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FCPA Enforcement and Credit Ratings

Fitch Ratings (see here) is a global rating agency that provides credit opinions, research and data to the world’s credit markets.

It recently issued a report titled “U.S. Foreign Corrupt Practices Act – No Minor Matter.”

The report contains some interesting and informative non-legal perspectives on FCPA enforcement which are excerpted below.


“Aside from management distraction and reputational risk, additional compliance costs and fines [arising from FCPA violations] could have rating implications for those companies with modest FCF [free cash flow] and/or liquidity. It should also be noted that it can take years from the discovery of a violation to the time a plea agreement is reached. In the interim, corporate credit profiles, liquidity, and ratings may weaken. The fine that could be easily paid with cash on hand today might not be readily payable years down the road if a company’s credit profile has weakened and liquidity becomes constrained.”

The report notes that many FCPA fines are “imposed on large investment grade corporations whose substantial cash balances easily afforded them the ability to absorb the payments with no or minimal increases in leverage.”

However, the report notes, “there have also been violations by non-investment grade companies.”

The report then discusses Willbros Group, Inc. “which borrowed from banks on a secured basis.” The report notes that when the company became aware of its FCPA issues (see here for prior posts on Willbros) the issues resulted “in the restatement of its annual financial statements at December 2002 and 2003, as well as the first, second, and third fiscal quarters iof 2004 and 2003.”

The report continues:

“In its 2005 10-K [Willbros] noted that it required an amendment on an indenture due to late filing and several amendments on its bank credit facility. In the July 1, 2005 Second Amendment and Waiver Agreement the credit facility was reduced from $150 million to $100 million.”


The report also discusses the fiscal consequences of “deferring the legal consequences” of an FCPA violation – as so often happens given the frequency in which non-prosecution and deferred prosecution agreements are used to resolve FCPA enforcement actions. Pursuant to these agreements, the non-prosecuted or deferred charges could go “live” if the company fails to adhere to its obligations under the agreement. “This means,” according to the report, “that investors and analysts cannot take a deep breath or relax until” the time period in the NPA or DPA has expired.


The report also discusses how FCPA issues can become a “sticking point in acquisitions/dispositions of businesses.”

The report notes:

“Sellers may have contingent liabilities related to violations even after assets or businesses are sold. Prices could be less than expected and may hamper sellers who need to receive a certain level of cash or offload debt to deleverage or meet covenants. Additionally, buyers who have not done enough due diligence up front may find themselves with an unexpected obligation and higher litigation expenses in the future.”

For a recent example of a company halting a planned acquisition because of an FCPA issue (see here).


As to “management distraction” resulting from an FCPA inquiry, the report notes:

“Fines, penalties, widespread adverse publicity with potential damage to corporate reputations, having an independent compliance monitor, and building up the compliance organization can all pose an enormous distraction to management. More importantly, while many companies tend to have significant financial resources at the
start of an inquiry, it generally takes years before there is a conclusion. In that interim, it is possible that a corporation’s financial profile could weaken.”


The report contains an informative chart detailing “Fitch-Rate Issuers” that tracks the date the FCPA issue first went public.

Noteworthy examples include:

Accenture Ltd. (identified a potential FCPA issue in July 2003 – in its March 2010 SEC filing the company stated that there has been no new developments);

Bristol-Myers Squibb Company (the SEC notified the company in October 2004 of an inquiry of certain pharma subsidiaries in Germany – in its 2009 10-K the company stated that it is cooperating with the SEC);

Eli Lilly & Co (the SEC notified the company in 2003 that it was investigating whether certain Polish units has violated the FCPA – in its 2009 10-K the company stated that the DOJ and SEC had issued subpoenas relating to other countries).


As to “credit implications,” the report notes, among other things:

That, because the time from discovery of FCPA violations to resolution can take years, a company’s credit profile could weaken – perhaps reflecting a weak economic cycle. When allegations of bribery separately arise, “for most corporations if the credit profile weakens, potential fines and/or legal contingencies would be among the items of concern in the Rating or Outlook.”

The report then talks specifically about Avon and its FCPA issues (see here for a prior post).

The report notes:

“The cost of investigations and ongoing compliance can be sizeable, and each company’s liquidity and metrics over the medium term would need to be considered. Avon, with $10 billion in 2009 revenues, had $120 million in FCF. In April 2010 the company disclosed that the cost of the investigation would be in the $85 million – $95 million range, up from $35 million in 2009. The additional cost of widening the investigation represents a significant percentage of the company’s 2009 FCF. While the company has more than $1 billion in cash on hand, Fitch’s expectation of moderate FCF in the medium term was part of the rationale for the downgrade to ‘A-’ from ‘A’ on Feb. 2, 2010. Additional layers of investigatory or compliance-related expenses could hamper FCF for Avon and other companies that violate the FCPA. Continued relative weakness in FCF and/or increased leverage typically can provide the impetus for a downgrade or change in outlook for many corporations.”

All in all, the Fitch Report is an interesting and informative read.

A couple of observations.

Some FCPA enforcement actions, per the enforcement agencies’ allegations, involve conduct that goes “all the way to the top” – the Siemens enforcement action comes to mind. In this type of FCPA enforcement action, the company’s credit ratings, and much else about the company’s business, ought to be negatively impacted by the FCPA enforcement action.

However, enforcement actions like Siemens are clearly outliers.

The far more common FCPA enforcement action involves allegations of improper conduct by a single employee or a small group of employees – often in a foreign subsidiary. Even so, because of respondeat superior, the parent company issuer faces FCPA exposure. In such a situation – a common FCPA scenario – is it proper for company’s credit rating to be negatively impacted by the enforcement action?

Add to this the fact that most FCPA enforcement actions are resolved through non-prosecution or deferred prosecution agreements. These agreements are privately negotiated, subject to no (or little) judicial scrutiny, and do not necessarily represent the triumph of one party’s legal position over the other. In such a situation – again a very common FCPA scenario – is it proper for the company’s credit rating to be negatively impacted by the enforcement action?

In my forthcoming piece “The Facade of FCPA Enforcement,” I discuss why the facade of FCPA enforcement matters.

The Fitch Report has informed me of another reason why the facade of FCPA enforcement matters – and that is because FCPA enforcement actions can negatively impact a company’s credit rating.

What Did the Willbros Monitor Find?

In May 2008, Willbros Group Inc. settled joint DOJ and SEC enforcement actions. See here and here.

The DOJ criminal information (see here) charges “Willbros with one count of conspiring to make bribe payments to Nigerian and Ecuadoran officials, two counts of violating the FCPA in connection with the authorization of specific corrupt payments to officials in those countries and three counts of violating the FCPA by falsifying books and records relating to corrupt payments and a tax fraud scheme.” See here for the DOJ release.

As is frequently the case, these criminal charges were not actually prosecuted, but were deferred pursuant to a deferred prosecution agreement (DPA) (see here).

The DPA lasts for approximately three years.

If the company fully complies with all of its obligations during the term of the DPA, the DOJ will dismiss the criminal charges against Willbros.

On the other hand, if the company fails to comply with all of its obligations during the term of the DPA, such as by violating the FCPA again, Willbros will “be subject to prosecution for any federal criminal violation of which the [DOJ] has knowledge.”

In addition, the DPA “does not provide any protection against prosecution
for any corrupt payments or false accounting, if any, made in the future” by Willbros “or any of their directors, officers, employees, agents or consultants, irrespective of whether disclosed by [Willsbros] pursuant to the terms” of the DPA. Nor does the DPA “provide any protection against prosecution for any corrupt payments made in the past which are not described in the [deferred charges] or were not disclosed to the [DOJ] prior to the date on which [the DPA] was signed.”

Enter the Willbros compliance monitor – a condition often imposed on a company pursuant to an FCPA DPA (or NPA).

In the FCPA context, a monitor does many things.

Most of these things are forward-looking – such as ensuring that the company “gets it” – that it is adhering to the terms of the DPA, and making the changes it said it was going to make so that it will never again be subject to FCPA scrutiny.

Like most monitors, the Willbros monitor was authorized to disclose to the DOJ should the monitor “discover credible evidence that questionable or corrupt” may have been offered, promised, paid, or authorized by Willsbros.

Fast forward to May 20th.

Willbros Group filed an 8-K (see here).

The filing includes an update on the company’s DPA obligations and the work of the monitor. Much of the discussion is fairly routine.

Except this paragraph.

“The [monitor’s report recently delivered to the DOJ] also sets out for the DOJ’s review the monitor’s findings relating to incidents that came to the monitor’s attention during the course of his review which he found to be significant, as well as recommendations to address these incidents. We and the monitor have met separately with the DOJ concerning certain of these incidents. The monitor, in his report, did not conclude whether any of these incidents or any other matters constituted a violation of the FCPA. We do not believe that any of these incidents or matters constituted a violation of the FCPA based on our own investigations of the incidents and matters raised in the report. Notwithstanding our assessment, the DOJ could perform further investigation at its discretion of any incident or matter raised by the report.”

It is unusual, so soon after an FCPA enforcement action, for a monitor to find additional facts that require investigation.


Because during settlement of an FCPA enforcement action, it is common for the enforcement agencies to ask the “where else” question. Thus, if the Willbros enforcement action followed the usual course, once DOJ/SEC got comfortable with the Nigeria and Ecuador facts, it is likely the enforcement agencies said something to the effect “well, if you did it in Nigeria and Ecuador, convince us you didn’t do it as well in countries x,y, and z.” To answer that question, the company is then often forced to conduct a general, high-level world-wide review of its entire operations. If problematic facts are found, it is in the company’s best interest (and the best interest of the enforcement agencies as well) to wrap-up these “tag-a-long” facts into the same enforcement action.

Against this backdrop, it is a bit surprising that problematic facts have arisen so soon after the Willbros FCPA enforcement action.

Was the assumed high-level world-wide review insufficient? Did Willbros perhaps commit another FCPA violation post-enforcement action, yet while still subject to the DPA.?

As indicated by Willbros’ filing, the company states its opinion that none of this new conduct constitutes a violation of the FCPA.

However, it is unusual to have a monitor find additional problematic facts, and for the DOJ to investigate those facts, so soon after an FCPA enforcement action.

If the “new” facts do indeed give rise to an independent FCPA violation, Willbros could be subject to prosecution on the “new” facts and the current criminal charges deferred against Willbros could again become active.

An FCPA Triangle

First it was the company – Willsbros Group Inc. (see here).

Then, it was the company’s employees – Jim Bob Brown (see here) and Jason Steph (see here).

Finally, it is the company’s consultant – Paul Novak (see here).

An FCPA triangle of sorts.

Don’t hold your breath waiting for an FCPA square because, as has been noted in previous posts, the final piece of the puzzle … the “foreign official” will not be happening anytime soon as the FCPA only applies to the “briber-giver” not the “bribe-taker.”

As noted in the DOJ release, Novak (a former consultant for Willbros International Inc. – a subsidiary of Willbros Group Inc.) pleaded guilty to one count of conspiracy to violate the FCPA and one substantive count of violating the FCPA in connection with payments to Nigerian “foreign officials.”

Assistant Attorney General Breuer (the blog’s “person of the week” given his frequent mention here in the last few days) had this to say:

“The use of intermediaries to pay bribes will not escape prosecution under the FCPA. The Department will continue to hold accountable all the players in an FCPA scheme – from the companies and their executives who hatch the scheme, to the consultant they retain to carry it out.”

Of course, there still must be jurisdiction over the consultant, but this was not a problem in the Novak matter as he is a U.S. citizen and thus subject both to territorial jurisdiction (i.e. U.S. nexus – see 78dd-2(a)) or nationality jurisdiction (see 78dd-2(i)).

This isn’t the first time the DOJ has gone after consultants or agents. In March 2009, the DOJ unsealed indictments against U.K. citizens Jeffrey Tesler and Wojciech Chodan for their alleged roles in the KBR/Halliburton Nigeria bribery scheme. (see here for the DOJ release, here for the indictment).

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