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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?

A Look Back in Time

Literally, Time Magazine that is.

In connection with my work in progress on the FCPA’s legislative / early history, the below articles from Time’s searchable archives caught my eye. (See here).

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In November 1979, Time carried a piece (here) about the DOJ’s new program to offer advice on the FCPA – what has come to be called the FCPA Opinion Procedure Release. The article contains this quote from Stanley Sporkin, the SEC’s then Enforcement Chief: “We do not have guidelines for rapists, muggers and embezzlers, and I do not think we need guidelines for corporations who want to bribe foreign officials.” Fast forward 30-some years and Sporkin is still on the FCPA scene. It was recently reported (here) that Sporkin is assisting former FBI Director Louis Freeh as the monitor in the Daimler enforcement action. Among the monitor’s duties is “review[ing] and evaluat[ing] the effectiveness of Daimler’s internal controls, record-keeping, and existing or new financial reporting policies and procedures as they relate to Daimler’s compliance with the books and records, interal accounting controls and anti-bribery provisions of the FCPA, and other applicable anti-corrption laws.” (See here Appendix D).

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Almost as soon as the FCPA was passed, concerns were raised that the law was harmful to U.S. business. There was much activity on this issue in the early 1980’s as evidenced in this article from October 1980, this article from March 1981, this article from March 1981 as well, and this article from June 1981.

These articles detail, among other things: (i) that the Carter administration (Carter signed the FCPA into law in December 1977) “sent a hefty 250-page report to Congress on the various ways the U.S. discourages exporters” – one example – “the provisions of the 1977 Foreign Corrupt Practices Act, which have never been clearly spelled out by the Justice Department.” (ii) that the GAO released a report in 1981 (see here for a prior post) detailing how the FCPA “is riddled with complicating ambiguities and shortcomings” including the key “foreign official” element; and (iii) that President Reagan’s “transition team on the workings of the Securities and Exchange Commission […] has recommended decriminalization of bribery.”

At to this last point, Time notes:

“Such a stance by the Administration toward foreign bribery would itself cause problems. By failing to enforce the act as written, the Administration not only would leave the legislation’s ambiguities unresolved, but would show a disrespect for the law, which is itself corrupting. Since the U.S. has adopted a moral position with regard to foreign bribery, neither the Administration nor Congress can now afford to let the subject wither away without compromising its principles in the process.”

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In response to Forbes recent FCPA article (see here), the Wall Street Journal Law Blog asked (see here) “is the FCPA just a full employment act for the private bar.” Such a question as it relates to the FCPA is not new. This March 1981 Time piece notes that the FCPA was “dubbed by one Wall Street wag” as the “Accountants’ Full Employment Act of 1977.”

Friday Roundup

A “foreign official” headed to prison, more on monitors, the language of bribery, more pre-enforcement action news, and perspectives from the field.

It’s all here in the Friday roundup.

Haitian “Foreign Official” Headed to U.S. Prison

Numerous prior posts (see here, here, and here) have covered the FCPA and FCPA-related enforcement action involving Telecommunications D’Haiti (“Haiti Teleco”).

The action was noteworthy because it involved “foreign officials.” Because the Foreign Corrupt Practices Act only applies to bribe givers and not bribe recipients, the charges were not FCPA charges, but rather a money laundering conspiracy charge.

Earlier this week, Robert Antoine (a former Director of International Relations of Haiti Teleco responsible for negotiating contracts with international telecommunications companies on behalf of Haiti Teleco), was sentenced to four years in prison. In addition, Antoine was ordered to serve three years of supervised release following his prison term, ordered to pay $1,852,209 in restitution, and ordered to forfeit $1,580,771. (See here for the DOJ release).

Certain of the indicted defendants, including “foreign official” Jean Rene Duperval, have not pleaded and the DOJ release notes that “trial for these remaining defendants is scheduled to begin July 19, 2010, in U.S. District Court in Miami.”

Additional Guidance on the Use of Monitors in Deferred Prosecution Agreements and Non-Prosecution Agreements

Most corporate FCPA enforcement actions involve deferred prosecution or non-prosecution agreements. Many of these agreements require the appointment of a compliance monitor.

Thus, most FCPA aficionados are familiar with the “Morford Memo” – the March 2008 DOJ guidance “relating to the use of independent corporate monitors in connection with deferred prosecution agreements and non-prosecution agreements with corporations.” The Morford Memo (see here) sets forth nine basic principles for
drafting monitor-related provisions in such agreements.

Recently Acting Deputy Attorney General Gary Grindler issued a memo (see here) “to supplement the guidance in the Morford Memorandum by adding a tenth basic principle to guide prosecutors in drafting agreements: namely, that an agreement should explain what role the Department could play in resolving any disputes between the monitor and the corporation, given the facts and circumstances of the case.”

The Language of Bribery

The FCPA is a serious topic.

But that doesn’t mean an FCPA article can’t be informative and entertaining at the same time.

Case in point, “A Bribe By Any Other Name” by James Tillen and Sonia Delman (Miller & Chevalier) (see here).

Don’t understand the significance of “moon cakes,” “rice cake expenses” or “black mist?”

You probably should.

As the authors note, “[w]hen an expatriate manager does not recognize that a subordinate is seeking reimbursement for a bribe disguised by a code word or when auditors miss a suspect transaction concealed behind a local idiom, the employees themselves and the company as a whole are at serious risk of running afoul of anti-bribery laws.”

The article concludes with a “few simple steps” companies can take to incorporate the language of bribery into compliance training and policies.

The Flood of Pre-Enforcement Action News Continues

One of these days, the FCPA dam is going to burst because the surge of pre-enforcement action news continues.

Among others in the “stay-tuned” category are: Alcatel-Lucent, Technip, Panalpina, Pfizer and Johnson & Johnson.

Add to the list Universal Corporation, “the world’s leading leaf tobacco merchant and processor.” (see here).

The company’s recent 10-K (see here) notes as follows:

“As a result of a posting to our Ethics Complaint hotline alleging improper activities that involved or related to certain of our tobacco subsidiaries, the Audit Committee of our Board of Directors engaged an outside law firm to conduct an investigation of the alleged activities. That investigation revealed that there have been payments that may have violated the U.S. Foreign Corrupt Practices Act. The payments approximated $2 million over a seven-year period. In addition, the investigation revealed activities in foreign jurisdictions that may have violated the competition laws of such jurisdictions, but we believe those activities did not violate U.S. antitrust laws. We voluntarily reported these activities to the Department of Justice (“DOJ”) and the SEC in March 2006. On June 6, 2006, the SEC notified us that a formal order of investigation had been issued.

Since voluntarily reporting, we have cooperated with and assisted the DOJ and SEC in their investigations, and for the past year we have engaged in settlement discussions with both authorities to resolve the matter. Those negotiations have resulted in agreements in principle being reached with representatives of the DOJ and the staff of the SEC. The final resolution of this matter remains subject to the completion of definitive agreements and the approval and execution of those agreements by the DOJ and the SEC. In addition, each settlement is subject to the approval of a federal district court with jurisdiction over the matter. We have been given no assurance that the settlements will be approved by the DOJ, SEC, or federal district courts. Based on the agreements in principle that have been reached to date, the resolution of this matter with the DOJ and the SEC is expected to include injunctive relief, disgorgement and prejudgment interest, fines, penalties, and the retention of an independent compliance monitor. Based in part on the progress of the matter and consultation with outside counsel, we have recorded accruals from time to time since the matter arose that are adequate to satisfy the estimated financial settlement we expect with the resolution of the matter. The financial settlement is not expected to have a material effect on our financial condition or results of operations.”

Incidentally, on the same day, Universal issued a press release announcing record annual earnings (see here).

U.K. Bribery Bill – Perspectives from the Conference Circuit

Michael Osajda (see here) is an attorney and business ethics consultant. He frequently writes and speaks on FCPA issues, including for World-Check (see here).

In the below guest post, Osajda offers perspectives from recent presentations in Singapore and Hong Kong attended by over 120 business professionals and attorneys.

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“My presentation compared and contrasted the FCPA and the U.K. Bribery Act. I spoke of the different bases for the two statutes, the FCPA being a product of a unique post Watergate cloture and a significant Cold War foreign policy element and the Bribery Act, a product of legislative efficiency and the need for the UK to comply with the OECD convention. The new offenses of foreign private bribery and failure to prevent bribery were stressed.

Like many commentators, the attendees were nervous about the SFO’s stated use of prosecutorial discretion to address issues such as facilitation payments and the appropriateness of business expenses. Attendees were concerned that SFO statements that it does not intend to shut down business and that it will look reasonably at facilitation payments, especially in circumstances that appear to be coercion that can be given to the field. These issues may be a mine filed until some pattern of prosecution or abstention is established. Another concern of attendees was the new strict liability offense of failure to prevent bribery. The attendees were interested as to the elements of “adequate procedures.” While the Sentencing Guidelines, the Woolf Report and OECD guidance are good starts, we will all wait for the guidance to come from the UK Secretary of State on the components of “adequate procedures”.

All in all this Asia trip underscores the world-wide interest of multinationals, whatever their home jurisdictions, to the issue of corruption. All understand that the landscape is changing and are interested in doing the right thing.”

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Also, Trace recently conducted a symposium in London “attended by over 60 company representatives and featuring speakers from government, the private bar and in-house legal and compliance departments.” For insight into what was on the minds of program participants see here.

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