In passing the Foreign Corrupt Practices Act, Congress anticipated that the “criminalization of foreign corporate bribery will to a significant extent act as a self-enforcing preventative mechanism.” Likewise since the FCPA’s earliest days, the DOJ has recognized that the “most efficient means of implementing the FCPA is voluntary compliance by the American business community.”
In short, the FCPA was never intended to be just a mechanism to achieve “hard enforcement” (actual enforcement actions), but more a mechanism to achieve “soft enforcement” (compliance) in furtherance of the statutory objective of reducing bribery and corruption. Indeed, as stated by the Sixth Circuit in Lamb v. Phillip Morris Inc., 915 F.2d 1024 (1990) and repeated by several other courts, the FCPA’s statutory scheme “clearly evinces a preference for compliance in lieu of prosecution.”
Yet, as the FCPA nears its 40th anniversary those in this space need to start asking the question of whether the FCPA – as currently written and currently enforced – has been effective?
Measuring the effectiveness of “soft enforcement” is nearly impossible save for a few anecdotal examples here and there. The effectiveness of “hard enforcement” however can be measured in at least four ways.
First, success can be measured by analyzing the settlement amounts that the DOJ and SEC recover. While prior posts have highlighted how this seems to be the measure of success by which the DOJ and SEC measures itself, knowledgeable observers know that this measure of success is, at least a part, a reflection of the imbalance of leverage that the enforcement agencies possess coupled with the risk aversion of business organizations.
Second, success can be measured by analyzing the instances in which the U.S. government has been put to its burden of proof in FCPA enforcement actions. Here, we know the answer. Despite some victories when put to its burden of proof in the context of an adversarial proceeding, the DOJ has an overall losing record. Indeed, the DOJ’s ultimate record in FCPA history when put to its burden of proof by a business organization is 0-2. The SEC has never prevailed in an FCPA enforcement when put to its ultimate burden of proof.
Third, success can be measured by analyzing the number of enforcement actions over time. If a law is effective in accomplishing its statutory purpose, one might expect less enforcement, not more enforcement, in the law’s fourth decade, compared to its third decade, compared to its second decade, compared to its first decade. Yet, although FCPA enforcement tends to wax and wane when looking at this issue through the arbitrary lens of a 365 day calendar year, the exact opposite is true when it comes to FCPA enforcement (even though there are several reasons for this namely the use of alternative resolution vehicles).
Related to the third measure of success is a fourth measure of effectiveness and that is analyzing the number of business organizations currently the subject of FCPA scrutiny. Using this measure, it would appear that more companies are the subject of FCPA scrutiny than at any other point in time in the FCPA’s history.
In short, we need to ask whether the FCPA is effective and current events make this question all the more important.
In the past 60 days, the following companies from a wide variety of industries have resolved FCPA enforcement actions.
- SciClone Pharmaceuticals
- Olympus Latin American
As previously highlighted in several recent posts, in the past 60 days the following companies from a wide variety of industries have become the subject of FCPA or related scrutiny and/or otherwise disclosed updates regarding its existing scrutiny.
- Novartis (just a few days resolving an FCPA enforcement action concerning conduct in China the company was again the subject of scrutiny for its alleged business practices in Turkey)
- SBM Offshore
- British American Tobacco
- General Cable
- HSBC Holdings
- Mondelez Int’l
- Key Energy
- Maxwell Technologies
- Malvern Bancorp
- Goldman Sachs
- Fairmont Santrol
- Platform Speciality Products
- Aegerion Pharmaceutcials
The remainder of this post highlights additional examples from just the past week.
A series of articles published last week by Fairfax Media and the Huffington Post shined a light on Unaoil, a company based in Monaco and incorporated in the British Virgin Islands. The media outlets termed the stories “the biggest leak of confidential files in the history of the oil industry” and asserted that Unaoil, through the movement of money through U.S. bank accounts and other means bribed, various government officials in numerous countries on behalf of its various corporate clients.
While a newspaper article does not an FCPA enforcement action make, the following companies, some of which have previously resolved FCPA enforcement actions, were discussed in the articles.
- National Oilwell Varco
- Aker Kvaener
- Tecnicas Reunidas
- FMC Technologies
- Leighton Offshore
- Canuck Completion / TMK Completions
My own two cents is to take the Fairfax Media and Huffington Post articles (and other FCPA or related articles written by journalists) with a grain of salt and not draw any conclusions at this point. For instance, on several basic FCPA and FCPA enforcement factual issues, the articles were off-target.
Moreover, the articles were a bit over-the-top and breathless, at least for my taste. Like many breathless and over-the-top articles in this space, the articles invoked Mohamed Bouazizi, a Tunisian fruit vendor whose act of self-immolation is often linked to his alleged frustration with bribery and corruption. Elsewhere, the articles implicitly linked the alleged conduct at issue with terrorists groups like al Qaeda, the Islamic State, the Taliban, ISIS, and other jihadists. Without explicit, direct links this represents irresponsible journalism in my opinion.
Regardless of what you think of the recent articles, the above companies (several companies not for the first time) are under FCPA and related scrutiny.
Perhaps not wanting to be upstaged by Fairfax Media and the Huffington Post, a few days later the Wall Street Journal published this article titled “BP’s Azerbaijan Push Comes at a Cost.” According to the article:
“In 2013, BP’s board of directors learned that an employee of its main logistics contractor, a subsidiary of Switzerland’s Panalpina World Transport Holding Ltd., had allegedly approved roughly $16 million worth of invoices billed by a shell company for transportation services that it didn’t provide, according to internal communications viewed by The Wall Street Journal. In 2014, BP and its partners on Azerbaijan’s giant Shah Deniz natural-gas project awarded contracts worth $2.5 billion to a consortium of oil-services companies, including firms controlled by Azerbaijan’s government. Their work was plagued by bloated costs, according to documents seen by The Wall Street Journal and people familiar with the matter. The issues prompted at least one written complaint to BP’s ethics department. BP said it investigated the issues related to Panalpina but “did not establish any misconduct with regard to BP nor any impact on our business.”
Panalpina of course resolved an FCPA enforcement action in 2010, an action that also implicated, directly or indirectly, several other oil and gas companies which also resolved FCPA enforcement actions.
While lacking in the front-page effect, several other companies updated previous FCPA disclosures or disclosed FCPA scrutiny for the first time last week.
Biomet / Zimmer Biomet Holdings
The company recently disclosed:
As previously reported, on March 26, 2012, Biomet, Inc. (“Biomet”) announced that it had settled an ongoing federal investigation into its international sales practices with the U.S. Department of Justice (“DOJ”) and the U.S. Securities and Exchange Commission (“SEC”). As part of the settlement, Biomet entered into: (i) a consent to final judgment (the “SEC Consent”) with the SEC and (ii) a deferred prosecution agreement (the “DPA”) with the DOJ. Pursuant to the SEC Consent, Biomet consented to the entry of a Final Judgment which, among other things, permanently enjoined Biomet from violating the provisions of the Foreign Corrupt Practices Act. As further disclosed, in October 2013, Biomet became aware of certain alleged improprieties regarding its operations in Brazil and Mexico, including alleged improprieties that predated the entry of the DPA. Additionally, pursuant to the terms of the DPA, in April 2014 and thereafter, Biomet disclosed these matters to and discussed these matters with the independent compliance monitor and the DOJ and the SEC. On July 2, 2014, the SEC issued a subpoena to Biomet requiring that Biomet produce certain documents relating to such matters. These matters remain under investigation by the DOJ and the SEC.
On March 13, 2015, the DOJ informed Biomet that the DPA and the independent compliance monitor’s appointment had been extended for an additional year. On April 2, 2015, at the request of the staff of the SEC, Biomet consented to an amendment to the Final Judgment to extend the term of the compliance monitor’s appointment for one year from the date of entry of the Amended Final Judgment.
The DPA, as extended, is set to expire on March 26, 2016. However, the DOJ and the SEC continue to evaluate the alleged misconduct in Brazil and Mexico, as well as any issues relating to Biomet’s compliance program. The DOJ, the SEC and Biomet have agreed to continue to evaluate and discuss these matters during the second quarter of 2016 and, therefore, the matter is ongoing and will not conclude in its entirety on March 26, 2016. Pursuant to the DPA, the DOJ has sole discretion to determine whether conduct by Biomet constitutes a violation or breach of the DPA. The DOJ has informed Biomet that it retains its rights under the DPA to bring further action against Biomet relating to the conduct in Brazil and Mexico disclosed in 2014 or the violations set forth in the DPA. The DOJ could, among other things, revoke the DPA or prosecute Biomet and/or the involved employees and executives. Biomet continues to cooperate with the SEC and the DOJ, and expects that discussions with the SEC and the DOJ will continue. There is no assurance that Biomet will enter into a consensual resolution of this matter with the SEC or the DOJ, and the terms and conditions of any such potential resolution are uncertain.”
Advanced Drainage Systems
The Ohio-based company recently disclosed:
In October 2015, members of the Company’s management became aware of transactions involving the Company’s consolidated Mexican joint venture, ADS Mexicana, that ADS Mexicana personnel initially brought to the attention of the Company for further review to confirm whether these transactions were appropriately characterized. The ADS Mexicana transactions in question included an aircraft leasing arrangement, a real estate leasing arrangement and several services arrangements that involved ADS Mexicana related parties. Once brought to the attention of the Company, management promptly undertook a review to determine whether such transactions were properly recorded and/or characterized and to ensure that such transactions and their financial impact were appropriately reflected in the Company’s consolidated financial statements.
After receiving a preliminary report from management on the breadth and scope of the issues, the Audit Committee in November of 2015 authorized independent counsel and its forensic consulting firm to conduct an independent investigation. The investigation involved the interview of members of the Company’s finance staff as well as finance and non-finance staff of ADS Mexicana, in addition to a review of the financial and accounting records of the Company and ADS Mexicana related to the transactions in question. Upon concluding the investigation, it was determined by management, upon consultation with the Audit Committee’s advisors, that the various lease and services arrangements described above, as well as certain additional services arrangements with related parties identified during the course of the investigation, lacked commercial and economic substance or proper supporting documentation as to the services performed, and therefore were not appropriately reflected in the Company’s consolidated financial statements and that certain of those transactions should be re-characterized by ADS Mexicana as dividends as opposed to expenses. As a result of re-characterizing the related party transactions, the Company will cause ADS Mexicana to amend its tax returns filed in Mexico for the open tax periods affected as soon as practicable in order to reflect the appropriate tax treatment for the transactions as re-characterized.
The scope of the investigation also included consideration of other ADS Mexicana matters that were identified during the course of the investigation to determine whether such matters involved any unlawful payments in violation of the FCPA. The Audit Committee’s advisors did not find such matters to have been mischaracterized, inappropriately recorded or otherwise contrary to applicable law, including the FCPA. It was, however, determined that such matters were a further indication of weaknesses in the ADS Mexicana control environment.
Management also identified potential accounting errors related to ADS Mexicana’s revenue recognition cut-off practices which were reported by management to the Audit Committee and also investigated by the Audit Committee’s advisors. Specifically, the Company identified instances where ADS Mexicana would recognize revenue prior to the date of shipment or transfer of title/ownership, which is not in accordance with accounting principles generally accepted in the United States (“GAAP”). The investigation also found that the timing for when such errors occurred was irregular and in certain instances attributable to requests from ADS Mexicana customers that were not properly accounted for, resulting in timing differences between invoicing date and shipment date. It was determined that these errors with respect to revenue recognition occurred due to ineffective controls and not due to an intent to commit fraud.
Management has concluded that the control deficiencies noted above related to the ADS Mexicana control environment, as well as the ADS Mexicana revenue recognition cut-off practices, each constituted a material weakness. Although such matters have resulted in a determination of material weakness, neither the Audit Committee’s advisors in the course of its investigation nor management have concluded whether the weaknesses in the ADS Mexicana control environment, the ADS Mexicana revenue recognition cut-off practices, or any other material weaknesses of the Company as described below, would result in an ultimate determination by the SEC or any other applicable regulatory agency that the Company has not complied with the books and records and internal control provisions of the FCPA.”
The Israel-based company with shares traded on Nasdaq recently disclosed:
“The Company have become aware of certain issues with respect to certain agreements that were executed in the past in connection with the Casa Radio Project in Bucharest, Romania that may contain potential violation of the requirements of the U.S. Foreign Corrupt Practices Act (FCPA), including the books and records provisions of the FCPA. As a result the abovementioned, the Company’s audit committee has decided to appoint a special committee to examine these matters, including any internal control and reporting issues. The Company intends to fully cooperate with the relevant governmental agencies in this matter.”
Braskem / Odebrecht
Media reports suggest:
“The U.S. Department of Justice is investigating possible corruption in contracts among Brazilian petrochemical company Braskem, engineering conglomerate Odebrecht and the country’s state-run oil company Petrobras …”.
Perhaps if you are a government prosecutor or FCPA Inc. participant, the above facts and figures indicate that the FCPA is effective.
Yet the FCPA was never intended to just be enforced or to make a niche industry rich. Rather, it was intended to reduce bribery (at least a certain type of bribery addressed in the statute).
Thus, for the reasons discussed in this post, as the FCPA nears its 40th anniversary, those in this space need to start asking the question of whether the FCPA – as currently written and currently enforced – has been effective?