Corporations Caught In Rising Tide Of FCPA Enforcement

Duing business around the world has been getting more hazardous lately. The culprit is neither the geopolitical situation nor global economic conditions--although both are indeed tense and volatile. No, the danger is increasing enforcement of the Foreign Corrupt Practices Act (FCPA).

As several recent high-profile cases illustrate, the SEC and DOJ have been cracking down on bribery and quid-pro-quo arrangements between U.S. companies and overseas officials (see sidebar).

This activity seems to be arising largely as a result of the government's increased focus on corporate accounting and governance practices post-Enron and SOX as well as tighter scrutiny of cross-border dealings dictated in the USA Patriot Act. As a result of the broader regulatory mandates and increased resources at the SEC, DOJ and the Commerce Department and the tougher due-diligence and disclosure mandates companies now face, pressure is rising to squeeze any hint of impropriety out of international business dealings.

As if the pain and embarrassment of bribery charges weren't enough, two cases in particular demonstrate corollary risks arising from increased FCPA enforcement. In the first case, a former employee of DaimlerChrysler filed a wrongful-termination lawsuit--Bazzetta v. Daimler-Chrysler Corp.--that precipitated an SEC investigation into FCPA violations. And in the second case, Titan Corp. is facing two class action lawsuits alleging the company's FCPA violations represented a breach in fiduciary duties that harmed shareholders (Paul Berger v. Gene W. Ray et. al., and Robert Garfield v. Mark W. Sopp, et. al.). The suits target the company, as well as individual directors and officers.

The DaimlerChrysler and Titan cases represent parallel proceedings that have made it into the public record. But behind the scenes, FCPA-related allegations are arising in various types of disputes involving shareholders, employees and competing companies.

"Litigants see the FCPA as a potential weapon they can use to force a settlement," says Roger Stark, a partner with Kirkpatrick & Lockhart Nicholson Graham in Washington, D.C. "FCPA violations can come up in discussions with the adversary, as the legal equivalent of saying, 'If you want a knife fight, I'll show you how sharp my biggest knife is.'"

Under Pressure

As GCs know all too well, the impact of SOX has rippled outward from the statute's core accounting and governance provisions to affect many areas of corporate business practices. The SEC and the DOJ have increased their investigatory staffs and are coordinating their efforts more closely, and companies are subjecting their own books and records to greater scrutiny. Therefore, increasing FCPA enforcement is, to some degree, a byproduct of governance and accounting reforms unrelated to the FCPA.

"Before 2002 companies were a little more lax in reviewing accounting entries, and you saw fewer FCPA cases come up," says Peter Henning, professor of law at Wayne State University Law School. "Now companies--and senior executives in particular--can no longer turn a blind eye to questionable payments and transactions. The risk of criminal liability under SOX is a powerful motivating factor for CEOs and CFOs to ensure their controls are in place and the numbers are legitimate."

As a result, more companies are voluntarily reporting potential FCPA violations to the SEC than might have done so before SOX. This self-reporting occurs as part of internal accounting audits and governance reviews and, in some cases, as part of merger-related due-diligence reviews. Indeed, one of the biggest FCPA cases to date--which Titan Corp. settled for $25 million--came to light when Lockheed Martin's due diligence in anticipation of a merger turned up questionable payments.

"M&A due diligence is a high growth area for FCPA cases," says Pat Brady, a principal with Deloitte Touche Tohmatsu in Chicago. "Thorough due diligence is part and parcel of Sarbanes-Oxley, and it also reflects a recognition in the global business community that payments to officials won't be tolerated."

Scrutiny of cross-border transactions has reached new heights for reasons beyond SOX--most notably, the anti-money-laundering provisions of the USA Patriot Act and the U.S. Commerce and State departments' export-control regulations.

"After 9/11, there generally has been heightened enforcement of anything related to offshore transactions," says Fred Shaheen, chairman of the government contracts practice group at Greenberg Traurig in Washington, D.C. "Corporate scandals have further increased enforcement."

Telling The Truth

Therefore, even if the scandals of recent years fade into history, and the SEC backs away from the aggressive posture it adopted after Enron and SOX, the trend toward stricter FCPA enforcement likely will remain strong. In short, if the U.S. expects other countries to implement the anti-corruption measures that it has vociferously advocated for decades (including those in the 1998, "OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions"), then the government cannot afford to relax FCPA enforcement efforts.

"The pendulum might be swinging away from Sarbanes-Oxley and director oversight, but the U.S. has made a lot of effort to get other countries to view corruption as we do," says Lisa Prager, a partner with DLA Piper Rudnick Gray Cary in Washington, D.C., and former deputy assistant secretary for export enforcement at the U.S. Commerce Department. "FCPA is viewed as part of an international law-enforcement effort that the U.S. government takes very seriously. It is going to be a priority."

Given stricter FCPA enforcement and the rigors of SOX compliance, GCs are increasingly likely to encounter a basic dilemma, namely: If a company discovers questionable payments to a foreign official, what should it do?

The provisions of FCPA itself do not require companies to voluntarily report violations, and SOX does not explicitly require FCPA compliance audits or internal-control standards. Nevertheless, many companies are interpreting the law broadly and assuming they must disclose FCPA violations under SOX. This reading of the law, however, might be incorrect--and it might cause unnecessary legal headaches. Superfluous disclosures not only expose companies to embarrassing government investigations, but confusion over disclosure duties also can raise litigation risks.

"Situations in ordinary commercial disputes get salted with corrupt-payment allegations, simply because litigants know they will get the other party's attention," Stark says. "And of course the longer that litigation sits out there in the public record, the higher the likelihood that an SEC or DOJ investigator will decide to look into it."

The threat of an FCPA investigation can be intimidating for companies in large part because the law doesn't clearly define what kind of conduct they must report. Recent governance and accounting reforms only exacerbate this anxiety.

"When Sarbanes-Oxley first hit the streets I was deluged with questions about the interplay between Sarbanes-Oxley and FCPA," Shaheen says. "I recommend dealing with FCPA as a stand-alone statute. FCPA has no mandatory reporting requirements with respect to violations, and that has not changed in the wake of Sarbanes-Oxley."

Reducing Risk

That doesn't mean companies needn't report violations. While the DOJ hasn't formally codified its prosecution guidelines for FCPA violators, it has in recent months deferred prosecution for companies that voluntarily report infractions and cooperate with FCPA investigations--namely, Micrus Corp., Monsanto Co. and InVision Technologies Corp., which was recently acquired by General Electric Co.

While self-reporting doesn't guarantee a company will escape prosecution, the DOJ generally seems to follow the guidelines set forth in the "Thompson memo," a 2003 document that established standards for companies to avoid prosecution by cooperating with DOJ investigations.

"If your company violated FCPA and didn't do it intentionally, your best course is to report it to the government, take your lumps and move on," Shaheen says.

However, the line between perceived improprieties and actionable violations of the statute can be fuzzy, and companies should consider their options carefully before disclosing questionable actions. For example, just because an informational junket included a golf outing doesn't mean the company is guilty of bribing a foreign official.

"In contrast to accounting violations, there are relatively few smoking-gun FCPA violations," Stark says. "Many situations will fall into a gray area and can justifiably not be reported on the basis of a good-faith belief that no violation has occurred."

Thus while GCs might believe they are taking the most prudent approach by erring on the side of greater disclosure, they might in fact be exposing themselves to unnecessary legal risks.

"At least make sure you really have an FCPA problem before you make a disclosure," Shaheen says. "You don't make brownie points with the government for disclosing things you didn't do."


FCPA Crackdown

A rising wave of enforcement has caught many multinational U.S. companies in alleged violations of the FCPA. With record-setting sanctions involving well-known companies, GCs are reassessing their own anti-corruption measures to prevent lapses that might lead to damaging and costly enforcement actions.

>Defense contractor Titan Corp. settled an SEC case in March in which the government alleged the company paid more than $3.5 million in bribes to the business adviser for the president of Benin, Africa. Titan agreed to surrender $12 million in profits that resulted from corrupt payments and paid a $13 million criminal fine. Titan's would-be acquirer, Lockheed Martin, uncovered the bribes during due diligence.

>Monsanto Co. settled an SEC complaint in January alleging the company funneled more than $700,000 in corrupt payments to Indonesian government officials between 1997 and 2002. In one case the SEC said Monsanto arranged to bribe a senior official in Indonesia's Ministry of Environment to influence regulatory changes that would have benefited Monsanto. Although Monsanto reportedly paid the official $50,000, the regulatory change never happened. Monsanto agreed to pay $1.5 million in fines to the SEC and the DOJ and negotiated with the DOJ to defer prosecution on criminal charges.

>A jury convicted two former executives of American Rice Inc. of bribing Haitian officials to reduce duties and taxes on rice imported to Haiti and, in July, sentenced them to multiyear prison sentences. The cases are being appealed to the U.S. Court of Appeals for the 5th Circuit.

>DaimlerChrysler reported in a July 6-K statement that both the SEC and DOJ are investigating allegations of FCPA violations at the company's Mercedes division. The investigations arose from a complaint filed by a former DaimlerChrysler accountant who claims he was fired for blowing the whistle on secret accounts the company allegedly used to pay bribes to foreign officials.

>The SEC is investigating Halliburton Corp. and Chicago Bridge & Iron Co. for possible FCPA violations involving a liquefied natural gas (LNG) facility under construction in Nigeria. The allegations came to light in June 2004, when Halliburton fired the former head of its Kellogg Brown & Root subsidiary, Jack Stanley, citing evidence of "improper personal benefits." Chicago Bridge filed an 8-K statement in August acknowledging it was under subpoena in the case.

>ExxonMobil, ChevronTexaco, Marathon Oil, Devon Energy and Amerada Hess, as well as several other oil companies, reportedly are involved in SEC investigations into bribes allegedly paid to government officials in Equatorial Guinea. The violations came to light during the SEC's investigation into Riggs Bank accounts, which the SEC suspected of being used to launder corrupt payments to Equatorial Guinea's leaders and their family members.

>Telecom equipment vendor Lucent Technologies dismissed four executives in its China operations, including the division president, in April 2004. The company said it fired the executives after an audit showed "deficiencies" in the division's FCPA compliance and that it is cooperating with the SEC and DOJ in an investigation into the violations. Separately, the SEC notified three former Lucent executives, including former CEO Richard McGinn, that it intends to sue them for FCPA violations involving corrupt payments to Saudi Arabian government officials.



Michael T. Burr

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