«Summer 2015 Anti-Corruption Enforcement Review Emerging Issues and Developments In the U.S., Foreign Corrupt Practices Act (FCPA) enforcement remains ...»
Emerging Issues and Developments
In the U.S., Foreign Corrupt Practices Act (FCPA) enforcement remains an area
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of emphasis for the U.S. Department of Justice (DOJ) and the U.S. Securities and
1 Recent Significant FCPA
Exchange Commission (SEC), with the latter agency aggressively expanding its
reach over global operations of U.S. issuers, in part through its increased reliance on
3 DOJ Guidance on FCPA Liability whistleblowers as sources of information. Outside the U.S., including in several major Arising From M&A Activity markets for multinational businesses, foreign regulators have initiated a number of 4 FCPA Legal Jurisprudence high-profile anti-bribery investigations or actions, sometimes in coordination with U.S. authorities. In this review, we focus on recent developments and emerging issues 4 Other International Antiin anti-corruption enforcement and their implications for multinational companies, Corruption Enforcement Activities including those engaged in M&A activity.
5 Dodd-Frank Whistleblower I. Recent Significant FCPA Enforcement Actions Program Developments The DOJ and SEC’s recent FCPA enforcement actions against issuers have been 6 Conclusion significant in several respects, not only because of the staggering size of the
penalties.1 Issuers had plenty to digest, including:
The SEC’s increased willingness to impose liability under the FCPA’s accounting ■■ provisions on parent companies for conduct occurring at foreign subsidiaries;
The increased focus on the role of legal and compliance officers in reviewing ■■ third-party transactions; and The DOJ’s continued attempts to highlight leniency for cooperating ■■ corporations that voluntarily disclose FCPA allegations.
Focus on Compliance and Overseas Internal Controls The SEC’s settlements with Alcoa
violating the FCPA’s books and records provision, 15 U.S.C. §78m(b)(2)(A), based on false accounting entries made by foreign subsidiaries regarding commission payments through third parties, and additionally, in the case of Alcoa, sales to a purported distributor, when the transactions were actually designed to conceal improper payments to government officials. The SEC also held both Alcoa and HP liable under the FCPA’s internal controls provision, 15 U.S.C. §78m(b)(2)(B), for “failing to devise and maintain” adequate internal controls over the financial and accounting operations of the relevant subsidiaries.4 In Alcoa, the settlement further reflected that the parent-issuer was liable for a violation of the anti-bribery provision of the FCPA, 15 U.S.C. §78dd-1, on the theory that the relevant subsidiaries where the conduct occurred were “agents” of the parent company because the parent “exercised control” over them by managing the alumina business segment that ran through these subsidiaries.5 Similarly, in a recent enforcement action against the Goodyear Tire & Rubber Company (Goodyear), the SEC again found an issuer liable for FCPA accounting violations based on conduct that occurred entirely overseas.6 Another noteworthy feature of both matters was the focus on the importance of ensuring robust due diligence by in-house compliance and legal officers when reviewing high-risk transactions, particularly with third parties. In Alcoa, the SEC and DOJ noted that in-house counsel did not follow-up on perceived FCPA “red flags” associated with transactions using a third-party consultant’s companies as a distributor of alumina to a state-owned smelter in Bahrain.7 In HP, the company’s existing policies and procedures were deemed insufficient where they did not generate further review of red flags that arose during due diligence regarding the use of third-parties in connection with a government contract in Russia and during review of an unusually high commission rate for a third-party in a transaction in Mexico.8 Likewise, in their FCPA enforcement actions against Avon Products, Inc. (Avon), the DOJ and SEC highlighted the fact that Avon’s internal auditors and the General Counsel’s office were aware of the practice in Avon’s subsidiary in China of giving corrupt payments, gifts and hospitality to government officials to obtain direct selling licenses in China. The SEC further noted that the legal department did not pursue the issues raised by the internal auditors.9 Similarly, the DOJ noted that Avon’s management did not “put in place controls to prevent the conduct” identified by the auditors.10 The SEC imposed civil liability on the parent corporation for violations of the FCPA’s books and records and internal control provisions, 15 U.S.C. §§78m(b)(2)(A) and (B), and the DOJ required that Avon’s Chinese subsidiary plead guilty to conspiring to violate the FCPA’s books and records provision.11 The Importance of Cooperation in FCPA Cases In an FCPA settlement involving Bio-Rad Laboratories, Inc. (Bio-Rad), notwithstanding evidence of the involvement of U.S.-based managers in the scheme to pay bribes to Russian government officials, the DOJ appeared to reward the parent company with leniency because of its voluntary disclosure, cooperation and remediation.12 Although Bio-Rad was required to pay a penalty of $14.35 million, it resolved its FCPA liability through a non-prosecution agreement. Conversely, the DOJ imposed a criminal penalty of over $772 million on Alstom S.A. (Alstom), the largest criminal FCPA penalty to date, and required the parent corporation to plead guilty to violations of the FCPA’s accounting provisions in part because of its perceived lack of cooperation in the DOJ’s investigation.13 In recent public remarks, the Chief of the FCPA Unit at the DOJ’s Fraud Section stated that if Alstom had received credit for self-disclosure and cooperation, its penalty range under the U.S. Sentencing Guidelines would have been reduced to between $296 million and $592 million.14 Summer 2015 Anti-Corruption Enforcement Review 3 II. DOJ Guidance on FCPA Liability Arising From M&A Activity In 2012, in the Resource Guide to the U.S. Foreign Corrupt Practices Act, the DOJ and SEC acknowledged that acquirers do not become liable under principles of successor liability for preacquisition conduct of a foreign company whose conduct was not previously subject to the FCPA’s jurisdiction. In 2014, the DOJ again addressed the question of successor liability in FCPA Opinion Release 14-02, which concerns an acquisition by a U.S.-based public, multi-national company (“the Requestor”) of a foreign (non-U.S. issuer) seller and its wholly-owned subsidiary (collectively, the “Target”).
According to the Opinion Release, the Requestor’s pre-acquisition due diligence had identified over $100,000 in suspect transactions, many of which involved payments or gifts to government officials in connection with permits and licenses. The Requestor represented to the DOJ that none of the payments to government officials had any discernable nexus to the U. S.15 Consistent with its previous guidance in the Resource Guide, the DOJ opined that it did not intend to take any enforcement action against the Requestor with respect to the Target’s pre-acquisition bribery because the conduct was not subject to the FCPA’s jurisdiction.16 At the same time, the DOJ indicated that an acquirer could become liable for ongoing corrupt conduct committed by a target post-acquisition. The DOJ stated that it was important to implement the acquiring company’s anti-corruption policies, engage in training and remediation, conduct an “FCPAspecific audit” of the target’s operations, and disclose to the DOJ any corrupt payments “as quickly as practicable” post-closing.17 According to the DOJ, “[a]dherence to these elements... may, among several other factors, determine whether and how [the DOJ] would seek to impose post-acquisition [acquirer] liability in case of a putative violation.” Notably, in the SEC’s recent enforcement action against Goodyear, the SEC held the company liable for violating the FCPA’s books, records and internal control provisions, 15 U.S.C. §§ 78m(b)(2)(A) and 78m(b)(2)(B), based on alleged bribes involving two African subsidiaries in which Goodyear had previously acquired a controlling or ownership interest.18 The bribes occurred after Goodyear had acquired control of the subsidiaries, but did not involve any of Goodyear’s U.S. operations.
Nevertheless, the SEC noted that Goodyear had not “conduct[ed] adequate due diligence when it acquired” one of the subsidiaries and had not “implement[ed] adequate FCPA compliance training and controls” at both subsidiaries once it controlled them.19 As part of the settlement, Goodyear agreed to disgorge over $14 million in profits, to pay over $2 million in prejudgment interest, and, as a remedial measure, to divest its interest in both subsidiaries.20 Goodyear also must self-report to the SEC on its remediation efforts for a three-year period.21 Neither the DOJ nor the SEC have issued specific guidance regarding the time for conducting and completing post-acquisition due diligence and remediation, and Opinion Release 14-02 simply reaffirmed the guidance in the Resource Guide that such steps should be taken “as quickly as practicable.”22 Previously, in FCPA Opinion Release 08-02 (June 13, 2008), the DOJ suggested that FCPA post-acquisition high-risk due diligence be completed within 90 days, that medium risk due diligence be completed within 120 days, and that lower risk due diligence be completed within 180 days of closing.23 The fact that, in Opinion Release 14-02, the DOJ did not find the Requester’s oneyear plan inadequate suggests that the timelines in Opinion Release 08-02 should be viewed as advisory rather than mandatory.
Summer 2015 Anti-Corruption Enforcement Review 4 III. FCPA Legal Jurisprudence The FCPA’s prohibition on corrupt payments to foreign officials extends to officers and employees of an “instrumentality” of a foreign government, but until last year, no federal appellate court had issued an opinion regarding the definition of “instrumentality.” In May 2014, the Eleventh Circuit set forth a two-part, case-specific test to determine whether an entity is in fact an “instrumentality” of a foreign government within the meaning of the FCPA. The court held that an “instrumentality” is (1) “an entity controlled by the government of a foreign country” that (2) “performs a function the controlling government treats as its own.” For further analysis of this ruling and its implications for businesses dealing with foreign state-owned or controlled entities, please refer to our FCPA Alert issued on May 22, 2014: http://www.weil.com/~/media/files/pdfs/white_collar_defense_alert_may_2014.pdf IV. Other International Anti-Corruption Enforcement Activities Recent developments strongly suggest that the increased focus on anti-corruption enforcement in countries outside the U.S. is likely to continue.
In China, there continues to be significant uncertainty over Chinese regulators’ enforcement of commercial and public anti-corruption laws, with significant enforcement actions being brought against multinational firms. For example, GlaxoSmithKline’s subsidiary in China was ordered to pay a record $480 million penalty for bribing Chinese healthcare professionals, conduct that is also being investigated by U.S. and U.K. anti-corruption authorities.24 Moreover, Chinese authorities have shown they are willing to prosecute politically connected former managers of state-run enterprises on corruption charges, such as the former head of China’s National Petroleum Corp.,25 and executives of foreign multinationals.26 In Canada, prosecutors recently announced charges against SNC-Lavalin Group, Inc. (SNC-Lavalin), a Montreal-based construction and engineering firm, under the Corruption of Foreign Public Officials Act (CFPOA),27 for bribery of high-ranking officials in Libya after a former senior executive of the firm pled guilty to bribery charges.28 Canadian prosecutors also obtained a three-year prison sentence against the agent of a Canadian security company in connection with a bribery scheme involving officials of Air India, the first-ever prison sentence imposed under the CFPOA.29 Prosecutors have already obtained significant fines against companies under the CFPOA.30 In March 2014, the Canadian government amended its procurement policies to provide that if any corporation or its subsidiaries committed an “integrity offense”—which includes the CFPOA and the U.S. FCPA—the corporation may be debarred from procurement contracts for up to 10 years. This will undoubtedly create uncertainty for multinationals considering entering into FCPA settlements with the DOJ that also do business with the Canadian government. In that regard, it has been reported that Canadian officials are reviewing the circumstances of HP’s FCPA resolution with the DOJ to see if it would trigger debarment in Canada.31 It remains to be seen how prosecutors will resolve charges against SNC-Lavalin, given that a conviction under the CFPOA could result in debarment of the engineering giant in Canada.
Brazil’s new Clean Companies Act (CCA) became effective in January 2014, and made it illegal for corporations to engage in bribery of public agents, including international bribery outside of Brazil. The CCA applies to any corporation domiciled in Brazilian territory and to foreign entities with affiliates or branch offices in Brazil. The CCA imposes civil administrative liability on companies engaged in corruption, and sanctions include fines that can be as high as 20 percent of the corporation’s gross revenues from the preceding fiscal year.32 The CCA does permit companies to seek “leniency Summer 2015 Anti-Corruption Enforcement Review 5 agreements” if they disclose violations and cooperate with investigating officials.33 Currently, prosecutors in Brazil are pursuing a massive criminal corruption probe involving state-controlled oil company Petrobas and numerous politicians and private businessmen.34 It remains to be seen whether anti-corruption regulators will also start to bring cases against businesses under the new CCA.