A stunning January sting operation has set an entirely new precedent for Foreign Corrupt Practices Act (FCPA) enforcement. Using tactics reminiscent of drug busts and mob crackdowns, FBI agents arrested 21 executives at the opening of a gun-industry trade show in Las Vegas. One more was simultaneously arrested in Miami.
The sting was the culmination of a two-and-a-half-year investigation and the result of extensive interagency--and even international--collaboration. It's also the single largest FCPA prosecution of individuals in DOJ history.
As the executives were taken into custody to face a total of 16 federal indictments, 150 FBI agents executed 14 search warrants across the country.
"What you see here is a very aggressive law enforcement action," says Joshua Berman, a partner at Katten Muchin Rosenman. "Most FCPA investigations have longer build-ups, hundreds of thousands of pages of subpoenaed documents. Here, no one saw this coming. You have a cooperating witness recording conversations, you had searches executed--it was a classic takedown."
Weapons and Tactics
Just as dramatic as the bust itself is the story that preceded it. Through a well-connected cooperating witness--widely thought to be an industry executive who was caught and flipped--disguised investigators met with the targets, presenting a fictitious business opportunity.
FBI agents posing as the emissaries of an African defense minister offered a plum $15 million contract to outfit the unspecified nation's presidential guard with weapons and other light military equipment. They also let it be known he wanted a bribe in the form of a 20 percent commission. The targets were asked to prepare two sets of invoices--one with the true cost and one that included the "commission"--and to engage in smaller test deals.
According to Assistant Attorney General Lanny Breuer, this is the first time the government has used such large-scale undercover tactics in FCPA enforcement, but it won't be the last. "From now on, would-be FCPA violators should stop and ponder whether the person they are trying to bribe might really be a federal agent," he stated in an announcement of the arrests.
Undercover operations are enormously expensive, both in terms of money and personnel. The massive outlay required for such a large sting, experts say, shows just how serious the feds are about cracking down on FCPA crimes.
"[Breuer] has intimated that they're going to be more aggressive and use more sophisticated means," says Pat Brady, a partner at Barnes & Thornburg. "He said they're going to focus on individuals. True to his word, they did. There are supposedly 140 open FCPA investigations, so there's a whole new universe of leaders of corporate entities that might be in the crosshairs."
The amped-up tactics may also owe to the background, experience and hardball inclination of the current generation of prosecutors, led by DOJ Fraud Section Deputy Chief Mark Mendelsohn.
"A lot of the guys who do FCPA stuff, including Mendelsohn and some of his deputies, have done either drug stuff or Mafia stuff in the past," says John Davis, chair of the international department at Miller & Chevalier. "It's not surprising that they're putting their heads together and saying, 'Hmmm, that worked there, let's try it here.'"
Another new wrinkle of the case is the fact that most of the target companies are smaller operations without extensive international experience--a far cry from the FCPA mega-cases against Siemens and Halliburton. The message to companies is clear: $800 million settlement agreements are not what drive prosecutions.
Other than a senior sales executive for Smith & Wesson, the executives caught in the sting work for companies that are not household names. These are smaller businesses that usually supply small arms and protective gear such as bulletproof vests to local police forces, not massive military contractors.
The sting is evidence that no business is off the radar for FCPA crimes, and may indicate the current direction of the enforcement spotlight.
"As is true in a lot of these cases, they're looking at an industry," Davis says. "This has been one of the trends the last couple of years. They've looked at the oil field industry, they've done blanket-type investigations in the pharmaceutical industry. Now they're looking at the [small arms] industry."
The investigation required active cooperation of many domestic and foreign agencies. In addition to the sting in Vegas, they executed search warrants in Arkansas, California, Florida, Georgia, Kentucky, Pennsylvania and Virginia, as well as in London.
"Back when I was at [the Department of] Justice, there wasn't that much cooperation--even between the SEC and the DOJ, let alone the fraud office or any other enforcement agencies," Brady says. "Now it's all global cooperation and information sharing."
It will take years to see whether undercover tactics prove effective in sending defendants to jail. The set-up, which calls to mind the classic ABSCAM sting, will undoubtedly raise questions of entrapment and other defenses normally seen in mob and drug trials. But the bust is clearly a game changer in the area, and no one expects it to be a one-off prosecution.
"This is just a natural progression in FCPA enforcement," Brady says. "You start out with self-disclosure. Now investigators put resources into it, and it becomes a priority. Other countries make it a priority, and you get big hits like Siemens and Halliburton. It gets a lot of press, and it goes from flavor of the day to being around for a long, long time."
The increase in FCPA enforcement over the past decade received a lot of publicity, giving companies fair warning to ramp up compliance efforts. Yet egregious behavior persists. The violations in the Vegas case were not marginal, gray-area questions of interpretation, but blatant, substantial bribes. So the message for in-house counsel is clear: The gloves are off.
"Counsel have heard all the compliance stuff before, but the wake-up call to me on this one is that the regulators, law enforcement and justice department are prepared to use whatever means available to investigate and prosecute FCPA," Brady says. "The era of self-disclosure is coming to an end. To me, this changes a whole lot."