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Facts, Figures and Findings

Trace International has again turned out an informative product.

First, it was the Trace Compendium (here) a searchable database of FCPA enforcement actions.

Now, it is what is planned to be an annual global enforcement report “designed to identify and track international anti-bribery enforcement trends.” See here for the 2010 report.

The “GER” – as it is being called – “provides a summary of all known international anti-bribery enforcement actions since the FCPA’s passage some 33 years ago.” As the GER notes, passing anti-bribery laws “is an important first step toward promoting international business transparency, but enforcement is a necessary second step in the effort to reduce corruption.”

Some facts, figures, and findings from GER 2010 include:

“Twenty-two countries pursued 515 foreign bribery enforcement actions between 1977 and June 2010, including known matters still in the investigative stage. The United States established the strongest record in the period, undertaking over 75 percent of all actions. This record is noteworthy, even given that the United States passage of the world’s first foreign bribery law—the Foreign Corrupt Practices Act of 1977—gave the country a considerable head start on enforcement. The United States has accumulated almost 18 times as many anti-bribery enforcement actions as the country with the next highest total, the United Kingdom. Many countries worldwide have not pursued a single enforcement action in the 33-year period.”

“The largest number of enforcement actions involves alleged bribe payments to officials in Iraq, Nigeria and China.” As noted in the GER, Iraq is high on the list because of the numerous Oil-for-Food cases. Nigeria is not surprising given its prominent oil and gas industry, coupled with the GER’s finding that “the extractive industries sector was most frequently the subject of international anti-bribery enforcement actions.” China is not surprising either given the extent to which U.S. companies have flocked to this growth market in recent years, the fact that there are literally millions of Chinese “foreign officials” because the enforcement agencies deem all employees of state-owned or state-controlled enterprises to be “foreign officials,” and because most companies operating in China do so through third-parties.

DOJ Speaks

There is a “same speech, different day” aspect of late when the DOJ talks about the FCPA. One can reasonably predict what will be said (i.e. DOJ values voluntary disclosure and cooperation), even before it is said, and this has the tendency of diminishing the message.

This week it was Compliance Week 2010 (see here). The speaker’s – Acting Deputy Attorney General Gary Grindler and Assistant Attorney General (Criminal Division) Lanny Breuer.

*****

On Tuesday, Grindler spoke (see here for his remarks).

Grindler began his remarks as follows:

“Having spent a good portion of my career in private practice representing corporate clients and advising them on compliance matters, I am no stranger to what I suspect many of you in the audience are thinking: What is the Department of Justice focused on and how can I make sure my clients stay as far away from it as possible? I’d like to spend my time with you this evening hopefully answering the first question by giving you a sense of some of the policy and enforcement priorities that we are focused on at the Department and sharing some of my thoughts how you can best position your clients when interacting with the Department.”

Grindler’s remarks covered three general topics: DOJ’s Financial Fraud Enforcement Task Force, DOJ’s efforts to combat health care fraud, and the DOJ’s new Intellectual Property Enforcement Task Force.

While speaking on health care fraud, Grindler noted:

“You can be assured that we will also use every tool at our disposal to investigate and prosecute corrupt practices in the pharmaceutical industry. In the months ahead, for example, you can expect to see the Department increasingly use the Foreign Corrupt Practices Act to prosecute kickbacks and bribes paid to foreign government officials by pharmaceutical companies. As the drug companies do more and more of their business overseas where so much of the health care business is government run, we see the opportunities for FCPA violations unfortunately proliferating. Indeed, in some foreign countries nearly every aspect of the approval, manufacture, import, export, pricing, sale and marketing of a drug product may involve a “foreign official” within the meaning of the FCPA. The extent of government involvement in foreign health systems, combined with fierce industry competition and the closed nature of many public formularies, creates, in our view, a significant risk that corrupt payments will infect the process. The Department will not hesitate to charge pharmaceutical companies and their senior executives under the FCPA if warranted to root out foreign bribery in the industry.”

For the same speech, different day version, see here and here.

The final part of Grindler’s speech is titlted – “What You Can Do.” Excerpted portions are below.

“Now, how can you best advise your clients in light of the Department’s enforcement priorities and given the climate we are in where there is so much distrust of corporate America.”

“First, you can make sure that your clients have robust, effective compliance programs and internal controls. A company’s compliance program continues to be one of the most important factors that we consider under the Principles of Federal Prosecution of Business Organizations. You are on the front lines of this issue and can make a real difference in your respective institutions by sending the message about the need for an effective compliance program. Compliance programs must not exist only on paper.”

“In this context, I want to point out that the United States Sentencing Commission recently amended the Sentencing Guidelines on the issue of compliance programs. Specifically, the Commission clarified the importance of assessing and modifying compliance programs after you discover criminal conduct at your company. The current Guidelines provide that, following the discovery of criminal conduct, a company should, among other things, make “any necessary modifications to the organization’s compliance and ethics program.” The new amendment — assuming it goes into effect in November — provides a new commentary to that provision specifying that this post-violation process includes “assessing the compliance and ethics program and making modifications necessary to ensure the program is effective … and may include the use of an outside professional advisor to ensure adequate assessment and implementation of any modifications.”

“In addition, the latest Guideline amendments clarify the circumstances under which an effective compliance and ethics program can entitle an organization to a 3-level reduction in its culpability score. Specifically, the amendment allows an organization to receive the decrease if the organization meets four criteria: (1) the individual or individuals with operational responsibility for the compliance and ethics program have direct reporting obligations to the organization’s governing authority or appropriate subgroup thereof; (2) the compliance and ethics program detected the offense before discovery outside the organization or before such discovery was reasonably likely; (3) the organization promptly reported the offense to the appropriate governmental authorities; and (4) no individual with operational responsibility for the compliance and ethics program participated in, condoned, or was willfully ignorant of the offense. These amendments reinforce the point that having a robust compliance program is critical not only to preventing misconduct in the first place, but also how your organization will be treated in the event criminal conduct does take place.”

“The second thing you can do to best position your client, is you can partner with us. As I hope has been clear in my discussion of our enforcement efforts, there is a consistent theme of the importance of sharing information and partnering with the private sector in its anti-fraud efforts. Through examples like the National Heath Care Fraud Summit and the regional mortgage fraud summits, we have been reaching out to private sector anti-fraud professionals to share information about fraud schemes and improvements in data analysis. While we have limitations in what we can share, we are interested in exploring ways to work together within those constraints. If the private sector sees new fraud schemes or ways in which we can prevent fraud, that is something you should share with us.”

“Third, you can advise your clients to make early, voluntary disclosure of misconduct. As you know, it is usually in your client’s best interest to cooperate with the government’s investigation through the disclosure of relevant facts, the production of documents and other evidence, and making witnesses available who have relevant information.”

“Fourth, you can guide your client’s decision to take meaningful remedial measures in response to criminal wrongdoing, including the payment of restitution and the disciplining or termination of culpable employees, officers, or directors.”

“In the end, all of these steps – robust compliance programs, information sharing between public and private sector anti-fraud efforts, voluntary disclosure, and meaningful remedial measures — will inure to the benefit of your clients in several significant ways. They will deter criminal conduct from occurring in the first place. They will ensure that if and when misconduct does occur, it is detected early on and can be rooted out before too much damage is done. Your client will receive credit for such actions during the prosecutorial decision-making process. Finally, such steps will make your clients stronger corporate citizens, and will empower your clients’ officers, directors, and employees to fulfill their fiduciary obligations to shareholders and their duties of honest dealing to the investing public and the taxpayers.”

For more on Grindler’s speech, including topics raised during the Q&A, see this piece from Christopher Matthews at Main Justice.

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On Wednesday, Breuer spoke (see here for a copy of his remarks). Below are various excerpts from the speech.

Given the DOJ’s recent “bribery, yet no bribery” cases against BAE and Daimler, I must admit to getting a bit frazzled after only paragraph two of the speech in which Breuer talks about the “the Justice Department’s determination to prosecute – and prosecute aggressively – financial fraud and corruption in all its forms. The American public demands no less, and we will deliver no less.”

Speaking generally, Breuer described “a new era of heightened white-collar crime enforcement – an era marked by increased resources, increased information-sharing, increased cooperation and coordination, and tough penalties for corporations and individuals alike.”

Breuer next discussed that “additional resources are also being committed in the Criminal Division, where we are in the process of adding a number of attorneys to the Fraud Section – lawyers who will be deployed immediately to prosecute crimes like securities fraud, health care fraud, and foreign bribery under the Foreign Corrupt Practices Act.” He cited the Africa Sting case as an example of using “more aggressive law enforcement techniques” and further stated that “it is fair to say that [DOJ] will continue to look for opportunities to innovate in how we identify financial fraud and corruption.”

Speaking of innovation at the SEC, Breuer stated:

“The SEC will now make use of cooperation agreements, as well as deferred and non-prosecution agreements – all of which have been staples of the Justice Department’s approach in white collar criminal cases for many years now. These innovations will likely lead to even earlier and closer coordination between the SEC and the Justice Department.”

Breuer next talked specifically about foreign bribery “which obviously is at the center of this heightened enforcement climate and which presents unique compliance challenges.”

Below are his remarks.

“As I have said in the past, foreign bribery is a law enforcement challenge of truly global dimensions. It is, as the Attorney General has said, a ‘scourge on civil society.’ We in the Criminal Division combat foreign bribery each and every day. And as we go about our business, we are looking carefully at lapses in corporate compliance. Why? Because of what I said a few minutes ago. Our preference, like yours, is for these crimes to be prevented in the first instance. And the only way that can happen in your organizations is through a robust, state-of-the-art compliance program and a true culture of compliance.”

“I know that you all do not lack for incentives; the statistics in FCPA enforcement are well known. But it is worth pausing on them for a moment.”

“Since 2004, the Fraud Section has achieved 37 corporate FCPA and foreign bribery related resolutions, with fines totaling over $1.5 billion. In this time period, we have charged 81 individuals with FCPA violations and related offenses. Forty-six have been charged since the start of 2009 – more than the total number of individuals charged in the previous seven years combined.”

“The individuals charged have included CEOs, CFOs, other senior-level corporate officials and, where jurisdiction existed here, several foreign officials. Charging individuals is part of a deliberate enforcement strategy to deter and prevent corrupt corporate conduct before it happens. And rest assured that we will seek equally tough sentences, including significant jail time if appropriate, to reinforce this message of deterrence.”

“Aggressive enforcement by the Criminal Division provides one set of incentives for corporations. Others are sprouting up each and every day, and they are coming from all corners as anti-fraud and corruption enforcement catches up with the globalization of business.”

“Here in the United States, the United States Sentencing Commission recently approved amendments to its Sentencing Guidelines, one of which reaffirmed the importance of compliance and ethics programs within organizations. The amendment stressed the critical need to embed these programs at the very highest level of the organization. In an interesting twist, the Commission expanded eligibility for effective compliance and ethics program credit at sentencing even if one or more members of ‘high level personnel’ has some role in the offense.”

“But there’s a catch. In order to be eligible for credit where there is such ‘high level’ involvement, the corporation must have in place a direct reporting relationship between the individual with operational responsibility for the compliance program and the corporation’s governing body. And more than that, the corporation must have discovered the offense and reported it to enforcement officials before it otherwise became known. The amendment has not been uncontroversial. But whatever your opinion, it can at least be said that the amendment reflects the Commission’s view that compliance should be embedded at the very highest levels of an organization.”

“On the international front, the United Kingdom has passed a new, comprehensive Bribery Act that criminalizes, among other things, the failure by a corporate entity to prevent bribery. Pretty serious, right? Well, the Act does provide a defense to such a charge if the corporate entity can show that it has ‘adequate procedures’ in place to deter and detect such conduct. What does ‘adequate procedures’ mean? It’s not entirely clear. And I’m, of course, not your lawyer. But, at a minimum, it would seem prudent to have in place a strong, state-of-the-art compliance program.”

Breuer then offers a few thoughts on compliance and offers up the Principles of Federal Prosecution of Business Organizations (see here) and the OECD’s Good Practice Guidance on Internal Controls, Ethics, and Compliance (see here – Annex II) as benchmarks.

Breuer then acknowledges that “even the best compliance program may not stop fraud or corruption from occurring. So, what should a corporation do when a problem has been discovered?”

Because the answer has been stated numerous, numerous times, you probably already known the answer – voluntarily disclose and cooperate.

Below are Breuer’s comments on these issues:

“Whether to voluntarily disclose potential criminality is admittedly a difficult question for business entities.”

“But I can offer you this: If you come forward and if you fully cooperate with our investigation, you will receive meaningful credit for having done so. In talking about ‘meaningful’ credit, we are not promising amnesty for doing the right thing. But, self-reporting and cooperation carry significant incentives – by working with the Department, no charges may be brought at all, or we may agree to a deferred prosecution agreement or non-prosecution agreement, sentencing credit, or a below-Guidelines fine. Ultimately, every case is fact-specific and requires an assessment of the facts and circumstances, as well as the severity and pervasiveness of the conduct and the quality of the corporation’s pre-existing compliance program. But, in every case of self-disclosure, full cooperation, and remediation, the Department is committed to giving meaningful credit where it’s deserved to obtain a fair and just resolution.”

“The Siemens matter is a case in point. While the conduct in that case is arguably the most egregious example of systemic foreign corruption ever prosecuted by the Department, [Note – Siemens was not charged with violating the FCPA’s anti-bribery provisions] it also illustrates the tremendous benefits that flow from truly extraordinary cooperation. By Siemens opening itself up to authorities, [Note – Siemens did this after its offices were raided by German authorities] the Department completed its investigation and resolved the case – with domestic and international dimensions – in two years’ time. In the end, the benefits Siemens received through its cooperation, even in the absence of a voluntary disclosure, were plain – the $450 million fine that was paid to the Justice Department, although quite substantial, was a far cry from the advisory range of $1.35 billion to $2.7 billion called for in the Sentencing Guidelines. Put another way, Siemens received a penalty that was 67 to 84 percent less than what it otherwise could have faced had it not provided extraordinary cooperation and carried out such extensive remediation.”

“Another example, on a more modest scale, was the resolution of the Helmerich & Payne matter, a company that self-disclosed improper or questionable payments. [Note – is Breuer acknowledging that the payments at issue in this case – payments to various officials and representatives of the Argentine and Venezuelan customs services in connection with importation and exportation of goods and equipment – may not have violated the FCPA? See here for more] The case was resolved through a non-prosecution agreement with a term of two years, a penalty of $1 million (which was approximately 30 percent below the bottom of the Guidelines range), and compliance self-reporting by the company for a period of two years in lieu of an independent compliance monitor. Because of the forward-leaning, proactive, and highly cooperative approach taken by Helmerich & Payne, that company received a host of benefits that likely would not otherwise have been obtained from the Department.”

“In short, these two cases, and others like them, reflect the Department’s willingness to step up to the plate when a corporation does the right thing by making a voluntary disclosure and cooperating fully.”

“Let me offer one additional piece of guidance on this topic. When a problem has been discovered, the corporation should seriously consider seeking the government’s input on the front end of its internal investigation. [Note – at the front end of an FCPA internal investigation, it is generally not even known if a violation has occurred – why should a company seek the DOJ’s input when it is not yet known if a violation of law has occurred?] We encourage a company to come in and describe its work plan for conducting the investigation. Often we have questions, or helpful suggestions, or we may ask that the corporation expand the scope of the investigation. Regardless, the dialogue can be very helpful in ensuring at the outset that the corporation has an effective, cost-effective plan in place to investigate and deal with the problem.”

Breuer then offered a few words about compliance monitors.

Below are his comments.

“In resolving criminal conduct, the Department’s goal is to vindicate the law and ensure adherence to it in both letter and spirit. In that regard, the structure and terms of a corporate resolution are properly determined by the particular facts of the case and the circumstances surrounding the specific business entity and the public interest. Thus, a compliance monitor may be particularly useful where the agreement requires the corporation to design, or substantially re-design, and implement a broad compliance and ethics program and internal controls. As an independent observer, the monitor can enable the government to verify whether a business is fulfilling the obligations to which it agreed. In other cases, however, a compliance monitor may not be needed for a variety of reasons, such as where the business organization has ceased operations in the area where the criminal conduct occurred, or where the business has re-designed and effectively implemented appropriate compliance measures and internal controls before entering into an agreement with the United States.”

“However the calculus plays out, we are always mindful of, and we do weigh, the potential benefits of employing a monitor with the cost of a compliance monitor and its impact on the operations of the business organization. Of that much you can be sure.”

For more on Breuer’s speech, including topics raised during the Q&A, see this piece from Christopher Matthews at Main Justice.

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A good holiday weekend to all – please check back on Tuesday for a post about a current FCPA compliance monitor.

The 1981 GAO Report

The year was 1981.

The FCPA was a mere infant – approximately 3.5 years old. Those living with it were concerned with its ambiguities and complying with it.

In March 1981, the “investigative arm” of Congress, the Government Accountability Office (GAO) released a report, “Impact of Foreign Corrupt Practices Act on U.S. Business.” (See here and here).

The report was based, in part, on a GAO questionnaire survey of 250 companies randomly selected from the Fortune 1000 list of the largest industrial firms in the U.S.

The questionnaire addressed the FCPA’s relationship to the following four areas: (1) corporate policies and/or codes of conduct, (2) corporate systems of accountability, (3) cost burdens, if any, incurred by management to comply with the act, and (4) corporate opinions regarding the (i) acts effect on U.S. corporate foreign sales, (ii) the clarity of the act’s provisions, (iii) the potential effectiveness of an international antibribery agreement, and (iv) perceived effectiveness of the act in reducing questionable payments.

The GAO also discussed the FCPA’s impact with leading public accounting firms, professional accounting and auditing organizations, professional legal associations and business and public interest groups. In addition, the GAO discussed enforcement of the FCPA with DOJ and SEC officials and examined documentation relating to enforcement activities. Also interviewed by the GAO were officials from the Overseas Private Investment Corporation, Department of Commerce, Treasury, and State.

The GAO report covers all the topics listed above. However, this post relates to the clarity of the FCPA’s provisions.

Chapter 4 of the Report is titled “Issues Surrounding the Act’s Antibribery Provisions.”

The chapter begins by noting that there is “confusion over what constitutes compliance with the act’s antibribery provisions.”

The report notes that “corporate and governmental officials have criticized the anti-bribery provisions as being ambiguous about what constitutes compliance.”

The ambiguities include confusion or uncertainty about a host of issues, including the “definition of ‘foreign official.””

At the time, the term “foreign official” specifically excluded any employee whose duties are essentially ministerial or clerical.” This exclusion was eliminated in the 1988 amendments to the FCPA. Otherwise the definition of “foreign official” the GAO report found to be ambiguous is same today – “any officer or employee of a foreign government or one of its departments, agencies or instrumentalties.” [Note -the public international organization prong was added in 1998].

The report notes:

“This definition has been criticized as unclear. Lawyers we contacted questioned whether employees of public corporations, such as national airlines or nationalized companies, are considered foreign officials. Similar questions have surfaced in countries – particularly developing countries – where there are small and frequently closely related groups, including both business and government relationships as well as families. Individuals within these groups frequently move between the private and public sectors, often without a clear distinction.”

The report then discusses the DOJ’s guidance program and begins by noting that “President Carter expressed concern over the potential effect of the act’s alleged ambiguities in September 1978 – only 9 months after its passage.” “To reduce this uncertainty, he directed the Department of Justice to give the business community guidance concerning its enforcement intentions under the act.”

The report notes that in March 1980, the DOJ implemented its “long awaited guidance program” but that the “program has yet to effectively address the ambiguities, and it is doubtful it will.”

In concluding Chapter 4 of the Report, the GAO notes:

“the act is an expression of congressional policy, and rigorously defined and completely unambiguous requirements may be impractical and could provide a roadmap for corporate bribery. On other hand, companies, whether registered with SEC or domestic concerns under Department of Justice jurisdiction, should be subject to clear and consistent demands by the Government agencies responsible for enforcing the act.”

An option the GAO recommends is that “the Justice Department, SEC, and other interested agencies […] offer legislative proposals which would amend the act to more explicitly define the antibribery provisions and [such an amendment] could cover concepts such as the definition of “foreign official.”

GAO notes “because of the importance of the act and the questions and concerns about the antibribery provisions, close congressional oversight is needed.”

Not surprsingly, both DOJ and SEC disagreed with the GAO’s findings. In its responses, the agencies attack, not the substance of the findings, but the GAO’s methodology.

The GAO report states:

“Both SEC and Justice disagree with our recommendations that they develop alternative ways to address the antibribery provisions. They contend that our statistics suggest that ambiguities in the act are not a sigifnicaint problem.”

In 1981, the investigative arm of Congress found, based on extensive study, that the FCPA’s “foreign official” element was ambiguous.

Here we are some thirty years later having the same discussion.

[Here is another interesting nugget. In June 1981, John Fedders was named to be the SEC’s Director of Enforcement, replacing Stanley Sporkin who left to become general counsel at the CIA. During a news conference, Fedders “pledged to enforce, with discretion, the Foreign Corrupt Practices Act, which he criticized as being ambiguous.” See Owen Ullmann, “Corporate Lawyer Gets SEC Enforcement Post,” Associated Press, June 29, 1981.]

Potpourri

Back in active blogging “mode” here on the campus of the Sweet 16 bound Butler Bulldogs after an enjoyable few days in Washington D.C. where I participated in Georgetown Law’s Combating Global Corruption Conference. It was nice to see some familiar faces, connect faces to some names I have met through this blog, and to meet new people. The title of my presentation and upcoming paper in the Georgetown Journal of International Law is “The Facade of FCPA Enforcement” and I will post in the coming days a short abstract of the paper as well as my presentation slides.

In the meantime, some items of note.

Africa Sting

Christopher Matthews at Main Justice continues to follow the Africa Sting case and has this report of yesterday’s hearing.

Shearman & Sterling Update

Shearman & Sterling pioneered the concept of keeping track of FCPA enforcement actions in an “FCPA Digest” (see here) and it supplements the digest with occasional “Recent Trends and Patters” update. For the latest, see here from Philip Urofsky & Danforth Newcomb.

FCPA Compliance in Phnom Penh

Looking for additional evidence that the FCPA is indeed a hot topic. How about this article from Phnom Penh Post of Cambodia. As noted in the article, a recent FCPA seminar, hosted in part by the American Chamber of Commerce, attracted more than 100 local business leaders.

I wonder if anywhere in the discussion of Siemens and/or BAE the point was made that neither of these entities were charged with FCPA antibribery violations?

Further, I remain perplexed by the curious (and frequent) tendency of FCPA conferences including representatives from FCPA violators – a regional compliance officer for Siemens Singapore presented at the seminar.

A Post-Holiday Stocking Stuffer

January can be a dismal month. The joy of the holiday season has diminished, our waistlines have expanded, it’s cold, and for many readers of this blog – it is time to start cranking out the billable hours again upon realizing, at this point, you are “annualized” at 600 hours.

But for FCPA watchers, it’s a different story as the holiday season has traditionally extended into the first week of January – the week in which Gibson, Dunn & Crutcher releases its Year-End FCPA Report (see here).

Part year in review, part marketing document, the report is a useful resource for those interested in following FCPA developments.

A couple of thoughts.

The number of DOJ FCPA enforcement actions noted in the report (26) is significantly inflated by separately including corporate prosecutions and related individual prosecutions. While this number is a good attention grabber, it is subject to debate whether 2009 was a record-enforcement year as corporate FCPA prosecutions by the DOJ slowed to a trickle in the second half of 2009. Since July 2009, there have been only two substantive DOJ FCPA enforcement actions against corporations (Control Components and UTStarcom). Whether the widely reported 100+ cases in the “pipeline” are taking longer to resolve, being resolved informally with no public disclosure, or about to burst onto the scene in 2010 is an open question and remains to be seen.

I’ve noted before that FCPA enforcement is a “unique creature.” I’ll say it again after reading this sentence in the report concerning the SEC’s charges against Bobby Benton (see here for a prior post) – “the fact that Benton did not settle the charges against him is remarkable in and of itself.”

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