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When the Dust Settles

Documents used to resolve a typical FCPA enforcement action (whether a non-prosecution or deferred prosecution agreement, plea, or settled civil complaint) are often peppered with vague generalities.

This is not surprising given that there is little serious threat of defense challenges and/or judicial scrutiny.

One element that is often vaguely described is the “foreign official” recipient of the alleged bribe. (This is in contrast to what the U.K. SFO has been doing in some of its recent enforcement actions when it “names names” – see here and here).

For instance, in the recent Daimler action (see here), certain of the “foreign officials” are described simply as follows:

“Nigerian government officials,” “high-level members of the executive branch of the Nigerian government,” “high-level executive branch official of Nigeria,” and “a member of the Nigerian police force” and

“senior official of a [Egypt] government owned factory.”

Given the ease in which information now flows and the world-wide interest in corruption and bribery, FCPA enforcement actions are read around the world.

Not only by foreign government officials and law enforcement agencies, but also by foreign media, foreign-based non-governmental organizations, and just plain old people.

It is thus not surprising that when the dust settles on the U.S. FCPA enforcement action, many are left wondering … who are those “foreign officials”?

For the foreign government involved, it is potentially embarrassing to have “one of your own” (assuming that all “foreign officials” in FCPA enforcement actions are properly deemed as such) become the focus of a bribery investigation in the U.S. without doing something about it “at home.”

Thus, with increasing frequency, one sees stories such as this recent Reuters report which details how the Nigeria Economic and Financial Crimes Commission has begun to probe the alleged bribe payments to the Nigerian “foreign officials” mentioned above.

What about that “senior official of a [Egypt] government owned factory”?

I’ve been told that this issue has become sort of a guessing game in Egypt and that Egyptian authorities have launched an investigation (see here)

Whether such foreign government investigations are bona fide or merely politically expediate cover is a valid question.

However, the take-away point is that just because the U.S. Foreign Corrupt Practices Act enforcement action is over, does not necessarily mean that all the dust has settled. Often, other persons, for entirely different reasons, remain interested.

An Interesting Corollary

Last week’s guest post (here) about the 1988 amendments to the Foreign Corrupt Practices Act and the DOJ’s decision not to issue compliance guidance provides an interesting corollary to private rights of action under the FCPA.

How so?

Around the same general time frame as the 1988 FCPA amendments, several courts addressed the issue of whether the FCPA contained an implied private right of action.

The answer was no.

Guess what was a key factor in the courts’ reasoning?

The guidance that Congress envisioned the Attorney General would issue.

The leading FCPA private right of action case is Lamb v. Phillip Morris Inc., 915 F.2d 1024 (6th Cir. 1990).

Here is what the court had to say:

“Recognition of the plaintiffs’ proposed private right of action, in our view, would directly contravene the carefully tailored FCPA scheme presently in place. Congress recently expanded the Attorney General’s responsibilities to include facilitating compliance with the FCPA. See 15 U.S.C. §§ 78dd-1(e), 78dd-2(f). Specifically, the Attorney General must ‘establish a procedure to provide responses to specific inquiries’ by issuers of securities and other domestic concerns regarding ‘conformance of their conduct with the Department of Justice’s [FCPA] enforcement policy….’ 15 U.S.C. §§ 78dd-1(e)(1), 78dd-2(f)(1). Moreover, the Attorney General must furnish ‘timely guidance concerning the Department of Justice’s [FCPA] enforcement policy … to potential exporters and small businesses that are unable to obtain specialized counsel on issues pertaining to [FCPA] provisions.’ 15 U.S.C. §§ 78dd-1(e)(4), 78dd-2(f)(4). Because this legislative action clearly evinces a preference for compliance in lieu of prosecution, the introduction of private plaintiffs interested solely in post-violation enforcement, rather than pre-violation compliance, most assuredly would hinder congressional efforts to protect companies and their employees concerned about FCPA liability.”

Given that the expected Attorney General guidance was a key factor in the court’s reasoning that the FCPA does not contain a implied private right of action, how would a court address this issue today given that the Attorney General never issued the guidance?

Also, what about the snippet from the Sixth Circuit’s opinion – that the 1988 amendments “clearly evinces a preference for compliance in lieu of prosecution.”

In this era of so-called aggressive FCPA enforcement, does the DOJ have its priorities backwards

DOJ Guidance and the FCPA

That is the issue addressed by James Parkinson (Mayer Brown – see here) in the below guest post.

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As followers of this blog know well, the UK’s newly-enacted Bribery Act (here) calls for the UK government to “publish guidance about procedures that relevant commercial organisations can put into place to prevent persons associated with them from bribing…” Seeing this provision in the Bribery Act suggests the question whether similar guidance issued by the US government would be helpful.

As it turns out, the US government considered this very question over 20 years ago but declined to offer guidance to companies affected by the FCPA. In the 1988 amendments to the FCPA, Congress added provisions entitled “Guidelines by Attorney General,” which required the following:

“Not later than one year after August 23, 1988, the Attorney General, after consultation with the Commission, the Secretary of Commerce, the United States Trade Representative, the Secretary of State, and the Secretary of the Treasury, and after obtaining the views of all interested persons through public notice and comment procedures, shall determine to what extent compliance with this section would be enhanced and the business community would be assisted by further clarification of the preceding provisions of this section and may, based on such determination and to the extent necessary and appropriate, issue–

(1) guidelines describing specific types of conduct, associated with common types of export sales arrangements and business contracts, which for purposes of the Department of Justice’s present enforcement policy, the Attorney General determines would be in conformance with the preceding provisions of this section; and

(2) general precautionary procedures which issuers may use on a voluntary basis to conform their conduct to the Department of Justice’s present enforcement policy regarding the preceding provisions of this section.

The Attorney General shall issue the guidelines and procedures referred to in the preceding sentence in accordance with the provisions of subchapter II of chapter 5 of Title 5 and those guidelines and procedures shall be subject to the provisions of chapter 7 of that title.”

15 U.S.C. §§ 78dd-1(d), 78dd-2(e).

Following the 1988 mandate, the DOJ issued a formal notice inviting all interested persons “to submit their views concerning the extent to which compliance with 15 U.S.C. 78dd-1 and 78dd-2 would be enhanced and the business community assisted by further clarification of the provisions of the anti-bribery provisions through the issuance of guidelines.” Department of Justice, Anti-Bribery Provisions of the Foreign Corrupt Practices Act, 54 Fed. Reg. 40,918 (Oct. 4, 1989).

What happened?

On July 12, 1990, the DOJ declined to issue guidelines on the anti-corruption provisions of the FCPA, stating:

“After consideration of the comments received, and after consultation with the appropriate agencies, the Attorney General has determined that no guidelines are necessary…. [C]ompliance with the [anti-bribery provisions] would not be enhanced nor would the business community be assisted by further clarification of these provisions through the issuance of guidelines.”

Department of Justice, Anti-Bribery Provisions, 55 Fed. Reg. 28,694 (July 12, 1990).

How many responses did the DOJ receive?

According to the OECD’s Phase I Report on the US implementation of the Convention (at 15), “[o]nly 5 responses were received, and 3 of the responses were to the effect that guidelines were unnecessary.”

This suggests another question: what would the commentary landscape look like today if the DOJ published a new Federal Register notice soliciting “views concerning the extent to which compliance with 15 U.S.C. 78dd-1 and 78dd-2 would be enhanced and the business community assisted by further clarification of the provisions of the anti-bribery provisions through the issuance of guidelines”?

Given the rise in enforcement activity and the focus companies now bring to compliance, it seems very likely that far more than five people would submit comments.

FCPA Enforcement and Credit Ratings

Fitch Ratings (see here) is a global rating agency that provides credit opinions, research and data to the world’s credit markets.

It recently issued a report titled “U.S. Foreign Corrupt Practices Act – No Minor Matter.”

The report contains some interesting and informative non-legal perspectives on FCPA enforcement which are excerpted below.

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“Aside from management distraction and reputational risk, additional compliance costs and fines [arising from FCPA violations] could have rating implications for those companies with modest FCF [free cash flow] and/or liquidity. It should also be noted that it can take years from the discovery of a violation to the time a plea agreement is reached. In the interim, corporate credit profiles, liquidity, and ratings may weaken. The fine that could be easily paid with cash on hand today might not be readily payable years down the road if a company’s credit profile has weakened and liquidity becomes constrained.”

The report notes that many FCPA fines are “imposed on large investment grade corporations whose substantial cash balances easily afforded them the ability to absorb the payments with no or minimal increases in leverage.”

However, the report notes, “there have also been violations by non-investment grade companies.”

The report then discusses Willbros Group, Inc. “which borrowed from banks on a secured basis.” The report notes that when the company became aware of its FCPA issues (see here for prior posts on Willbros) the issues resulted “in the restatement of its annual financial statements at December 2002 and 2003, as well as the first, second, and third fiscal quarters iof 2004 and 2003.”

The report continues:

“In its 2005 10-K [Willbros] noted that it required an amendment on an indenture due to late filing and several amendments on its bank credit facility. In the July 1, 2005 Second Amendment and Waiver Agreement the credit facility was reduced from $150 million to $100 million.”

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The report also discusses the fiscal consequences of “deferring the legal consequences” of an FCPA violation – as so often happens given the frequency in which non-prosecution and deferred prosecution agreements are used to resolve FCPA enforcement actions. Pursuant to these agreements, the non-prosecuted or deferred charges could go “live” if the company fails to adhere to its obligations under the agreement. “This means,” according to the report, “that investors and analysts cannot take a deep breath or relax until” the time period in the NPA or DPA has expired.

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The report also discusses how FCPA issues can become a “sticking point in acquisitions/dispositions of businesses.”

The report notes:

“Sellers may have contingent liabilities related to violations even after assets or businesses are sold. Prices could be less than expected and may hamper sellers who need to receive a certain level of cash or offload debt to deleverage or meet covenants. Additionally, buyers who have not done enough due diligence up front may find themselves with an unexpected obligation and higher litigation expenses in the future.”

For a recent example of a company halting a planned acquisition because of an FCPA issue (see here).

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As to “management distraction” resulting from an FCPA inquiry, the report notes:

“Fines, penalties, widespread adverse publicity with potential damage to corporate reputations, having an independent compliance monitor, and building up the compliance organization can all pose an enormous distraction to management. More importantly, while many companies tend to have significant financial resources at the
start of an inquiry, it generally takes years before there is a conclusion. In that interim, it is possible that a corporation’s financial profile could weaken.”

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The report contains an informative chart detailing “Fitch-Rate Issuers” that tracks the date the FCPA issue first went public.

Noteworthy examples include:

Accenture Ltd. (identified a potential FCPA issue in July 2003 – in its March 2010 SEC filing the company stated that there has been no new developments);

Bristol-Myers Squibb Company (the SEC notified the company in October 2004 of an inquiry of certain pharma subsidiaries in Germany – in its 2009 10-K the company stated that it is cooperating with the SEC);

Eli Lilly & Co (the SEC notified the company in 2003 that it was investigating whether certain Polish units has violated the FCPA – in its 2009 10-K the company stated that the DOJ and SEC had issued subpoenas relating to other countries).

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As to “credit implications,” the report notes, among other things:

That, because the time from discovery of FCPA violations to resolution can take years, a company’s credit profile could weaken – perhaps reflecting a weak economic cycle. When allegations of bribery separately arise, “for most corporations if the credit profile weakens, potential fines and/or legal contingencies would be among the items of concern in the Rating or Outlook.”

The report then talks specifically about Avon and its FCPA issues (see here for a prior post).

The report notes:

“The cost of investigations and ongoing compliance can be sizeable, and each company’s liquidity and metrics over the medium term would need to be considered. Avon, with $10 billion in 2009 revenues, had $120 million in FCF. In April 2010 the company disclosed that the cost of the investigation would be in the $85 million – $95 million range, up from $35 million in 2009. The additional cost of widening the investigation represents a significant percentage of the company’s 2009 FCF. While the company has more than $1 billion in cash on hand, Fitch’s expectation of moderate FCF in the medium term was part of the rationale for the downgrade to ‘A-’ from ‘A’ on Feb. 2, 2010. Additional layers of investigatory or compliance-related expenses could hamper FCF for Avon and other companies that violate the FCPA. Continued relative weakness in FCF and/or increased leverage typically can provide the impetus for a downgrade or change in outlook for many corporations.”

All in all, the Fitch Report is an interesting and informative read.

A couple of observations.

Some FCPA enforcement actions, per the enforcement agencies’ allegations, involve conduct that goes “all the way to the top” – the Siemens enforcement action comes to mind. In this type of FCPA enforcement action, the company’s credit ratings, and much else about the company’s business, ought to be negatively impacted by the FCPA enforcement action.

However, enforcement actions like Siemens are clearly outliers.

The far more common FCPA enforcement action involves allegations of improper conduct by a single employee or a small group of employees – often in a foreign subsidiary. Even so, because of respondeat superior, the parent company issuer faces FCPA exposure. In such a situation – a common FCPA scenario – is it proper for company’s credit rating to be negatively impacted by the enforcement action?

Add to this the fact that most FCPA enforcement actions are resolved through non-prosecution or deferred prosecution agreements. These agreements are privately negotiated, subject to no (or little) judicial scrutiny, and do not necessarily represent the triumph of one party’s legal position over the other. In such a situation – again a very common FCPA scenario – is it proper for the company’s credit rating to be negatively impacted by the enforcement action?

In my forthcoming piece “The Facade of FCPA Enforcement,” I discuss why the facade of FCPA enforcement matters.

The Fitch Report has informed me of another reason why the facade of FCPA enforcement matters – and that is because FCPA enforcement actions can negatively impact a company’s credit rating.

What is Alba?

It’s the commercial enterprise at the center of two FCPA enforcement inquiries.
Commercial enterprise?

In the words of the late Gary Coleman – “whatcha talkin bout” (see here) – the Foreign Corrupt Practices Act concerns payments to “foreign officials.”

However, that is not how the enforcement agencies see it.

Well, actually it is, but under the enforcement agencies’ interpretation of the key “foreign official” element (an interpretation that has never received judicial approval), if a commercial enterprise seemingly has any hint of state involvement, it is an “instrumentality” of the foreign government and all employees of the commercial enterprise are deemed “foreign officials.”

Over 50% of recent FCPA enforcement actions center, in whole or in part, on this controversial interpretation of the “foreign official” element.

The commercial enterprise at the center of two FCPA enforcement inquiries is Aluminium Bahrain BSC (“Alba”).

First, a bit of background.

As evident from the DOJ’s recent stay motion in Alba v. Sojitz Corporation – embedded in this story by Lisa Brennan at Main Justice, the DOJ is currently investigating whether Sojitz Corporation, a Japanese company with its principal place of business in Tokyo, and Sojitz Corporation of America, a wholly owned subsidiary and agent/or alter ego of Sojitz Corporation, made corrupt payments to Alba officials in violation of the FCPA. It appears that DOJ will assert jurisdiction over the Japanese entity based on this statement: “Sojitz Corporation, and its controlled subsidiaries, make use of United States banks to distribute aluminum, and other products, and is a member of the Chicago Board of Trade.”

The DOJ filing also notes that since 2008 the DOJ has also been investigating a separate matter involving Alba, specifically, whether Aloca Inc. made corrupt payments to “public officials in Bahrain in connection with Alcoa’s sale of alumina to Alba.” (see page 3). (See page 11 of Alcoa’s recent 10-Q filing – here – for more).

So what is Alba, the entity at the middle of two separate DOJ FCPA enforcement inquiries?

According to its website (here), Alba is one of the largest aluminium smelters in the world. The company has three shareholders: the government of Bahrain, the Saudi Public Investment Fund, and Breton Investments.

The company exports to more than 25 countries. Approximately 50% of its output is for Bahrain’s downstream industries, about 20% for the Gulf Cooperation Council (Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and UAE) and Middle East market, approximately 13% for the Far East market, with the rest for North Africa, South East Asia, India, Europe and the U.S.

The company has over 3,000 employees.

Alba’s CEO is Laurent Schmitt and its CFO is Tim Murray (see here). Prior to being appointed Alba’s CEO, Mr. Schmitt was previously President of Rhodia Polyamide a world wide global business of Rhodia Group based in France. (see here). On Alba’s board is David Meen (see here).

When Congress enacted the FCPA, did it envision that a company like Alba (a company with thousands of employees, a company conducting significant business outside of Bahrain, and company with non-“native” executive officers and board members) would be deemed a “instrumentality” of the Bahrain government by the enforcement agencies?

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