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I N S I D E T H E M I N D S
International White
Collar Enforcement
Top Attorneys on Preventative Measures,
Regulatory Compliance, and Litigation
2014 EDITION2014 Thomson Reuters/Aspatore All rights reserved. Printed in the United States of America. No part of this publication may be reproduced or distributed in any form or by any means, or stored in a database or retrieval system, except as permitted under Sections 107 or 108 of the U.S. Copyright Act, without prior written permission of the publisher. This book is printed on acid free paper. Material in this book is for educational purposes only. This book is sold with the understanding that neither any of the authors nor the publisher is engaged in rendering legal, accounting, investment, or any other professional service. Neither the publisher nor the authors assume any liability for any errors or omissions or for how this book or its contents are used or interpreted or for any consequences resulting directly or indirectly from the use of this book. For legal advice or any other, please consult your personal lawyer or the appropriate professional. The views expressed by the individuals in this book (or the individuals on the cover) do not necessarily reflect the views shared by the companies they are employed by (or the companies mentioned in this book). The employment status and affiliations of authors with the companies referenced are subject to change. For customer service inquiries, please e-mail West.customer.service@thomson.com. If you are interested in purchasing the book this chapter was originally included in, please visit www.west.thomson.com.
The Globalization of Anti-
Corruption Enforcement:
Recent Trends and
Developments
Robb Adkins
Partner
Benjamin Kimberley
Associate
Winston & Strawn LLPBy Robb Adkins and Benjamin Kimberley Introduction The Foreign Corruption Practices Act of 1977 (FCPA) continues to be one of the most fear-inducing US statutes for companies conducting business on the world stage. The blurring of government and business in some countries, along with persistent historical trappings of corruption, continue to present difficult environments for companies to operate in without running afoul of the FCPA or FCPA-like legislation. The risk is substantial for multinational companies, and it is not going away any time soon. In the words of the Department of Justice (DOJ) Acting Assistant Attorney General Mythili Raman, “[s]tamping out foreign bribery is a Justice Department priority, and we are determined to continue our vigorous enforcement of the Foreign Corruption Practices Act.” 1 Additionally, the risk is becoming increasingly multi-layered as foreign countries develop anti-corruption legislation and infrastructures to combat bribery both within and outside their borders. The specter of liability and staggering penalties associated with the FCPA now represents just one of many anti-corruption perils as other countries are stepping up their anti-corruption measures and developing their own enforcement authority and sanctions. This chapter provides a brief overview of the FCPA as well as recent trends and developments, both domestically and abroad. It discusses the growth of whistleblower bounties—culminating in two recent awards, one over $14 million—at the same time that anti-retaliation protections shrink for foreign employees who blow the whistle to reap those awards. It also addresses the increased emphasis on cross-border enforcement efforts as well as the globalization of the FCPA and FCPA-like legislation. These developments reinforce that companies with questions regarding compliance, or seeking to strengthen their internal controls to combat corruption, should seek advice on the increasingly broad range of anti-corruption enforcement risks. Overview of the Foreign Corrupt Practices Act The FCPA, 15 U.S.C. §§ 78dd-1, et seq., contains both anti-bribery and accounting provisions. The anti-bribery provisions make it unlawful to offer 1 See, Press Release, Office of Pub. Affairs of the U.S. Dep’t of Justice, Foreign Bribery Charges Unsealed Against Current And Former Executives of French Power Company (Apr. 16, 2013), http://www.justice.gov/opa/pr/2013/April/13-crm-434.html.
The Globalization of Anti-Corruption Enforcement or provide anything of value to officials of foreign governments or political parties with the corrupt intent to obtain or retain business. The accounting provisions impose certain record-keeping and internal control requirements on issuers (i.e., companies traded on US exchanges) and prohibit individuals and companies from knowingly falsifying an issuer’s books and records or circumventing or failing to implement a system of internal controls. Violations of the FCPA can lead to civil and criminal penalties, sanctions, and other remedies, such as fines, debarment, disgorgement, and/or imprisonment. The DOJ and the Securities and Exchange Commission (SEC) share FCPA enforcement authority. 2 There currently is no private right of action under the FCPA, although plaintiffs frequently—but unsuccessfully—file actions against companies asserting various civil claims, primarily shareholder-derivative claims based on securities law. 3 The FCPA applies to “issuers,” “domestic concerns,” and their “agents,” as well as to “any person” that violates the FCPA while in the territory of the United States. The term “issuer” means any company whose securities are registered in the United States or that is required to file periodic reports with the SEC. 4 The FCPA also applies to foreign companies that trade in the US financial markets, including certain companies with American Depository Receipts (ADRs) listed on US exchanges. The term “domestic concern” includes any US citizen, national, or resident as well as any legal entity that is organized under US federal or state law or that has its principal place of business in the United States. Under certain circumstances, the FCPA can also apply to stockholders, officers, directors, employees, and agents acting on behalf of the issuer or domestic concern, including third parties or intermediaries. Anti-Bribery Provisions The FCPA’s anti-bribery provisions prohibit the willful use of the mail or any means of instrumentality of interstate commerce corruptly in 2 The SEC’s authority is relatively limited compared to the DOJ as it is responsible for civil enforcement of the FCPA over only issuers and their officers, directors, employees, agents, or stockholders acting on the issuer’s behalf. 3 See, e.g., Lamb v. Philips Morris, Inc., 915 F.2d 1024, 1028-29 (6th Cir. 1990); McLean v. Int’l Harvester Corp., 817 F.2d 1214, 1219 (5th Cir. 1987). 4 See 15 U.S.C. § 78m(b)(2) (2013) (The definition includes any business entity registered under 15 U.S.C. § 78l or that is required to file reports under 15 U.S.C. § 78o(d).)
By Robb Adkins and Benjamin Kimberley
furtherance of any offer, payment, promise to pay, or authorization of the
payment of money or anything of value to any person, while knowing that
all or a portion of such money or thing of value will be offered, given or
promised, directly or indirectly, to a foreign official to influence the foreign
official in his or her official capacity, induce the foreign official to do or
omit to do an act in violation of his or her lawful duty, or to secure any
improper advantage to assist in obtaining or retaining business for or with,
or directing business to, any person. 5
What is a Foreign Official?
The anti-bribery provisions apply to corrupt payments made to “foreign
officials.” The question of who can be deemed a “foreign official” has long
been a nettlesome and nuanced issue. The statute, rather unhelpfully,
broadly defines “foreign official” as:
any officer of a foreign government or any department,
agency, or instrumentality thereof, or of a public
international organization, or any person acting in an
official capacity for or on behalf of any such government
or department, agency, or instrumentality, or for or on
behalf of any such public international organization. 6
For those familiar with the US governmental system of departments and
agencies, the concept of a “foreign official” seems obvious due, in part, to
the historical separation between the government and other enterprises in
the United States. Yet, numerous foreign countries do not share this
degree of separation, and, even in the United States, the lines of
demarcation sometimes blur. Many foreign governments use state-owned
or state-controlled entities to provide certain goods and services to their
citizenry. US regulators and enforcement officials construe the FCPA to
include these “instrumentalities” into its definition of “foreign official.”
According to enforcement officials, the test to determine whether a
5
See Fraud Section of the U.S. Dep’t of Justice, Foreign Corrupt Practices Act - An
Overview, http://www.justice.gov/criminal/fraud/fcpa.
6
See 15 U.S.C. § 78dd-1(f)(1)(A) (2013); 15 U.S.C. § 78dd-2(h)(2)(A) (2013); 15 U.S.C.
§ 78dd-3(f)(2)(A) (2013).The Globalization of Anti-Corruption Enforcement particular entity constitutes an “instrumentality” under the FCPA “requires a fact-specific analysis of an entity’s ownership, control, status, and function.” 7 Although district courts tend to agree with this construction 8—by allowing a jury to resolve whether an “instrumentality” constitutes a foreign official—the first federal circuit court to squarely confront the issue, the Eleventh Circuit Court of Appeals, recently heard oral arguments and will issue a decision in the near future. 9 Anything of Value, As Long As It Is Offered With Corrupt Intent The anti-bribery provisions prohibit a corrupt “offer, payment, promise to pay, or authorization of the payment of any money, or offer, gift, promise to give, or authorization of the giving of anything of value to” a foreign official. 10 There is no de minimis exception. The giving of something of value can include anything a recipient might find interesting or useful, and is not limited to tangible items of economic value. For instance, enforcement officials assert that indirect benefits given to an official’s family members, such as employment opportunities, can constitute bribery. 11 Additionally, in some cases, a corrupt act need not succeed to qualify under the FCPA; an offer or promise will suffice. As a practical matter, regulators contend that even an executive who authorizes others to pay “whoever you need to” in a foreign government to gain business violates the FCPA, even if the company does not actually make any payments. 12 7 Criminal Div. of the U.S. Dep’t of Justice and the Enforcement Div. of the U.S. Sec. & Exch. Comm’n, A Resource Guide to the U.S. Foreign Corruption Practices Act, p. 20 (November 14, 2012) [hereinafter FCPA Manual], http://www.justice.gov/criminal/fraud/fcpa/guide.pdf 8 See, e.g., United States v. Esquenazi, No. 09-cr-21010 (S.D. Fla. Aug. 5, 2011); United States v. Carson, No. 09-cr-77, 2011 WL 5101701, (C.D. Cal. May 18, 2011), United States v. Aguilar, 783 F. Supp. 2d 1108 (C.D. Cal. 2011); United States v. O’Shea, No. 09-cr-629 (S.D. Tex. Jan. 3, 2012); United States v. Nguyen, No. 08-cr-522 (E.D. Pa. Dec. 30, 2009). 9 The Esquenazi case currently is on appeal in the 11th Circuit. United States v. Esquenazi, No. 11-15331 (11th Cir. 2013). 10 See 15 U.S.C. §§ 78dd-1(a); 78dd-2(a); 78dd-3(a). 11 See United States v. DaimlerChrysler China Ltd., No. 1:10-CR-066 (D.D.C. Mar. 22, 2010), Deferred Prosecution Agreement, at p. 8 (identifying internships for a Chinese government official’s son and his son’s girlfriend as improper benefits provided to the official). 12 See FCPA Manual supra n. 7 at 14.
By Robb Adkins and Benjamin Kimberley
One key to determining whether or not the “thing of value” constitutes a
bribe is whether it is given with a corrupt intent. 13 The term “corruptly”
means an intent or desire to wrongfully influence the recipient:
The word “corruptly” is used in order to make clear that the
offer, payment, promise, or gift must be intended to induce
the recipient to misuse his official position; for example,
wrongfully to direct business to the payor or his client, to
obtain preferential legislation or regulations, or to induce a
foreign official to fail to perform an official function. 14
The DOJ and SEC enforcement officials explain that the “corrupt intent
requirement protects companies that engage in the ordinary and legitimate
promotion of their businesses while targeting conduct that seeks to
improperly induce officials into misusing their positions.” 15
Many companies pay for entertainment, give small gifts, or provide
promotional material in the ordinary course of business and, in large part,
with a dual purpose of business generation and goodwill. The enforcement
authorities recognize this reality. For instance, the DOJ’s and SEC’s stated
position is that their anti-bribery enforcement actions focus on small
payments and gifts “only when they comprise part of a systemic or long-
standing course of conduct that evidences a scheme to corruptly pay
foreign officials to obtain or retain business.” 16 Yet, the line between gift
and graft—even for a one-time transfer—can blur very easily, particularly as
the size of the expenditure increases and the context of the giving suggests
an improper motive.
13
Additionally, an individual defendant must have acted “willfully” to be held criminally
liable under the FCPA. The FCPA does not define the term “willfully,” but courts
typically construe it to mean “knowledge that [a defendant] was doing a ‘bad’ act under
the general rules of law” or an act with a “bad purpose.” See United States v. Kay, 513
F.3d 432 (5th Cir. 2007); see also Jury Instructions drawn from United States v.
Esquenazi, No. 09-cr-21010 (S.D. Fla. Aug. 5, 2011); United States v. Jefferson, No. 07-
cr-209 (E.D. Va. July 30, 2009); United States v. Green, No. 08-cr-59 (C.D. Cal. Sept.
11, 2009); United States v. Mead, No. 98-cr-240 (D.N.J. Oct. 1998).
14
See S. Rep. No. 95-114, at 10 (1977).
15
See FCPA Manual supra n. 7 at 15.
16
Id. (US enforcement officials acknowledge that “it is difficult to envision any scenario
in which the provision of cups of coffee, taxi fare, or company promotional items of
nominal value would ever evidence corrupt intent, and neither DOJ nor SEC has ever
pursued an investigation of the basis of such conduct.”)The Globalization of Anti-Corruption Enforcement
Affirmative Defenses
The FCPA anti-bribery provisions offer two affirmative defenses: (1) the
“local law” defense and (2) the “reasonable and bona fide business
expenditure” defense:
• Local Law Defense. The local law defense can be asserted when a
payment is lawful under the written laws and regulations of the
foreign official’s country. 17 Silence of the local law is insufficient
to satisfy the defense. 18 As a practical matter, the written laws and
regulations of nearly every country prohibit corrupt payments,
and, therefore, the defense rarely arises as a meaningful shield
from prosecution.
• Reasonable and Bona Fide Expenditure Defense. The reasonable and
bona fide business expenditure defense allows companies to
provide reasonable and bona fide travel and lodging expenses to a
foreign official where the expenses directly relate to the promotion,
demonstration, or explanation of a company’s products or services,
or relate to a company’s execution or performance of a contract
with a foreign government or agency. 19 The DOJ frequently
provides guidance and legitimate expenditures that offer some
helpful advice, but whether a particular payment is a bona fide
expenditure is a fact-specific analysis.
Additionally, the FCPA anti-bribery provisions contain a limited exception
for “facilitating or expediting payments” to further routine governmental
action that involves non-discretionary acts. According to US enforcement
officials, examples of “routine governmental action” include processing
visas, providing police protection or mail service, and supplying utilities like
phone service, power, and water. 20 As a practical matter, enforcement
17
15 U.S.C. §§ 78dd-1(c)(1); 15 U.S.C. §§ 78dd-2(c)(1); 15 U.S.C. §§ 78dd-3(c)(1).
18
United States v. Kozeny, 582 F.Supp.2d 535, 537-40 (S.D.N.Y. 2008) (finding that a
provision in Azeri law that relieved bribe payors of criminal liability if they were extorted
did not make the bribe payments legal).
19
15 U.S.C. §§ 78dd-1(c)(2); 15 U.S.C. §§ 78dd-2(c)(2); 15 U.S.C. §§ 78dd-3(c)(2).
20
See FCPA Manual supra n. 7 at 25.By Robb Adkins and Benjamin Kimberley authorities regularly find that facilitation-like payments represent improper bribes and other countries’ foreign anti-bribery laws, such as the UK Bribery Act of 2010, prohibit such payments outright. 21 Accounting Provisions In addition to the anti-bribery provisions, the FCPA contains two categories of accounting provisions applicable to publicly traded companies that operate in tandem with the anti-bribery provisions: (1) the “books and records” provision and (2) the “internal controls” provision. The books and records provision, 15 U.S.C. § 78m(b)(2)(A), requires issuers to “make and keep books, records, and accounts, which, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the issuer.” Generally, the law requires issuer’s records should conform with accepted methods of recording economic events and prevent off-the-books transactions. As a practical matter, the books and records provisions often apply to circumstances where a company either fails to record an alleged bribe or mischaracterizes it (e.g., as a commission, consulting fee or surcharge, or sales or marketing expense, among others) in the company’s books and records. Yet, as with the anti-bribery provisions, “DOJ’s and SEC’s enforcement of the books and records provisions has typically involved misreporting of either large bribe payments or widespread inaccurate recording of smaller payments made as part of a systemic pattern of bribery,” rather than nominal, isolated transactions or issues. 22 The internal controls provision, 15 U.S.C. § 78m(b)(2)(B), requires issuers to devise and maintain a system of internal accounting controls sufficient to ensure management’s control, authority, and responsibility over the firm’s assets (e.g., controls aimed at preventing and detecting FCPA violations). 21 Fraud Section of the U.S. Dep’t of Justice, Non-Prosecution Agreement for In re Helmerich & Payne, Inc. (July 29, 2009), http://www.justice.gov/criminal/fraud/fcpa/ cases/helmerich-payne/06-29-09helmerich-agree.pdf (payments seeking preferential treatment during inspection of imported goods considered improper under FCPA; Criminal Information for Vetco Gray Controls Inc.,et al., No. 07- cr-4 No. (S.D. Tex. Jan. 5, 2007), available at http:// www.justice.gov/criminal/fraud/fcpa/cases/vetco-controls/ 02-06- 07vetcogray-info.pdf ((payments seeking preferential treatment during customs process considered improper under FCPA). 22 See FCPA Manual supra n. 7 at 39.
The Globalization of Anti-Corruption Enforcement The internal controls provision does not enumerate any particular controls. Instead enforcement agencies expect companies to take into account the operational realities and risks associated with that particular business in crafting a compliance program that fits their business. 23 A strong compliance program—including robust accounting controls—can be a company’s best defense to both limiting FCPA exposure and defending against asserted violations. 24 The accounting provisions do not require that a false record or deficient internal control be connected to an improper payment. In other words, a payment might not constitute a bribe, but it can expose the company to a violation of the accounting provisions if it was caused, in part, by an accounting controls failure or recorded in an inaccurate manner. Companies also need to consider additional accounting-related requirements—many enacted by the Sarbanes-Oxley Act—that might potentially implicate compliance and reporting efforts regarding FCPA issues. Recent FCPA Developments Increased Cross-Border Cooperation and Multi-Layered Liability On May 29, 2013, the DOJ and the SEC announced a joint settlement with French oil and gas company Total, S.A. regarding alleged violations of the FCPA. According to US enforcement officials, between 1995 and 2004, at the direction of an Iranian official, Total corruptly paid approximately $60 million in bribes for the purpose of inducing that official to use his influence in connection with the company’s efforts to obtain and retain lucrative oil rights. Total allegedly then mischaracterized the unlawful payments as “business development expenses.” Further, the enforcement officials asserted that Total failed to implement effective internal controls, which allowed the concealment of the true nature and true participants of the arrangement and the failure to maintain accountability for the assets in a proper manner. 23 See FCPA Manual supra n. 7 at 40 (noting that a company should consider “the nature of its products or services; how the products or services get to market; the nature of its work force; the degree of regulation; the extent of its governmental interaction; and the degree to which it has operations in countries with a high risk of corruption.”) 24 See FCPA Manual supra n. 7 at 40.
By Robb Adkins and Benjamin Kimberley
To resolve the case, Total—an ADR-issuer in the United States—agreed to
pay $245 million in fines to the DOJ and $153 million in disgorged profits
to the SEC. The settlement represents one of the largest combined
monetary resolutions in the FCPA’s history. It also represents the first
coordinated effort by French and US law enforcement in a major foreign
bribery case. In the DOJ’s press release announcing the settlement, Acting
Assistant Attorney General Mythili Raman explained:
Today we announce the first coordinated action by French
and U.S. law enforcement in a major foreign bribery case.
Our two countries are working more closely today than
ever before to combat corporate corruption, and Total,
which bought business through bribes, now faces the
criminal consequences across two continents 25
Additionally, the case provides an example of companies subject to multiple
layers of liability based on allegations of foreign bribery. On the same day
US enforcement authorities announced the settlement, French authorities
announced that they requested the company and its chairman and chief
executive officer, among others, be referred to the French Criminal Court
for violations of French law, including France’s anti-bribery law.
The cooperation between French and the US authorities demonstrates an
example of the growing dual anti-corruption enforcement by foreign
countries. Global companies should be aware of the compliance risk
associated with foreign anti-corruption laws, including multiple layers of
liability should a company engage in bribery or related misconduct across
multiple jurisdictions. Yet the laws themselves might represent less of an
innovation compared to the increasing prevalence and sophistication of
non-US anti-corruption investigative authorities. As discussed further
below, whereas US-led enforcement marked the past decade of anti-bribery
efforts, the development of foreign agencies—staffed with trained
investigators and enforcement officials armed with domestic anti-bribery
laws—could mark a new era of cross-border information-sharing and
enforcement efforts.
25
Press Release, DOJ, Fraud Section, French Oil and Gas Company, Total, S.A.,
Charged In The United States And France In Connection With An International Bribery
Scheme, (May 29, 2013), http://www.justice.gov/criminal/fraud/fcpa/cases/totalsa/2013-
05-29-total-press-release-final.pdfThe Globalization of Anti-Corruption Enforcement Whistleblower Bounties Grow As Certain Anti-Retaliation Protections for Foreign Whistleblowers Shrink The Sarbanes-Oxley Act of 2002 (SOX) and the Dodd-Frank Act of 2010 (Dodd-Frank) contain certain protections and incentives for whistleblowers that report violations of the law, including FCPA violations, to enforcement authorities. 26 In 2012, the SEC published its first Annual Report on the Dodd-Frank Whistleblower Program, which provided statistical information regarding the program’s first year in operation. During that period, the SEC received 3,001 whistleblower tips. Around 10 percent of the total tips (324) originated from a foreign country and around 4 percent (115 tips) related to the FCPA. Whistleblower Bounties Increase in Size and Frequency In the first two years of the Dodd-Frank Whistleblower Program, whistleblower awards generally have been infrequent and unremarkable; however, within the last few months the SEC awarded bounties in two cases—the same number of cases involving bounty awards in its prior two years—and the awards have been sizeable by comparison. In its first two years in existence, the whistleblower bounty program only awarded bounties in two enforcement actions. In the first-ever bounty award, in August 2012, the SEC awarded an anonymous whistleblower approximately $50,000, or 30 percent of the total penalties the SEC collected following an enforcement action into an unidentified multi-million dollar fraud. 27 It took the SEC nearly a year to issue its second award, which it did on June 12, 2013. 28 In that case, the SEC awarded three whistleblowers 5 percent of the sanctions collected from an enforcement action against a fraudulent investment fund. According to the SEC, in August or September 2013, the SEC paid more than $25,000 to three 26 18 U.S.C. § 1514A(c) (West 2013). SOX also prohibits retaliation against employee whistleblowers as a matter of obstructing justice. 15 U.S.C. § 78u-6(a)(3). 27 Press Release, U.S. Sec. & Exch. Comm’n , SEC Issues First Whistleblower Program Award, No. 2012-162 (Aug. 21, 2012), http://www.sec.gov/News/PressRelease/Detail/ PressRelease/1365171483972. 28 U.S. Sec. & Exch. Comm’n, Exchange Act Release No. 70293 (Aug. 30, 2013), http://www.sec.gov/rules/other/2013/34-70293.pdf; see also Exchange Act Release No. 69749 (Jun. 12, 2013), http://www.sec.gov/rules/other/2013/34-69749.pdf.
By Robb Adkins and Benjamin Kimberley
whistleblowers. The ultimate total payout in that case after collecting all
sanctions is expected to be around $125,000. 29
Within the first few months of the whistleblower bounty program’s third
year in existence, it issued back-to-back awards that were both sizeable
compared to prior awards. On September 30, 2013, the SEC awarded more
than $14 million to an anonymous whistleblower. According to the SEC,
the bounty “appropriately recognizes the significance of the information
that the Claimant provided to the Commission, the assistance the Claimant
provided in the Commission action, and the law enforcement interest in
deterring violations by granting awards.” 30 A month later, on October 30,
2013, the SEC announced that it awarded another anonymous
whistleblower more than $150,000. 31 The whistleblower received the
maximum amount available under the law—30 percent of the monetary
sanctions to be collected in the action—for information pertaining to a
scheme to defraud investors. 32
As the history of the program demonstrates, within the first couple months
of the program’s third year, the SEC increased both the frequency and size
of its bounty awards, suggesting that the bounty program might be finding
its legs as whistleblower-initiated actions wend their way to resolution, and
more FCPA-related investigations might be on their way based on
whistleblower tips. The SEC certainly hopes so. In the words of Mary Jo
White, the SEC Chair, and Sean McKessy, head of the SEC’s Office of the
Whistleblower:
Our whistleblower program already has had a big impact
on our investigations by providing us with high quality,
meaningful tips. We hope an award like this encourages
29
Id.; see also supra, n. 26.
30
U.S. Sec. & Exch. Comm’n, Exchange Act Release No. 70554 (Sep. 30, 2013),
http://www.sec.gov/rules/other/2013/34-70554.pdf (Although the whistleblower award order
redacted nearly all identifying information, the whistleblower tip likely led to a successful
recovery of between $67 million to $140 million based on the award amount.)
31
U.S. Sec. & Exch. Comm’n, Exchange Act Release No. 70775 (Oct. 30, 2013),
http://www.sec.gov/rules/other/2013/34-70775.pdf.
32
Id. (according to the SEC, “[t]his is the sixth whistleblower [in four cases] to be awarded
through the SEC’s whistleblower program since it began two years ago.”)The Globalization of Anti-Corruption Enforcement
more individuals with information to come forward. 33
This is continued momentum and success for the SEC’s
whistleblower program that is bringing our investigators
valuable and timely information … 34
The SEC officials’ comments suggest that the agency does not view the $14
million award as the high-water mark nor does it believe that the program’s
momentum should be slowed in coming months or years. More likely, the
lack of frequency and size in early bounty awards might simply be due to
the logistical lag associated with receipt, investigation, and enforcement of
bounty-qualified tips, a process that regularly takes years rather than
months. Many of the original whistleblower tips might now be working
their way through the enforcement processes. The political commitment to
the program remains strong, and companies may be faced with an increase
in enforcement efforts against them as a result of whistleblower tips.
Foreign Whistleblowers Are Not Protected by Dodd-Frank’s Anti-Retaliation Provisions
The whistleblower program’s momentum, however, has suffered a recent
blow: a court opinion issued within weeks of the recent bounty awards
might decrease the willingness of certain foreign-based whistleblowers to
come forward with information. In October 2013, a District Court in the
Southern District of New York held that Dodd-Frank’s anti-retaliation
provisions do not apply extraterritorially to protect foreign
whistleblowers. 35 In that case, the former Division Compliance Officer,
Meng-Lin Liu, of Siemens China Ltd. brought an action against Siemens,
A.G., a German corporation, for retaliating against him after Mr. Liu
alleged that Siemens China violated the FCPA. Enforcement officials
alleged that Siemens inflated bids to sell medical equipment to public
hospitals in North Korea and China to share a portion of the total price
with public officials with influence over the hospitals. 36
33
See Press Release, U.S. Sec. and Exch. Comm’n, SEC Awards More Than $14 Million to
Whistleblower, No. 2013-209 (Oct. 1, 2013), http://www.sec.gov/News/PressRelease/
Detail/PressRelease/1370539854258.
34
See Press Release, U.S. Sec. and Exch. Comm’n, SEC Rewards Whistleblower With
$150,000 Payout, No. 2013-231 (Oct. 30, 2013), http://www.sec.gov/News/PressRelease/
Detail/PressRelease/1370540158194.
35
See Liu v. Siemens A.G., 13 CIV. 317 WHP, 2013 WL 5692504 (S.D.N.Y. Oct. 21,
2013).
36
Id. at *2 (citing 15 U.S.C. § 78u–6(h)(1)(a).)By Robb Adkins and Benjamin Kimberley
The court—citing a similar case decided recently by the Southern District
of Texas—dismissed Mr. Liu’s complaint on the basis that “[t]here is
simply no indication that Congress intended the anti-retaliation provision
to apply extraterritorially.” 37 Both courts concluded that the SOX and
Dodd-Frank anti-retaliation provisions are silent regarding its
extraterritorial application, thereby creating “a strong presumption against
extraterritoriality.” 38 In addition, the court emphasized that “[t]he FCPA
itself does not require or protect any disclosures,” thereby leaving a
vacuum for foreign whistleblowers. 39
In rendering their holdings, both the Southern District of New York and
Southern District of Texas focused on the factual connections between the
case and the United States. 40 In Siemens, the only connection between the
case and the United States—which was brought by a Taiwanese resident
against a German company over alleged corruption in China and North
Korea—was the fact that Siemens’ ADRs were traded on a US exchange. 41
In Asadi, although the plaintiff was a dual US and Iraqi citizen terminated in
the US “as an at-will employee, as allowed under U.S. law,” the majority of
events giving rise to the lawsuit occurred in a foreign country. 42 The courts
acknowledged that “it is a rare case of prohibited extraterritorial application
that lacks all contact with the territory of the United States,” but found that
the presumption against extraterritorial application overcame some
domestic activity. 43
37
Id. at *4; see also Asadi v. G.E. Energy (USA), LLC, CIV.A. 4:12-345, 2012 WL
2522599 (S.D. Tex. June 28, 2013), aff’ed sub nom. 720 F.3d 620 (5th Cir. 2012)
(dismissing complaint alleging retaliation against foreign employee in violation of Dodd-
Frank anti-retaliation provision); see also Villanueva v. Core Laboratories NV, 2011 WL
6981989, *9 ARB No. 09-108, ALJ No. 2009-SOX-6 (ARB Dec. 22, 2011 (en banc)
(construing 18 U.S.C. § 1514A) (holding that a SOX’s whistleblower provision does not
apply overseas when addressing a whistleblower complaint filed by a foreign citizen who
worked in Colombia for a Colombian company)
38
Siemens, 2013 WL 5692504, at *3 (citing Asadi, 2012 WL 2522599, at *4). The court,
in Siemens, also noted that language found elsewhere in the statute, specifically Section
929P(b), allowed the SEC to bring enforcement actions for some conduct or transactions
outside the US, which would be rendered superfluous if the rest of the law applied
outside the U.S. Id. at *3.
39
Id.
40
Id. at *4; Asadi, 2012 WL 2522599, at *5.
41
Siemens, 2013 WL 5692504, at *3.
42
Asadi, 2012 WL 2522599, at *5.
43
Siemens, 2013 WL 5692504, at *4; Asadi, 2012 WL 2522599, at *5.The Globalization of Anti-Corruption Enforcement
Neither court stated that their rulings denied foreign whistleblowers all
advantages afforded domestic whistleblowers. The Southern District of
New York specifically stated that:
[t]he issue is not whether persons located abroad can be
‘whistleblowers’ and thus eligible for whistleblower awards,
but whether the Anti-Retaliation Provision’s protections
extend to overseas whistleblowers. The fact that a person
outside the United States may be a ‘whistleblower’ under
Dodd-Frank does not compel the conclusion he is
protected by the Anti-Retaliation Provision. 44
The court failed to explain why the drafters of Dodd-Frank—or other
whistleblower bounty-related provisions—would pay an extraterritorial
bounty but not protect extraterritorial whistleblowing, outside the Act’s
explicit exclusion of officers and employees of a foreign government from
eligibility. 45 Additionally, the court did not clarify what amount of domestic
activity or foreign connections to the United States would be required to
trigger the application of the anti-retaliation provision. Nevertheless, the
Siemens and Asadi decisions present a daunting obstacle to foreign
employees trying to invoke Dodd-Frank’s anti-retaliation provision. 46
Recent Anti-Corruption Initiatives Outside the US
Brazil, Russia, and China Step Up Anti-Corruption Efforts, In Different Ways
There are few countries in the world that receive more anti-bribery
attention than those that make up the “BRIC” countries (Brazil, Russian,
44
Id. at *3 (citing 17 C.F.R. § 240.21F-2(b)(1)(iii) (anti-retaliation protections are not
tied to whether a person is eligible for a whistleblower award.)
45
Id. (citing 17 C.F.R. § 240.21F-8(c)(2).)
46
Although certain US-based anti-retaliation provisions do not apply extraterritorially,
foreign countries might have their own anti-retaliation rules and regulations that could
expose companies to liability for acting in a retaliatory manner. Similarly, most
companies have compliance programs that include internally reporting procedures that,
among other things, prohibit retaliation, and these should unequivocally be followed by
company officers and employees. Setting aside the legal issues associated with
retaliation, any retaliation—whether at home or abroad—might suggest to employees a
corporate culture that permits retaliation and encourages employees to circumvent the
internal reporting structures and report potential misconduct directly to the US
enforcement officials.By Robb Adkins and Benjamin Kimberley India, and China), and, deservedly so, due to their position as important emerging markets (e.g., in 2014, both Brazil and Russia will host world events, the World Cup and Olympics, respectively), the prevalence of partnerships between the government and industry in those countries, and the perceived trappings of corruption that continue to persist within their borders, as reflected in the Transparency International corruption index. Additionally, these countries are experiencing widespread public support for and political commitments to developing anti-bribery structures or stepping up enforcement where those structures already exist. Accordingly, it is worth spotlighting a few important recent legislative efforts in Russia and Brazil as well as increased enforcement efforts in China. 47 Brazil Enacts the “Clean Company Act” In Brazil, the government finally enacted its long-awaited “Clean Company Act” (CCA) on July 4, 2013. The CCA will go into effect on January 29, 2014, and will increase the corporate risk associated with operating a company in Brazil. Previously, Brazil limited liability for corrupt acts to individuals. Under the CCA, companies will now also be liable for corrupt acts committed on their behalf by directors, officers, employees, and agents. In addition to both the domestic and foreign actions of Brazilian companies, the CCA applies to foreign companies legally established in Brazil (e.g., subsidiaries, branches, or offices in Brazil) and non-Brazilian companies that have “representation in the Brazilian territory” (e.g., companies operating de facto in Brazil, even if only temporarily). The law prohibits promising, offering, or giving, directly or indirectly, an undue advantage to a public official, or third person related to him or her. It also prohibits other misconduct, such as bid rigging in public procurements, funding or subsidizing corrupt acts, using intermediaries to conceal or disguise the identity of the beneficiaries or otherwise concealing the misconduct, and tampering with government investigations. The CCA explicitly defines domestic and foreign public agents or officials to include entities controlled, directly or indirectly, by the government, such as state- owned or controlled companies and their employees. It also imposes 47 While corruption continues to dominate the headlines in India and public opposition to it remains steady, legislation and enforcement efforts seeking to curb that corruption have stalled the last couple of years.
The Globalization of Anti-Corruption Enforcement successor liability on an acquiring company in the event of mergers and incorporations, including liability for the acquisition’s past misconduct under certain circumstances. 48 Civil enforcement efforts are split between the public prosecutor (Ministerio Publico) and the highest executive, legislative, or judicial authority affected by the conduct. The CCA imposes civil and administrative—but not criminal—liability on companies as well as their officers, employees, and agents. According to the CCA, administrative fines cannot be less than the benefit obtained by the misconduct, and can equal up to 20 percent of the company’s gross revenue (excluding taxes) for the prior year or, if enforcement authorities cannot calculate the gross revenue, up to R$60 million (US$30 million). For administrative penalties, the law would apply a strict liability standard: companies would be held liable for their employees’ acts and the acts of a third party on the companies’ behalf without a showing of intent. Other penalties include disgorgement and/or forfeiture of illegally obtained assets, rights, or other benefits; partial or full suspension of corporate activities; compulsory dissolution; or debarment for up to five years, including prohibition from support (e.g., subsidies, loans, etc.) from public financial institutions. To enforce these judicial sanctions, except for seizure or forfeiture of assets, enforcement authorities must prove intent or fault on the part of the company. In fashioning the appropriate sanction, authorities may consider a number of factors, including misconduct-specific facts (its seriousness, the benefit sought or obtained, and the amount of damages and negative consequences caused by it), internal compliance efforts (the company’s internal compliance, audit, and reporting policies and procedures as well as the existence and effectiveness of internal codes of ethics and conduct), 49 the 48 The fines and damages that can result from successor liability might be limited to the value of the assets transferred; however, this limit can be ignored if the prosecuting authorities prove that the transaction was executed with fraudulent intent. 49 Although the CCA does not codify effective anti-compliance programs as an affirmative defense (as does the UK Bribery Act), it offers incentives in the form of reduced fines for companies’ compliance efforts. The CCA’s approach appears to be similar to the leniency or discretionary standard expressed by the US Department of Justice (e.g., in determining whether to charge a company or negotiating a plea) as well as the US Sentencing Guidelines for Organizations. The CCA allows enforcement authorities to enter into leniency agreements with companies, but only with those that report the violation, end the misconduct, cooperate with the government’s investigation (including identifying other implicated parties), and admit to having participated in the
By Robb Adkins and Benjamin Kimberley
financial position of the company, the level of cooperation provided by the
company (both before, in the context of self-reporting, and during the
government’s investigation), and the value of the other contracts between
the company and the public entity.
Russia Requires Internal Anti-Corruption Compliance Measures
On January 1, 2013, Russia implemented an amendment to its anti-
corruption law—Federal Anti-Corruption Law No. 273—following the
country’s signing of the OECD Anti-Bribery Convention, which will have
immediate and important implications for companies operating in Russia.
The amendment, Article 13.3, goes further than the FCPA, requiring
affirmative internal controls to combat corruption rather than viewing those
controls as considerations in determining whether to prosecute as well as
fashioning punishments. As of January 1, 2013, companies operating in
Russia are required to implement internal anti-corruption compliance
measures, including:
• Defining departments, structural units, and officers responsible for
the prevention of bribery and related offenses;
• Implementing protocols aimed at cooperating with law
enforcement authorities;
• Developing and implementing policies and procedures designed to
ensure compliance with Russian law and ethical business conduct;
• Adopting a corporate code of ethics and professional conduct for
all employees;
• Creating internal controls to identify, prevent, and resolve conflicts
of interest;
• Preventing the creation and use of false or altered documents,
including financial statements and records.
Furthermore, the law requires companies operating in Russia to conduct
due diligence and corruption risk assessments of its partners and third party
agents. While Russian law does not impose criminal liability upon
illegal activity. A company that fulfills these requirements may receive a reduction of up
to two-thirds of the total potential fines (except for forfeiture and restitution), protection
against the withholding of public subsidies and benefits, and confidentiality regarding the
specifics of the agreement and penalty.The Globalization of Anti-Corruption Enforcement companies, it does impose administrative liability for violations of its anti- corruption law committed on their behalf. Although Russian enforcement officials typically have not exercised their authority with any regularity, a company’s failure to comply with these legal requirements can expose it to administrative fines up to one hundred times the amount of any bribe offered or given on its behalf. The Russian amendments are legally unique because companies operating within Russia must now affirmatively enact effective anti-corruption compliance programs. Yet, as a practical matter, an effective internal compliance program is a necessity for all companies operating in industries and geographic areas susceptible to corruption. It can also provide substantial benefits to the company should international corruption issues arise. For instance, the UK Bribery Act considers an adequate internal compliance program an affirmative defense to anti-bribery violations under certain circumstances. Likewise, US enforcement officials consider a company’s compliance efforts in fashioning the appropriate sanction under the FCPA. China Steps Up Enforcement Efforts China’s current president, General Secretary Xi Jinping, recently emphasized the government’s heightened efforts to combat corruption in government at all levels, from the “tigers” (senior officials) to the “flies” (lower-level officials), stating that “[China] must have the resolve to fight every corrupt phenomenon, punish every corrupt official and constantly eliminate the soil which breeds corruption.” 50 The PRC has a number of anti-bribery provisions that PRC officials appear to be applying with increased frequency: the PRC Criminal Code and the PRC Anti-Unfair Competition Law. Both laws prohibit the offering or payment of bribes to, or solicitation of bribes by, government functionaries. As of May 1, 2011, the PRC Criminal Code also prohibits bribery of foreign government officials to gain an improper commercial advantage or benefit. Recent news reports suggest that Mr. Jinping’s statements are not just lip- service. In July 2013, Chinese authorities raided offices and detained people 50 Xi Jinping Fights Corruption Among “Tigers” and “Flies”, CHINA DIGITAL TIMES, Jan. 22, 2013, http://chinadigitaltimes.net/2013/01/xi-jinping-takes-anti-corruption-fight-to-tigers-and- flies/.
By Robb Adkins and Benjamin Kimberley working for GlaxoSmithKline China, leading to accusations against certain executives for offering and receiving bribes, both directly and indirectly (through travel agencies), including sponsoring events and travel for government officials, medical associations, foundations, hospitals, and physicians to bolster drug sales in China. The recent wave of enforcement action also includes allegedly corrupt Chinese officials, including the conviction of the former Chongqing Party Secretary, arrest of the former Ministry of Railways, and investigation into the former chairman of state- run PetroChina, China’s largest oil company. China has always been a complicated business environment for Western businesses and a focal point of FCPA enforcement. The recent Chinese enforcement efforts further emphasize the risks for companies operating in China, now with the added risk of multi-layered anti-corruption enforcement (from both a domestic and foreign source). Canada Amends CFPOA and Convicts Its First Offender Although Canada’s FCPA-equivalent, the Corruption of Foreign Public Officials Act (CFPOA), has been in place since 1999, Canadian authorities prosecuted only one case under that law prior to 2011. In a March 2011 report, the OECD criticized Canada’s lack of enforcement activity, stating that the “the future of [CFPOA] cases and enforcement … may be uncertain” and expressing “significant concerns” over Canada’s framework for implementing the OECD’s anti-bribery convention. 51 Since then, Canada enacted amendments to the CFPOA and increased its enforcement efforts. On June 19, 2013, Canada enacted Bill S-14, also known as the “Fighting Foreign Corruption Act,” which amends the CFPOA. Unlike the FCPA, the CFPOA was originally of limited extraterritorial application and did not contain any accounting provisions. Bill S-14 removed those impediments to enforcement by adding a books and records offense and expanding the jurisdictional standard to include violations committed outside Canada. Canadian courts now can exert jurisdiction over all persons or legal entities that have Canadian nationality, regardless of the location of the alleged bribery. Additionally, among other things, the bill increased the maximum 51 Phase 3 Report On Implementing The OECD Anti-Bribery Convention In Canada, (Mar. 18, 2011), http://www.oecd.org/daf/anti-bribery/anti-briberyconvention /Canadaphase3 reportEN.pdf.
The Globalization of Anti-Corruption Enforcement criminal penalty under the CFPOA from a five-year term of imprisonment to fourteen years and eliminated an exception permitting facilitation payments. Also, around the same time as the enactment of Bill S-14, Canada created the Royal Canadian Mounted Police National Division, a centralized body authorized to investigate violations of the CFPOA and other anti-corruption measures. Additionally, on August 15, 2013, the Ontario Superior Court of Justice convicted Nazir Karigar, an officer of the Canadian subsidiary of an American company, CryptoMetrics. Mr. Karigar was accused of violating the CFPOA by conspiring to bribe India’s Minister of Civil Aviation and certain Air India officials to obtain Air India contracts (a state-owned entity) on behalf of the Canadian subsidiary and of offering (but not paying) bribes. The trial conviction was the first under the CFPOA. The prosecution of Mr. Karigar also represents another example of the increased cooperation between international authorities. The Canadian authorities began their investigation after the US DOJ forwarded a tip— submitted by Mr. Karigar himself to retaliate against the company—to Canadian authorities. As with the cooperation between US and French authorities in the Total, S.A. case, the cross-border sharing of information suggests that future anti-corruption efforts will be a coordinated effort among countries. Additionally, the United States’ deferral to Canadian enforcement officials to pursue an action against Mr. Karigar—who availed himself of US jurisdiction—while deciding not to pursue actions against Mr. Karigar or the US parent company of his Canadian subsidiary, represents an interesting course of action. It might suggest that US enforcement officials frown upon multi-layered anti-bribery liability on the basis of foreign-looking statutes (e.g., liability for both CFPOA and FCPA, as in Mr. Karigar’s case) but not on multi-layered liability on the basis of foreign-looking and domestic- focused statutes (e.g., liability for both the FCPA and the French Criminal Code, as in Total, S.A.’s case). The UK’s Serious Fraud Office Brings Its First Significant UK Bribery Act Prosecution Around the same time, Canadian enforcement officials secured the conviction of Mr. Karigar, and Britain’s enforcement agency, the Serious
By Robb Adkins and Benjamin Kimberley Fraud Office (SFO), charged three British nationals, including the chief executive officer and financial controller of an energy investment company, Sustainable Agro Energy plc, with “making and accepting a financial advantage contrary to Section 1(1) and 2(1) of the Bribery Act 2010.” 52 The charges are part of a larger set of allegations against executives at Sustainable Agro for conspiracy to commit fraud and furnish false statements in connection with an investigation into the promotion and selling of “bio fuel” investment products to UK investors. The action is the first prosecution for violations of the UK Bribery Act brought by the SFO, the primary enforcer of the act. While other agencies have brought smaller Bribery Act cases over the past few years—against a cab driver, a junior Ministry of Justice court clerk, and a student at Bath University—none of them involved the SFO or suggested a focus on anti-bribery enforcement by British officials. Yet, many practitioners forget that US enforcement officials failed to bring any actions under the FCPA for five years following its enactment in 1977 and the statute lay relatively dormant for much of the next thirty years. The UK Bribery Act also has no retroactive effect, so the SFO may only prosecute individuals engaged in bribery since the Act’s July 1, 2011 enactment. Given the complex nature of international investigations, it is relatively unsurprising that prosecutions are lagging behind the law’s enactment. The director of the UK SFO noted at the 31st Cambridge International symposium on Economic Crime that it has eight active UK Bribery Act investigations underway and that the office remains committed to pursuing corporate bodies suspected of committing Bribery Act offences. While the landmark law has yet to cause the sky to fall as some predicted, the SFO’s first prosecution of the UK Bribery Act—coupled with the fact that several active investigations are underway—might signal the awakening of a sleeping giant. 53 52 Press Release, Serious Fraud Office, Four charged in ‘bio fuel’ investigation (Aug. 14, 2013),http://www.sfo.gov.uk/press-room/latest-press-releases/press-releases-2013/four- charged-in-'bio-fuel'-investigation.aspx. 53 The arrival of Deferred Prosecution Agreements in 2014 will further add to the options available to the SFO in pursuing wrongdoing under the U.K. Bribery Act. They have been particularly effective for the US prosecution agencies and all indications are that the SFO—while keen to maintain that it will prosecute where appropriate will consider DPAs a useful weapon in their arsenal.
The Globalization of Anti-Corruption Enforcement Conclusion The danger of FCPA enforcement actions, with large fines totaling in the billions of dollars, continues to dominate compliance discussions amongst multinational companies. Increasingly such discussions must now include the dangers posed by new anti-corruption enforcement in a multitude of countries, whistleblower bounties, and cross-border cooperation. The best defense to these dangers is a robust compliance program able to adapt to changes in international enforcement efforts and remain informed about the ever-changing anti-corruption landscape. The future of US FCPA enforcement might be fueled by tips received under the Dodd-Frank Whistleblower Program, which seems to be finding its legs as whistleblower-initiated actions wend their way to resolution. The increase in the frequency and size of recent bounty payments represent new incentives for whistleblowers to report potential misconduct to the government. Yet, new disincentives also exist for a certain subset of whistleblowers—those reporting tips from abroad. According to recent US judicial decisions, foreign whistleblowers are not protected by Dodd- Frank’s anti-retaliation protections even though they are potentially eligible for Dodd-Frank bounty awards. In the coming years, additional challenges might be mounted against the application of Dodd-Frank to foreign whistleblowers (e.g., bounty awards), which may further erode the incentives for foreign whistleblowers to report misconduct. Anti-corruption enforcement is also increasingly becoming a global priority. A number of countries that represent important emerging markets targeted by Western companies—including Brazil, Russia, and China—recently took measures to combat corruption. Although the future of enforcement in these countries will depend, in large part, upon the continued public support for and political commitment to the new anti-bribery structures, companies will need to consider the new compliance risk associated with operating in these markets. Moreover, the United States is no longer the sole enforcer of international anti-bribery legislation. Both Canada and the United Kingdom have entered the fray in a meaningful way, suggesting that additional enforcement efforts are on the way from these countries as well as others that only recently developed their own FCPA-like legislation.
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