Part IV: THE NEW ERA OF FCPA ENFORCEMENT: FOCUS ON INDIVIDUALS AND CALLS FOR REFORM
This is the fourth in a series of five articles that will be posted this week examining current trends in FCPA and anti-corruption enforcement. The posts are excerpts from a forthcoming article by Thomas Gorman and William McGrath.
Focus on individuals
A key facet of the “new era” of FCPA enforcement is a focus on individuals. Enforcement officials are targeting individuals involved in these actions as a way to halt future violations. This view is reflected in basic statistics. In 2005 the DOJ charged five individuals with criminal FCPA violations. In 2009 over 50 individuals were charged with criminal FCPA violations. As a result, more FCPA cases are going to trial. For example, in the first half of 2011 at least three FCPA cases involving individuals have been tried to verdict.
The so-called SHOT-show cases best illustrate the focus of FCPA enforcement officials on individuals. These cases stem from what Assistant Attorney General Lanney Breuer has called the largest FBI sting operation in FCPA enforcement history. The sting operation yielded nineteen indictments charging twenty two individuals.
In the sting operation an undercover FBI agent posed as a sales agent of a foreign government. Executives were told that the defense minister for an African country was prepared to spend $15 million to outfit the country’s presidential guard. The undercover agent told executives that a 20% commission was required. Half of the commission would go to the agent and half to the minister. To participate, the executive was required to create two price quotes for the equipment. One included the commission while the other did not.
As part of the sting operation the deal was set up in two phases. The first was a small “test” and the second was the actual deal. During the test phase the businessman supposedly confirmed the arrangement in e-mails which contained the price quotations that included the “commissions.” If the test was successful, the deal moved to the second phase. There the businessman would meet with a sales agent and another FBI undercover agent. He would be told that the Minister of Defense was pleased with the result and be furnished with a written agreement for execution. It contained the corrupt commissions.
The first trial resulting from this operation was against four defendants. It ended with a hung jury. U.S. v. Patel, Case No. 1:09-CR-335 (D.D.C.). Reportedly the jury was concerned over the definition of “willfulness” in the context of the sting operation. Prior to the commencement of this trial three individuals had pleaded guilty.
In other FCPA cases criminal cases charging individuals the DOJ has been more successful. For example, in July 2001 two Individual defendants were convicted in the on-going FCPA prosecutions involving Haiti Teleco. U.S. v. Esquenazi (S.D. Fla.) Those cases, and others awaiting trial, stem from an alleged scheme to bribe officials of Haitian state owned telecommunications provider, telecommunications D’Haiti or Haiti Teleco.
Similarly, in May 2011 three individual defendants along with the company were convicted in U.S. v. Lindsey Manufacturing Company, Case No. 2:10-cr-01031 (C.D. CA.). That case centered on allegations that the company’s sales representatives in Mexico secured business contracts for the company by passing a portion of their 30% commission to officials of Commission Federal de Electricidad, Mexico’s state-owned electric utility in exchange for steering contracts to the company.
Many of the prosecutions against individuals are a product of the cases being brought against business organizations. For example, the FCPA actions involving KBR discussed earlier resulted in the prosecution of its former CEO Albert Stanley who pleaded guilty to FCPA charges. U.S. v. Stanley, No. 4:08-CP-00597 (S.D. Tex. Filed Aug. 29, 2008). Jeffrey Tessler, a U.K. attorney involved in this case was extradited from England to stand trial on FCPA charges. Similarly, the individuals charged in the Esquenazi cases stem from the FCPA charges brought against Control Components, Inc.
Not every FCPA case results in prosecutions by U.S. enforcement officials against the individuals. For example, the DOJ and the SEC have not brought FCPA charges against individuals involved in the Siemens, Daimler, or JGC or a number of other large cases. This may well be a function of the jurisdictional prerequisites of the Act.
At the same time the DOJ has been aggressive in this area and sought to expand the reach of the statutes. The FCPA does not reach the conduct of the foreign officials involved in the bribery schemes. Some commentators have argued that congress deliberately chose not to expand liability to cover foreign officials. Yet in recent cases the DOJ has brought criminal charges against these officials using the money laundering statutes.
The increased focus on, and prosecution of, individuals by the DOJ has been followed by a demand for increased prison terms. Enforcement officials have obtained mixed results with this approach as reflected by the following sample of cases:
- U.S. v. Green, Case no. 2:08-cr-00059 (C.D. Cal. Filed Jan. 16, 2008). The defendants were convicted on nineteen counts which included conspiracy, FCPA and money laundering charges. The government sought sentences of ten years in prison despite the advanced age of the defendants. The court imposed a sentence of six months.
- U.S. v. Jumet, 09-cr-00397 (E.D. Va. Nov. 13, 2009). The defendant was convicted on one count of conspiracy to violate the FCPA and one count of making a false statement. The guideline range is 87-108 months in prison. The government requested 87 months which the Court ordered.
- U.S. v. Warwick, No. 3:09CR 444 (E.D. Va. Dec. 15, 2009). The defendant was convicted of one count of conspiracy to violate the FCPA. The pre-sentence report contained a range of 37-46 months. The government requested 40 months. The Court ordered 37 months.
- U.S. v. Steph, No. 07-003-07 (S.D. Tex. Jul. 19, 2007). The defendant pleaded guilty to one count of conspiracy to violate the FCPA. The sentence was 15 months in prison.
- U.S. v. Nyugen, No. 2:08-cr-00522 (E.D. Pa. Sept. 4, 2008). The defendant was convicted of one count of conspiracy and one count of FCPA charges. The government sought 37-46 months in prison. The Court ordered 24 months of probation.
Since enforcement officials are targeting individuals there is little doubt that there will be more FCPA trials in the future. With more trials there may well be additional rulings interpreting key provisions of the Act. For example, the Lindsey case and others have resulted in rulings regarding the interpretation of who is a foreign official as discussed earlier. Likewise, the Patel case resulted in a ruling on the application of one aspect of FCPA jurisdiction. At the same time more trials with perhaps more convictions can be expected to yield continued demands for longer prison sentences.
Calls for reform
In the wake of current enforcement trends business groups such as the U.S. Chamber of Commerce, the Business Round Table, and others have argued that the FCPA needs to be reformed. These groups and others typically contend that key terms in the Act are vague and that the zealous manner in which the statutes have been enforced has inappropriately expanded some terms while virtually eliminating certain defenses. All of this impedes the ability of U.S. business to compete on a world stage and is making American markets uncompetitive according to the proponents of reform. Cited in support of these arguments is the fact that a number of multinationals such as Siemens, Daimler, Volvo and ABB delisted their securities from trading in the aftermath of FCPA inquiries.
Government officials, in contrast, argue that the FCPA is good for U.S. business. It creates a level playing field where companies can compete on the merits rather than through kickbacks while ensuring the integrity of business transactions. The Act also gives any U.S. company a built-in defense to a request for a kickback: it is illegal and violates the FCPA. This view is bolstered by the recent report by the Organization for Economic Cooperation and Development or OECD. It endorsed and gave high praise to the enforcement efforts of the DOJ and the SEC.
The position of the DOJ and the SEC is fortified by the passage in other countries of even more stringent anticorruption legislation. The U.K. Bribery Act, which went into force on July 1, 2011, is widely viewed as essentially a strict liability version of the FCPA. Other countries are also increasing their anti-corruption efforts, although a recent report by Trace International suggests that in most parts of the world enforcement continues to be lax.
Congress held hearings to consider the question of amending the FCPA before the Senate Judiciary Committee, Subcommittee on Crime and of the Department of Justice in October 2010. Additional hearings were held before the House Committee on the Judiciary, Subcommittee on Crime, Terrorism and Homeland Security in June 2011. In those hearings the Department of Justice essentially reiterated its position that the Act does not require amendment. The Department rejected calls for the implementation of an immunity program similar to the one utilized by the Justice Department Anti-trust Division or for a compliance defense similar to the one which is available under the U.K. Bribery Act.
The U.S. Chamber of Commerce offered testimony at both hearings, supporting specific amendments to the Act. Collectively those included:
- adding a compliance defense;
- limiting a company’s liability for the prior actions of an acquired entity;
- adding a “willfulness” requirement for corporate criminal liability;
- limiting a company’s liability for acts of a subsidiary; and
- clarifying the definition of a “foreign official” under the statute.
Testimony furnished to the Senate Committee focused in part on a kind of “inoculation” program proposed by Retired U.S. District Court Judge and former SEC Enforcement Director Stanley Sporkin, widely regarded as the father of the FCPA. Under this proposal a company would not be prosecuted for FCPA violations for five years, except in extreme cases, if it took the following steps:
- Conducted a full and complete FCPA compliance review of the past five years;
- The review is conducted by a major law firm or specialty/forensic accounting firm;
- The results are disclosed to the DOJ, the SEC and the public;
- If violations are discovered, the appropriate corrective steps are taken;
- It submits to an annual review for five years; and
- An FCPA compliance officer is retained who provides the SEC and DOJ with an annual certificate of compliance.
A variation of Judge Sporkin’s proposal, and one supported by the U.S. Chamber, is a “compliance” defense. Under this proposal a business organization would be afforded a defense to an FCPA violation if it had a rigorous and appropriate compliance program in place. To date Congress has not amended the Act.