Attacks From Abroad

Sunday, June 1, 2008 - 00:00

Last fall, we wrote a two-part article in this publication predicting, in part, that more U.S. companies would be implicated and sued by foreign countries and foreign-owned companies in an effort to reduce corruption. These actions are heavily encouraged by international conventions and countries' desires to level the playing field for their domestic companies. Recently the first such case has been filed. U.S. companies with international operations who are unsure that all bribery has been eliminated now must be wary about finding themselves in the crosshairs of foreign companies and countries. It is best to be prepared now rather than wait for the knock on the door later.

In that two-part article we opined that a major source of these attacks would come from China, and certainly there have been several Department of Justice investigations initiated as a result of "tips" from Chinese authorities. Other such investigations have begun as the result of information from or cooperation with European authorities.

It was recently announced that a foreign firm, Aluminum Bahrain BSC, has sued U.S. aluminum giant Alcoa, claiming that Alcoa bribed Bahraini government officials to secure a contract to supply alumina at above-market rates. The difference in price paid and market price was then allegedly funneled to the Bahraini officials to maintain the contract. Nothing has been proven, and attorneys commenting so far believe that the risks and burdens of U.S. discovery on the Bahraini company will cause a settlement.1

Nonetheless the U.S. Department of Justice and Securities and Exchange Commission are now on the case, which has been put on Administrative hold pending their investigation. If history is any judge, the matter will probably be broadened to the entirety of Alcoa's international operations by government investigators. Depending on its level of preparedness in this area, Alcoa may be in for a massive international internal investigation to prove its innocence. The tenet that one is considered innocent until proven guilty has not been historically applied in the Foreign Corrupt Practices Act ("FCPA") setting.

To frame the magnitude of such investigations, one can look at the Baker Hughes judgment, the largest FCPA fine to date. Not only did they pay in excess of $44 million in fines and disgorgements of profit, but an additional estimated $50 million in legal and accounting costs. The Siemens case in Europe is likely to dwarf the Baker Hughes case. Wilbros, Inc., a Houston-based company involved in the oil industry, recently settled its FCPA charges for $32 million in fines and penalties. This followed many millions spent investigating themselves and announcing withdrawal entirely from Nigeria and other profitable but corruption-riddled hotbeds last year.

Hopefully, for their shareholders' sake, Alcoa has already completed a robust internal investigation, implemented high-quality anti-bribery internal controls, and can prove that this either did not occur or was a rogue unavoidable circumstance in violation of clear policy. Even then, complete cooperation with the government, disclosure of all evidence gathered by the company, submission to penalties for past uncovered violations long since remedied, and the delivery of the Alcoa wrongdoers to the authorities may be part of the ultimate bargain.

After that, the threat of class action looms. Plaintiffs' attorneys are hard at work reviewing public disclosures and the negative effects this situation may have on shareholders of Alcoa. Additional costly investigations by governments in other foreign countries, damage to international reputation, removal from status on World Bank and other approved-contractor lists, loss in stock value, and declining revenues and profits are all possible results of the filing of this case - regardless of the result.

The FCPA is a 30-year-old law forbidding virtually any company with ties to the U.S. from paying any sort of bribe for business purposes to a foreign government official. It is broadly interpreted in the extreme, and consultation with an experienced FCPA attorney on the boundaries is required. In the case of a major pharmaceutical company, for example, kickbacks paid to physicians who worked in a state hospital were considered bribes to foreign officials.

Countries are recognizing that improving their economic condition depends on increased international investment and business ties. They are also realizing that native companies cannot be overpaying for foreign goods and must be on a level playing field when bidding for government or international projects if they are to remain competitive, grow and provide jobs and other economic stimuli to their populations.

Turning in the Americans and Europeans (see Siemens) is the easiest way to accomplish all of these goals. Suing them directly is a way to stop the activity and recover funds for the native business or the country. In China the bribe-recipients are punished heavily. That allows the Chinese to pursue these matters with relatively clean hands. Although they have not done so to date, if the Aluminum Bahrain BSC experiment works well for the plaintiff, one would expect them and many other international competitors to do so.

The lesson in all of this is simple. If your company does any business internationally, it should follow this relatively cost-effective process:

1. Hire an experienced professional to perform a strong corruption compliance review of your company to determine whether there are high risks and where they are.

2. Simultaneously implement strong anti-bribery anti-corruption internal controls throughout your organization and establish enforcement processes.

3. Begin a step-by-step investigation of your highest-risk operations gradually and potentially down to your lower-risk operations to identify potential and actual issues.

4. If problems of any kind are found, you must hire an experienced FCPA attorney to help you perform a more detailed and focused international internal investigation into current and past practices.

At the conclusion of these processes you and your attorney must determine whether to turn yourself in to U.S. and other authorities. On the positive side, cleaning up your international operations, or establishing strong controls before going overseas, can place your company at a strong competitive advantage.

Failure to act proactively can result in an extremely costly surprise. For the average international business, such a situation can be devastating. As we mentioned in the prior article, the choice is yours.

1Aluminum Bahrain BSC v. Alcoa, Inc et al., 2:08cv299 (WD Pa Feb. 27, 2008).

Jeff Harfenist is a Managing Director of UHY Advisors FLVS and leads that firm's Foreign Corrupt Practices Act team, which includes financial fraud, electronic discovery, data mining and global investigations.

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