Stories of foreign intrigue are no longer the exclusive realm of spy thrillers as in-house counsel increasingly find themselves entangled in the corporate battle against corruption - either inadvertently as unwitting participants in alleged "bad acts" or as gatekeepers who must assess risks and guide compliance initiatives. Although the most recent spate of problems may not have involved "moles" divulging their true identities at the Berlin Wall, chases through untamed oil fields, or the deployment of secret agents, they have included the use of slush funds with fabricated names, the routing of bribery payments through offshore accounts, clandestine and questionable payments, handwritten notes to avoid leaving a trail of electronic evidence, and documents marked "do not copy" or "store in a high-security vault."
Historically, as the global economy has experienced rising prices in the food and energy sectors, the level of corruption has increased in step with panic and avarice. For many individuals and corporations, the most significant form of corruption has been bribery, which may come in the way of cash, jewelry, all-expense-paid vacations, artwork, wines, or gift certificates. This form of corruption is in direct violation of the Foreign Corrupt Practices Act of 1977 (FCPA)1 and its anti-bribery provisions.2
This article focuses on the anti-bribery provision of the FCPA, and data pertaining to corruption, targets, compliance, and protections, all with a view toward assisting in-house counsel in examining their potential exposure and role.
In 1976, post-Watergate, a Securities and Exchange Commission (SEC) investigation disclosed that "more than 400 U.S. companies admitted to having made questionable or illegal payments in excess of $300 million to foreign government officials, politicians, and political parties."3 In response to this investigation and in an effort to curtail the bribery of foreign officials and restore the public's trust in the U.S. system of doing business, Congress enacted the FCPA in 1977.
The anti-bribery provisions of the FCPA make it unlawful for a U.S. person, including issuers of securities regulated by the SEC and domestic concerns, as well as certain foreign issuers of securities, to make a corrupt payment to a foreign official for the purpose of obtaining or retaining business for or with, or directing business to, any person.4 The FCPA applies to individuals, firms/corporations, officers, directors, employees, agents of firms/corporations and any stockholder acting on behalf of a firm/corporation.5 The FCPA also applies to foreign firms and persons who take any act in furtherance of a corrupt payment while in the United States.6 U.S. parent corporations are liable for the acts of foreign subsidiaries where they authorize, direct or control the activity in question.7
Notably, the FCPA applies to payments to any public official, regardless of rank. The payment can be money or anything of value, and it must be made with corrupt intent. It is also a violation of the anti-bribery provisions to make a payment to an intermediary or third party while knowing that all or a portion of the payment is designed to influence a foreign official.8
The anti-bribery provisions exclude payments to facilitate or expedite performance of "routine governmental action" such as granting permits or licenses; processing visas or work orders; or providing police protection, telephone service, power or water.9 The FCPA also provides an affirmative defense where a payment made to a foreign government official is lawful under the written laws of the foreign official's country, or where a payment was a reasonable and bona fide expenditure directly related to the promotion, demonstration or explanation of products or services or to the performance of a particular contract between a company and a foreign government.10
The Department of Justice (DOJ) is responsible for all criminal enforcement of the FCPA and for civil enforcement of the anti-bribery provisions with respect to domestic concerns, foreign companies, and nationals, while the SEC is charged with civil enforcement with respect to issuers of securities.
In determining how payments should be characterized, the DOJ has established an FCPA Opinion Procedure which allows any U.S. company or national to submit proposed business conduct and receive an opinion as to whether the conduct described would be considered prohibited pursuant to the FCPA.11 Inasmuch as provisions of the FCPA are broad and there is little case law interpreting them, the DOJ often recommends consulting with counsel when analyzing the statute.12
Criminal penalties for violating the anti-bribery provisions for corporations and other business entities include a fine of up to $2 million; directors, officers, employees, stockholders and agents are subject to a fine of up to $100,000 plus up to 5 years imprisonment. No corporate indemnification is permitted for fines against individuals.13
Civilly, the U.S. Attorney General or the SEC may bring an action for a fine of up to $10,000 per violation against companies and individuals.14 In an SEC enforcement action the court may also impose an additional fine based on ill-gotten gains received. Further, persons or entities judicially determined to have violated the FCPA may be barred from doing business with the federal government.
Although there is no private right of action under the FCPA, the same conduct that violates the anti-bribery provisions may serve to initiate civil lawsuits alleging breaches of fiduciary duties, violations of the federal securities laws, fraud, and violations of the Racketeer Influenced and Corrupt Organizations Act (RICO).15 As such, directors and officers of companies continue to be on high alert as related civil actions are filed against them. Thus, in-house counsel who are also officers may have an additional exposure in this regard. Note, however, that while FCPA fines and penalties are typically not eligible for coverage pursuant to a Directors & Officers (D&O) Liability Policy, defense costs for investigations as well as defense and indemnity payments for civil actions may be available.
Aside from the threat and costs of multijurisdictional investigations and litigation, in-house counsel are particularly concerned with the exorbitant dollar amounts disgorged, the considerable size of criminal fines,16 payments to the SEC, monitoring arrangements with the DOJ if a plea deal is struck, the costs of internal investigations which can run from $2 million to $20 million, and damage to reputation/brand image.
Globally, U.S. regulators are working in conjunction with international prosecutors and investigators to further anti-corruption initiatives and equalize the economy so as not to provide unfair advantages to those who engage in corrupt activity. By example, the OECD (Organization for Economic Cooperation and Development) Anti-Bribery Convention on Combating Bribery of Foreign Public Officials in International Business Transactions includes 37 member countries focused on reducing corruption in developing countries. As the data bears out, vigorous enforcement of laws and implementation of initiatives on a global scale require teams of international crime fighters and other resources.
Robert S. Mueller III, director of the Federal Bureau of Investigation (FBI), in his April 2008 speech before an American Bar Association Annual Conference stated, "[T]he FBI is uniquely situated to address corruption. We have the skills to conduct sophisticated negotiations. We are insulated from political pressure and we are able to go where the evidence leads us, without fear of reprisal or recrimination,"17 and they have.
The FBI has four full-time agents dedicated to FCPA probes. At the beginning of 2008, the FBI had an estimated 77 pending FCPA investigations. That number does not include the multitude of internal company probes that have not been reported to the government. Additionally, the DOJ employs more than a dozen FCPA prosecutors who by year-end 2007 brought approximately 16 enforcement actions; an equal number was brought by the SEC.
In 2007, the SEC and DOJ imposed more than $135 million in fines, penalties, and disgorgement against corporations for violations of the anti-bribery provisions. The U.S. government's enforcement efforts, which involve parallel investigations and less reliance on self-reporting, have continued in 2008. Further, inasmuch as the DOJ has not hesitated to enforce the FCPA against foreign-owned companies it seems likely that more non-U.S. probes by the DOJ are on the way.
According to Daniel E. Karson, executive managing director of Kroll Associates, in comments made to the author, "[I]n 2007 and now in 2008, the FCPA has eclipsed Sarbanes-Oxley as the primary concern for corporate general counsels."18 An analysis of FCPA enforcement trends by Kroll indicates that since 2000, the largest number of cases involve Asia, followed by Latin America, Africa, Europe, and the Middle East.19 The Kroll analysis notes that emerging economies may present breeding grounds for bribery.
The 2007 Bribe Payers' Index compiled by Transparency International cited India, China, and Russia as having the highest corruption rates. Although Chinese officials maintain that anti-corruption is a top priority, noting the 500,000 bribery cases investigated over the past decade and the fact that an individual can be sentenced to death for a bribery conviction, it remains high on the risk list. Absent from all lists is Nigeria, which remains a focus of the DOJ with respect to the potential for bribery. Kroll has ranked potential exposure by industry sectors (from highest risk to lowest) as energy, technology/telecom, medical/pharmaceutical, food/agriculture, metals/mining, construction, and chemicals.20
According to the 2008 European Corporate Integrity Survey published by Integrity International, bribery was highest among the most critical concerns for European in-house counsel. Many overseas operatives have embraced the U.S. position and work in conjunction with the DOJ as demonstrated by an OECD 2007 report citing that more than 150 prosecutions or investigations involving bribery have been brought worldwide.
As companies continue to expand globally and encourage business and legal cultures that will not tolerate bribery, the FCPA and similar types of investigations, penalties and legal actions continue to rise. As such, in-house counsel remain vigilant in monitoring developments and targets.
Among the targets of FCPA current enforcement activity are individual officers and employees of companies. These individuals increasingly are being held criminally liable for their conduct. This represents a shift in the DOJ focus on charging corporations with criminal offenses. At present, the DOJ more commonly offers companies deferred prosecution agreements, as alternatives to criminal prosecution, in exchange for monetary penalties and continued cooperation with the government. Meanwhile, individual officers and employees continue to face employment termination and criminal prosecution.
In an analysis of target trends, it appears the U.S. government is particularly interested in pursuing multiple companies in a specific industry sector, such as oil, gas, energy, or construction and related industry groups, because historically the FBI has discovered a higher incidence of corruption in these sectors. Further, companies that conduct business in countries known to have heightened susceptibility to corruption are also targeted by the government. Additionally, the government has paid significant attention to companies with prior FCPA-related issues or repeat offenders. Finally, and as Mr. Karson highlights, it has become much more commonplace for the Department of Justice to target local business partners of U.S. entities in other countries such as consultants or agents. Third-party agents and consultants are often native to the countries in which they conduct business and are unaware of FCPA provisions. Traditionally, they have acted as intermediaries between political officials and foreign subsidiaries of U.S. companies, and if bribery is a customary local practice, they too have been involved in such activity as the intermediary; hence, the heightened focus on this group of individuals.
The stories of individual targets that have been apprehended may read like complex mysteries complete with alias names, motives, disguises, and clandestine activities, but U.S. and international anti-corruption experts have been able to decipher clues and follow the trails through multiple countries to disclose corrupt activity. To maintain anonymity, true names and corporate positions of individual targets are not often disclosed, but those involved in the bribery process have included chief executive officers, chief financial officers, legal chiefs, finance directors, client/account executives, third-party agents/intermediaries, and board members, as well as low and mid-level managers. Acts that have been the subject of such stories include wiring millions of dollars to Iranian officials in exchange for oil and gas rights; paying off Nigerian officials with suitcases of cash in exchange for oil; wooing government officials in an Asian country with lavish weekend getaways in return for defense and aerospace contracts; offering shares of stock in return for furthering business interests in another Asian country; and providing cash and gifts in certain European countries to win construction contracts.21
While less than a handful of in-house counsel have been implicated pursuant to the anti-bribery provisions, they often are the initial targets questioned during the course of an investigation. Although in-house counsel generally seek to cooperate with authorities, there may be ramifications for the attorney/client privilege, which varies internationally. Inquiries made of in-house counsel often focus on compliance and due diligence functions within the FCPA context.
In his April 2008 speech, Robert Mueller, FBI director, also remarked, " . . . you are those to whom business leaders turn for counsel. You are often one of the first lines of defense. You are the gatekeepers - the ones who must say, 'this is the right thing to do . . . .'"22 In this regard, although a company's board of directors is ultimately responsible for the oversight and management of an FCPA compliance program, significant portions of these duties are delegated to in-house counsel. As such, it becomes incumbent upon in-house counsel to assist in conducting worldwide risk assessments to identify business units and regions where they believe their companies are most exposed to corruption; research and retain competent local counsel where necessary; work in cooperation with leadership of the company to establish clear, written policies, codes of conduct, training, procedures, and hotlines; and aid in creating a culture of anti-bribery compliance from the top down.
Effective compliance also typically requires: ongoing monitoring to ensure that all policies are regularly evaluated and are working to prevent or identify inappropriate activities; managing internal investigations; establishing appropriate disciplinary mechanisms for violations of company policy or the law; conducting due diligence inclusive of background checks and FCPA compliance on all foreign business partners, potential acquisitions/mergers, agents or anyone engaged in overseas commerce on behalf of the company23; being acutely aware of, and accounting for, societal and language differences in international compliance training; and documenting all compliance efforts.
Mr. Karson of Kroll also advises: "A particular area of concern and challenge for general counsels is due diligence on foreign agents and consultants . . . .Corporations need to know exactly who they hire and what services are to be performed as a majority of FCPA investigations target these individuals." It has been equally challenging for in-house counsel to impress the importance of FCPA compliance upon employees of non-U.S. subsidiaries and affiliates.
According to the U.S. Federal Sentencing Guidelines Chapter 8 Part B (2005), which provides guidance with respect to the establishment of compliance programs, penalty reductions for companies of up to 95 percent are available provided that an effective compliance and ethics program is created and implemented.24 Failure to establish such programs may result in additional liability of in-house counsel charged with this responsibility.
In addition to robust FCPA compliance programs, due diligence and consulting with counsel, the DOJ and SEC consistently highlight that self-reporting is a vital protective measure for in-house counsel in their efforts to minimize legal exposure to the corporations they serve. In-house counsel may also seek to review their D&O liability insurance policies in the event that the directors, officers, or company they serve are confronted with an FCPA investigation and/or related civil litigation as insurance coverage may be available depending upon the allegations and circumstances.
As for protecting themselves, Employed Lawyers Professional Liability Insurance is specifically designed to provide coverage for claims alleging negligent acts, errors or omissions in the performance of the duties of in-house counsel and their staffs. Although no insurance will provide coverage for intentional violations of statutes and their attendant fines and penalties, defense cost coverage is available in the investigation stage through litigation up and until there is a final adjudication. On the civil side, in terms of allegations of breaches of fiduciary duties, violations of the federal securities laws, fraud, misrepresentation, and negligence, this type of insurance may provide coverage for defense costs as well as monies for settlements or judgments.
In the end, for in-house counsel, although there may be no billionaire eccentric foreign villains with desires to take over the world, and no cerebral sophisticated secret agents dedicated to moral ideals, foreign intrigue persists via the FCPA and the global anti-corruption crime fighters.
Susan F. Friedman is a senior vice president, claims advocate and the practice leader of the employed lawyers professional liability insurance practice of Marsh. She can be reached at Susan.F.Friedman@marsh.com.
2. Id. §§78dd-1(a), 78dd-2(a), et seq.
3. U.S. DOJ "Lay Person's Guide to FCPA," http://www.usdoj.gov.
4. See note 2 supra. The FCPA also requires companies whose securities are listed in the United States to make and keep books and records that accurately and fairly reflect the transactions of the corporation and to devise and maintain an adequate system of internal accounting controls. Id. at §§78dd-1(a), 78dd-2(a), 78dd-3(a), 78dd-1(f)(1).
5. See note 3 supra.
6. See note 3 supra. This addition was made by Congress in 1998.
7. See note 3 supra.
8. Id. Knowledge includes conscious disregard and deliberate ignorance.
9. 15 USC §§78dd-1(b), 78dd-2(b), 78dd-3(b). The statute lists examples of routine government action, but companies must also make certain that such payments do not violate the local laws of the country in which they are doing business.
10. Id. at §§78dd-1(c)(1), 78dd-2(c)(1), 78dd-3(c)(1), 78dd-1(c)(2)B, 78dd-2(c)(2)B, 78dd-3(c)(3)B. Generally, as anti-corruption legislation spreads globally, the first affirmative defense is often unavailable.
11. 28 CFR Part 80.
12. See note 3 supra.
13. See note 12 supra.
15. 18 USC §§1961-1968, 1970 as amended.
16. The largest FCPA penalty thus far was $44 million which included an $11 million criminal penalty and $33 million in disgorgement of profits. The average settlement cost for the three-year period ending 2007 was $13.5 million.
17. See http://www.fbi.gov/pressrel/speeches/mueller041708.htm, April 17, 2008.
18. See generally, Kroll Global Fraud Report Annual Edition 2007/2008 and June 2007 Corruption and the Foreign Corrupt Practices Act.
21. See generally, http://www.america.gov/st/washfile, U.S. Department of State 2008.
22. See note 17 supra.
23. The U.S. Department of Commerce Commercial Services Program has several programs to assist U.S. companies in conducting due diligence when selecting business partners or agents overseas. See generally, http://www.trade.gov/cs.
24. U.S. Sentencing Guidelines, §8B2.1 (2005).