The Department of Justice (DOJ) and Securities and Exchange Commission (SEC) continue to reveal insights on how to successfully navigate Foreign Corrupt Practices Act (FCPA) investigations. Recently, the government geared up to combat overseas bribery with the appointment of 10 new FCPA prosecutors—a 50 percent increase in dedicated FCPA attorney resources. In tandem, the FBI established three new squads of FBI agents to investigate and prosecute FCPA culprits. From DOJ implementation of the year-old “Yates Memo” to a slew of recent FCPA investigations, we are learning more about how corporations can cooperate to avoid negative outcomes.
Don’t Hide Info on Individuals
Individual wrongdoers in FCPA or other corporate wrongdoing matters are having a harder time hiding among all the horses on the carousel. A year ago, the DOJ ushered in a new focus on holding individuals accountable for their fraudulent actions in corporate roles. “Americans should never believe, even incorrectly, that one’s criminal activity will go unpunished simply because it was committed on behalf of a corporation,” said Deputy Attorney General Sally Yates in a September 2015 speech. In what has become known as the Yates Memo, the deputy attorney general announced six new DOJ policies aimed at removing challenges to holding individuals liable for corporate wrongdoing. The new policies that continue to crop up in current investigations are:
1. No Individual Information, No Cooperation Benefits. To obtain any benefits from cooperating with the government, companies must give up the individuals involved, no matter their company rank. Further, companies that fail to continue to cooperate regarding prosecution of the individuals after securing any corporate plea and settlement agreements will be in material breach of those agreements.
2. No Delays on Individual Investigations. Government prosecutors will focus on the individual right from the start, regardless of whether the case starts civilly or criminally. This is intended to stop delays in individual cases during the corporate investigation, which can make later individual investigations more difficult.
3. Civil and Criminal DOJ Synergies. Department civil and criminal attorneys will cooperate a lot more during all stages of their investigations. The new policy contains specific directives on cross-unit communications and information sharing.
4. Approval for Exceptions to Common Start. Attorneys must write a justification for special circumstances and gain approval to proceed with any corporate investigations before the individual investigation commences.
5. Approval for Liability Releases. Government attorneys are only permitted to release individuals from civil or criminal liability when resolving a matter with a corporation under the rarest of circumstances. When such circumstances do arise, the litigating attorneys must obtain written approval from the relevant U.S. attorney or assistant attorney general.
6. Determining Factor Not Ability to Pay. The U.S. attorneys will pursue civil actions against corporate wrongdoers even if they lack the financial resources to satisfy a significant monetary judgment. In the past, decisions not to prosecute were sometimes made based solely on the inability to pay any eventual judgment.
Pilot FCPA Program
The Yates Memo was followed in the spring of 2016 by a new one-year FCPA Pilot Program.
“Bribery of foreign officials to gain or retain a business advantage poses a serious systemic criminal problem across the globe. It harms those who play by the rules, siphons money away from communities, and undermines the rule of law.” Thus starts the DOJ Fraud Section’s Foreign Corrupt Practices Act Enforcement Plan and Guidance, which outlines the Pilot Program.
The Pilot Program, aimed at encouraging companies to voluntarily come forward with facts on questionable corporate and individual activities, offers some fairly specific guidance on how cooperation can result in benefits such as non-prosecution, faster resolution and lower fines. According to the Pilot Program, prompt and voluntary disclosure of relevant facts (including facts on individual misconduct), full investigative cooperation and timely remediation can lead to up to a 50 percent reduction in fines. In addition, under the program, if the company has implemented an effective compliance program, a monitor may not be assigned. Cooperation under the Pilot Program also increases the chances of avoiding full prosecution.
Initial Pilot Program Cases
In June, the government announced the first two prosecutorial declinations under the Pilot Program. Both cases involved allegations that the company’s Chinese subsidiary had engaged in bribery. Employees at Akamai’s Chinese subsidiary provided $40,000 in improper gift cards, meals and entertainment to officials at state-owned entities to build business relationships. Nortek’s Chinese subsidiary made improper payments and gifts to Chinese officials totaling $291,000 to influence regulatory actions and fines, according to the SEC.
Key Non-Prosecution Nortek Factors
Daniel Kahn, Director of the DOJ FCPA unit, outlined the key factors influencing the Nortek non-prosecution agreement.
- Company internal audit function identified the misconduct
- Prompt voluntary self-disclosure
- Thorough company investigation
- Full cooperation in this matter
- Identification of all individuals involved in or responsible for misconduct
- Provision to DOJ of all facts relating to the individual misconduct
- Agreement to continue to cooperate in any ongoing investigations of individuals
- Steps taken to enhance compliance program and internal accounting controls
- Full remediation
- Termination of all five individuals involved in the misconduct, including two high-level executives of the Chinese subsidiary
- Disgorgement of full amount to the SEC
Relatively Low Fine
In late August, after a 10-year investigation, AstraZeneca (AZ) agreed to pay $5.5 million to settle an FCPA investigation. Relative to an earlier $25 million settlement fee paid by Novartis, the AZ settlement seems like a walk in the park.
According to the SEC Cease and Desist Order, AZ’s wholly owned subsidiaries in China and Russia failed to comply with FCPA internal controls and record-keeping requirements, allowing employees to generate cash using fake receipts, open bank accounts for doctors, and leverage a travel vendor to submit false expense invoices—all to make payments to influence healthcare providers’ drug purchases and prescriptions. The government also alleged bribery of local Chinese officials to reduce or dismiss pending financial sanctions.
AZ Shows How to Cooperate
Even though AZ did not self-report, the SEC ruling cites AZ’s subsequent voluntary and timely internal investigation disclosures, translations of key documents, and factual disclosures that would have proved difficult for the SEC to discover. The company’s regular updates to SEC staff were also a positive factor. The key factors in the resolution were:
- Developed a centralized compliance program
- Revamped internal controls and procedures
- Enhanced its policies on gifts and entertainment as well as third-party engagements
- Added more training and audits
- Placed key compliance personnel in high-risk local markets
- Took several disciplinary actions involving employees, including demoting some, accepting voluntary separations and dismissing others
No Prosecution of Cisco
In September, the DOJ and SEC declined to prosecute Cisco under the FCPA after Cisco fully cooperated, sharing their internal investigation of their Russian operations and resellers in nearby countries. Though public details are sparse, in what appears to be remediation steps, Cisco closed down its operation in Moscow that sold equipment to the Russian government, military and intelligence services. Eleven employees were either laid off or transferred, according to Buzz News.
Hedge and Private Equity Funds Not Immune
Finance ranks as the fourth most investigated industry under the FCPA over the last two years, according to the Shepard Mullin law firm. A high-profile FCPA investigation of the largest publicly traded hedge fund, Och-Ziff, signals that hedge funds and private equity firms should get their FCPA houses in order. Och-Ziff is accused of bribing Libyan officials to win business from the Libyan sovereign wealth fund, and of making illegal payments to the Democratic Republic of Congo. The New York–based company recently earmarked more than $400 million for a possible settlement with the U.S. government.
Here are few thoughts on what general counsels and chief compliance officers can take away from the last year of FCPA activity.
- Build the AZ and Nortek factors into your compliance programs and FCPA government investigations approach.
- Update your ability to audit and monitor the activities of employees, wholly owned subsidiaries and overseas partners with advanced forensics, “silent” searches and analysis tools.
- Double down on Chinese and Russian FCPA audits and monitoring.
- Be sure all employees in all locations get FCPA compliance training, especially sales reps.
- Reemphasize FCPA record-keeping and internal control requirements to accounting, HR, travel and managers.
- Consider placing compliance leaders in high-risk locations.
- Don’t protect insiders; share findings on individuals with the DOJ and SEC to take advantage of the Pilot Program benefits.
- Take swift action to terminate bad actors.
Published September 28, 2016.