Regulators come down hard on corruption, unless companies cooperate completely
As it nears its fortieth birthday, the Foreign Corrupt Practices Act (FCPA) remains a focus of both the Securities and Exchange Commission and the U.S. Department of Justice. At the same time, the agencies regularly modify their approach to enforcement. While no radical departures from historical practice appear imminent, experts have identified several shifts.
In 2015, the DoJ and SEC together brought eleven core corporate FCPA enforcement actions, says Mike Koehler, associate professor of law at Southern Illinois University and the individual behind FCPA Institute, which provides training on anti-corruption programs. Core actions are based on the same set of corporate conduct. For instance, actions against a corporate parent and its subsidiary for actions by the subsidiary typically would count as one action.
During the first half of 2016, the DoJ reports that it has brought six FCPA-related actions, and the SEC has brought fourteen. In April of this year, the DoJ launched a one-year pilot program intended to motivate companies to self-report FCPA-related misconduct. To be sure, regulators have always emphasized the strength of companies' internal control programs and their willingness to self-report criminal wrongdoing by employees or agents. The pilot program shows "more effort to demonstrate the benefits of voluntary disclosure," says Kimberly Parker, partner at law firm WilmerHale.
Chief among these is a company's eligibility for "the full range of potential mitigation credit, including a declination of prosecution." So far, the DoJ has issued at least four declination letters: to Akamai Technologies, Johnson Controls, Nortek, and Key Energy.
Letter of the Law
The decision to make the letters of declination public is a significant change from past practice, says James Koukios, a partner at law firm Morrison Foerster and a former senior deputy chief of the DoJ's fraud section.
The long-term success of the program remains a question mark. Parker notes that even if the DoJ decides not to move forward against a company at the moment, the SEC still can bring a case in the future. While companies would escape criminal prosecution from the DoJ—admittedly, an enormous benefit—they could face the negative repercussions of an SEC civil case, including hefty fines, damaging publicity, and restrictive agreements.
Koehler sounds skeptical about the motives behind the letters. "They're marketing a government program," he says. The conduct at issue took place by a few employees in foreign subsidiaries who concealed their actions from the corporate parent. Their actions may have been sufficient to bring a civil action against the company, but based on the only information currently available in the public domain, don't appear to rise to level of criminal case, he says. "What criminal charges did the DoJ decline? Based on the information in the public domain, it appears to be none."
Koukios raises some concerns about the DoJ's decisions to decline prosecution only when a company disgorges profits stemming from the wrongdoing, which has been the case with each of the four declinations so far. "I understand the gut reaction, that companies shouldn't keep tainted money," he says. But requiring companies to disgorge profits when they've acted quickly and thoroughly to stop the activity and prevent future problems may prompt companies to question whether self-reporting and cooperating with the enforcement agencies actually will pay off. "There's no perfect solution," he adds.
In September 2015, Sally Yates, a deputy attorney general with the Department of Justice, issued a memorandum titled, "Individual Accountability for Corporate Wrongdoing." It states "one of the most effective ways to combat corporate misconduct is by seeing accountability from the individuals who perpetrated the wrongdoing."
To be sure, prosecutors have long focused on individual culpability, says Michael Diamant, a partner with law firm Gibson, Dunn & Crutcher. "This was largely a codification of what was already happening in most cases."
Of the fourteen FCPA enforcement actions by the SEC so far this year, five name individuals. "It's a notable percentage," Koukios says.
"The enforcement authorities don't want monetary penalties on companies to be seen as an acceptable cost of doing business," says Jeremy Zucker, co-chair of the international trade and government regulation practice at law firm Dechert LLP. News photos of executives being hauled to prison can be a more compelling deterrent to criminal action.
A focus on the individuals involved also lessens the risk that an entire company suffers for the actions of a few, says Ed Williams, senior manager, risk advisory services with Experis.
Diverging Paths of SEC, DoJ
Until recently, the SEC and DoJ brought most FCPA cases almost in parallel with each other, Koukios says. This year to date, four of the resolutions have been parallel, and ten have been only from the SEC. "The DoJ has become more circumspect in the cases it will bring," says Koukios. It then can shift resources to other cases, including those in which the SEC doesn't have jurisdiction.
In addition, by limiting the number of parallel cases to those in which the companies under investigation decide not to work with the government and fail to take remediating action, the DOJ emphasizes the importance of mitigation and cooperation, Koukios says.
Of the fourteen SEC resolutions this year, all but one has been for less than $30 million, Koukios notes. Several are for relatively modest amounts, such as Akamai Technologies' agreement to disgorge $650,000 in profits connected to bribes paid to Chinese officials. The numbers reflect the SEC's focus on accounting violations, rather than grand corruption schemes involving suitcases of cash changing hands, he adds.
Employees and Third Parties
Two actions in the past twelve months centered on companies that offered jobs or internships to the offspring of foreign officials. In August 2015, BNY Mellon agreed to pay $14.8 million to settle FCPA charges when it provided internships to family members of foreign government officials affiliated with a Middle Eastern sovereign wealth fund. In March of 2016, Qualcomm agreed to pay $7.5 million to settle similar charges when it hired relatives of Chinese officials deciding whether to purchase the company's products. The cases are a new application of the FCPA, and one companies should be concerned about.
At the same time, Koehler notes that the cases ended with no judicial scrutiny, and the companies neither admitted nor denied the SEC's findings. If the DoJ or SEC was forced to action in such a case, it's "very much an open question" if the charges would satisfy the burden of proof, Koehler says.
Koehler also points to a double standard. "How many kids in Washington D.C., New York, or other centers of power get jobs because of their parents?"
Another shift in enforcement actions concerns third parties, the focus of most cases. Early on, most actions centered on commissioned sales agents, Parker says. Now, along with agents, the actions target distributors, resellers, customs brokers, and others. The broader focus means this high-risk area has expanded.
Across the Globe
Anti-corruption and anti-bribery enforcement efforts around the globe are intensifying. While many countries have had regulations in place for years, more are actually enforcing them, Parker says.
In addition, most regulatory authorities are working more closely with their peers in other countries, Zucker says. The U.S. government also has taken a "more demanding attitude" regarding claims that certain information needs to remain in a foreign country due to privacy concerns, he adds. These trends boost the chance an issue originating outside the United States will find its way to the attention of U.S authorities.
China, for instance, has ramped up anti-corruption efforts under the current premier, Diamant says. The cases so far have focused almost entirely on domestic companies, yet the efforts have "lasted longer and been more aggressive than many anticipated," he says.
At the same time, China remains a hotspot for FCPA enforcement, accounting for eight of the fourteen SEC actions so far this year. "It's easy to slip-up in China," Koukios says. Many of the cases focus on travel and gift-giving, highlighting the risk inherent in operating in cultures in which gift-giving often is seen as a cost of doing business. On top of that, the sheer physical distance between China and the United States hinders efforts to monitor employee behavior.
Yet, companies need to make a sincere, intelligent effort. "Corruption and bribery continue to be recognized as important problems by policy makers around the world," Diamant says. Both can undermine government institutions, consume money needed for education, infrastructure, and other government works, and obstruct efforts to help people pull themselves from poverty, all of which can aid terrorists in attracting new adherents.
"You can have an interesting debate about how vigorously the law is enforced and if the government is too puritanical," Diamant says. "But the concept that bribery is bad is widely acknowledged."
Karen Kroll is a writer and editor based in Minneapolis, Minnesota.