FCPA prosecutions: liability trend to watch.

• Author: Huskins, Priya Cherian
• Position: Foreign Corrupt Practices Act

INTRODUCTION I. FOREIGN CORRUPT PRACTICES ACT II. THE CURRENT ENVIRONMENT A. Regulatory Environment B. Private Litigation Environment C. The Threat to Directors and Officers III. RECOMMENDATIONS A. Training B. Monitoring IV. OUT IN FRONT ON THE ISSUE INTRODUCTION

When it comes to compliance with the Foreign Corrupt Practices Act (FCPA), multinational companies that adopt a "don't ask, don't tell" policy may come to regret their hands-off approach. Compliance with the FCPA's laws against bribing foreign officials has recently come under increased scrutiny by the Securities and Exchange Commission (SEC), the United States Department of Justice (DOJ), and the plaintiffs' bar. At the same time, jurisdictions outside of the United States have also exhibited a renewed interest in enforcing their own FCPA-like laws.

For individual officers and directors, the environment is equally challenging. Of particular concern may be an emerging focus by the SEC to hold individual officers personally liable for failing to implement proper internal controls designed to prevent FCPA violations.

In this environment, directors and officers should gauge FCPA-related risks and put in place procedures and internal controls designed to mitigate these risks. To achieve these ends, officers and directors can help their companies, and themselves, by asking searching questions to assure themselves that the company is following the dual tracks of preventative training and proactive monitoring.

1. FOREIGN CORRUPT PRACTICES ACT

   The Foreign Corrupt Practices Act was first passed in 1977 and is part of the Securities Exchange Act of 1934, as amended. (1) The FCPA fundamentally stands for the proposition that--notwithstanding local customs or business pressures to the contrary--U.S. businesses and persons should not bribe foreign officials or foreign political parties.

   Broadly written, the FCPA's provisions include both anti-bribery provisions and accounting provisions. The anti-bribery provisions prohibit public companies from using bribes to secure an "improper advantage." (2) Moreover, the FCPA is designed to prevent companies from hiding behind local agents. The FCPA prohibits giving any person something of value "while knowing that all or a portion of such money or thing of value will be offered" for a bribe. (3) Although there are some exceptions to these broad prohibitions--such as if the payment in question is legal in the foreign jurisdiction involved--these exceptions are narrowly tailored, and it is risky to rely on these exceptions.

   In addition to the anti-bribery provisions, the FCPA also has "books and records" and internal control requirements that obligate companies to maintain internal controls that will result in their books and records accurately reflecting all transactions. (4) This is to stop companies from maintaining off-the-books slush funds and turning a blind eye to them.

   The penalties for violations of the FCPA can be significant. Under the FCPA, any person who is an "officer, director, employee or agent" of a company in violation of the FCPA--if that violation is willful--may be faced with a penalty of up to five years in jail and $100,000. (5) The SEC has the ability to impose even larger civil fines.

2. THE CURRENT ENVIRONMENT

   Navigating the current enforcement environment is a tricky proposition for companies as well as their directors and officers. Companies now face renewed scrutiny from regulators. At the same time, shareholder plaintiffs have sensed a potential avenue for recovery and therefore may also pay increasing attention to FCPA-related issues.

   1. Regulatory Environment

      The SEC and the DOJ have dramatically increased their interest in FCPA violations in the last several years. Between 1978 and 2000, the SEC and the DOJ together averaged only about three FCPA-related prosecutions a year. (6) In stark contrast, the DOJ more recently estimated that there are some sixty cases of possible FCPA violations currently under investigation. (7) Another source has put the number of companies with open FCPA investigations at one hundred. (8)

      Much of this increase in activity may result from the tendency of companies in the post-Sarbanes Oxley world to conduct internal investigations and "self-report" violations in hopes of gaining leniency from regulators. Fearing the harsh penalties that the SEC and the DOJ may exact for failure to take FCPA concerns seriously, many companies today are quick to launch an internal investigation in the face of credible suspicion of a potential FCPA violation. For their part, the SEC and the DOJ have enthusiastically embraced the role that self-monitoring and cooperation play in assisting their investigations.

      In addition to a substantial increase in the number of FCPA-related investigations, the penalties imposed in recent actions seem to be on the rise. Notable among recent investigations is the $44 million settlement that the SEC and the DOJ announced with Baker Hughes, Inc. in April 2007. This settlement included $23 million in disgorgement and pre-judgment interest paid to the SEC, a $10 million civil penalty paid to the SEC for violating an earlier SEC cease-and-desist order, and an $11 million criminal free. (9) The Baker Hughes settlement is the largest penalty ever imposed in an FCPA case. By way of comparison, the largest penalty before Baker Hughes was the $28 million penalty imposed in March 2005 on Titan Corporation. (10) Other large settlements in 2007 included the $30 million in combined fines and penalties that Chevron Corporation paid to settle its FCPA investigation, (11) the $26 million that subsidiaries of Vetco International, Ltd. paid, and a $22 million settlement paid by York International Corporation. (12)

      There is also reason to believe that the government is interested in continuing this trend towards imposing large fines to discourage FCPA violations. Consider the DOJ's pronouncement in the press release regarding the Baker Hughes settlement:

      "Today's announcement demonstrates that the Department of Justice will continue to hold U.S. companies and their subsidiaries accountable for foreign bribery," said Assistant Attorney General Alice Fisher. "The record penalties leveled in this case leave no doubt that foreign bribery is bad for business. By...