Industry Sweeps
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Industry sweeps – it’s a term in the vocabulary of most FCPA practitioners. And with good reason. Industries that have been subjected to industry sweeps or are reportedly in the middle of industry sweeps include: oil and gas, pharmaceutial / medical devices, and financial services.
But what are industry sweeps, what issues do they pose, and what policy implications are implicated?
Homer Moyer (Miller & Chevalier) recently penned (here) “The Big Broom of FCPA Industry Sweeps” and it is re-posted below with his permission.
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The Big Broom of FCPA Industry Sweeps
Inaugurated by the series of so-called “Panalpina cases,” which focused on companies doing business with the giant Swiss freight forwarding company, FCPA enforcement has seen additional industry-wide government investigations that have come to be known as “industry sweeps.” Focusing on particular industries — pharmaceuticals and medical devices come to mind — industry sweeps are investigations that grow out of perceived FCPA violations by one company that enforcement agencies believe may reflect an industry-wide pattern of wrongdoing.
Industry sweeps are often led by the Securities and Exchange Commission (“SEC”), which has broad subpoena power as a regulatory agency, arguably broader oversight authority than prosecutors. They are different from internal investigations or traditional government investigations, and present different challenges to companies. Because the catalyst may be wrongdoing in a single company, agencies may have no evidence or suspicion of specific violations in the companies subject to an industry sweep. A sweep may thus begin with possible cause, not probable cause. In sweeps, agencies broadly solicit information from companies about their past FCPA issues or present practices. And they may explicitly encourage companies to volunteer incriminating information about competitors. This practice not only fuels the “salesman’s defense” (that “everybody does it”), but can also generate anecdotal or speculative information that simply leads to additional rounds of inquiries.
Inevitably, industry sweeps become organic and evolve, with government investigators using information from one company as the basis for additional requests to others. Pooling information about unreliable third parties, suspect government instrumentalities, and information about employees who have worked for multiple companies can prolong an investigation or cause its scope to expand or turn in new directions.
The coming year could well force some of the issues of industry sweeps to the surface. What threshold of evidence is appropriate to target a particular company in an industry sweep? What prevents sweeps from becoming fishing expeditions that are costly to the companies and unconstrained in the agencies? What are the disclosure considerations for a company in a sweep investigation focused on Asia if issues arise in Latin America? Can a company decline to participate or cooperate, and, if so, what are the risks or trade-offs for doing so? Answers to questions such as these — which often raise policy issues, not legal ones — could affect corporate attitudes about disclosure generally, and possibly result in challenges to the agencies.
Another BRIC In The Anti-Corruption Wall: Brazil Considers Foreign Bribery Law Overhaul
This guest post is authored by Matteson Ellis, the founder and Principal of Matteson Ellis Law, PLLC, who also writes the FCPAmericas Blog.
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The Brazilian Congress is now considering Draft Bill 6.826/2010 that would dramatically strengthen its foreign bribery law. This is a significant development – the result of years of effort by Brazilian authorities working closely with their OECD, United States, and other counterparts. It is also timely. Sophisticated Brazilian-based multinationals are quickly expanding internationally, and encountering corruption risk. At the same time, Brazil is grappling with corruption on the domestic front: the President’s administration has lost six Ministers to corruption allegations since June 2011, and the country consistently ranks high on corruption risk indices.
Brazil’s effort is part of a broader movement. Countries that have adopted the OECD Anti-Bribery Convention, the United Nations Convention Against Corruption and other treaties are working to strengthen their anti-corruption laws. The FCPA Professor summarized Turkey’s recent progress in an earlier post. The Brazilian bill should improve its treaty implementation status with the OECD. (Brazil’s gaps were highlighted in the OECD’s Country Monitoring Reports for Brazil.) Moreover, as a significant effort by a major economy and regional leader, this bill may have impact outside of Brazil.
These provisions constitute dramatic changes in the Brazilian legal system. According to Carlos Henrique da Silva Ayres, one of the attorneys heading the Anti-Corruption and Compliance Committee of the Brazilian Institute for Business Law (Ibrademp): “The new law still requires some adjustments; however, it should be more easily applied than current laws. It introduces features that are relatively new or non-existent in the Brazilian anti-corruption arena, such as the credits corporations will get for compliance programs, self-disclosure and cooperation with authorities.”
Key Provisions in Brazil’s Draft Legislation
In addition to penalizing domestic bribery, Brazil’s draft bill prohibits bribery of foreign public officials, defining the act in a way that appears consistent with the OECD Anti-Bribery Convention. Some provisions are particularly relevant:
Corporate Liability. The draft bill establishes the direct civil liability of corporations (also known as “legal persons”) for bribery of foreign public officials. It also makes corporations liable for the acts of their directors, officers, employees and agents under the theory of respondeat superior. These are dramatic developments in a country where the notion of corporate liability has received only limited recognition.
These changes bring Brazilian law closer to the U.S. Foreign Corrupt Practices Act (FCPA). Why not extend criminal liability to corporations, like the FCPA does? The answer is reflected in Brazil’s civil law system. Unlike common law jurisdictions, civil law systems generally do not apply criminal liability to legal persons. Civil law typically considers corporations to be abstract, intangible entities that have no capacity for the mens rea (intent) required to establish criminal conduct.
The OECD Antibribery Convention recognizes this variation in legal systems and compensates for it. Article 3(2) provides: “In the event that, under the legal system of a Party, criminal responsibility is not applicable to legal persons, that Party shall ensure that legal persons shall be subject to effective, proportionate and dissuasive non-criminal sanctions, including monetary sanctions, for bribery of foreign public officials.”
Tightened Sanctions. The draft bill would establish harsh consequences for bribery of foreign officials. Fines would range between 1% and 30% of the company’s gross revenue. In addition, the bill would make prosecutions public, potentially creating reputational risk. Companies can be debarred from public contracts based on bribery violations.
These steep penalties appear responsive to the requirement of sanctions that are “effective, proportionate and dissuasive.” If the legislation is enacted, it will be important to watch how Brazilian courts apply these sanctions. The OECD Working Group on application of the Convention is certain to review that question (see a previous review here).
Voluntary Disclosure, Cooperation, and Compliance Programs. The draft bill provides that the government should take into account voluntary disclosure, cooperation with government investigations, the existence of pre-existing and effective compliance programs, and other factors when determining sanctions. Specifically, Article 9 states:
“The following will be taken into consideration at the application of the sanction: (i) the seriousness of the offense; (ii) the advantage obtained or sought; (iii) the accomplishment or non-accomplishment of the offense; (iv) the extension of the breach or the danger of injury; (v) the negative result caused by the injury; (vi) the economic status of the company; (vii) the cooperation in investigating the facts, through practices such as reporting violations to public authorities before a legal proceeding is initiated and the promptness in providing information in the course of investigations; and (viii) the existence of internal integrity mechanisms and procedures, audits, and incentives to report violations, as well as the effective application of codes of ethics and conduct within the company.”
This also makes the Brazilian approach similar to that of the FCPA. In fact, many of the provisions in the Brazilian bill appear to be directly lifted from the U.S. Department of Justice’s McNulty Memorandum and Chapter 8 (Sentencing of Organizations) of the 2010 United States Federal Sentencing Guidelines. But the bill goes further than the FCPA by incorporating considerations of such factors into the law. Under the FCPA, such factors make up enforcement policy and practice.
The difference, again, flows from Brazil’s civil law system. As a general principle of law, prosecutors and public authorities do not have discretion to seek specific sanctions. Rather, sanctions must be determined in accordance with a written law. Invoking a memorandum on enforcement practice would have little, if any, effect before a Brazilian court. In order to have any relevance, considerations like cooperation and compliance must be written into the law.
Mr. Ayres, along with Bruno Carneiro Maeda (also of Ibrademp), have testified before the Brazilian Congress about the draft legislation. They point out some lingering questions related to Article 9. They seek clarification on whether companies will get credit for their cooperation after proceedings have already begun. They are also concerned that the draft bill does not describe the elements of a credit-worthy compliance program.
Foreign Official. The Brazilian draft bill defines “Foreign Public Administration” and “Foreign Public Official” in a way that is consistent with the OECD and United Nations Conventions. Specifically, Article 6 provides: “The agencies and government entities or diplomatic representations of a foreign country are considered foreign public administration, no matter their level or sphere of government, as well as companies held directly or indirectly by the government of a foreign country. For purposes of this law, a foreign government official is any individual who, although momentarily or without payment, holds a public position, employment or function in any public agency or entity or diplomatic representations of foreign country, and also in companies held directly or indirectly by the government of a foreign country or in any international public organization.”
This definition encompasses a broad range of entities, including agents of the state, state-owned enterprises, international public organizations, and other instrumentalities of the state. This definition would make employees at these entities “foreign public officials.” The broad definition appears to stand in contrast with ongoing efforts in the United States to clarify or narrow the meaning of that term.
Accounting Provisions. The Brazilian draft bill does not include any accounting provisions, as required under Article 8 of the OECD Anti-Bribery Convention. However, Brazil’s laws provide similar provisions elsewhere, which work to meet the OECD requirement as noted in the OECD Working Group Phase II Report. The report also notes that, while an advanced framework for accounting requirements exists under other laws, requirements under the law for internal controls have room for development.
“The FCPA’s Big Lesson”
[Stay tuned for analysis of the written decision and order expected today from Judge Howard Matz (C.D. of Cal.) throwing out the trial convictions of Lindsey Manufacturing, Keith Lindsey and Steven Lee and dismissing the indictment with prejudice. For coverage of yesterday’s hearing and Judge Matz’s tentative order see here and here]
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Richard Cassin, the pioneer of the FCPA blogosphere, writes nearly every day – sometimes more than once. Thus, picking Cassin’s greatest hit is no easy chore. But in my mind it is easy, this piece (“The FCPA’s Big Lesson”) written by Cassin one year ago (not on his FCPA Blog, but for Ethisphere) is Cassin’s greatest hit.
He begins as follows. “The FCPA is a great statute. It stands for the rule of law and the noble idea that public bribery, no matter how common or petty, is never a victimless crime, no matter where it happens. But the FCPA has some flaws too, and they’re too big to ignore.” It is worth a read, and even though 2011 will go down as the most active year of litigation in the FCPA’s history, Cassin’s points remain valid.
What does Cassin think today? Below he provides some thoughts.
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“Writing the Ethisphere article gave me a chance to blow off steam about some aspects of FCPA enforcement that appeared inconsistent with the way America’s criminal justice system is supposed to work. That Prof Koehler noticed the article and judged it to be a ‘greatest hit’ is a special bonus.
Do the flaws I talked about still exist? Yes they do. During the year just past — and continuing a two-decade trend — no public company defended itself against FCPA charges at trial. Why not? Because corporations are automatically guilty if an employee is convicted of a crime related to his or her job. Why fight when U.S. law makes it impossible to win? Denying corporations the right to defend themselves when they’re accused of crimes is wrong. But giving them a ‘good faith’ defense to FCPA charges would encourage more compliance and return the scales of justice to where they should be.
Again there were no criminal prosecutions against executives from ‘issuers’ that settled enforcement actions. Although a dozen ‘issuers’ resolved FCPA cases during the past year, none of their people have been indicted. Two public company executives — Lessen Change of Watts Water Technologies and Paul Jennings of Innospec — were dinged by the SEC with civil penalties. But the DOJ hasn’t moved against anyone from a settling ‘issuer.’ Does that mean FCPA enforcement is tainted by checkbook justice? It’s a question that won’t go away.
The UK Bribery Act: Engagement With Companies And Compliance Effects
Today’s post is from Richard Alderman (Director of the U.K. Serious Fraud Office).
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The UK Bribery Act: Engagement With Companies And Compliance Effects
By Richard Alderman (Director, SFO)
In the months since the UK Bribery Act came into force on July 1st 2011, there is one question that I have probably been asked more than any other: what are we actually doing under the Act at the SFO?
In part, people are asking me this because of recent comments by some observers, suggesting that the SFO will be under intense pressure to go out and secure convictions very quickly under the new legislation – and that this means we’ll be out there hunting for easy targets.
That is a fairly easy claim to deal with. Easy targets are easy to find. We could go out and find half a dozen cases very quickly that we could probably investigate and prosecute through the criminal justice system, possibly by Christmas.
The SFO’s approach: Finding the Difficult Cases
But is this really what most people want to see? In my view, many people would regard the SFO as taking a rather lazy and unreflective approach if we pursued easy ‘quick wins’ rather than the really difficult and more serious cases. Also, I know which type of cases our staff would prefer to investigate – and it is definitely the more challenging ones.
So, what are we doing? The plain answer is that we’re actively looking for cases to take up – but these cases are the difficult ones. For example, we have been examining the activities of a number of foreign companies with a UK business presence who are involved in bribery in other countries.
We have found a number of these. But what we are looking for in particular is evidence that they have undermined ethical UK businesses. If they have not, then although there may be a technical Bribery Act offence, it is not the type of case where I would want to use our scarce resources, or take up the valuable time of UK courts and juries.
So we have seen instances of bribery involving foreign companies where we have decided not to take them forward for a full investigation, because we cannot see that a UK company lost out. Other authorities might choose to take action, but it is not a priority for the SFO.
However, there are other cases where we have found potential damage to UK companies and their employees. It is still early days – but I can confirm that we are looking at some cases to see whether or not to start using our compulsory powers.
I am under no illusions about the difficulty of these cases. Getting the evidence and getting people before a UK jury will be incredibly difficult. Investigations will be complex, and we will need to make full use of international co-operation and the SFO’s own powers. But make no mistake, these cases are a high priority for us.
Compliance Effects
Aside from questions about our approach to actions under the Bribery Act, a further area of interest is in our view of its compliance effects on companies. Experience shows that laws – and especially new laws – have an enforcement effect as well as a compliance effect, and that the latter of these is often larger.
In the specific context of the Bribery Act itself, a particular question that arises is whether the Bribery Act without an adequate procedures defence would have had the same compliance effects as the Act with adequate procedures. In other words, is it the Bribery Act itself – or the adequate procedures defence specifically – that has resulted in its compliance effects?
It is still early days for the Bribery Act – and it is difficult to answer these questions in detail without hard research into what companies are doing internally in response. However, looking at what US corporations are telling us, they have realised that being compliant under the FCPA does not automatically mean that they are Bribery Act compliant.
This is a message that professional services firms have been trying to hammer home with their clients whether in the UK, US or elsewhere for some time now. I believe it is getting through and that corporations are going on to take action in response. The likelihood is that those Boards that are more committed to good corporate governance will take notice, but if companies wish to ignore it then that is ultimately their choice. They should not be surprised though if the SFO takes a close interest in them. They should also not be surprised if they find that other corporations become less willing to do business with them. I believe they will suffer commercially if they do not have an anti-corruption culture.
In this context, we take differing views of compliance by SMEs and large corporates. We are aware that SMEs – unlike their larger counterparts – often lack the time, resources and readily-available, expensive professional advice needed to move quickly into compliance. So we are taking a more consultative approach to compliance by SMEs, and accept that they may take longer to get there.
The Act’s Impact on our Engagement with Companies
This leads neatly into a further theme that is especially relevant to our approach to the Bribery Act, but also touches on our work under other pieces of legislation: our commitment to engaging with companies. In general, we are finding that engagement is a more effective tool with bribery and corruption under the Bribery Act than it has been in the past with fraud.
On reason for this is that, for a successful prosecution under the UK’s previous bribery and corruption legislation, we had to prove that there was a ‘controlling mind’ at Board level behind the activities. Under the new Act, the key question is whether the Board has put effective structures in place to prevent bribery from taking place. If a company has not done this, and has significant operations in the UK, we can prosecute it for bribery and corruption by any of its employees anywhere in the world.
This is a big change. One effect is that prosecution of fraud is now out of line with bribery and corruption, since to prosecute a company for fraud we still need to prove that people at a senior level knew the fraudulent activity was taking place. Another effect is that acquirers who take over a business, and then discover that suspected bribery and corruption has been (and probably still is) taking place in it, are more likely to come forward, self-report and engage with us.
They are encouraged to do this by an awareness that we will take a pragmatic approach, quite possibly by letting them conduct their own internal investigation and then report the findings to us so we can take a balanced view on further action. They know that their demonstration of goodwill in initially disclosing their suspicions to us will be taken into account.
Our Broader Approach to Intelligence and Proactive Engagement
More broadly, we constantly monitor and review intelligence and other information relating to the activities of corporations within our jurisdiction. This comes to us in all sorts of ways – including suspicious activity reports to the UK’s Serious Organised Crime Agency (SOCA) and increasingly from whistle-blowers contacting our new SFO Confidential hotline. We also receive a lot of information from our international partners, from individuals across the world and indeed from picking up press reports.
With every piece of information, we need to assess whether there is something here that justifies SFO action. It’s a vital decision, and so we have a rigorous internal process for it, including making a number of enquiries to test the information before deciding formally whether to launch an investigation. We need to be as sure as possible that there is something there that justifies us in taking on the case.
When we do decide to do something, our approach can take a number of different forms. In some cases we contact the corporation involved, and say we believe they have a problem and would they like to come and see us. Most – but not all – do come in for that discussion, where we encourage them to agree to undertake an internal investigation and present the findings to us in due course. This makes obvious sense for the corporation, and several have agreed to this.
The Downside of Non-Cooperation
Of course, some corporations may not be interested in a discussion with the SFO – in which case we can carry on doing what we need to do. However, this does mean the corporation has passed up its opportunity for the maximum degree of mitigation and flexibility on our part. I regard this as a short-sighted and misguided approach, but of course that’s a matter for them.
In other cases we think that approaching the corporate is not appropriate – perhaps because of the size and systemic nature of the alleged corruption, the involvement of very senior people, or the potential for evidence to be destroyed. In that sort of case we may well decide to proceed quietly with our investigation. So the first that the corporate will know of our interest is likely to be when we arrive at its door with search warrants – the worst possible outcome for any business.
This is why we encourage companies to be rigorous in looking at allegations they receive internally about instances of corruption. Senior management should be asking hard questions about these – and should have a robust risk assessment process in place to provide as much reassurance as possible. If companies do not police themselves in this way, then the possibility that the SFO will need to take action is all the greater.
Beyond All Boundaries: The Extraterritorial Grasp Of Anti-Bribery Legislation
Today’s post is from Bruce Bean (here – Michigan State University College of Law)
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“The American Branch of the International Law Association held its Annual Law Weekend in New York City this past weekend. As a member of the ABILA Extraterritoriality Committee, I organized an expert panel to highlight how the UK Bribery Act 2010 takes an even more aggressive view of its jurisdictional scope than the Justice Department’s well documented, extraordinarily expansive view of the global reach of the FCPA. The panel included Visiting Professor Alexander Domrin, Oklahoma City University Law School, Philip Urofsky, former DoJ FCPA prosecutor and partner at Shearman & Sterling, Robert Buehler, partner at Hogan Lovells and former Assistant U.S. Attorney for the Southern District of NY, and Jeremy Carver, President of the UK Branch of the ILA as well as a partner for three decades at Clifford Chance.
The provocative title of the panel discussion, “Beyond All Boundaries: The Extraterritorial Grasp of Anti-Bribery Legislation,” attracted an animated crowd. I shared my opinion that a hyper-aggressive DoJ had expanded the reach of the FCPA far beyond the language of the law and the intent of Congress. I pointed out that this overreaching had been exceeded by the egregious extraterritorial grasp of Section 7 of the Bribery Act, which imposes strict criminal liability on a company for failing to prevent a bribe, even a facilitation payment by a non-UK person who is not employed by that company. And the guilty-until-proven-innocent company need not be a UK company, or have a place of business in the UK. The statutory nexus of the Bribery Act is merely that the company once conducted “a part of a business, in any part of the UK.”
Philip Urofsky, the long-time DoJ FCPA prosecutor, began his presentation by announcing that he “strongly disagreed” with everything I had said. In practice, he noted, the commerce clause nexus of the FCPA is met when a dollar wire transfer between two offshore jurisdictions clears through a New York money center bank, even though there was no “intent” by either of the parties involved to have any connection with the U.S.
Bob Buehler pointed out that the jurisdiction of the Southern District’s U.S. Attorney’s office is its statutory jurisdiction which includes Manhattan and its “contiguous waters.” I innocently asked if that extended to the Atlantic Ocean. The response was, perhaps not, but driving over the Verrazano Bridge between two boroughs not within the Southern District can bring jurisdiction to the “Sovereign District.”
Jeremy Carver, now President of Transparency International UK, testified regularly before Parliamentary and other Committees during the ten years of deferral and delay which finally produced the Bribery Act with its seriously aggressive overseas reach. More than once Carver accused the UK government of misleading Parliament about the adequacy of UK laws applicable to overseas bribery. A speech he gave at the Commonwealth Club in February 2007 was entitled “Is the UK Government Serious about Fighting International Corruption?” In later testimony he announced that the “government has done its utmost to undermine the efforts that so many others have been making to combat foreign bribery.”
As finally effective on July 1, 2011, the UK’s Bribery Act has enormous extraterritorial reach. Carver pointed out that it could have been worse. During the reign of Queen Elizabeth I, as Sir Francis Drake roamed the Seven Seas, the suggestion was made that the overwhelming dominance of British Navy meant that the Queen Elizabeth’s jurisdiction should extend over all the oceans. This suggestion was not accepted at the time, although I remain convinced that the UK Bribery Act 2010 is an attempt to do just that.
In whatever ways the Bribery Act evolves, few will forget last weekend’s ABILA panel discussion.”