical. There is also the specter of massive collateral litigation, including class-action lawsuits; costs of investigation and remediation, including forensic accountants, investigators and other consultants; reputational damage; and the unappealing and expensive prospect of a third-party monitor to oversee a company’s compliance and reporting efforts. In the Siemens case, U.S. investigators and the company’s own defense attorneys collected more than 100 million documents, necessitating the creation of special facilities in China and Germany to house them all. Siemens’ legal and compliance fees over the course of the litigation reportedly totaled $1 billion.

While more difficult to quantify, the effect of a public FCPA investigation or conviction on a company’s reputation can be substantial. From investors who see a tainted company as a risk not worth taking to executives who don’t want to be associated with corruption, the knock-on effects can be lasting. For the UK defense contractor BAE Systems, the investigation into alleged bribery of Saudi officials to secure a £43 billion defense contract first surfaced in the 1980s. After several years of negative press comment and allegations of UK government intervention in the investigation, the matter was finally brought to a close in 2010 with the payment of fines totaling $445 million.

Of course, a legal settlement is not the end of the story. Companies that have been the target of an investigation must then go to great lengths to rebuild their reputations and demonstrate their commitment to anticorruption measures.

Boards Must Take Action

To mitigate the huge costs and other negative consequences of enforcement actions, board members have a responsibility to ensure their company has taken appropriate measures to deter and detect overseas corruption. By instituting measures such as those outlined below, the organization will be in a good position either to avoid a protracted government investigation or, if one is inevitable, at least manage it on more palatable terms.

Board members and executives in industries targeted by regulators – such as medical devices and supplies, energy and pharmaceuticals – may already be well aware of the FCPA and its overseas equivalents. Leaders at other companies, however, are much less familiar with the risks. All board members and senior executives should be prepared, and should consider the following preventive measures:

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