Posted Mar 18, 2007 10:05 am CDT
When Alexandra A. Wrage traveled to Dubai a little more than two years ago, only about 20 people showed up for her class on compliance with the U.S. Foreign Corrupt Practices Act.
Eyes rolled as Wrage explained the act, which can mean crippling fines for U.S. companies and prison terms for employees caught bribing foreign government officials in order to seal deals abroad.
“But there’s a real appetite for this stuff now,” says Wrage, president of Annapolis, Md.-based Trace International Inc., an association of multinational businesses that provides anti-bribery training for American and foreign salespeople, consultants, distributors, suppliers and others engaged in overseas commerce.
A return trip last November to the bustling trade center on the Persian Gulf drew more than 220 attendees, who came from as far away as Bangladesh and Greece.
Their attendance came amid reports that the Justice Department has stuffed the pipeline with new FCPA cases, which can implicate foreign subsidiaries of U.S. companies as well as foreign companies whose stock trades on U.S. exchanges.
Still, some remained suspicious of U.S. motives, Wrage says. One audience member at the November session struck a familiar chord by suggesting that far-reaching FCPA enforcement efforts really amounted to the United States positioning itself as a sort of world economic policeman. The man wanted to know whether the Americans were imposing a double standard on everyone else. Hardly, replied Wrage.
“There was a bit of an edge to it,” recalls Wrage, a former international lawyer for U.S. defense contractor Northrop Grumman. “It’s an interesting double standard, because for every 15 American companies that get investigated, only one non-American company gets investigated. So if it’s a double standard, the Americans aren’t doing a very good job at it.”
But while the United States pretty much used to go it alone with the FCPA, anti-bribery compliance has become more complicated in recent years with new international enforcement agreements and enactment of similar laws in other nations. International banking authorities also have become more vigilant.
So FCPA compliance planning has taken on fresh urgency as the 1977 statute turns 30 this year. Prosecutors aren’t talking, but a digest prepared by the New York City law firm Shearman & Sterling estimates that the government was conducting 43 investigations of corporations as of the end of November. During the act’s first three decades, the government pursued only about 60 corporate cases.
Though many don’t like it, in-house and outside lawyers alike know the only way to avoid getting hammered in any white-collar case is through cooperation with the government, including internally investigating and disclosing violations before prosecutors discover them through other sources. They view effective compliance planning as the first line of defense in avoiding the full force of the law should they—sometimes unwittingly—find themselves illegally lining the pockets of some potentate in a far-off land.
U.S. companies also face an ever-expanding interpretation of the FCPA by the enforcement agencies—the Justice Department on the criminal side and the Securities and Exchange Commission at the civil end.
The agencies operate largely unconstrained by judicial precedent: Staying in business is more important than setting precedent to most companies, so they typically plead guilty or settle with the government rather than risk the potentially ruinous consequences of going to trial.
The dearth of case law and widening intolerance of bribery can turn compliance into an international game of pin the tail on the donkey.
“As a lawyer, I expect laws to be readily transparent and easily predictable,” Wrage says. “The FCPA is neither.”
Hunch Uncovers Corruption
The FCPA traces its origins to a little-noticed aspect of the Watergate hearings, which led to the downfall of President Richard M. Nixon. Congressional investigators and the public focused on Nixon’s connection to the bungled 1972 burglary of the Democratic National Committee headquarters.
But then-SEC enforcement chief Stanley Sporkin was struck by testimony from corporate executives about illegal contributions they had made to Nixon’s re-election campaign. Sporkin, a lawyer and an accountant, asked his staff to take an informal look at how the corporations recorded the payments on their books.
“We discovered the funds were masked in secret mislabeled accounts, and that their use was not confined to illegal political contributions,” Sporkin, now a federal district judge, wrote in a 1998 law review article looking back on the first 20 years of the FCPA.
“Indeed, these secret funds were used to make many other forms of illicit payments, including payments of bribes to high officials of foreign governments.”
A subsequent formal investigation revealed that more than 400 companies had paid some $300 million to foreign officials, politicians and political parties. Of those companies, 117 were listed on the Fortune 500.
“The SEC was literally overrun with these cases, and its meager resources were tapped to the utmost,” Sporkin recalled in the 1998 piece. “A creative solution became absolutely necessary.”
Sporkin figured all the commission needed was a simple statute requiring the publicly traded companies under its jurisdiction to keep honest and accurate records of such payments. “In my view, a corporation would think twice before it recorded a bribe for what it was.”
Congress obliged Sporkin with a criminal statute to punish public companies that disguise bribes in their books. But Congress didn’t stop there. Lawmakers also explicitly made the act of bribing a foreign official a crime in itself. They extended that provision to include privately held companies and individuals.
The anti-bribery provision forbids payments or gifts to foreign officials in order to acquire or maintain business. It originally applied only to payments originating inside the United States, but Congress in 1998 greatly expanded its jurisdiction to reach bribes originating outside the country. The amendment also holds U.S. companies liable for the acts of foreign employees.
Criminal violations of the anti-bribery provisions can cost companies up to $2 million per count. Actual payments, though, may be much higher because courts in the alternative can fine a company up to double the amount of the profit or savings it sought by making a payoff.
Prosecutors in recent years have regularly asked for the stiffer alternative penalties, both to deter future violations and to wipe out financial rewards obtained through bribery. Criminal fines for individuals can reach $100,000, though courts also can use the same alternative sentencing scheme. Employers cannot pay fines for individual defendants, who also can get up to five years in prison.
Civil penalties can reach $500,000 for companies and $100,000 for individuals, or they can equal the amount of gain sought or loss avoided. What’s more, indictment alone can bar a company from U.S. government contracts. Companies also can lose crucial export licenses.
In addition, the threat of international parallel prosecutions looms over potential defendants as the U.S. anti-bribery campaign spreads to other nations and institutions. JOINT EFFORT GROWS
as the united states ramped up the FCPA in 1998, it also persuaded the 30 industrialized nations belonging to the Organization for Economic Cooperation and Development to sign a treaty agreeing to adopt similar criminal laws. Another six nonmember nations also had signed by late 2006.
And the Senate made the U.S. the 65th nation to join the United Nations Convention Against Corruption when it approved the treaty last September on President Bush’s recommendation. The convention requires parties to criminalize bribery and similar offenses, cooperate in prosecutions and adopt procedures to recover assets stolen through corruption.
On yet another front, the World Bank and related institutions gradually have increased efforts over the last decade to ensure that billions of dollars in loans to developing countries flow to the projects for which they were intended and not into the hands of crooked officials. Banking authorities view bribery as especially pernicious for impoverished nations because it both siphons off money and deters legitimate investment needed to raise living standards.
For U.S. companies, FCPA compliance is no small job when the government can prove criminal intent with as little as a defendant’s “firm belief” that bribery “is substantially certain to occur.”
While a few bribery attempts assume the form of outright shakedowns, most are much more subtle and difficult to detect. A bribe can be a chunk of cash channeled to an official through a salesperson or other company representative. Or it can be an extravagant dinner, a rare bottle of wine or a trip to Disneyland. Even determining who works for the government and who doesn’t creates headaches, notably in countries with state-owned industries, where any employee arguably is a government official. Hiring foreign nationals can be particularly treacherous, says Lockheed Martin Corp. in-house lawyer Howard O. Weissman. Lockheed’s overall compliance program, one of the most extensive around, prescribes ethical and legal conduct for all its employees far beyond the FCPA.
On the FCPA side, Lockheed spends considerable time and money investigating foreign consultants with which it contracts as part of the due diligence the government expects from effective programs.
In addition to background checks using multiple sources, Lockheed requires consultants to undergo annual ethics training that includes FCPA compliance. In most cases, the company places two-year limits on contracts. It can terminate a contract without cause on 60 days’ notice—and immediately in cases of illegal payments or suspected FCPA violations.
Lockheed also reserves the right to inspect a consultant’s books and records. And it requires face-to-face interviews with consultant candidates. Such extensive due diligence has paid off more than once.
For example, a Southeast Asian country, which Weissman declines to identify, had purchased F-16 fighter jets directly from the U.S. govern- ment. The country, however, wanted to buy some additional equipment for the planes from Lockheed and recommended an agent to act as a go-between.
The proposed agent turned out to be a jewelry salesman with glowing letters of recommendation from satisfied customers. The proposal already smelled fishy to Lockheed executives, but it could have meant a $25 million sale. So Weissman traveled to Asia to interview the candidate.
“What does he bring to the party?” Weissman wondered. It turned out the “agent” also was closely connected to officers in the country’s air force.
“Our assessment was correct,” Weissman recalls. “The deal stunk. He really was a conduit for those air force officers, who were going to share in his commission.”
The officers didn’t let it drop, though. They approached Lockheed and offered to find someone who could “work with” the obviously unqualified jewelry salesman.
“That made it worse,” Weissman says. Lockheed walked away, and a French company eventually made the sale. It wasn’t long before the press reported that the equipment didn’t work, and that the French company had closed the deal with bribes.
Hindsight Steers Decisions
not all payments to foreign officials are illegal. To qualify as a bribe under the FCPA, a payment must “corruptly” induce an official to direct business to or seek favorable treatment for the company making it. Nevertheless, fear of prosecution can have a chilling effect, even when companies try to do the right thing.
Washington, D.C., practitioner Kenneth B. Reisenfeld recalls a U.S. corporate telecommunications client that wanted a foreign operating permit. Unrelated to obtaining the license, a government minister pleaded for the company’s help in getting urgent medical treatment in the United States for one of his deputies. Wary company executives, however, had to think like prosecutors.
“You sometimes have to make very tough calls,” says Reisenfeld, past chair of the ABA International Law Section. “The business executives in this company really wanted to help. But they wound up not doing it because of the way it would be perceived in hindsight.”
Lawyers who do FCPA work also strongly urge clients to hire competent local counsel to help them navigate unfamiliar foreign legal systems and business practices. But even retaining foreign lawyers can be fraught with peril, warns Wrage of Trace International. “If you want to hire a local law firm, you want to do due diligence,” she says. “That includes their business practices and ethics. Lawyers do move bribes, and it’s a lot easier to move a bribe if you are a lawyer or accountant, because you can just put it down as a consulting fee. If the top officials in a country are on the take, chances are that the enforcement folks—the police and the courts—are also corrupt.”
Lockheed, for one, avoids that problem by using U.S.-based law firms with established international practices. Such firms already have contacts, offices and lawyers trained in countries where Lockheed does business.
But while large multinationals like Lockheed can afford to look under endless rocks when making international hiring decisions, many smaller companies simply can’t go that far. Though definitions of small businesses vary, about 65 percent of the nation’s exporters are companies with fewer than 20 employees, according to the Office of the U.S. Trade Representative.
Besides lacking the money to perform due diligence Lockheed style, small companies often don’t appreciate what an FCPA violation can mean, according to Stuart H. Deming, who splits time between law offices in Washington, D.C., and Kalamazoo, Mich. Couple naiveté with limited resources, and smaller companies and their owners can stumble all the way to the poorhouse, prison or both.
“Many companies don’t understand the nuances of the FCPA,” Deming says. “Many think that if someone else is doing it, if they hire a consultant and are not an active participant, they’re OK. They hide their heads in the sand. Small to medium-sized companies are the most apt to be compromised in a foreign setting.”
Smaller companies don’t have to go it alone, however. For example, they can learn much from the experiences of others in particular foreign settings.
“Look at the companies that are already there, if they’ve had a good experience and a good track record,” Deming suggests. “Who are their contacts? Who are their suppliers? Who are their lawyers?”
The Commerce Department has several programs that may help small companies avoid FCPA problems, including finding and vetting potential foreign partners. The department’s Commercial Service, for example, operates an international partner search program, with experts in more than 80 countries who can supply exporters with a list of as many as five prequalified candidates within 30 days.
For companies interested in particular partners, the service can provide profiles on many foreign companies and salespeople. These profiles include listings of key officers and senior management, as well as banking relationships and market information, including sales, profits and possible liabilities. The Commercial Service operates offices in major U.S. and foreign cities, or companies can contact it through the Web at trade.gov/cs. Though they can’t provide specific legal advice, the departments of Commerce and State can offer general counseling on FCPA compliance. And the Justice Department issues opinions to companies inquiring whether planned specific conduct may run afoul of the FCPA. Though not considered legal advice, there is a presumption of compliance in subsequent enforcement actions for activities on which Justice has issued favorable opinions. More information is available on the Fraud Section’s site at usdoj.gov/criminal/fraud/fcpa.html.
Smaller companies that take advantage of those services and others available through the government or private sources can go far in avoiding future problems with the enforcement agencies, Deming says.
“They don’t expect a small company to have a compliance program like Lockheed does,” he says, “but they do expect them to have some sort of mechanism.” BATTLE OVER SOCIETAL NORMS
In post-Enron America, prosecutors, defense lawyers and courts often speak of creating a “culture of compliance,” where everyone from the CEO on down bears responsibility for corporate behavior. Compliance officers say the same goes for instilling a spirit of FCPA compliance in foreign settings.
But regardless of laws, some societies still regard bribery as the cost of doing business. That often makes overseas compliance training particularly challenging.
Wrage remembers a class she conducted in Singapore. A young man in attendance took copious notes and told her that he never would pay a bribe in Singapore.
“ ‘That’s why I drive across the causeway to Malaysia,’ ” she recalls him saying. “He seemed like a Boy Scout. He had his hand on his heart, and he’s representing U.S. companies. He just didn’t get it.”
Getting the message across also means more than simply drumming a set of rules into people, says Marjorie Doyle, Houston-based chief ethics and compliance officer for Vetco International Ltd. The privately held supplier of drilling equipment for oil and gas is based in London and has offices in 60 countries. Doyle says laws alone set a low threshold.
“You have to talk not only about ethics and compliance, but about corporate culture as well,” she says. Vetco’s overseas compliance training first focuses on the image the company wants to project.
“Then you can talk about specific requirements, but people aren’t going to remember things that are for lawyers,” Doyle says. “I think you really have to have this base of ethics, rather than say we’re going to follow all these laws. I think that appeals to different cultures around the world.”
For international compliance training to work, it also must account for societal differences. Training in a country’s native language may be the most crucial, Doyle says, as it’s often the only way for the compliance officer to know whether non-English speakers really do get the point. “You have a common message you’re trying to get out, but you have to deliver it locally,” she says.
But regardless, Doyle and other compliance instructors who work abroad say they also need to read foreign employees the riot act to make doubly sure they know the company and the law are serious. Threats of prison and other horribles shouldn’t be overrated, they say.
“But you also want to create an atmosphere where people aren’t afraid to report things that are going on,” Doyle says. “Then there are some people with whom you always have to use the stick because they just don’t get it. I think these are probably people you eventually don’t want in your company anyway.”
Still, things can go wrong, especially in an enforcement atmosphere where the prosecutors, not the courts, assume the leading role in determining what violates the FCPA and what doesn’t. With that kind of uncertainty, compliance planners constantly have to ask themselves when prevention becomes overkill.
“If you in good faith can turn to a prosecutor and ask what else you could have done, and the prosecutor can’t come up with any answer,” Deming says, “you’ve probably done everything you reasonably could have.”
Case Studies from Two Companies
Documents filed in two recent Foreign Corrupt Practices Act cases demonstrate what the government does—and doesn’t—want from corporate defendants.
• The government doesn’t want Titan Corp.’s compliance plan, which it described as no plan at all.
The San Diego-based defense and communications company in March 2005 paid the largest FCPA penalty to date, which included a $13 million criminal fine and $15.5 million in profit disgorgements after it pleaded guilty to funneling millions of dollars to an agent in the African nation of Benin. Included was $2 million toward the 2001 re-election campaign of Mathieu Kerekou, then Benin’s president.
“Despite utilizing over 120 agents and consultants in over 60 countries, Titan never had a formal companywide FCPA policy, failed to implement an FCPA compliance program, disregarded or circumvented the limited FCPA policies and procedures in effect, failed to maintain sufficient due diligence files on its foreign agents, and failed to have meaningful oversight over its foreign agents,” the SEC said in a litigation release announcing the joint settlement of the case with the Justice Department.
The scandal also killed a $1.7 billion buyout offer from Lockheed Martin Corp., which discovered the problems in 2004 as part of its own premerger investigation. Lockheed forced Titan to report the violations to the government but later pulled out of the deal after Titan failed to resolve the matter.
And Titan wound up with a compliance program and ethics officer anyway as part of its sentence, which included three years of supervised probation. The dubious distinction of entering Titan’s guilty plea went to newly hired ethics officer David W. Danjczek, an international business consultant from Washington, D.C.
“I am not a lawyer, and I had never been in a federal court before in my life,” Danjczek recalls. “It was a humbling experience and not one I care to repeat—to feel the full wrath of the law coming down on me.”
• Schnitzer Steel Industries Inc. of Portland, Ore., could have experienced the law’s full wrath as well, had it tried to let slide more than $1.8 million in corrupt payments made by a subsidiary to mill managers in China and South Korea. The bribes, paid from 1999 to 2004, were to induce the managers to buy scrap metal from Schnitzer. They included cash, jewelry, gift certificates, cosmetics, golf club memberships and time-shares.
Schnitzer caught a break after one of its employees returned from a company-sponsored FCPA training course in the summer of 2004 and told his superiors that he and other workers routinely had participated in making such payments. Schnitzer’s audit committee hired outside counsel to do an internal investigation and reported the results to the government in November 2004.
Besides making the initial disclosure to the government, Schnitzer preserved electronic and paper documents, produced results of interviews with employees and urged them to further cooperate with the Justice Department by paying their travel expenses. The company also encouraged certain employees to hire their own lawyers and volunteered to pay their legal fees.
Prosecutors were particularly impressed that Schnitzer, a family-controlled business, also replaced senior officers and for the first time appointed a board of directors with a majority of independent members.
“In such a business environment, the decisions … were undoubtedly quite painful, but also sent a strong message about the lack of tolerance for unethical and illegal business practices and about the importance of a modern corporate governance structure,” deputy Justice fraud section chief Mark F. Mendelsohn wrote in an Oct. 15 letter to U.S. District Judge Garr M. King.
As a result, the subsidiary, SSI International Far East Ltd., pleaded guilty to FCPA violations and related charges and was fined $7.5 million, significantly less than the minimum $24.5 million fine recommended under the sentencing guidelines. Parent Schnitzer was permitted to enter into a deferred prosecution agreement with the government, which allowed it to escape the stigma of a criminal conviction. And though the government calculated the company’s profits from the bribes at $61 million—about one-third of its net income during the period—it walked away from a companion civil action with a $7.7 million penalty.
“Here, there can be no question but that the cooperation provided by the company, under the leadership of Schnitzer Steel’s audit committee, was sincere and unflinching,” Mendelsohn told the judge. “Indeed, the cooperation was, in a word, exceptional.” Still, the government found Schnitzer’s FCPA compliance planning inadequate and forced the company to rework it from top to bottom. But Schnitzer isn’t a convicted felon.
John Gibeaut is a senior writer for the ABA Journal.
John Gibeaut is a senior writer for the ABA Journal.