Lost amidst the unprecedented fines and penalties doled out as part of recent FCPA enforcement actions are several other key challenges to corporations, according to Shearman & Sterling’s semiannual report, Recent Trends and Patterns in FCPA Enforcement, part of its renowned FCPA Digest.
The Trends and Patterns report found that, in addition to the increasing size of the penalties, FCPA enforcement today is characterized by coordinated international investigations and enforcement actions, against both corporations and individuals, along with expansive assertions of jurisdiction by US enforcement authorities and a rapidly expanding body of interpretative guidance from both the courts and the enforcement agencies themselves.
In addition, although past enforcement actions led many companies to devote resources and attention to FCPA risk in M&A transactions, some of the more recent cases have emphasized the need for increased sensitivity to FCPA concerns in common commercial transactions and business relationships.
“The enormity of the Siemens and Halliburton/KBR penalties—$800 million and $579 million, respectively—obviously made the headlines,” said Philip Urofsky, a Washington-based partner at Shearman & Sterling and one of the leaders of the firm’s FCPA practice, “but the underlying facts—M&A due diligence failures, inadequate internal controls, and use of agents and consultants in foreign countries—have been, or should have been, front and center in any corporation’s evaluation of FCPA risk in international business.”
Danforth Newcomb, the New York-based founder of the firm’s FCPA practice, added, “Concern over FCPA matters may have been restricted to the internal compliance area in the recent past, but today FCPA and anti-corruption concerns permeate the organization—all the way to the CEO suite and the board of directors. No one wants to be the focus of a high-profile FCPA investigation or enforcement.”
FCPA prosecutions remain on the rise, as a result of increased voluntary reporting by corporations, more Department of Justice resources, growing international law enforcement cooperation, and, just as important, increased international law enforcement coordination. The year 2007 was the biggest year to date, with 25 US Department of Justice and US Securities and Exchange Commission corporate matters initiated against US and foreign corporations, followed closely by 2008 with 18 matters. There have been three matters thus far in 2009.
A significant change is that, increasingly, the authorities are charging individuals or the corporations separately and in sequence. Seventeen individuals were charged in 2007, 16 in 2008 and 3 so far in 2009.
“Although some of the individual cases are cleaning up and closing earlier corporate matters,” Urofsky said, “many of the newer cases appear to reflect the DOJ’s adoption of traditional law enforcement tools from other types of investigations, such as using individuals to go ‘up the chain’ to charge superiors and, eventually, the corporation.”
Actions against corporations can produce very costly results, as individual fines for FCPA violations have grown 10-fold or more. Prior to the record-setting several-hundred-million dollar fines against Siemens and Halliburton, the previous high fine was the April 2007 FCPA penalty of $44 million against Baker Hughes and a $32.3 million in penalties and disgorgement paid by Willbros Group and Willbros International.
In the past, the Trends and Patterns report has shown evidence of increased international law enforcement. But that’s changing, Newcomb noted.
“The most recent cases and investigations suggest not only cooperation, but coordination,” Newcomb said, “with the prosecutors in a number of countries sharing evidence and supporting one another so that the timing of enforcement actions and sanctions are interwoven to capture the full scope of the alleged wrongful conduct.”
These coordinated, cooperative efforts haven’t slowed US authorities, Urofsky added.
“In a number of recent matters, the U.S. authorities—both the DOJ and the SEC—have shown that they are willing to go it alone and have announced an expansive jurisdictional theory that would capture virtually any bank transfer involving U.S. dollars,” he said. “This obviously poses a risk to non-U.S. corporations that they may be hauled into U.S. court even when their own regulators do not act.”
Increasingly, the FCPA has become a key factor within M&A transactions. In 2008, this trend was reflected in the culmination of a series of cases and FCPA Opinions that provide guidance as to the government’s expectations concerning the scope of due diligence in M&A transactions and the appropriate response to red flags discovered during such due diligence.
“Although the DOJ Opinions are not binding,” Urofsky explained, “they appear to establish a clear pattern that the DOJ will provide acquiring companies with a ‘grace period’ in which they will not be charged for improper conduct by their newly acquired business, provided that they undertake reasonably comprehensive pre-acquisition due diligence, promptly implement a compliance program and controls to prevent post-acquisition conduct and disclose any pre-acquisition conduct they discover.”
“At the end of the day, even with increased legal focus on the current broad scope of FCPA investigations, I would expect FCPA investigations and enforcements to continue to grow in complexity and to be an increasingly critical concern and area of emphasis for all corporations,” he added.
Shearman & Sterling’s updated Recent Trends and Patterns in FCPA Enforcement report provides insightful analysis and serves as an executive summary to the firm’s FCPA Digest, a compendium of cases and review releases relating to bribes of foreign officials under the FCPA. The Digest, which is updated regularly, is considered the authoritative source on all FCPA-related proceedings.
For additional information contact: Ron Brandsdorfer | New York | T +1.212.848.5081 |