TOP TEN FEATURES OF FCPA ENFORCEMENT IN 2014
The last year saw a continuation of large-scale prosecutions from the Department of Justice (DOJ) and the Securities and Exchange Commission (SEC). While there are many areas to discuss, ten topics stand out.
1. Fewer prosecutions but larger penalties
At the end of 2014 the total value of fines imposed stood at US$1.5 billion. While this was not the highest annual amount (2010 had that honour), the fines were levied from only ten companies, providing by far the highest average fine per prosecution (however, almost 50 percent of those fines came from the Alstom settlement of US$770 million).
2. More guilty pleas
In five of the seven recent prosecutions by the DOJ, the settlement was made using a corporate plea agreement. While the distinction between guilty pleas, non-prosecution agreements (NPAs) and deferred-prosecution agreements (DPAs) does not directly affect the fines or other punishments, the ongoing impact of a guilty plea can be severe. While there may be marginally greater reputational harm from a guilty plea, most damaging are the impact debarments from government procurement have on the business and the potential for civil litigation. It seems, however, that even when guilty pleas are used, they tend to be structured using subsidiaries rather than the parent entities, therefore avoiding the worst effects.
3. Still a place for DPAs and NPAs
Since 2010, 86 percent of corporate DOJ enforcement actions have involved either a NPA or DPA. In 2014, however, given the greater use of guilty pleas, only half were settled in this way. It seems unlikely that DPAs and NPAs will disappear, but they may well be reserved for those cases with the greatest level of cooperation.
Another interesting development with this type of settlement is the evolving role for the courts in sanctioning the agreement. In the case of Fokker Services (related to export control, not the FCPA), the judge refused to be a ‘rubber stamp’ for a DPA and rejected the agreement between the company and the DOJ as being inadequate. In the same case, however, the judge did acknowledge that the choice of a regulator not to prosecute a case fell outside the remit of the courts. This might indicate that the NDA option will provide greater certainty for companies and the DOJ to negotiate settlements.
4. More individuals
There is a stated desire from the DOJ to prosecute more individuals in conjunction with the corporations they represent. This is primarily a public policy response to the need to be seen to provide justice, but in reality the number of individual prosecutions in 2014 was no greater than in other years. There are various reasons for this, but at the heart it is probably related to the lower likelihood of a negotiated settlement when incarceration is possible, and therefore the need to provide evidence at trial to a criminal level of proof.
Changes seen during 2014 involved the use of other statutes such as RICO, wire fraud and money laundering to prosecute bribery (either in conjunction with the FPCA or independently), as well as the use of civil and administrative prosecutions – all of which provide a far greater likelihood of successful prosecutions of individuals. It is likely that this trend will continue, with alternative mechanisms being used to try to ensure that individuals who were clearly involved in a directing role in corruption are brought to justice. Either way, the increased emphasis on individuals and the lack of settlement agreements does have the benefit of providing clarity through more FCPA-related case law.
5. Less compliance monitors
The appointment of monitors appears to be on the decline, with only one monitor appointed in 2014. Regulators are now generally instructing companies to report directly to them on compliance programme improvements (such as in the Bio-Rad and Layne Christensen cases). The one monitor that was appointed last year was for Avon, and this was due to the extent of the attempts of senior management to cover up the allegations and failures in the compliance department itself.
6. Extension of United States jurisdiction
An interesting development during 2014 was the increasing extension of bribery prosecutions to non-United States citizens, entities which had no United States presence, and even the foreign officials in receipt of the bribes (which is not specifically an offence under the FCPA). The methods used to extend the reach of the FCPA included conspiracy charges (when one member of a group did have a United States connection) and other United States statutes (such as the Travel Act and RICO).
7. Global cooperation
One trend that has been noticeable in recent years is the increased level of cooperation between international agencies that are investigating corruption in their own jurisdictions. In many cases the cooperation is given freely, but even when it is not, media speculation of an investigation in one country will generally generate a request for disclosure from other jurisdictions. The recent example of Rolls-Royce being named as part of the Petrobras investigation in Brazil (adding to their troubles in Indonesia) highlights this.
8. Parental liability
The liability of a parent company for the bribery of its subsidiary was crucial in the recent case of Alcoa. Previously it was understood that parental liability would only attach where the parent authorised, directed or controlled the misconduct. The case of Alcoa revolved around the activities of its Russian entity Alcoa World Alumina, and there were no allegations of misconduct or knowledge by employees of the parent company. Despite the lack of direct involvement, Alcoa was held liable because:
- it appointed the majority of seats on the council that managed the subsidiary
- it set goals for the subsidiary and ‘coordinated’ the legal, compliance and audit functions
- it oversaw the employees of the subsidiary who were managing the problematic business
- Alba (who received the bribes) was a key customer of Alcoa
- it knew and approved of the agent that the subsidiary used to facilitate the bribes, although it was unaware that bribery occurred.
9. The definition of ‘instrumentality’
While case law on the FCPA is limited, the court’s decision in the case of Joel Esquenazi (involving the payment of bribes to a telecom provider in Haiti) provided some important guidance about the definition of a foreign official by helping to clarify when an enterprise becomes a government instrumentality. It determined that a foreign government not only had to control the entity, but also had to perform a function of government. This test has subsequently been approved in the associated case of Jean Rene Duperval (the official accused of receiving the bribes in the Esquenazi case – though he was charged with money laundering).
While the decision makes sense in many ways, the addition of the government function element does add a complexity to dealings with semi-governmental enterprises because it adds a subjective element of having to understand how the government works in that particular country rather than objectively considering control.
10. The purpose of the bribe: to ‘obtain or retain business’
In the case of Layne Christensen, the company was accused of paying bribes to foreign officials in multiple African countries ‘in order to, among other things, obtain favourable tax treatment, customs clearance for its equipment, and a reduction in its customs duties’. There was very little evidence adduced or discussion about how this reduction in costs would support the obtaining or retention of business, as required by the FCPA. This opens up the possibility that the regulators are expanding their remit when bribery is found to have occurred, and also that there will soon be a challenge to this interpretation in the courts.
WHAT DOES THIS MEAN FOR COMPLIANCE OFFICERS IN 2015?
While the trends provide interesting reading for lawyers, the more important question is what the impact will be on the role of the compliance officers who need to build policies and processes to support anti-bribery programmes.
The key trends that can be useful when generating buy-in from business partners is that:
- the fines are getting bigger
- more individuals are being prosecuted (albeit with varying success)
- when a settlement is in the form of a guilty plea, there will be an ongoing impact to the business from debarments and shareholder suits.
While avoiding fines and liability should not be the only purpose of an anti-corruption programme, getting other members of the business on board with the programme is vital and generally requires multiple types of argument – from the positive business benefits to the negative avoidance of fines.
The dual trends of the United States Government extending its jurisdiction and greater cooperation between governments means that compliance officers need to build programmes that clearly target global risks.
It is important that businesses don’t try to structure using subsidiaries in order to avoid provisions of the FCPA. Firstly, this may have limited benefit (where liability may still fall on the parent), and secondly, such a structure itself may be seen as a negative factor when determining both the size of penalties and the type of settlement.
For the compliance programme, there needs to be a balance between allowing remote business units too much flexibility in interpreting and implementing policy (as with Bio-Rad) and having too much central oversight over the programme (such as Alcoa) thus increasing the likelihood that any subsidiary liability will attach to the parent.
Any FCPA due diligence programme should be designed to provide information that can actually help address the legal issues. For example, there should be a ‘mapping of the information’ to the legal position of whether an entity is a government instrumentality. This may now need to include factors relating to the role and function of government within the country, and whether the entity performs any specific questions of control.
Prepare for the best possible settlement outcome
As a NPA is still generally the preferred option for corporations to manage a negotiated settlement with the greatest certainty and least impact, it is important to be able to show that:
- the pre-existing compliance programme made a reasonable attempt to manage risks
- improvements were made to the programme during the investigation and negotiation process
- a high level of cooperation was provided
- the unique facts of the case (such as the length of time that the conduct was ongoing, the value of the gain, and whether internal processes were being followed or subverted) indicate that it is an isolated incident rather than a systemic failure.
In addition, showing that the compliance department is functioning properly will help to avoid the imposition of compliance monitors.