FCPA enforcement heats up

Don’t be fooled by the numbers. It’s true that last year federal regulators announced almost 50 percent fewer anti-bribery enforcement actions than in 2011 – and almost three times fewer than the number announced in 2010. During the first three months of this year, the pace hardly quickened: there was only one announced settlement, and industry watchers aren’t even sure it qualifies as an FCPA case. 

But April brought stirrings of new activity. According to compliance lawyers and consultants who specialize in the Foreign Corrupt Practices Act (FCPA), quietly, behind the scenes, investigators at both the SEC and the Department of Justice (DoJ) have been extremely busy. In fact, many highlight a number of significant new trends and tactics that may portend an aggressive crackdown in the months ahead.

‘On the corporate side there was a bit of a lull, but that lull has passed,’ says John Davis, a leader of Miller & Chevalier’s FCPA and international anti-corruption practice group, which closely tracks enforcement activity. ‘The amount of continued investigations makes it very clear that ongoing enforcement is happening. Don’t let the perceived lull or the lack of recent blockbuster finds convince you the agencies are backing off. Companies can’t afford to skimp in this area.’ 

According to a recent report issued by Miller & Chevalier, last year the government initiated at least 39 new corporate investigations, almost 20 percent more than the previous record of 33, initiated in 2007 – three years before the 2010 surge in disposition that many believe marked a new era in FCPA scrutiny.

Going after individuals

Meanwhile, prosecutors finally appear to have started delivering on their publicly stated intention to step up enforcement actions against individuals – an approach federal authorities have suggested could serve as a powerful deterrent. In April the SEC and DoJ revealed recent civil and criminal charges against at least eight individuals, including executives at Alstrom, for bribes related to a power project in Indonesia; four individuals at Bizjet, including its president and CEO and several vice presidents; and a former board member of Siemens. 

‘That is one trend you will continue to see,’ says Bill Pollard, a partner at Deloitte Financial Advisory Services and the firm’s central region FCPA leader. ‘It’s an added weapon in the arsenal of government. One of the ways you get the attention of corporate America, senior management and the board is when individuals start going to jail.’

It’s a trend that has also caught the attention of Michael Himmel, chair of the litigation department and white-collar criminal defense practice at Lowenstein Sandler and a former assistant DA and US Attorney. It’s just one indication he sees that the crackdown on individuals is likely to become even more aggressive.

Increasingly, Himmel has noticed in recent months, federal authorities have reached out to the US Attorneys Office in New York and New Jersey, taking advantage of the experience of their prosecutors and their ability to use the services of local FBI offices. Though most of the cases have yet to be concluded, the involvement of these entities in individual investigations may be a sign of a more strident stance in the months ahead.

‘The fact that the federal authorities are using US Attorneys Offices to assist them is the headline as far as I am concerned,’ Himmel says. ‘I have seen that over the last 12 to 18 months, and while enforcement numbers may be down, there are probably more investigations going on than ever before, with more investigators and more trial attorneys that can do this than ever before.’

Historically, Himmel notes, US Attorneys’ Offices ‘certainly prefer when they go after corporations to get individual scalps, too.’ So in-house counsel should not rest easy, he adds: ‘As a former federal prosecutor, I can tell you US attorneys like to bring big cases. If they catch wind of something brewing that involves their district, they are going to want to get involved.’

What’s a company to do? 

A number of experts stress that it is important for companies to evaluate the areas in which their business is at risk of scrutiny and then more carefully target their resources where they are needed. Among the minimum actions companies should take are increased training, establishing ethics hotlines and conducting regular scrutiny of third-party transactions.

Jacqueline Wolff, partner and co-chair for corporate investigations and white-collar defense litigation at Manatt Phelps & Phillips, suggests every company perform targeted risk assessments before making decisions about where to target compliance funding. 

‘A lot of consulting firms and lawyers out there are happy to provide an off-the-shelf FCPA program to a company that does not want to spend too much money on compliance,’ she says. ‘But if there is no risk assessment, that off-the-shelf FCPA program won’t necessarily protect them.’

A company manufacturing widgets in the US and distributing them to private purchasers abroad, Wolff notes, is going to have very different risks from a company providing services overseas to government entities. Companies that provide services to foreign government agencies, for instance, might focus their efforts on preventing any transaction that could be perceived as a bribe of officials working at those agencies. A widget company – or, in the recent case of Ralph Lauren, a company importing merchandise – may be better served scrutinizing contacts and training those who deal with low-level customs officials. 

‘The same policies and procedures might not work for both,’ Wolff says. ‘The idea of training your entire workforce on FCPA is always a good one, but sometimes you don’t have the money to do it all immediately. Who are you supposed to train first? It differs in different cases.’

Industry and regional variation

In addition, policies may differ based on industry. A company seeking work setting up government-run manufacturing businesses, for instance, may need to fly government officials abroad to show them facilities, and may incorporate exemptions for such travel into company FCPA policies. A company selling the government lipstick may have less reason to pay for travel and may want to ban such practices outright, Wolff notes.

Companies should pay special attention, Himmel explains, if they do business in third world countries considered ‘hotbed areas’ of corruption by FCPA experts, because they are more likely to come under scrutiny. ‘I hear the names of some countries over and over: Vietnam, Indonesia, India, Congo, Sudan, Brazil, the new nations of the old Soviet Union,’ he says. ‘Investigations can happen anywhere. But if you do business in those countries, that is going to be of interest to the FCPA folks if for some reason they stumble onto your company.’

Companies need to ‘take a step back’ and make sure not only that individuals in hotbed areas are being trained, but also that compliance officials have a protocol in place to scrutinize third-party transactions, and to ensure intermediaries being used ‘are real and not just a ‘beard’ for a public official or some quasi-public official,’ Himmel continues. ‘Many firms have tens of thousands of employees. They can’t ride herd with every one of them. They need to take prophylactic measures.’

Companies should also be aware of investigations targeting their industry peers, notes Davis. Often, when investigators discover a practice that has violated FCPA guidelines performed by one industry player, they will expand their investigation to examine whether that company’s peers employ similar practices.

A number of companies in the pharmaceutical and healthcare fields, for instance, have been in the sights of regulators in recent years for payments made to doctors in foreign countries who work for state-owned hospitals. A number of oil services companies have been investigated in countries such as Nigeria. And though no cases have yet been publicly announced, federal authorities appear to be in the process of investigating a number of motion picture studios and production companies in China, industry experts say.

‘If you work for a company and you hear or read a story about someone else in your industry being investigated, there is a very real possibility the rest of your industry is going to come under investigation as well,’ Davis says. ‘And if you are the general counsel of that client you should probably get an understanding of what is going on in your company because the SEC and DoJ may come knocking pretty soon.’

Voluntary disclosure

Wolff and a number of other FCPA experts are keen to highlight the emphasis that SEC and DoJ regulators have placed on convincing companies to voluntarily come forward when they discover violations. A growing number of companies, Wolff notes, ‘are coming in, or when they realize they are being investigated, establishing that they want to co-operate – and co-operation at that point means not simply coming in, but also providing evidence against individuals. That appears to be what the authorities expect to happen.’

The government, agrees Pollard, is in fact actively trying to get the message out with regard to self-reporting and co-operation. ‘Getting in front of these matters as a corporation and as an individual member of senior management is looked at as a premium and is very valuable from the government’s perspective in terms of evaluating culpability and liability,’ he says. In the recent case in which Ralph Lauren came forward to voluntarily disclose that it had discovered evidence of bribery of low-level customs officials, the SEC agreed to a non-prosecution agreement, he adds. 

Monitoring compliance

Once a violation has been detected, the degree to which proper procedures were in place to monitor FCPA compliance at the company will also play a factor in the way the government reacts. 

‘The government still has a perspective that many companies are operating with a ‘paper’ compliance program,’ Pollard says. ‘You have to be able to demonstrate an effective FCPA or anti-corruption compliance program that has proper visibility at the board level and is being executed by the management of the company. That is still paramount to success not only in mitigating this risk, but also in creating a defensible position for the company if indeed a violation is detected.’

For instance, in the recent China bribery case against a managing director in Morgan Stanley’s real estate investment and fund advisory business, government officials took great pains to highlight in their decision that the individual responsible for the violation was well trained, well informed and reminded of FCPA protocols and his professional obligation to adhere to company policy. The violation was therefore found to be the result of a ‘rogue employee’ rather than a systemic program within the organization. 

Conversely, perhaps the textbook example of the opposite finding can be seen in the government’s actions against Siemens, which resulted in hundreds of millions of dollars in fines against the company for systemic problems, in addition to individual prosecutions that continue to this day. ‘Siemens had volumes of material that talked about the program it had in place. The company just didn’t follow it,’ Pollard notes. 

To more proactively combat FCPA violations, a number of companies have been creating or buying cutting-edge data-mining and pattern recognition programs similar to those used to detect credit card fraud, identify theft and insurance fraud, Pollard adds. These powerful computer tools scan vast stores of accounting data for unusual anomalies that may be associated with bribes or illegal contracts with government officials.

UNCOVERING HIDDEN BRIBES

Enforcement of anti-bribery and corruption laws around the world is at an all-time high. If your company does business in any foreign country, there’s a risk that bribes could be hiding in plain sight.

Phillip Ostwalt, partner and head of the investigations department at KPMG, lists six key clues that can help companies uncover hidden bribes.

• Look for insufficient or non-existent descriptions of the transaction, lack of proper support, and specious business rationale for the transaction. Conducting trend analyses and data analytics on these accounts can expose anomalies that might point to a hiding place.
• Many bribes are relatively small in amount. It may be necessary to take various samples of transactions and review supporting documentation to assess the legitimacy of a payment.
• With travel and entertainment expenses, look for original receipt documentation, the names of individuals involved and the purpose of the event, proper approvals and timely submissions, reasonable exchange rates, and mathematical accuracy of the expense report.
• Bribes may hide in contracts and agreements, financing arrangements, invoices, purchase orders, bills of lading and shipping documents, bank statements and written communications. Special attention should be paid to supplemental, modified or last-issued invoices and purchase orders because many times a bribe is solicited after the initial business dealings. Sales contracts should be reviewed to assess the reasonableness of margins, commissions and costs, and checked for vague terms, advance fees, large termination fees and frequent undocumented change orders.
• The most common types of disguises are special payments or fees, above-market commissions, business introduction fees, rebates or discounts, promotion and marketing expenses, inspection fees, political or charitable contributions, and unusual selling or distribution charges. More creative covers for bribes can be manipulations of currency exchange conversions, payments in other currencies, overstated product quantities or weights, overly complex financing terms or unnecessary insurance/indemnity charges.
• Another form of bribery is awarding work to a third party that’s affiliated with a current or former foreign official or his or her family. This is especially true if the third party isn’t qualified, can’t deliver the service or doesn’t submit the lowest bid or quote. Offering scholarships and educational allowances to persons affiliated with foreign officials or their families is also considered a bribe. These types of bribes are extremely difficult to detect because they often don’t leave a footprint anywhere in your organization. Often, the only way to detect one of these bribes is for someone to spot it and report it to the appropriate person.

Simplifying the supply and sales channels can help. Many of the hiding places can be removed by eliminating third parties that aren’t essential for business operation, by reducing complex procurement and distribution processes, and by creating uniform external documentation.