03/25/2010

Corporate Finance Alert: DOJ and SEC Actively Hunting for Violations of the FCPA

Companies with operations or sales outside of the United States may be targets for enforcement of the Foreign Corrupt Practices Act (FCPA). The FCPA, which became law in 1977, makes it a felony to give anything of value to a foreign official to induce him to assist your company in obtaining or retaining business, among other things. This might include direct payments of cash to land a contract with a foreign government, donations to an official's favorite charity to influence whether he will recommend your company, or treating visiting officials to entertainment at places like Disneyworld when they come to view your products in action. The bribes might be given directly, through employees, or, more frequently, given indirectly through agents, consultants or other intermediaries. And more people in foreign countries are considered officials under the FCPA than most would think. A mid-level manager or professional at a commercial business is probably a foreign official if her company happens to be owned or controlled by a foreign government;likewise for a doctor at a hospital owned or controlled by a foreign government.

Now, the federal government is ramping up its enforcement of the FCPA. The FBI recently said that the number one priority of its Criminal Division is the investigation of corruption. The Department of Justice (DOJ), which says that it is currently pursuing more than 120 FCPA investigations, has promised to grow the number of FCPA cases it prosecutes "substantially" when it adds 50% more prosecutors to the area over the next two years. And the Securities and Exchange Commission has added a dedicated Foreign Corrupt Practices Act enforcement unit this past month.

Earlier this year, the DOJ demonstrated a completely new tactic in the area of FCPA cases: an undercover sting operation. In a massive, coordinated operation among the DOJ, the FBI and the City of London Police, 22 executives of firearms and personal protective gear companies were arrested on a single day for violations of the FCPA. In this sting, dubbed "Catch-22," federal agents posed as representatives of an African country interested in purchasing law enforcement and military equipment from U.S. and U.K.-based businesses, including well known gun maker Smith & Wesson. Federal agents solicited bribes from those company representatives. About 150 FBI agents were involved in making arrests and executing search warrants on a single day in January. According to Assistant Attorney General Lanny Breuer, "This ongoing investigation is the first large-scale use of undercover law enforcement techniques to uncover FCPA violations and the largest action ever undertaken by the Justice Department against individuals for FCPA violations." He went on to say that, "The fight to erase foreign bribery from the corporate playbook will not be won overnight, but these actions are a turning point. From now on, would-be FCPA violators should stop and ponder whether the person they are trying to bribe might really be a federal agent."

Assistant Attorney General Breuer and Deputy Chief of the DOJ's Fraud Section Mark Mendelsohn, who heads the DOJ's enforcement of the FCPA, have been letting businesses know about enhanced enforcement against U.S. companies with sales and operations outside the U.S. Mendelsohn is telling companies to "adopt stricter standards" in dealing with foreign officials. To emphasize the point, he stated that not only are prosecutions against companies at the highest levels ever, but the DOJ also prosecuted a record number of individuals in 2009. And the huge fines keep coming: Daimler paid $185 million within the last few days, BAE Systems paid $400 million in early March, Kellog, Brown & Root paid $579 million last year and Siemens paid $800 million in 2008. Corporate management (such as Willbros managers Jim Bob Brown and Joseph Edward Steph) are writing personal checks for penalties and going to jail to serve sentences of a year and longer. And Mendelsohn also added that the DOJ has entered into a number of international agreements to foster cooperation among law enforcement agencies of several countries in prosecuting bribery and corruption. Breuer and Mendelsohn's messages to business are clear. Either have a "rigorous" FCPA compliance program including internal investigations and remedial measures that is "faithfully enforced" or face "significant criminal fines for the corporation, unwanted negative publicity, a potentially devastating impact on stock prices" and, for individuals, fines and jail time.

What This Means to You
If your company has sales or operations outside the U.S., this is an excellent time to review your FCPA compliance program.