Part V: How Corporate Officials Can Get A Good Night’s Sleep Despite Current SEC Enforcement Trends

This is the fifth in a series discussing new trends in SEC enforcement which impact corporate directors and officers and steps that can be taken to avoid future liability.

FCPA enforcement

Aggressive enforcement of anti-corruption laws by the DOJ and the SEC is another area in which individuals and their business organizations are at risk. Enforcement officials have declared that this is a “new era” of FCPA enforcement. Few would doubt that they are correct. More FCPA enforcement cases have been brought in the last few years than in the history of the statute. More is being paid in settlement by corporations than at any time in the history of the FCPA. More individuals are being prosecuted and sent to prison and there are more FCPA trials than at any time since the enactment of the law in 1977. While enforcement of anti-corruption laws around the globe is on the increase as indicated in a a recent report by the OECD Working Group on Bribery, there is no doubt that the U.S. is far and away the leader in bringing corruption actions.

The key trends and characteristics of the New Era are:

• Ever increasing amounts paid by business organizations to settle;

• Ever increasing amounts paid by companies to cooperate with enforcement officials in an effort to mitigate their potential liability;

• Expansive interpretations of the statutes by enforcement officials;

• An increasing use of industry sweeps; and

• An emphasis on individuals coupled with demands for prison terms.

One of the hallmarks of corporate FCPA settlements is the spiraling cost of settlement. That cost begins with what is paid to the enforcers. The current top ten largest settlements as compiled by the FCPA blog are:

• Siemens in 2009 paid $800 million in 2008

• KBR in 2009 paid $579 million

• BAE in 2010 paid $400 million

• Snamprogetti Netherlands B.V. in 2010 paid $365 million

• Technip S.A. in 2010 paid $338 million

• JGC Construction in 2011 paid $218.8 million

• Daimler AG in 2010 paid $185 million

• Alcatel-Lucent in 2010 paid $137 million

• Magyar Telekom/Deutsche Telekom: $95 million in 2011 and

• Panalpina in 2010 paid $81.8 million

It is noteworthy that eight of the largest amounts paid were from settlements in 2010 and after with 6 cases added in 2010 and 2 in 2011. These cases are frequently, but not always, based on pervasive patterns of misconduct. Siemens and Daimler for example, involved that type of conduct based on multiple violations over a period of time – essentially corporate cultures which utilized bribes as a business tool, according to prosecutors. The cases involving KBR, Tehnicup,Snamprogetti and JGC centered on the years long and highly profitable TSKJ consortium, formed to secure contracts and ultimately the payer of millions of dollars in bribes.

In contrast, the latest addition to this rogues gallery of FCPA cases is Magyar Telekom/Deutsche Telekom. There the action is not based on a pervasive, years long pattern of misconduct or an international conspiracy running for years. Rather, the action is based on just two transactions. Indeed, an analysis of the underlying conduct raises significant question concerning just how the case moved up to the number nine slot on the list and ahead of Panalpina which engaged in multiple violations around the globe for years. Despite the fact that settlements are based on the sentencing guidelines on the criminal side and the SEC’s disgorgement policies on the civil side, it appears that the cost of settlement is increasing.

An often unseen cost of these cases is what is spent on cooperation credit. Each of the amounts paid by the companies in the top ten, with the exception of BAE, was reduced by “cooperation credit,” that is, credit from enforcement officials for cooperating with their investigative efforts. Enforcement officials urge business organizations to self-report and cooperate, promising meaningful credit, although in the top ten only Magyar Telekom/Deutsche self-reported. Cooperation is typically defined in terms of self-reporting, furnishing enforcement officials the pertinent facts and instituting the necessary remedial steps to prevent a reoccurrence of the wrongful conduct. An examination of the settlement papers in the top ten clearly demonstrates that meaningful credit is given by the DOJ, although the SEC settlements evidence little impact from the often extensive efforts of the company.

Regardless of whether settlement costs are increasing, it is beyond dispute that those costs are only the beginning. The hidden cost in all of this is that of cooperation. In their quest to earn credit many companies are going far beyond the basics. Siemens, Panpelina and others, for example, have developed evidence of wrong doing by others, becoming a kind of corporate whistleblower which is part of a trend that will be discussed later in this series. Others, such as Siemens, created a significant compliance function while Alcatel-Lucent fundamentally altered its business model.

The cost of these undertakings can be significant. Siemens, for example, spend $850 million in its efforts to cooperate over two years and another $150 million on compliance. Diamler reportedly spent $500 million in its efforts to win cooperation credit. Currently, Avon Products Inc. has reportedly spent over $160 million in its efforts to cooperate with enforcement officials conducting an FCPA inquiry and has yet to settle the underlying actions. The increasing cost of settlement, coupled with the expense of cooperation, can make the decision by a corporate board to self-report and cooperate most difficult. It may be for this reason that the President of TRACE International, a non-profit focused on anti-corruption, recently noted that most corporations do not self-report after learning of a potential difficulty.

Another characteristic of the new era of FCPA enforcement is an expansive interpretation of the statutes. On the question of jurisdiction, for example, enforcement officials have frequently adopted a reading of the provisions which some commentators argue unduly expands the reach of the statutes. The case involving JGC Corporation is a good example.

There the defendant is a Japanese company with no operations in the United States. It was a member of the TSKJ discussed above. The jurisdictional contacts, according to the court papers, appear to be two e-mails from the company to Houston and two bank transfers from one foreign bank to another through New York.

Initially, the company raised jurisdictional issues. Later the company cooperated, according to the DOJ. The case was resolved when the JGC entered into a deferred prosecution agreement. Subsequently, the court in U.S. v. Patel, Case No. 1:09-CR-335 (D.D.C.) one of the prosecutions arising out of the now collapsed Africa Sting actions discussed later in this series, rejected a DOJ claim that similar contacts were sufficient to support a claim of jurisdiction.

Enforcement officials have also taken an expansive view of what constitutes a bribe. Under U.S. law small facilitation payments for routine items are not bribes. Yet the vitality of this exception despite specific statutory authorization is anything but clear in view of recent FCPA cases. The point well illustrated by the SEC’s settlement in In the Matter of Diago plc., Adm. Proc. File No. 3-14410 (July 27,2011). That action charges FCPA books and records violations based on small payments to government-owned liquor store operators for product placement, label registration, lobbying fees and promotion. Another payment was to a Korean Customs Service official as a reward for assistance in negotiating a tax refund. Rewards are not bribes, but gratuities under domestic U.S. law. Gratuities are not violations of the FCPA. In this case the payments were not charged as bribes but for not being properly recorded, an FCPA books and records violation.

Even if the payments are properly booked, however, there may be liability. In SEC v. Noble Corporation, No. 4:10-cv-4336 (S.D. Tex. filed Nov. 4, 2010); SEC Litg. Rel. No. 21728 (Nov. 4, 2010) the payments were actually recorded in a facilitating payments account. The SEC said they were not facilitation payments so the books and records were false.

Under the expansive views of the New Era, even payments made under compulsion can be viewed as bribes. This point is illustrated by the SEC’s settlement in In the Matter of NATCO Group, Inc., Adm. Proc. File No. 3-13742 (Jan 11, 2010); SEC v. NATCO Group. Inc., No. 4:10-cv-00098 (S.D.Tex. Jan. 11, 2010). There the company employed local workers and expatriates in Kazakhstan. Local immigration authorities claimed the expatriates did not have the proper documentation and threatened to impose fines and to either jail or deport the workers if the company did not pay the fines. Management paid the fines based on the belief that the workers would otherwise be jailed. The local subsidiary made payments to facilitate the proper visas using bogus invoices totaling $80,000 to obtain the money from the bank. The company reimbursed the invoices. NATCO settled the case based on FCPA books and records charges.

Next: FCPA enforcement (cont.)