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Deceitful Deals

There's something about bribery that just seems old school. It calls to mind shady operatives, exotic locales, suitcases stuffed with cash. It's the stuff of a Graham Greene novel, not a sophisticated global enterprise. Nobody really does that anymore, right?

Well, some things never go out of style. Take, for example, the ongoing corruption saga of the massive German conglomerate Siemens AG: more than $2 billion in international bribes revealed so far; implicated parties as high up the organizational chart as the CFO and the managing board.

It is shaping up to be one of the largest and most expensive internal investigations ever.

But Siemens has good company. Last year Baker Hughes paid a record
$44 million in penalties to settle charges of bribery in Kazakhstan. And there's
a whole nexus of corruption around the Iraq Oil for Food program: Chevron
($30 million), Volvo ($7 million), Flowserve ($4 million) and Ingersoll-Rand ($2.5 million) are among those that have coughed up major corruption settlements related to the troubled United Nations program so far.

"There is a significant spike," says William Steinman, a partner at Powell Goldstein who specializes in Foreign Corrupt Practices Act (FCPA) matters.
"Starting in about 2004 we saw a significant enforcement against both companies and individuals. Since then there have been more FCPA cases than in all of the prior years since the law was enacted combined. That increased
volume has sustained itself with no end in sight," Steinman says.


Up to Speed
Rarely does a trend emerge that is so stark and unambiguous. According to a recent report issued by Shearman & Sterling, the government initiated nine FCPA investigations in 2003. Last year that number was up to 29. There are
currently 82 corporations involved in open investigations.

The dramatic rise in corruption enforcement reflects the convergence of several developments.

The financial certification requirements under Sarbanes-Oxley have forced companies to step up their internal investigations, turning up problems that previously would have stayed under the rug. Increased globalization means more companies than ever are doing business abroad, many of them ignorant of the risks of foreign operations. And the fraud section at the Department of Justice (DOJ), led by Deputy Chief Mark F. Mendelson, is more aggressive than ever.

Perhaps most significantly, a host of foreign and international regulations have come online--notably conventions of the United Nations, the European Commission and the Organization for Economic Cooperation and Development--that facilitate cross-border cooperation among government enforcers. From its 1977 inception to the late 1990s, the FCPA was the only act in town. Not anymore.

"The enforcement community finally has the tools it needs to make these cases," says Danforth Newcomb, a partner at Shearman & Sterling. "The treaties that have been in place for about 10 years are coming up to speed."

The treaties contain two crucial provisions: one for sharing of evidence among governments; the other making it a crime in both jurisdictions to pay a
foreign bribe.

About two-thirds of investigation activity is a direct result of the maturation of the global enforcement community, according to Newcomb. The remaining third stems from self-reported violations.

Internal compliance efforts often turn up problems. Others emerge during M&A due diligence. Companies that self-report can expect a more pragmatic response from the DOJ than in years past.

"There has been an increased use of deferred prosecutions," says Ellen S. Podgor, editor of The FCPA Blog and a law professor at Stetson University. "Since Arthur Andersen, enforcement agencies are cognizant of the fact that innocent parties can be seriously hurt when you put a company out of business, and that might not necessarily be the right thing to do."


Stiff Penalties
That's not to say that there's a trend toward lesser penalties, just more nuanced proceedings. "The government is making an effort to move away from the one-size-fits-all hammer," says Steinman. "Prior to 2006, it was, 'Oh, you have an FCPA violation? Here's your million-dollar bill,' regardless of how pervasive the situation was."

The rub is, while the hammer may be smaller, it's likely to be accompanied by an ice pick, a blowtorch and a pair of pliers. Consider the Baker Hughes settlement. Of the record $44 million penalty, just $11 million was a criminal fine, $23 million was disgorged profits and interest and $10 million was civil penalties.

"Agencies use a range of alternatives," Newcomb explains. "They're clearly going after individuals more aggressively than they did a few years ago. They are not insisting on a guilty plea in every case. They use deferred prosecution agreements when appropriate. And the SEC now insists on disgorgement, which can often be as big as or bigger than the fine."

Here's another wrinkle: Violators can rack up even greater expenses on investigations. Baker Hughes' $44 million penalty is actually less than the $50 million it reportedly spent on its own five-year internal investigation.

And then there's the compliance monitor. As part of most settlements, the government requires the violator to retain an independent monitor--almost always a partner at a large law firm--to review the company's FCPA compliance and regularly report to the board and government. The company has to pay, and depending on how far-flung a company's operations are and how much hot water they were in to begin with, the tally can add up to tens of thousands of billable hours.

With so many factors feeding corruption investigations and so many tools at enforcer's disposals, don't expect the trend to turn.

"We're in a period where this is a high-priority issue," Steinman concludes, "but there are always bad actors. In five years, we could see a slowdown in FCPA enforcement, but I don't think that's going to happen. I think this level of scrutiny is here to stay. "

Contributing Author

Steven Andersen

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