FCPA Debarment Bill Takes Step Forward … Related Bill Also Introduced
Last week, the House Committee on Oversight and Government Reform “favorably forwarded several pieces of good government legislation” to the House of Representatives. (see here).
One bill taking the next step is H.R. 5366 – the “Overseas Contractor Reform Act.”
As I discussed in this May post when H.R. 5366 was introduced, the bill states that “any person found to be in violation of the Foreign Corrupt Practices Act of 1977 shall be proposed for debarment from any contract or grant awarded by the Federal Government within 30 days after a final judgment of such violation.”
In the prior post (here) I noted that the bill is a step in the right direction, but pointed out several shortcomings and said that the bill, if enacted, could become a “toothless tiger” because it assumes all FCPA enforcement actions are resolved through judicial proceedings and it assumes all FCPA enforcement actions are resolved with charges that actually fit the facts.
As noted in this release from the bill’s sponsor, Representative Peter Welch (D-VT), the bill was drafted “in response to an ongoing investigation into whether Xe Services – formerly known as Blackwater Worldwide – bribed Iraqi officials following a 2007 Baghdad shooting that left 17 Iraqis dead.” (See here for more).
Yet if enacted the bill could, if drafted with an understanding of how FCPA actions are resolved, have far-reaching implications as several major government suppliers have recently resolved FCPA enforcement actions (whether anti-bribery or books or records and internal controls) or are currently under investigation for potential FCPA violations.
For video footage of H.R. 5366’s passage by the House Committee (see here – the first video).
*****
H.R. 5366 is not the only FCPA-related bill to keep on your radar screen.
On July 22nd, Representative Raymond Green (D-TX) (here) introduced H.R. 5837 (see here).
The bill states that an “Executive Agency” “may not enter into a contract for the procurement of goods or services with any person or entity unless that person or entity has certified that the person or entity, and each of its officers, employees, and agents, have not violated [the FCPA’s anti-bribery provisions] or any comparable law of any other country.” Further, under the bill, an “Executive Agency” “may not allow any contractor awarded a contract by the agency to enter into a subcontract (at any tier) under the contract with any person or entity that has not made the certification …”
My critique of this well-intentioned bill is the same as H.R. 5366.
Most FCPA enforcement actions are settled through non-prosecution or deferred prosecution agreements. Thus, if a company settles an FCPA enforcement through such a vehicle, the company likely will not be found to have “violated” the FCPA making H.R. 5837 a “toothless tiger.”
Further, the bill assumes that facts implicating the FCPA’s anti-bribery provisions are actually resolved with FCPA anti-bribery charges. As demonstrated by the all too frequent “bribery, yet no bribery” FCPA enforcement actions, that is simply not the case as companies are frequently allowed to settle egregious instances of bribery without being charged with anti-bribery violations.
So great is the facade of FCPA enforcement in many cases that H.R. 5366 and H.R. 5837, if enacted as currently drafted, are unlikely to have any effect.
Smith & Wesson’s Recent Disclosures
In January, Amaro Goncalves was one of the individuals indicted in the Africa Sting case.
Goncalves is described in the indictment as “the Vice President of Sales for Company A, a United States company headquartered in Springfield, Massachusetts. Company A was a world-wide leader in the design and manufacture of firearms, firearm safety/security products, rifles, firearms systems, and accessories. The shares of Company A were publicly traded on the NASDAQ stock exchange.”
Company A is Smith & Wesson, a fact quickly acknowledged by the company in this press release.
I noted in January:
“At present, this case only involves individuals.
However, as indicated by Assistant Attorney General Breuer in yesterday’s DOJ release (here) the investigation is “ongoing” and you can bet that many of the companies which employ these individuals are “lawyering up” as past FCPA enforcement actions demonstrate that corporate enforcement actions or investigations often, but not always, precede or follow individual enforcement actions.”
Indeed, the companies indirectly implicated in the Africa Sting by their employees alleged conduct did “lawyer up.”
Because Smith & Wesson is a public company, the public is provided a better glimpse of how the Africa Sting case is affecting this company compared to the many other companies indirectly implicated – many of which are small, private businesses.
On June 30th, Smith & Wesson reported its Fourth Quarter and Full Year 2010 Financial Results Ended April 30, 2010 (see here). The company release contains this paragraph:
“Operating expenses of $89.1 million, or 21.9% of sales, for fiscal 2010 decreased versus operating expenses of $170.5 million, or 50.9% of sales, for fiscal 2009. Excluding the impact of the impairment charge recorded in the second quarter of fiscal 2009 and $9.7 million of operating expense at USR not contained in prior year results, operating expenses increased $7.1 million for the current fiscal year. This increase included $3.2 million in legal and consulting fees related to allegations against one of our employees under the Foreign Corrupt Practices Act (FCPA).”
If nothing more, Amaro Goncalves is probably not on the short-list for employee of the month because of his alleged conduct.
Yesterday, Smith & Wesson filed its annual report (see here). The report contained the following:
“Foreign Corrupt Practices Act (FCPA)
On January 19, 2010, the U.S. Department of Justice (“DOJ”) unsealed indictments of 22 individuals from the law enforcement and military equipment industries, one of whom was our Vice President−Sales, International & U.S. Law Enforcement. We were not charged in the indictment. We also were served with a Grand Jury subpoena for the production of documents. We have always taken, and continue to take seriously, our obligation as an industry leader to foster a responsible and ethical culture, which includes adherence to laws and industry regulations in the United States and abroad. Although we are cooperating fully with the DOJ in this matter and have undertaken a comprehensive review of company policies and procedures, the DOJ may determine that we have violated FCPA laws. We cannot predict when this investigation will be completed or its outcome. There could be additional indictments of our company, our officers, or our employees. If the DOJ determines that we violated FCPA laws, or if our employee is convicted of FCPA violations, we may face sanctions, including significant civil and criminal penalties. In addition, we could be prevented from bidding on domestic military and government contracts, and could risk debarment by the U.S. Department of State. We also face increased legal expenses and could see an increase in the cost of doing international business. We could also see private civil litigation arising as a result of the outcome of the investigation. In addition, responding to the investigation may divert the time and attention of our management from normal business operations. Regardless of the outcome of the investigation, the publicity surrounding the investigation and the potential risks associated with the investigation could negatively impact the perception of our company by investors, customers, and others.
SEC Investigation
Subsequent to the end of fiscal 2010, we received a letter from the staff of the SEC giving notice that the SEC is conducting a non−public, fact−finding inquiry to determine whether there have been any violations of the federal securities laws. It appears this civil inquiry was triggered in part by the DOJ investigation into potential FCPA violations. We have always taken, and continue to take seriously, our obligation as an industry leader to foster a responsible and ethical culture, which includes adherence to laws and industry regulations in the United States and abroad. Although we are cooperating fully with the SEC in this matter, the SEC may determine that we have violated federal securities laws. We cannot predict when this inquiry will be completed or its outcome. If the SEC determines that we have violated federal securities laws, we may face injunctive relief, disgorgement of ill−gotten gains, and sanctions, including fines and penalties, or may be forced to take corrective actions that could increase our costs or otherwise adversely affect our business, results of operations, and liquidity. We also face increased legal expenses and could see an increase in the cost of doing business. We could also see private civil litigation arising as a result of the outcome of this inquiry. In addition, responding to the inquiry may divert the time and attention of our management from normal business operations. Regardless of the outcome of the inquiry, the publicity surrounding the inquiry and the potential risks associated with the inquiry could negatively impact the perception of our company by investors, customers, and others.”
Smith & Wesson’s disclosure is hardly surprising. Anytime a company’s employee is criminally indicted for an FCPA violation, it is reasonable to assume that the DOJ will wonder “who knew what and when” and will seek to discover whether the employee’s alleged conduct is isolated or evidence of broader, more systemic conduct. When that employee is the “Vice President−Sales, International & U.S. Law Enforcement” it is virtually guaranteed that the DOJ will ask such questions.
It is unlikely that Smith & Wesson is the only company implicated in the Africa Sting case under investigation. However, as stated above, because Smith & Wesson is a public company, the public is provided a better glimpse of how the Africa Sting case is affecting this company compared to the many other companies implicated – many of which are small, private businesses. These companies are “domestic concerns” and thus subject to the FCPA, it’s just that FCPA inquiries of non-public companies generate less attention that FCPA inquiries of public companies.
Nor is it surprising that Smith & Wesson disclosed the existence of an SEC investigation.
I noted in January:
“Given that one of the individuals indicted is employed by a public-company issuer, the SEC may also be interested in that company from, at the very least, an FCPA books and records and internal control perspective.”
Even if Smith & Wesson is never charged with violating the FCPA’s antibribery provisions, it is likely that the company could face some exposure under the FCPA’s books and records and internal control provisions.
The SEC’s analysis would likely be as follows.
Goncalves, if the alleged conduct is true, no doubt, while a Smith & Wesson employee, made entries on the company’s books and records that did not accurately or fairly represent the transactions at issue. That, in and of itself, would be an FCPA books and records violation. Further, the SEC will take the position that if Smith & Wesson had effective internal controls, Goncalves could not have engaged in the conduct he is alleged to have engaged in. If he did, this in and of itself, is evidence that Smith & Wesson lacked effective internal controls.
A bit simplistic, yes. But this is perhaps how the Smith & Wesson inquiry will play out.
A final point.
Smith & Wesson is a supplier to numerous government customers and military installations. Under guidelines issued by the Office of Management and Budget, a person or firm found in violation of the FCPA may be barred from doing business with the Federal government. Add this issue to the list of issues to follow as the Smith & Wesson FCPA inquiry escalates. However, this sanction (to my knowledge) has never been used against an FCPA violator.
FCPA Debarment Bill Introduced
Last week, Representative Peter Welch (D-VT) introduced H.R. 5366 (see here).
Titled the “Overseas Contractor Reform Act,” the bill states that “it is the policy of the United States Government that no Government contracts or grants should be awarded to individuals or companies who violate the Foreign Corrupt Practices Act of 1977.”
The bill states, “any person found to be in violation of the Foreign Corrupt Practices Act of 1977 shall be proposed for debarment from any contract or grant awarded by the Federal Government within 30 days after a final judgment of such violation.”
However, there is a big “unless” qualifier.
The qualifier is “unless waived by the head of a Federal Agency.” The bill states: “The head of a Federal agency may waive this section for a Federal contract or grant. Any such waiver shall be reported to Congress by the head of the agency concerned within 30 days from the date of the waiver, along with an accompanying justification.”
Because most FCPA enforcement actions are settled through a non-prosecution agreement (NPA) or deferred prosecution agreements (DPA) (see here), the bill may need some tweaking if it is to be effective.
Among other issues will be: is a company that agrees to an NPA or DPA to resolve an FCPA case “found to be in violation of the FCPA.” Likely not.
Also, the bill defines “final judgment” as when “all appeals of the judgment have been finally determined, or all time for filing such appeals has expired.” Again, this assumes that all FCPA enforcement actions are resolved through actual judicial proceedings – which is not how FCPA enforcement works in many cases.
Other issues with the bill is that “persons” merely includes: an individual, a partnership and a corporation. Other business entities are equally capable of violating the FCPA and the bill, to be most effective, should adopt the definition of “domestic concern” in the FCPA. (see 78dd-2(h)(1) here).
Other potential shortcomings with the bill is that it only applies to violations of the FCPA’s antibribery provisions. Thus, the bill would not be triggered by the recent “bribery, yet no bribery” cases (Daimler, BAE, and Siemens) – see here, here and here. In these cases, despite DOJ allegations that would seem to establish that the company violated the FCPA’s antibribery provisions, none of these companies were charged with violating the FCPA’s antibribery provisions. Instead, non-FCPA charges or FCPA books and records and internal controls violations were charged in an attempt to avoid application of the European Union debarment provisions. (This fact is apparent from the DOJ’s sentencing memos in the cases – see here).
The big picture flaw with H.R. 5366 (as currently drafted) is it assumes all FCPA enforcement actions are resolved through judicial proceedings and it assumes all FCPA enforcement actions are resolved with charges that actually fit the facts.
Neither of these assumptions are accurate – that why I call FCPA enforcement, in many cases, a facade.
Nevertheless, despite the shortcomings of H.R. 5366 as drafted, the bill is a step in the right direction.
The bill has been referred to the House Oversight and Government Reform Committee. Yesterday’s post (see here) profiled a letter from the Chairman of that committee, Edolphus Towns (D-NY), to Attorney General Holder regarding debarment issues.
Congressman Towns Is Asking The Right Questions
One interesting, surprising, and controversial aspect of FCPA enforcement is that the U.S. government remains a lucrative customer for many FCPA violators, including some of the most egregious violators.
Last December, on the one-year anniversary of the record-setting Siemens enforcement actions, I ran this post – “Siemens … The Year After.”
Among other things, the post noted that in the year since resolution of the Siemens FCPA matter, the U.S. government continues to do substantial business with the company it charged with engaging in a pattern of bribery “unprecedented in scale and geographic scope.”
Using www.recovery.gov, the post then identifies many of the hundreds of government contracts awarded to Siemens’ business units with funds made available from the American Recovery and Reinvestment Act, the $787 billion stimulus bill passed by Congress and signed by President Obama in February 2009.
These contracts have been awarded by the following government agencies: Department of Defense, Department of the Air Force, Department of the Army, Department of Transportation, Department of Health and Human Services, Department of Energy, Department of Commerce, Department of Housing and Urban Development, and the General Services Administration. According to Recovery.gov, even the DOJ (i.e. the same government agency that prosecuted Siemens for a pattern of bribery the agency termed “unprecedented in scale and geographic scope”) awarded a Siemens business unit a contract funded with stimulus dollars. Because these are just government contracts awarded with stimulus money, they represent merely the tip of the iceberg.
Siemens is not alone.
In February, BAE settled “FCPA-like” charges. Since the enforcement action, the company has been inking contracts with U.S. government agencies left and right.
Last week it was a $10.7 million contract with the U.S. Army (see here). The week before it was a $5.5 million contract and a $10 million contract with U.S. government agencies (see here and here).
Numerous other FCPA violators could be listed as well.
Against this backdrop, Congressman Edolphus Towns (D-NY), Chairman of the House Committee on Oversight and Government Reform, is asking the right questions.
In a May 18th letter to Attorney General Eric Holder (see here) the Committee expresses its concern “that settlements of civil and criminal cases by DOJ are being used as a shield to foreclose other appropriate remedies, such as suspension and debarment, that protect the government from continuing to do business with contractors who do not have satisfactory records of quality performance and business ethics.”
The letter specifically mentions Kellogg, Brown & Root (KBR), including its 2009 FCPA enforcement action (see here and here).
The letter notes that “remarkably, neither the criminal [FCPA] conviction” nor KBR’s other legal woes “have precluded KBR from continuing to receive new government contracts.”
The letter then correctly notes, as detailed above, that “KBR does not appear to be an isolated example of this inconsistent policy whereby DOJ pursues fines and criminal sanctions for illegal actions by government contractors, yet the negotiated resolution of these cases does not have any effect on the company’s eligibility to continue to receive new contracts. In fact, an agreement by DOJ to intervene on the company’s behalf in any collateral proceedings, such as suspension and debarment, is a staple of deferred prosecution agreements.”
The letter continues:
“This type of clause, in which DOJ agrees to take the company’s side in suspension and debarment proceedings, has become standard and continues to this day. In a settlement just last month in which Daimler paid $185 million to settle criminal and civil charges that it violated the Foreign Corrupt Practices Act, DOJ “agrees to cooperate with Daimler” “[w]ith respect to Daimler’s present reliability and responsibility as a government contractor.” (See here for the Deferred Prosecution Agreement – para 21).
The letter concludes by the Committee asking for answers to the following questions by May 28th.
1. Does DOJ consider resolution of charges to foreclose action by other government agencies to suspend or debar companies from contracting?
2. In view of the fact that suspension and debarment is not a penalty, but is an important means for government agencies to protect themselves from unscrupulous and poorly performing contractors, please provide a detailed explanation of whether the Justice Department believes it is in the government’s best interest to continue to award contracts to those with a record of violations of law.
3. Does DOJ consult with federal government contracting authorities when entering into settlement agreements with companies that compete for government contracts?
4. Identify all instances in which DOJ officials intervened in a suspension and debarment proceeding on behalf of government contractors since 2005 and explain the basis for the DOJ intervention.
These are all the right questions to ask of the DOJ.
I’ve noted in numerous other posts (and elsewhere) that DOJ’s deterrance message will not fully be heard until an FCPA violator is debarred from receiving lucrative government contracts.
For a copy of the Committee’s news release (see here).
Multilateral Development Banks Sign Cross-Debarment Agreement
In April, five multilateral development banks (MDB’s) – the World Bank, the African Development Bank, the Asian Development Bank, the European Bank for Reconstruction and Development, and the Inter-American Development Bank Group – signed an agreement to “cross-debar firms and individuals found to have engaged in wrongdoing in MDB-financed development projects. (See here for more information).
World Bank Group President Robert Zoellick noted that with the “cross-debarment agreement among development banks, a clear message on anticorruption is being delivered: steal and cheat from one, get punished by all.”
Under the agreement (here), each participating institution “will enforce debarment decisions made by another participating institution” to the extent the debarment exceeds one year. However, as is often the case, notwithstanding such a commitment, the agreement also states that a “participating institution may decide not to enforce a debarment by the sanctioning institution where such enforcement would be inconsistent with its legal or other institutional considerations …”
It remains to been seen whether the cross-debarment agreement will have any deterrant effect by raising the “cost” of engaging in bribery and corruption.
For a World Bank list of debarred firms and individuals (see here).
In July 2009, the World Bank announced (here) “an agreement of up to a four-year debarment for Siemens’ Russian subsidiary, and a voluntary two-year shut-out from bidding on Bank business for Siemens AG and all of its consolidated subsidiaries and affiliates.” In November 2009, the World Bank announced (here) that it “debarred [for four years] Limited Liability Company Siemens (OOO Siemens), a Russian subsidiary of Siemens AG, for having engaged in fraudulent and corrupt practices in relation to a World Bank-financed project – Moscow Urban Transport Project.” For more information on what was and was not included in that debarment proceeding, see here.