The Numbers Do Not Support Chair White’s Statement Regarding Individual FCPA Enforcement Actions
In this recent testimony before the House Financial Services Committee, SEC Chair Mary Jo White stated: “as in other areas, the Commission is focused on holding individuals accountable in FCPA cases.” (emphasis added).
The numbers do not support White’s statement.
As highlighted in this recent post, since 2008 approximately 85% of SEC corporate FCPA enforcement actions have not (at least yet) resulted in any related SEC action against company employees.
Indeed, prior to the SEC’s November 2014 FCPA enforcement action against Stephen Timms and Yasser Ramahi (individuals who worked in sales at FLIR System Inc.) there was a 2.5 year gap in any SEC individual enforcement actions. During that 2.5 years, the SEC brought 19 corporate enforcement actions and not one involved any related SEC action against company employees.
As to the accountability portion of White’s statement, the two SEC individual FCPA enforcement during the last three years (the above Timms / Ramahi action and the January 2015 action against former PBSJ International employee Walid Hatoum) involved SEC administrative orders in which the individuals were allowed to settle without admitting or denying the SEC’s findings.
It is debatable what is more concerning.
A political actor making assertions without knowledge of and/or understanding of the underlying facts.
Or a political actor making assertions with knowledge of and/or understanding of the underlying facts, but making the political statement anyway.
Regardless of the cause or reason prompting Chair White’s recent statement, the numbers do not support her assertion that the SEC is “focused on holding individuals accountable in FCPA cases.”
SEC Enforcement Director Talks FCPA And Is On The Hot Seat Over Administrative Proceedings
Last week, Andrew Ceresney testified before the House Financial Services in a hearing titled “Oversight of the SEC’s Enforcement Division.”
As highlighted below, Ceresney’s testimony touched upon Foreign Corrupt Practices Act issues and during the hearing Ceresney was on the hot seat regarding the surge in SEC administrative proceedings to resolve enforcement actions.
In his written testimony, Ceresney stated as following regarding the FCPA.
“Pursuing violations of the FCPA remains a critical part of our enforcement efforts, as international bribery saps investor confidence in the legitimacy of a company’s performance and undermines the accuracy of a company’s books and records, among other negative impacts. The Division, and particularly the specialized FCPA unit, is active in this area, bringing significant and impactful cases, often in partnership with its law enforcement and regulatory counterparts both at home and abroad. Last fiscal year, the Commission obtained orders for over $380 million in disgorgement and penalties in FCPA cases. In FY 2013, the SEC and DOJ released A Resource Guide to the U.S. Foreign Corrupt Practices Act. The guide takes a multi-faceted approach toward setting forth the statute’s requirements, providing insights into SEC and DOJ enforcement practices.
In today’s globalized marketplace, Enforcement’s ability to protect investors and maintain fair and efficient markets is often dependent on the Division’s ability to investigate misconduct that takes place, at least in part, abroad. In coordination with the SEC’s Office of International Affairs, the Division has expanded its efforts to obtain evidence of potential wrongdoing from around the globe. Many of Enforcement’s FCPA investigations rely on evidence obtained from foreign jurisdictions, and often are conducted in parallel with foreign governments. Other areas, such as financial reporting and accounting fraud, asset management, and insider trading, also often rely on evidence obtained through foreign regulators.”
Whether many of the SEC’s recent FCPA enforcement actions (such as Bruker Corp., Layne Christensen, Smith & Wesson and one against former employees of FLIR System, Inc ) were “significant and impactful” is of course subject to debate.
During the hearing, Ceresney found himself on the hot seat over the SEC’s prominent use of administrative proceedings to resolve enforcement actions. As highlight in this article, Rep. Scott Garrett (R-N.J.) reportedly stated as follows in an opening statement:
“While bringing more cases through the administrative proceedings can lead to lower costs for the agency and increases in efficiency, it’s important to realize that those benefits come with a cost. The cost is less due process protections for defendants.”
“Because the SEC’s administrative proceedings use the SEC’s procedural rules, respondents are forced to operate on a condensed timeframe and do not have the benefit of some of the fundamental due process protections under federal civil procedures.”
As noted in the article:
“Rep. Sean Duffy (R-Wis.) also hammered the agency’s head of enforcement, Andrew Ceresney, over the fairness of administrative law proceedings. Duffy questioned the SEC’s track record in these hearings, in which it won 100 percent of its cases last year.
“You won every case. How about with regard to the cases you brought in federal court? One hundred percent there? No, you won 11 out of 18 [cases]. You think there could be any correlation when you actually hire the judges, and you set the rules, that you win all the cases?” Duffy asked somewhat sarcastically.”
Concern as to the surge in the SEC’s use of the administrative process to resolve enforcement actions, including in the FCPA context, is warranted.
As highlighted in prior posts, of the seven SEC corporate FCPA enforcement actions in 2014, six (86%) were resolved through SEC administrative orders meaning there was not one ounce of judicial scrutiny.
Judge Jed Rakoff (S.D.N.Y.) has been among the more prominent critics of this surge. As highlighted in this prior post, Judge Rakoff has asked: “is the SEC becoming a law unto itself?”
Analyzing The SEC’s Recent FCPA Pharma Speech
In November 2009, then DOJ Assistant Attorney General Lanny Breuer delivered this Foreign Corrupt Practices Act speech at a pharmaceutical industry conference. In the speech, Breuer warned the audience as follows.
“[C]onsider the possible range of “foreign officials” who are covered by the FCPA: Some are obvious, like health ministry and customs officials of other countries. But some others may not be, such as the doctors, pharmacists, lab technicians and other health professionals who are employed by state-owned facilities. Indeed, it is entirely possible, under certain circumstances and in certain countries, that nearly every aspect of the approval, manufacture, import, export, pricing, sale and marketing of a drug product in a foreign country will involve a “foreign official” within the meaning of the FCPA.”
In the speech, Breuer also talked about “the importance [of] rigorous FCPA compliance polic[ies] that are faithfully enforced” and reminded the audience as follows.
“[A]ny pharmaceutical company that discovers an FCPA violation should seriously consider voluntarily disclosing the violation and cooperating with the Department’s investigation. If you voluntarily disclose an FCPA violation, you will receive meaningful credit for that disclosure. And if you cooperate with the Department’s investigation, you will receive a meaningful benefit for that cooperation—without any request or requirement that you disclose privileged material. Finally, if you remediate the problem and take steps to ensure that it does not recur, you will benefit from that as well.”
Over five years and ten FCPA enforcement actions against pharma/healthcare companies later, Andrew Ceresney (Director of the SEC’s Enforcement Division) delivered a nearly identical speech earlier this week.
The below post excerpts Ceresney’s speech.
When reviewing the speech, you may want to keep the following in mind.
As highlighted in this prior post, the enforcement theory that physicians, lab personnel, etc. are “foreign officials” under the FCPA was first used in 2002 and has since been used in 17 corporate enforcement actions.
Even even though Ceresney’s speech contains several citations, it is telling that the following assertion lacks any citation “doctors, pharmacists, and administrators from public hospitals in foreign countries … are often are classified as foreign officials for purposes of the FCPA.”
There is no citation for this assertion because it is one of the most dubious enforcement theories of this new era of FCPA enforcement and an enforcement theory that finds no support in the FCPA’s extensive legislative history. (See here for “The Story of the Foreign Corrupt Practices Act“).
Of further note, despite extracting hundreds of millions of dollars from risk averse corporations based on this “foreign official” theory, the DOJ and SEC have never used this enforcement theory to charge any individual.
Another issue to consider.
As highlighted in this recent post, despite the continued foreign scrutiny of the pharma and healthcare industry, the corporate dollars continue to flow to U.S. physicians and other healthcare workers. It is one of the more glaring double standards when it comes to FCPA enforcement and enforcement of U.S. domestic bribery laws.
With that necessary information, to Ceresney began his speech as follows.
“Pursuing FCPA violations is a critical part of our enforcement efforts. International bribery has many nefarious impacts, including sapping investor confidence in the legitimacy of a company’s performance, undermining the accuracy of a company’s books and records and the fairness of the competitive marketplace. Our specialized FCPA unit as well as other parts of the Enforcement Division continue to do remarkable work in this space, bringing significant and impactful cases, often in partnership with our criminal partners.
Now, our FCPA focus obviously covers many industries. For example, we have conducted a recent sweep in the financial services industry that will yield a number of important cases. But the pharma industry is one on which we have been particularly focused in recent years. A few factors combine to make it a high-risk industry for FCPA violations. Pharmaceutical representatives have regular contact with doctors, pharmacists, and administrators from public hospitals in foreign countries. Those people often are classified as foreign officials for purposes of the FCPA, and they often decide what products public hospitals or pharmacies will purchase. This influence over the awarding of contracts is true for virtually every country around the globe.
There have been three types of misconduct that we have seen arise most often in our pharma FCPA cases. One is “Pay-to-Prescribe”; another is bribes to get drugs on the approved list or formulary; and the third is bribes disguised as charitable contributions. Let me discuss each of these in turn.
In “Pay-to-Prescribe” cases, we see public official doctors and public hospitals being paid bribes in exchange for prescribing certain medication, or other products such as medical devices. Some of our cases involve simple cash payments to doctors and other medical officials. But we have also seen some more innovative schemes created for the purposes of rewarding prescribing physicians. For example, in our 2012 action against Pfizer, subsidiaries in different countries found a variety of illicit ways to compensate doctors. In China, employees invited “high-prescribing doctors” in the Chinese government to club-like meetings that included extensive recreational and entertainment activities to reward doctors’ past product sales or prescriptions. Pfizer China also created various “point programs” under which government doctors could accumulate points based on the number of Pfizer prescriptions they wrote. The points were redeemed for gifts ranging from medical books to cell phones, tea sets, and reading glasses. In Croatia, Pfizer employees created a “bonus program” for Croatian doctors who were employed in senior positions in Croatian government health care institutions. Once a doctor agreed to use Pfizer products, a percentage of the value purchased by a doctor’s institution would be funneled back to the doctor in the form of cash, international travel, or free products. Each of these schemes violated the FCPA by routing money to foreign officials in exchange for business.
Let me turn to a second form of bribery, which is aimed at getting products on a formulary. Of course, getting your company’s drugs on formularies is important to success in this industry. But the FCPA requires that you do this without paying bribes, and we have taken action where companies have crossed that line. We brought a case against Eli Lilly that included such violations. There, the company’s subsidiary in Poland made payments totaling $39,000 to a small foundation started by the head of a regional government health authority. That official, in exchange, placed Lilly drugs on the government reimbursement list. That action involved a variety of other FCPA violations and Eli Lilly paid $29 million to settle the matter.
The Eli Lilly case brings me to my third point, which concerns bribes disguised as charitable contributions. As you might know, the FCPA prohibits giving “anything of value” to a foreign official to induce an official action to obtain or retain business, and we take an expansive view of the phrase “anything of value.” The phrase clearly captures more than just cash bribes, and Eli Lilly is not the only matter where we have brought an action arising out of charitable contributions.
For example, in Stryker, we charged a medical technology company after subsidiaries in five different countries paid bribes in order to obtain or retain business. Stryker’s subsidiary in Greece made a purported donation of nearly $200,000 to a public university to fund a laboratory that was the pet project of a public hospital doctor. In return, the doctor agreed to provide business to Stryker. Stryker agreed to pay $13.2 million to settle these and other charges.
Similarly, in Schering-Plough, we brought charges against the company arising out of $76,000 paid by its Polish subsidiary to a charitable foundation. The head of that foundation was also the director of a governmental body that funded the purchase of pharmaceutical products and that influenced the purchase of those products by other entities, such as hospitals. In settling our action, Schering-Plough consented to paying a $500,000 penalty.
The lesson is that bribes come in many shapes and sizes, and those made under the guise of charitable giving are of particular risk in the pharmaceutical industry. So it is critical that we carefully scrutinize a wide range of unfair benefits to foreign officials when assessing compliance with the FCPA – whether it is cash, gifts, travel, entertainment, or charitable contributions. We will continue to pursue a broad interpretation of the FCPA that addresses bribery in all forms.”
Under the heading “Compliance Program,” Ceresney stated:
“The best way for a company to avoid some of the violations that I have just described is a robust FCPA compliance program. I can’t emphasize enough the importance of such programs. This is a message that I think has started to get through in the past 5 years.
The best companies have adopted strong FCPA compliance programs that include compliance personnel, extensive policies and procedures, training, vendor reviews, due diligence on third-party agents, expense controls, escalation of red flags, and internal audits to review compliance. I encourage you to look to our Resource Guide on the FCPA that we jointly published with the DOJ, to see what some of the hallmarks of an effective compliance program are. I’ll highlight just a couple.
First, companies should perform risk assessments that take into account a host of factors listed in the guide and then place controls in these risk areas. The pharmaceutical industry operates in virtually every country, including many high risk countries prone to corruption. The industry also comes into contact with customs officials and may need perishable medicines and other goods cleared through customs quickly. They may also come into contact with officials involved in licensing and inspections. These are just a few examples of risk factors that a risk assessment should be focused on in this particular sector.
A healthy compliance program should also include third-party agent due diligence. In addition to using third-party agents, many pharmaceutical companies use distributors. This creates the risk that the distributor will use their margin or spread to create a slush fund of cash that will be used to pay bribes to foreign officials. Because of this added layer of cash flow, companies frequently improperly account for bribes as legitimate expenses. To properly combat against these abuses, a compliance program must thoroughly vet its third-party agents to include an understanding of the business rationale for contracting with the agent. Appropriate expense controls must also be in place to ensure that payments to third-parties are legitimate business expenses and not being used to funnel bribes to foreign officials.”
Under the heading, “Self-Reporting and Cooperation,” Ceresney stated:
“The existence of FCPA compliance programs place companies in the best position to detect FCPA misconduct and allow the opportunity to self-report and cooperate. There has been a lot of discussion recently about the advisability of self-reporting FCPA misconduct to the SEC. Let me be clear about my views – I think any company that does the calculus will realize that self-reporting is always in the company’s best interest. Let me explain why.
Self-reporting from individuals and entities has long been an important part of our enforcement program. Self-reporting and cooperation allows us to detect and investigate misconduct more quickly than we otherwise could, as companies are often in a position to short circuit our investigations by quickly providing important factual information about misconduct resulting from their own internal investigations.
In addition to the benefits we get from cooperation, however, parties are positioned to also help themselves by aggressively policing their own conduct and reporting misconduct to us. We recognize that it is important to provide benefits for cooperation to incentivize companies to cooperate. And we have been focused on making sure that people understand there will be such benefits. We continue to find ways to enhance our cooperation program to encourage issuers, regulated entities, and individuals to promptly report suspected misconduct. The Division has a wide spectrum of tools to facilitate and reward meaningful cooperation, from reduced charges and penalties, to non-prosecution or deferred prosecution agreements in instances of outstanding cooperation. For example, we announced our first-ever non-prosecution agreement in an FCPA matter with a company that promptly reported violations and provided real-time, extensive cooperation in our investigation. And just six weeks ago, we entered into a deferred prosecution agreement with another company that self-reported misconduct.
More commonly, we have reflected the cooperation in reduced penalties. Companies that cooperate can receive smaller penalties than they otherwise would face, and in some cases of extraordinary cooperation, pay significantly less. One recent FCPA matter in this sector illustrates the considerable benefits that can flow from coming forward and cooperating. Our joint SEC-DOJ FCPA settlement with Bio-Rad Laboratories for $55 million reflected a substantial reduction in penalties due to the company’s considerable cooperation in our investigation. In addition to self-reporting potential violations, the company provided translations of numerous key documents, produced witnesses from foreign jurisdictions, and undertook extensive remedial actions. There, the DOJ imposed a criminal fine of only $14 million, which was equivalent to about 40% of the disgorgement amount – a large reduction from the typical ratio of 100% of the disgorgement amount.
In fact, we have recently announced FCPA matters featuring penalties in the range of 10 percent of the disgorgement amount, an even larger discount than the case I just mentioned. And in the Goodyear case we announced last week, we imposed no penalty. In those cases, the companies received credit for doing things like self-reporting; taking speedy remedial steps; voluntarily making foreign witnesses available for interviews; and sharing real-time investigative findings, timelines, internal summaries, English language translations, and full forensic images with our staff.
The bottom line is that the benefits from cooperation are significant and tangible. When I was a defense lawyer, I would explain to clients that by the time you become aware of the misconduct, there are only two things that you can do to improve your plight – remediate the misconduct and cooperate in the investigation. That obviously remains my view today. And I will add this – when we find the violations on our own, and the company chose not to self-report, the consequences are worse and the opportunity to earn significant credit for cooperation often is lost.
This risk of suffering adverse consequences from a failure to self-report is particularly acute in light of the continued success and expansion of our whistleblower program. The SEC’s whistleblower program has changed the calculus for companies considering whether to disclose misconduct to us, knowing that a whistleblower is likely to come forward. Companies that choose not to self-report are thus taking a huge gamble because if we learn of the misconduct through other means, including through a whistleblower, the result will be far worse.”
Like A Kid In A Candy Store
Like every year around this time, I feel like a kid in a candy store given the number of FCPA year in reviews hitting my inbox. This post highlights various FCPA or related publications that caught my eye.
Reading the below publications is recommended and should find their way to your reading stack. However, be warned. The divergent enforcement statistics contained in them (a result of various creative counting methods) are likely to make you dizzy at times and as to certain issues.
Given the increase in FCPA Inc. statistical information and the growing interest in empirical FCPA-related research, I again highlight the need for an FCPA lingua franca (see here for the prior post), including adoption of the “core” approach to FCPA enforcement statistics (see here for the prior post), an approach endorsed by even the DOJ (see here), as well as commonly used by others outside the FCPA context (see here)
Debevoise & Plimpton
The firm’s monthly FCPA Update is consistently a quality read. The most recent issue is a year in review and the following caught my eye.
“The government’s pressure on companies to assist in investigating and prosecuting individuals raises significant challenges for in-house legal and compliance personnel as they work to navigate the potentially conflicting interests in anti-bribery compliance and internal investigations. This pressure has produced legitimate concerns that a failure to self-report could, in and of itself, be met with, or be the cause for imposing, monetary penalties. Although the U.S. Sentencing Guidelines provide for a reduction in fines for a heightened level of cooperation, outside of a narrow range of arenas (such as where duties to self-report are imposed on U.S. government contractors), the government generally lacks any statutory basis for imposing financial penalties against companies for the failure to self-report potential misconduct. Since there is no legal obligation to self-report, it is our view that the government should exercise caution when discussing bases for monetary penalties and should rely solely on laws passed by Congress and the Sentencing Guidelines provisions that properly draw their authority from a duly-passed statute. It would be a disturbing trend indeed were the government to begin to impose monetary penalties for failing to self-report where there is no legal obligation to do so. The actions by U.S. regulators in the coming year will continue to warrant close scrutiny …”.
Gibson Dunn
The firm’s Year-End FCPA Update is a quality read year after year. It begins as follows.
“Within the last decade, Foreign Corrupt Practices Act (“FCPA”) enforcement has become a juggernaut of U.S. enforcement agencies. Ten years ago, we published our first report on the state-of-play in FCPA enforcement. Although prosecutions were at the time quite modest–our first update noted only five enforcement actions in 2004–we observed an upward trend in disclosed investigations and advised our readership that enhanced government attention to the then-underutilized statute was likely. From the elevated plateau of 2015, we stand by our prediction. In addition to the traditional calendar-year observations of our year-end updates, this tenth-anniversary edition looks back and analyzes five trends in FCPA enforcement we have observed over the last decade.”
The update flushes out the following interesting tidbit from the Bio-Rad enforcement action.
“[A noteworthy aspect] of the Bio-Rad settlement is that it is the first DOJ FCPA corporate settlement agreement to require executives to certify, prior to the end of the [post-enforcement action] reporting period, that the company has met its disclosure obligations. As noted above in the Ten-Year Trend section, post-resolution reporting obligations, including an affirmative obligation to disclose new misconduct, have long been a common feature of FCPA resolutions. But Bio-Rad’s is the first agreement to insert a provision requiring that prior to the conclusion of the supervisory period, the company CEO and CFO “certify to [DOJ] that the Company has met its disclosure obligations,” subject to penalties under 18 U.S.C. § 1001.”
Gibson Dunn also released (here) its always informative “Year-End Update on Corporate Deferred Prosecution Agreements (DPAs) and Non-Prosecution Agreements (NPAs).” The update: “(1) summarizes highlights from the DPAs and NPAs of 2014; (2) discusses several post settlement considerations, including protections for independent monitor work product and post settlementterm revisions; (3) analyzes a potential trend in the judicial oversight of DPAs; and(4) addresses recent developments in the United Kingdom, where the Deferred ProsecutionAgreements Code of Practice recently took effect.
According to the Update, there were 30 NPAs or DPAs entered into by the DOJ (29) or SEC (1) in 2014. (However, this figure includes two in the Alstom action and two in the HP action. Thus, there were 27 unique instances of the DOJ using an NPA or DPA in 2014. Of the 27 unique instances, 5 (19%) were in FCPA enforcement actions and the FCPA was the single largest source of NPAs and DPAs in 2014 in terms of specific statutory allegation.
The Gibson Dunn updates provides a thorough review of two pending cases in which federal court judges are wrestling with the issue of whether to approve of a DPA agreed to be the DOJ and a company.
Shearman & Sterling
The firm’s “Recent Trends and Patterns in Enforcement of the FCPA” is also another quality read year-after-year.
Of note from the publication:
“[W]hat may be the most interesting facet of the SEC’s current enforcement approach is the Commission’s shift in the latter half of 2014 in Timms to settle charges against individuals through administrative proceedings. This may come as no surprise, as the SEC has had difficulty successfully prosecuting individuals for violating the FCPA in previous years. Most recently, in early 2014, the SEC suffered a pair of setbacks in its enforcement actions against executives from Nobel Corp. and Magyar Telekom […] before the U.S. courts. Other cases, such as SEC v. Sharef (the SEC’s case against the Siemens executives) and SEC v. Clarke (which is currently the subject of a pending stay), have lingered in the S.D.N.Y. for significant periods of time without resolution.”
[…]
Obtain or Retain Business
Following the announcement of the SEC’s settlement with Layne Christensen over improper payments made to foreign officials in various African countries, we noted that the SEC’s approach to the “obtaining or retaining business” test in the FCPA appeared at odds with the Fifth Circuit’s 2007 opinion in United States v. Kay. Specifically, in Kay, the DOJ charged two executives of American Rice, Inc. for engaging in a scheme to pay Haitian customs officials bribes in exchange for accepting false shipping documents that under-reported the amount of rice onboard ocean-going barges. The result of the false shipping documents was to reduce the amount of customs duties and sales taxes that American Rice would have otherwise been forced to pay. While the court in Kay dismissed the defendants’ argument that the FCPA was only intended to cover bribes intended for “the award or renewal of contracts,” holding instead that the payment of bribes in exchange for reduced customs duties and sales taxes, the court added that in order to violate the FCPA, the prosecution must show that the reduced customs duties and sales taxes were in turned used “to assist in obtaining or retaining business” per the language of the FCPA. In short, the court in Kay held that while bribes paid exchange for the reduction of duties or taxes could violate the FCPA, they were not per se violations of the statue, and that the Department would have to show how the benefit derived from the reduced duties and taxes were used to obtain or retain business.
Fast forwarding to 2014 in Layne Christensen, the Houston-based global water management, construction, and drilling company, was forced to pay over $5 million in sanctions despite the fact that the SEC’s cease-and-desist order pleaded facts inconsistent with the Fifth Circuit’s opinion in Kay. In its discussion of Layne Christensen’s alleged violation of the FCPA’s anti-bribery provisions, the SEC only alleged that the company paid bribes to foreign officials in multiple African countries “in order to, among other things, obtain favorable tax treatment, customs clearance for its equipment, and a reduction of customs duties.” The SEC’s cease-and-desist made no reference to how these reduced costs were used to obtain or retain business, rendering the SEC’s charges facially deficient.
Layne Christensen is not, however, the first time the DOJ and SEC have brought similar FCPA charges against companies without alleging how reduced taxes and customs duties were used to obtain or retain business. In the Panalpina cases from 2010, a series of enforcement actions against various international oil and gas companies, the DOJ and SEC treated the exchange of bribes for reduced taxes and customs duties as per se violations of the FCPA. Even in the 2012 FCPA Guide the enforcement agencies make clear that “bribe payments made to secure favorable tax treatment, or to reduce or eliminate customs duties . . . satisfy the business purpose test.” Whether the DOJ’s and SEC’s approach to the “obtaining or retaining business” element of the FCPA stems from a misinterpretation of Kay or is an attempt to challenge the Fifth Circuit’s opinion, remains to be seen. Nevertheless, we are troubled by the lack of clarity in the DOJ’s and SEC’s approach as it ultimately disadvantages defendants who may otherwise be pressured to settle charges over conduct which does not necessarily constitute a crime.”
Parent/Subsidiary Liability
As noted in previous Trends & Patterns, over the past several years the SEC has engaged in the disconcerting practice of charging parent companies with anti-bribery violations based on the corrupt payments of their subsidiaries. In short, the SEC has adopted the position that corporate parents are subject to strict criminal liability not only for books & records violations (since it is the parent’s books ultimately at issue) but also for bribery violations by their subsidiaries regardless of whether the parent had any involvement or even knowledge of the subsidiaries’ illegal conduct. The SEC has subsequently continued this approach in Alcoa and Bio-Rad.
According to the charging documents, officials at two Alcoa subsidiaries arranged for various bribe payments to be made to Bahraini officials through the use of a consultant. The SEC acknowledged that there were “no findings that an officer, director or employee of Alcoa knowingly engaged in the bribe scheme” but it still charged the parent company with anti-bribery violations on the grounds that the subsidiary responsible for the bribery scheme was an agent of Alcoa at the time. The Commission’s tact is curious considering that it charged Alcoa with books and records and internal controls violations as well, making anti-bribery charges seemingly unnecessary. Moreover, it is noteworthy that in the parallel criminal action, the DOJ elected to directly charge Alcoa’s subsidiary with violations of the FCPA’s anti-bribery provisions instead of Alcoa’s corporate parent.
In Bio-Rad, the SEC’s cease-and-desist order alleged that the corporate parent was liable for violations of the FCPA’s anti-bribery provisions committed by the company’s corporate subsidiary in Russia, Vietnam, and Thailand. In order to impute the alleged wrongful conduct upon the corporate parent, the SEC relied heavily upon corporate officials’ willful blindness to a number of red flags arising from the alleged schemes in Russia, Vietnam, and Thailand. Nevertheless, even if certain officials from Bio-Rad’s corporate parent were aware of the bribery scheme, the SEC’s charges ignore the black-letter rule that in order to find a corporate parent liable for the acts of a subsidiary, it must first “pierce the corporate veil,” showing that the parent operated the subsidiary as an alter ego and paid no attention to the corporate form.
It is also interesting that much like the case of Alcoa, the DOJ’s criminal charges against Bio-Rad are notably distinct from the SEC’s. Specifically, while the DOJ charged Bio-Rad’s corporate parent with violating the FCPA, the Department elected to only charge the company with violations of the FCPA’s book-and-records and internal controls provisions, not the anti-bribery provisions like the SEC.
The SEC’s charging decisions in Alcoa and Bio-Rad are even more peculiar given the fact that the SEC took an entirely different approach in HP, Bruker, and Avon, where despite alleging largely analogous fact patterns, the SEC charged the parent companies in HP, Bruker, and Avon with violations of the FCPA’s books-and-records and internal controls provisions only. Much like Alcoa and Bio-Rad, all of the relevant acts of bribery in HP, Bruker, and Avon were committed by the company’s subsidiaries in Mexico, Poland, Russia (HP), and China (Bruker and Avon). The SEC’s decisions in Alcoa, Bio-Rad, HP, Bruker, and Avon to charge parent companies involved in largely analogous fact patterns with different FCPA violations raise ongoing questions as to consistency and predictability of the SEC’s approach to parent-subsidiary liability.”
WilmerHale
The firm’s FCPA alert states regarding the travel and entertainment enforcement actions from 2014.
“While most cases involving travel and entertainment historically have involved other allegedly corrupt conduct, it was notable this year that travel and entertainment was the focus of the conduct in some cases. … [T]his suggests that travel and entertainment should continue to be a focus of corporate compliance programs. Unfortunately, the settled cases give little guidance as to some of the gray areas that challenge compliance officers, such as the appropriate dollar amounts for business meals, or how much ancillary leisure activity is acceptable in the context of a business event. Perhaps most interesting about the recent cases is that the government’s charging papers in some cases seem to lack any direct evidence that the benefits provided were provided as a quid pro quo to obtain a specific favorable decision from the official. The cases seem to simply conclude that if there were benefits provided to a government decision maker, the benefits must have been improper. Whether such allegations would be sufficient to satisfy the FCPA’s “corruptly” standard in litigation remains to be seen.”
Regarding the lack of transparency in FCPA enforcement, the alert states:
“[T]here still remains legitimate debate about whether the amount of credit that companies receive for voluntary disclosures is sufficient, especially when compared to companies that cooperate but do not self-report. One important factor that is often left out of the debate on this topic is the “credit” that is not visible in the public settlement documents but is nonetheless often informally received by companies that voluntarily disclose and/or cooperate. While the discussion above focuses on Sentencing Guidelines calculations and percentages of credit off the Sentencing Guidelines ranges, the discussion does not take into account decisions made by the government in settlement discussions that affect the ranges that are not seen in the settlement documents. For example, in settlement negotiations, the government might determine not to include certain transactions when calculating the gains obtained by the corporate defendant—perhaps because the evidence might have been weaker, or because jurisdiction might have been questionable, or because the settlement may have focused on transactions from a certain time period, or because of other factors. Thus, while the settlement documents might suggest a 20% discount from the bottom of the Sentencing Guidelines range, that range could have been higher had other transactions been included. These determinations are not transparent, but, anecdotally, there is some basis to believe that companies that voluntarily disclose and/or cooperate are more likely to get the benefit of the doubt as the sausage is being made. Given the lack of transparency in this area, the debates on this topic are likely to continue for a long time.”
Covington & Burling
The firm’s “Trends and Developments in Anti-Corruption Enforcement” is here. Among other things, it states:
“As we have noted in the past, U.S. enforcement authorities have a taken creative and aggressive legal positions in pursuing FCPA cases. This past year saw a continuation of that trend, most notably with the SEC staking out an expansive position on the FCPA’s reach via agency theory.
Aggressive Use of Agency Theory. 2014 saw the SEC make use of a potentially far reaching agency theory to hold a parent company liable for the conduct of subsidiaries. In the Alcoa settlement, the SEC made clear that it had made “no findings that an officer, director or employee of [corporate parent Alcoa Inc.] knowingly engaged in the bribe scheme” at issue. Instead, its theory of liability was that the parent company “violated Section 30A of the Exchange Act by reason of its agents, including subsidiaries [Alcoa World Aluminum and Alcoa of Australia], indirectly paying bribes to foreign officials in Bahrain in order to obtain or retain business.” This agency theory was premised on the parent company’s alleged control over the business segment and subsidiaries where the conduct at issue allegedly occurred. Notably, the SEC did not rely on any evidence that parent-company personnel had direct involvement in or control over the alleged bribery scheme. Instead, the SEC pointed only to general indicia of corporate control that are the normal incidents of majority stock ownership (e.g., that Alcoa appointed the majority of seats on the business unit’s “Strategic Council,” transferred employees between itself and one of the relevant subsidiaries, and “set the business and financial goals” for the business segment). This is notable, in our view, because it is arguably at odds with DOJ and the SEC’s statement in the FCPA Resource Guide that they “evaluate the parent’s control — including the parent’s knowledge and direction of the subsidiary’s actions, both generally and in the context of the specific transaction — when evaluating whether a subsidiary is an agent of the parent.” (Emphasis added.) In the Alcoa matter, the SEC seemed to focus solely on “general” control; it did not allege any facts to support parent-level “knowledge and direction . . . in the context of the specific transaction.” This potentially expansive use of agency theory underscores the need for parent companies who are subject to FCPA jurisdiction to be attentive to corruption issues and compliance in all their corporate subsidiaries, even entities over which they do not exercise day-to-day managerial control.”
Miller & Chevalier
The firm’s FCPA Winter Review 2015 is here.
Among other useful information is a chart comparing the top ten FCPA enforcement actions (in terms of settlement amounts) as of 2007 compared to 2014 and a chart comparing SEC administrative proceedings and court filed complaints since 2005.
Davis Polk
The firm recently hosted a webinar titled “FCPA: 2014 Year-End Review of Trends and Global Enforcement Actions.” The webcast and presentation slides are available here.
Jones Day
The firm’s FCPA Year in Review 2014 is here.
Other Items for the Reading Stack
From the FCPAmericas Blog – “Top FCPA Enforcement Trends to Expect in 2015.”
From the Corruption, Crime & Compliance Blog – “FCPA Year in Review 2014,” and FCPA Predictions for 2015.”
SEC Enforcement Of The FCPA – Year In Review
Foreign Corrupt Practices Act enforcement, it is not just about the DOJ. Granted, as a civil enforcement agency its sticks are less sharp than the DOJ’s, but the SEC also claims a significant piece of the FCPA enforcement pie (query whether it should – but that is a subject for another day – for instance as discussed in “The Story of the Foreign Corrupt Practices Act” the SEC wanted no part in enforcing the FCPA’s anti-bribery provisions).
Today’s post is a year in review of SEC FCPA Enforcement. (See here for a similar post for 2013; here for a similar post for 2012; here for a similar post for 2011; and here for a similar post for 2010).
Stay tuned for a similar post on DOJ FCPA enforcement in 2014.
Settlement Amounts and Specifics
In 2014, the SEC collected approximately $327 million in 7 corporate FCPA enforcement actions.
By comparison, in 2013 the SEC collected approximately $300 million in 8 corporate enforcement actions; in 2012 the SEC collected approximately $118 million in 8 corporate FCPA enforcement actions; in 2011 the SEC collected approximately $148 million in 13 corporate FCPA enforcement actions; and in 2010, the SEC collected approximately $530 million in 19 corporate FCPA enforcement actions.
The range of SEC FCPA enforcement actions in 2014 was, on the high end, $175 million (Alcoa), and on the low end, $2 million (Smith & Wesson). Of the $327 million the SEC collected in 2014 corporate FCPA enforcement actions, approximately 54% was in just one enforcement action (Alcoa) and two enforcement actions (Alcoa and Avon) comprised approximately 75% of the amount.
Three corporate FCPA enforcement actions from 2014 were SEC only (Bruker, Layne Christensen and Smith & Wesson).
Of the 7 corporate enforcement actions from 2014, 6 enforcement actions (all but the Avon action) were administrative actions. In other words, there was no judicial scrutiny of 86% of SEC FCPA enforcement actions from 2014. The settlement amounts in these actions comprised approximately 80% of the SEC’s $326 million collected in 2014 corporate FCPA enforcement actions. By comparison, in 2013 there was no judicial scrutiny of 50% of SEC FCPA enforcement actions and settlement amounts in these actions comprised approximately 57% of the SEC’s $300 million collected.
In 2014, the SEC collected approximately $104 million in disgorgement and prejudgment interest in enforcement actions that did not charge anti-bribery violations. This is noteworthy because many question, and rightfully so, whether disgorgement is an appropriate remedy in cases that do not charge FCPA anti-bribery violations. See here for a prior post on so-called “no-charged bribery disgorgement” cases. In 2013, the SEC collected approximately $208 million in disgorgement and prejudgment interest in no-charged bribery disgorgement cases; in 2012, the SEC collected approximately $57.4 million in disgorgement and prejudgment interest in no-charged bribery disgorgement cases; and in 2011 the SEC collected approximately $51 million in disgorgement and prejudgment interest in n0-charged bribery disgorgement cases.
The $327 million the SEC collected in 2014 FCPA enforcement actions breaks down as follows:
$2.7 million in a civil penalties (Bruker, Layne Christensen and Smith & Wesson); and
$324.3 million in disgorgement and prejudgment interest.
Thus, 99% of SEC FCPA settlement amounts in 2014 consisted of disgorgement and prejudgment interest. By way of comparison, in 2013 98% of SEC FCPA settlement amounts consisted of disgorgement and prejudgment interest; in 2012 86% of SEC FCPA settlement amounts consisted of disgorgement and prejudgment interest; in 2011, disgorgement and prejudgment interest comprised 94% of SEC FCPA enforcement settlement amounts; and in 2010, disgorgement and prejudgment interest comprised 96% of SEC FCPA enforcement settlement amounts.
If one tries to analyze why some SEC FCPA enforcement actions in 2014 included a civil penalty, disgorgement and prejudgment interest (Bruker, Layne Christensen, and Smith & Wesson), whereas other enforcement actions included only disgorgement and prejudgment interest (Avon, Bio-Rad and HP), whereas other enforcement actions included only disgorgement (Alcoa), good luck and please enlighten us all with your insight.
Corporate vs. Individual Actions
Of the 7 corporate SEC FCPA enforcement actions from 2014, 0 (0%) have involved, at present, related SEC charges against company employees. By way of comparison, of the 8 SEC corporate FCPA enforcement actions from 2013, 0 (0%) have involved, at present, related SEC charges against company employees; in 2012, 0 of the 8 corporate (0%) FCPA actions involved related SEC charges against company employees; in 2011, 2 of the 13 (15%) corporate SEC FCPA enforcement actions involved related SEC charges against company employees; in 2010, 3 of the 19 (15%) corporate SEC FCPA enforcement actions involved related SEC charges against company employees.
Voluntary Disclosures
Of the 7 corporate SEC FCPA enforcement actions from 2014, 4 enforcement actions (57%) (Avon, Bruker, Bio-Rad and Layne Christensen) were the result of corporate voluntary disclosures. 1 enforcement action (Smith & Wesson) originated from the manufactured Africa Sting enforcement action, 1 enforcement action (HP) was the result of a previous foreign law enforcement action and 1 enforcement action (Alcoa) was the result of a previous civil lawsuit. By way of comparison, of the 8 corporate SEC FCPA enforcement actions in 2013, 3 enforcement actions (38%) were the result of corporate voluntary disclosures; in 2012 of the 8 corporate SEC FCPA enforcement actions 4 (50%) were the result of corporate voluntary disclosures; and in 2011 of the 13 corporate SEC FCPA enforcement actions 11 (85%) were the result of corporate voluntary disclosures.
This remainder of this post provides an overview of SEC FCPA enforcement in 2014.
Avon (December 17th)
See here and here for prior posts
Charges: Violation of the FCPA’s books and records and internal controls provisions
Settlement: Approximately $67.4 million ($52,850,000 in disgorgement plus prejudgment interest of $14,515,013.13)
Disclosure: Voluntary Disclosure
Individuals Charged: No
Related DOJ Enforcement Action: Yes
Bruker Corp. (December 15th)
See here for the prior post.
Charges: None. Administrative cease and desist order finding violations of the FCPA’s books and records and internal control provisions.
Settlement: Approximately $2.4 million ($1,714,852 in disgorgement, $310,117 in prejudgment interest, and a $375,000 penalty)
Disclosure: Voluntary Disclosure
Individuals Charged: No
Related DOJ Enforcement Action: No
Bio-Rad (November 3rd)
See here and here for prior posts
Charges: None. Administrative cease and desist order finding violations of the FCPA’s anti-bribery provisions and books and records and internal control provisions.
Settlement: Approximately $40.7 million in disgorgement
Disclosure: Voluntary Disclosure
Individuals Charged: No
Related DOJ Enforcement Action: Yes
Layne Christensen (November 3rd)
See here and here for prior posts
Charges: None. Administrative cease and desist order finding violations of the FCPA’s anti-bribery provisions and books and records and internal control provisions.
Settlement: Approximately $5.1 million ($3,893,472.42 in disgorgement plus $858,720 in prejudgment interest as well as a $375,000 penalty amount)
Disclosure: Voluntary Disclosure
Individuals Charged: No
Related DOJ Enforcement Action: No
Smith & Wesson (July 28th)
See here and here for prior posts.
Charges: None. Administrative cease and desist order finding violations of the FCPA’s anti-bribery, books and records and internal control provisions.
Settlement: Approximately $2 million ($107,852 in disgorgement, $21,040 in prejudgment interest, and a civil monetary penalty of $1,906,000
Disclosure: The enforcement action originated after a Smith & Wesson employee was criminally charged in the DOJ’s manufactured Africa Sting enforcement action.
Individuals Charged: No (as to the conduct alleged in the corporate enforcement action).
Related DOJ Enforcement Action: No.
HP (April 9th)
See here for the prior post.
Charges: None. Administrative cease and desist order finding violations of the FCPA’s books and records and internal control provisions.
Settlement: $34 million in disgorgement and prejudgment interest (approximately $2.5 million of the disgorgement amount was satisfied by payment of $2.5 million in connection with the HP Mexico DOJ action).
Disclosure: The enforcement action appears to have been the result of a previous German and Russian law enforcement investigation (see here for the prior post).
Individuals Charged: No
Related DOJ Enforcement Action: Yes
Alcoa (January 9th)
See here for the prior post.
Charges: None. Administrative cease and desist order finding violations of the FCPA’s anti-bribery provisions and books and records and internal control provisions.
Settlement: $175 million in disgorgement (of which $14 million will be satisfied by the payment of the forfeiture in the criminal action).
Disclosure: A 2008 civil lawsuit between Alba and Alcoa.
Individuals Charged: No
Related DOJ Enforcement Action: Yes
SEC Enforcement (Individual)
For the first time since April 2012, the SEC brought an FCPA enforcement action against an individual. This enforcement action is summarized below.
Stephen Timms and Yasser Ramahi (November 17th)
See here for the prior post
Charges: None. Administrative cease and desist order finding violations of the FCPA’s anti-bribery provisions, causing violations of the FCPA’s books and records provisions
Settlement: Timms and Ramahi consented to the entry of the order and agreed to pay financial penalties of $50,000 and $20,000 respectively.
Employer Charged: The individuals were associated with FLIR System, Inc. but at present the company has not been charged
Related DOJ Enforcement Action: No