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The Demand Side Of Bribery

This new era of FCPA enforcement has resulted in many things, including an increase in quality legal scholarship devoted to the FCPA and related topics.

Case in point, Joseph Yockey’s recently released scholarship “Solicitation, Extortion, and the FCPA” (see here for the download).  Yockey (here – Associate Professor at the University of Iowa College of Law) provides the following abstract.

“The U.S. Foreign Corrupt Practices Act (FCPA) prohibits firms from paying bribes to foreign officials to obtain or retain business. It is one of the most significant and feared statutes for companies operating abroad. FCPA enforcement has never been higher and nine-figure monetary penalties are not uncommon. This makes the implementation of robust FCPA compliance programs of paramount importance. Unfortunately, regardless of whether they have compliance measures in place, many firms report that they face bribe requests and extortionate threats from foreign public officials on a daily basis. The implications of these demand-side pressures have gone largely unexplored in the FCPA context. This Article helps fill that gap. First, I describe the nature and frequency of bribe solicitation and extortion to illustrate the scope of the problem and the costs it imposes on firms and other market participants. I then argue that current FCPA enforcement policy in cases of solicitation and extortion raises several unique corporate governance and compliance challenges, and ultimately poses a risk of overdeterrence. Though these concerns can be partially addressed through enhanced statutory guidance, I conclude by urging regulators to shift some of their focus from bribe-paying firms in order to directly target bribe-seeking public officials. Confronting the market for bribe demands in this way will help reduce corruption in general while also allowing employees and agents to spend less time worrying about how to respond to bribe requests and more time on legitimate, value-enhancing transactions.”

Yockey’s article also nicely touches upon other topics as the below excerpts demonstrate.

“As regulators continue to push the boundaries of statutory interpretation firms, find it difficult to predict ex ante whether conduct that appears permissible under the FCPA‟s terms will later expose them to sanction (or the threat of sanction). Left unchecked, this hinders efforts to design monitoring programs that will prevent illegal payments without also deterring employees from pursuing legitimate transactions or engaging in socially desirable risk-taking.”

“Several factors explain the recent resurgence in FCPA enforcement. […] A more cynical explanation for the government‟s focus on the FCPA is based on the “revolving door” between government and private sector employment. The rise in FCPA enforcement has produced a cottage industry of FCPA experts, including lawyers, accountants, and consultants at prestigious firms, which DOJ and SEC personnel often join after leaving their federal jobs for considerably higher compensation.”

“Another factor adding to the compliance challenges faced by firms concerns the way in which the DOJ and SEC have recently interpreted and applied several of the FCPA’s key provisions. Regulators have become more expansive in their interpretation of the FCPA anti-bribery provisions and considerably narrower in their assessment of the statute’s exceptions and defenses. Much of the trouble in this regard comes because the government’s authority under the FCPA is not as broad as the recent resurgence in enforcement activity might suggest.”

“Whether there is truly an unfair balance of power between regulators and corporate defendants [given the prevalence in which FCPA enforcement actions are resolved via non-prosecution or deferred prosecution agreements] is outside the scope of this paper. What appears undeniable, however, is that an absence of judicial review on key aspects of the FCPA makes it considerably more difficult for firms to design compliance programs that efficiently separate lawful but aggressive competitive activity from conduct that clearly violates the statute.”

Ready, Set, Go …

The 2010 FCPA enforcement year has begun.

Yesterday, the SEC announced (here) resolution of an FCPA books and records and internal controls action against NATCO Group Inc. – a Houston based “worldwide leader in design, manufacture, and service” of oil and gas process equipment (see here).

The SEC complaint (here) alleges that TEST Automation & Controls, Inc., a wholly-owned subsidiary of NATCO Group, “created and accepted false documents while paying extorted immigration fines and obtaining immigration visas in the Republic of Kazakhstan.” According to the complaint, “NATCO’s system of internal accounting controls failed to ensure that TEST recorded the true purpose of the payments, and NATCO’s consolidated books and records did not accurately reflect these payments.”

According to the complaint, TEST maintained a branch office in Kazakhstan and in June 2005 it won a contract which required it to hire both expatriates and local Kazakh workers. Pursuant to Kazakh law, TEST needed to obtain immigration documentation before an expatriate worker could enter the country. Thereafter, Kazakh immigration authorities claimed that TEST’s expatriate workers were working without proper documentation and the authorities threatened to fine, jail, or deport the workers if TEST did not pay cash fines.

According to the complaint, TEST employees believed the threats to be genuine and, after consulting with U.S. TEST management who authorized the payments, paid the officials approximately $45,0000 using their personal funds for which the employees were reimbursed by TEST.

The complaint alleges that when reimbursing the employees for these payments, TEST inaccurately described the money as: (i) being an advance on a bonus; and (ii) visa fines.

The complaint further alleges that TEST used consultants in Kazakhstan to assist in obtaining immigration documentation for its expatriate employees and that “one of these consultants did not have a license to perform visa services, but maintained close ties to an employee working at the Kazakh Ministry of Labor, the entity issuing the visas.” According to the complaint, the consultant twice requested cash from TEST to help him obtain the visas and the complaint alleges that the consultant provided TEST with bogus invoices to support the payments.

Based on the above allegations, the SEC charged NATCO with FCPA books and records and internal control violations even though the complaint is completely silent as to any involvement or knowledge by NATCO in the conduct at issue. This action is thus the latest example of an issuer being strictly liable for a subsidiary’s books and records violations (see here for a prior post).

Without admitting or denying the SEC’s allegations, NATCO agreed to pay a $65,000 civil penalty. According to the SEC’s findings in a related cease and desist order (here), during a routine internal audit review, NATCO discovered potential issues involving payments at TEST, conducted an internal investigation, and voluntarily disclosed the results to the SEC. The order also lists several other remedial measures NATCO implemented.

I’ve noted in prior posts that one of the effects of voluntary disclosure is that it sets into motion a whole series of events including, in many cases, a much broader review of the company’s operations so that the company can answer the enforcement agencies’ “where else may this have occurred” question.

On this issue, the SEC order states that NATCO “expanded its investigation to examine TEST’s other worldwide operations, including Nigeria, Angola, and China, geographic locations with historic FCPA concerns.” However, the SEC order notes that “NATCO’s expanded internal investigation of TEST uncovered no wrongdoing.”

According to the complaint, at all times relevant to the complaint, NATCO’s stock was listed on the NYSE, but in November 2009 NATCO became a subsidiary of Cameron International Corporation (here) (an NYSE listed company) and NATCO’s NYSE listing ended.

The NATCO enforcement action is “as garden variety” of an FCPA enforcement action as perhaps one will find. Not only does moving product into and out of a country expose a company to FCPA risk, but so too does moving employees into and out of a country.

The NATCO civil penalty also demonstrates that in certain cases, the smallest “cost” of an alleged FCPA violation are the fines or penalties, figures which are so dwarfed by investigative, remedial and resolution costs.

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