Many of the critiques of this new era of Foreign Corrupt Practices Act enforcement – including my own – have focused on enforcement theories, non-prosecution and deferred prosecution agreements, and other DOJ or SEC policies and procedures.
While there has been attention and focus on fine, penalty and disgorgement amounts (see here, here, here and here for prior posts including my own), more attention needs to be paid to such issues.
The reason is simple.
FCPA settlement amounts have come a long way in a short amount of time. To be sure, historical issues with certain foreign issuers (i.e. Siemens, Total, and Daimiler) mostly account for this dynamic, as does the $6 billion Bonny Island, Nigeria liquified natural gas plant project that was the focus of 4 out of the top 10 FCPA enforcement actions of all time.
But consider this.
In 2007 – that is a mere six years ago – Baker Hughes resolved the largest FCPA enforcement action of all-time by agreeing to pay $44 million in combined DOJ and SEC settlements. According to the criminal information, the company made approximately $4.1 million in improper payments – via an agent – in connection with the Karachaganak Project in Kazakhstan – a “giant gas and oil field” – according to the DOJ. According to the DOJ’s sentencing guidelines calculation, the “benefit received or to be received [from the alleged improper conduct was] approximately $19 million.”
The SEC enforcement action against Baker Hughes was based on the same core set of conduct and the SEC stated in this release as follows:
“Baker Hughes paid approximately $5.2 million to two agents while knowing that some or all of the money was intended to bribe government officials, specifically officials of State-owned companies, in Kazakhstan. […] Baker Hughes engaged the agent and was awarded an oil services contract in the Karachaganak oil field in Kazakhstan that generated more than $219 million in gross revenues from 2001 through 2006.”
In addition, the SEC release stated:
- from 1998 to 2004, Baker Hughes authorized commission payments of nearly $5.3 million to an agent (who worked in Kazakhstan, Russia and Uzbekistan) under circumstances in which the company failed to determine whether such payments were, in part, to be funneled to government officials in violation of the FCPA;
- in Indonesia, between 2000 and 2003, Baker Hughes paid certain freight forwarders to import equipment into Indonesia using a “door-to-door” process under circumstances in which the company failed to adequately assure itself that such payments were not being passed on, in part, to Indonesian customs officials;
- in Nigeria, between at least 2001 and 2005, Baker Hughes authorized payments to certain customs brokers to facilitate the resolution of alleged customs deficiencies under circumstances in which the company failed to adequately assure itself that such payments were not being passed on, in part, to Nigerian customs officials; and
- in Angola, from 1998 to 2003, Baker Hughes paid an agent more than $10.3 million in commissions under circumstances in which the company failed to adequately assure itself that such payments were not being passed on to employees of Sonangol, Angola’s state-owned oil company, to obtain or retain business in Angola.
The record-setting 2007 Baker Hughes FCPA enforcement was then.
In October, the DOJ and SEC announced an FCPA enforcement action against Diebold.
As noted in this previous post, the enforcement action was primarily an excessive travel and entertainment enforcement action focused on conduct in China and Indonesia wherein the DOJ alleged in the criminal information that the company provided various things of value (such as Las Vegas sightseeing, a dance show, a Grand Canyon tour, a Universal Studios tour and a Napa Valley tour) totaling approximately $1.75 million to alleged “foreign officials” over a five year period. (Note: the enforcement action also contained non-specific monetary allegations concerning relationships with private business customers in Russia. However, the DOJ’s sentencing guidelines calculation makes clear that the Russia conduct was a minor factor in determining the fine and penalty amount). As to the core conduct – the China and Indonesia conduct – the DOJ’s sentencing guidelines calculation references a “value of benefit received [from the alleged improper conduct] more than $7 million.”
The SEC enforcement action against Diebold was based on the same core set of conduct and the SEC alleged in this complaint that Diebold subsidiaries in China and Indonesia spent approximately $1.8 million on travel, entertainment, and other improper gifts for senior officials with the ability to influence the banks’ purchasing decisions. The SEC further alleged that Diebold falsified books and records to hide approximately $1.2 million of bribes paid to employees at privately owned banks in Russia.
In short, the recent Diebold enforcement action involved significantly less egregious allegations than the Baker Hughes enforcement action.
Yet the combined fine and penalty in the Diebold action ($48 million) was more than the record-setting $44 million Baker Hughes enforcement action from a mere six years ago.
Of course, factors beyond the core conduct at issue – such as volunatary disclosure, cooperation and a company’s past history – can influence settlement amounts in an FCPA enforcement action. However, the Baker Hughes and Diebold enforcement actions were substantively identical in these regards (i.e. both companies had a past history, both companies voluntarily disclosed and both companies cooperated).
This raises the obvious issue – have FCPA settlement amounts increased … just because?
Perhaps you have noticed this general trend in other areas. Pfizer recently resolved a $2.2 billion enforcement action (and now for the weather), SAC Capital recently resolved a $1.2 billion enforcement action (can you please pass the butter) and JPMorgan recently resolved a $13 billion enforcement action.
In a recent speech SEC Commissioner Daniel Gallagher noted:
“[T]he amounts of the penalties that the SEC imposes against corporations today are eye-popping and likely would have shocked the legislators who voted for the Remedies Act and the Commission that sought penalty authority from Congress.”
As to the JPMorgan action, as noted in this recent Wall Street Journal article, the company’s top lawyer asked at a recent event “at what point does this [record-setting fines] stop.” As Professor Peter Henning noted in this recent New York Times DealBook column regarding the JPMorgan matter:
“A standard part of enforcement actions against companies these days is the multimillion-dollar – or even multibillion-dollar – penalty. What can be perplexing is figuring out how those penalties were determined, and whether they have much if any direct relationship to either the gains realized from the violations or the harm inflicted.”
Indeed, at the same event discussed above, a government official acknowledged that the government’s application of fines in legal settlements “is more art than science.”
In many cases. there is little rhyme or reason to how FCPA settlement amounts are calculated. As noted in this prior post, in the SEC context some FCPA settlements include a civil penalty, disgorgement and prejudgment interest, whereas other enforcement actions include only disgorgement and prejudgment interest, whereas other enforcement actions include only disgorgement and a civil penalty, whereas other enforcement actions include only disgorgement, whereas other enforcement actions include only a civil penalty.
As noted in this prior post, double-dipping by multiple government enforcement agencies is the norm in corporate FCPA settlements.
When a NPA is used to resolve an FCPA enforcement action, the ultimate fine amount and how it as calculated is not transparent. Even with corporate DPAs and plea agreements, there remains little transparency regarding FCPA criminal fine amounts, particularly as to the value of the benefit allegedly received through the improper payment. The DOJ simply cites a number.
As noted in this prior post, in 2012 the Supreme Court held in Southern Union that any fact that substantially increases a criminal defendant’s fine amount must be provable to a jury beyond a reasonable doubt. As noted in the prior post however, the Supreme Court’s decision was great in theory, but it is rare for anything connected to a corporate FCPA enforcement action to be provable to a jury beyond a reasonable doubt.
The largest FCPA enforcement action of all time is the $800 million action against Siemens in 2008. It is only a matter of time before there is an FCPA enforcement action in the “b” (as in billion) category.
Indeed, as the Baker Hughes and Diebold enforcement actions highlight, FCPA settlement amounts have come a long way in a short amount of time.
If a billion dollar FCPA enforcement action is what the conduct at issue warrants … fine. But if it is just because, this is a problem and a significant public policy concern as even alleged wrongdoers have due process rights.