COMPLIANCE CULTURE / FCPA Vs. US ANTI-BRIBERY FINES

12 September 2018, 

Review by Bachir El Nakib (CAMS), Senior Consultant, Compliance Alert (LLC).

While corruption is one of the biggest threat to thw well being of a society degrading the quality of the services and ruins the life of common man, Bribery is yet act of giving or receiving something of value in exchange of of some kind of influence or action in returnthat the receipient would otherwise not alter. Bribe is the gift bestowed to influence the receipient's conduct which may take the form of secret commission, a profit made by an agent, according to BBC news U.K. "Bribery is around the world is estimated at about $1 trillion.

A grey area may exist when payments to smooth transactions are made. United States law is particularily strict in limiting the ability of business to pay for the awarding of contracts by foreign governments, however the Foreign Corrupt Practice Act contains an exception for 'grease payments', very basically, this allows payments to officials in order to obtain the performance of ministiriel acts which they are legally required to do, but may delay in the absence of such payments.

In some countries, this practice is the norm, often resulting from a developing nation not having the tax structure to pay civil servants an adequate salary. Nevertheless, most economists regard bribery as a bad thing becuase it encourages rent seeking behaviour. A state where bribery has become a way of life is a kleptocracy.

Recent evidence suggests that the act of bribery can have political consequences, with citizens being asked for bribes becoming less likely to identify with their country, region and/pr tribal unit. 

The enforcement of the U.S. Foreign Corrupt Practices Act (FCPA) this year has featured a diverse mix of corrupt behavior, the first joint U.S.-French bribery resolution, and rulings by federal courts of who can be charged with violations and who can be protected as a whistleblower.

Although bribery enforcement by the Department of Justice (DOJ) and Securities and Exchange Commission (SEC) is behind pace relative to previous years since the FCPA's enactment in 1977, the authorities are not putting the brakes. They have shown an intent to hold companies accountable even in the absence of specific corrupt payments, and to honour their pledges to reward companies that cooperate in investigations or self-report violations.

No allegations of payments

Firms faced enforcement actions under provisions of the FCPA that required them to maintain anti-bribery programs, even though the authorities did not seek to prosecute actual bribes. 

-- In March 2018, the SEC settled an FCPA case with an Israeli-based holding company called Elbit Imaging over alleged violations of the FCPA's books and records and internal controls provisions. 

The agency issued a cease-and-desist order order that said Elbit and an indirect subsidiary paid $27 million to two consultants and a sales agent in conjunction with real estate projects in Romania and the United States, with the SEC focusing the lack of work performed by the consultants. 

The regulator noted that Elbit had paid inadequate due diligence to the consultants' and sales agents' qualifications at the hiring stage and that they were paid exorbitant amounts for doing little work, which the commission said indicated corruption.

The firm "lacked evidence that the consultants and the sales agent had actually provided the contracted for services," the SEC said. It said there was no evidence of any meetings or materials that would support consulting work.

The SEC never alleged that funds were ever turned over to government officials; instead, the lack of due diligence and failure to flag the $27 million as suspicious -- as the compensation was seemingly made without supporting documentation of work performed -- was enough to signify violations of accounting and internal-controls requirements of the FCPA. 

The FCPA's two major provisions address bribery itself and accounting. The first prohibits payments of anything of value to a foreign government official to obtain or retain business. The accounting, or books and records, provision requires firms to maintain accurate books and records and to have internal controls that detect falsifications.

The SEC charged Elbit in a case-and-desist order in which Elbit agreed to settle the charges without admitting or denying the allegations.

Elbit had disclosed its potential violations to the SEC and Romanian authorities and cooperated in the investigation, the SEC said. 

The commission said, in determining the civil money penalty of $500,000, that the agency had considered Elbit's prompt remedial actions, its self-reporting and its cooperation. This included conducting a thorough internal investigation, voluntarily providing detailed reports to SEC staff, fully responding to the staff’s requests for additional information, and providing translations of certain documents.

-- Also in March 2018, a Canadian mining company, Kinross Goldsettled with the SEC over alleged violations of the FCPA's accounting provisions. According to the SEC's order, the company conducted due diligence on the owner of two mining operations in west Africa that Kinross had just acquired and found that the operations lacked anti-corruption compliance programs and related controls.

Nevertheless, the company failed to implement any such anti-corruption compliance programs or controls for almost three years after the acquisition, the SEC said. It continued to allow low-level personnel to contract with vendors without the involvement of the procurement or compliance teams, using petty cash as the form of payment.

Kinross made payments to "vendors and consultants, often in connection with government interactions, without reasonable assurances that the transactions were consistent with their stated purpose or the prohibition on improper payments to government officials," the SEC said. 

According to a guide to the FCPA issued by the SEC and the Justice Department, any company acquiring a new business must mitigate potential liability by performing post-acquisition due diligence and addressing any weaknesses it finds in anti-corruption compliance programs and controls.

Kinross failed to do that, the SEC said. The SEC's cease-and-desist order states that Kinross Gold violated the books and records and internal accounting controls provisions of Sections 13(b)(2)(A) and (B) of the Exchange Act. 

"Relationship hires"

Following a line of so called "princeling" (referes to China The Princelings (simplified Chinese: 太子党; traditional Chinese: 太子黨), also translated as the Party's Crown Princes, are the descendants of prominent and influential senior communist officials in the People's Republic of China) cases over hiring-related corruption (see JPMorgan Chase & Co.Qualcomm, Inc., and Bank of New York Mellon Corp.), Credit Suisse Group AG settledcharges brought by the DOJ and SEC involving allegations that the bank hired people at the request of Chinese government officials in order to obtain business from the officials. Those hired allegedly lacked the technical skills or overall qualifications that the bank's other employees holding those same positions possessed.

The bank received a limited, 15-percent discount to its penalty because its cooperation was deemed "reactive and not proactive" and Credit Suisse "failed to sufficiently discipline employees who were involved in the misconduct." The maximum discount is 25 percent, under the FCPA Corporate Enforcement Policy for non-voluntary disclosures. 

U.S.-France joint resolution

Legg Mason Inc., an asset manager based in Maryland, in June paid $64 million to resolve FCPA violations caused by its partner in Libyan investments, the Paris-based Société Générale S.A.

The Justice Department said that between 2004 and 2010, a Legg Mason subsidiary partnered with Société Générale, or SocGen, to solicit business from state-owned financial institutions in Libya by paying $90 million in bribes through a Libyan broker in connection with 14 investments made by the Libyan institutions. 

SocGen settled FCPA offenses with the DOJ the same day, agreeing to pay a criminal penalty of $32.6 million and disgorgement of $31.6 million, with half of the disgorgement penalties being paid to law enforcement authorities in France. 

As part of a non-prosecution agreement, Legg Mason agreed to continue to cooperate with the DOJ in any continuing investigations and prosecutions relating to the conduct and to enhance its compliance program.

The DOJ said Legg Mason "did not voluntarily and timely disclose the conduct at issue, but fully cooperated in the investigation and fully remediated." The Justice Department also said Legg Mason’s misconduct involved only mid-to-lower level employees of its subsidiary and "was not pervasive" throughout Legg Mason or the subsidiary. It said SocGen maintained the relationship with the Libyan broker and was responsible for originating and leading the scheme.

The DOJ also said the illicit profits earned by Legg Mason and its subsidiary were less than one-tenth of the profits earned by SocGen, and that neither Legg Mason nor its subsidiary had a history of similar misconduct.

SocGen's penalties paid to the DOJ in this case included fines for violations arising from its manipulation of the LIBOR interest rate benchmark, as well as the multi-year scheme to pay bribes to Libyan officials. The bank also agreed with the Commodity Futures Trading Commission to pay a fine for rigging LIBOR.

The resolution is the first coordinated between U.S. and French authorities in a foreign bribery case, DOJ said.

Judicial interpretation

The U.S. Second Circuit Court of Appeals last month ruled that a non-resident foreign national cannot be charged with conspiracy to violate the FCPA unless the government can show that this person acted as an agent of a "domestic concern" or committed such acts in furtherance of a conspiracy while physically present in the United States.

The case upheld a lower court ruling that had rejected an expansive interpretation by the DOJ of its reach. The charges stem from an earlier FCPA case from December 2014 in which French engineering firm Alstom S.A. pleaded guilty to violating the FCPA for bribing officials in multiple countries.

The case involved acts by a British national and former Alstom UK executive based in Paris named Lawrence Hoskins. Hoskins allegedly approved payments to "consultants" who bribed Indonesian officials to win a $118 million power station project bid with Indonesia's state electricity company.

The question before the Supreme Court was whether Hoskins could be charged under the FCPA despite not being a U.S. citizen, never being a U.S. resident and working for a foreign firm. There was no proof of him committing acts in furtherance of the bribery scheme while in the United States. 

The court said "no."

The court's decision to restrict the territorial reach of anti-bribery prosecutions may force changes in DOJ and the SEC enforcement strategies. But it does not give businesses a pass. The appeals court said in its decision that the Justice Department could proceed with a theory of liability premised on Hoskins acting as an agent of Alstom's U.S. subsidiary, since "agents of domestic concerns" are within the categories of persons covered by the FCPA.

The Justice Department and SEC are likely to articulate future such cases to suggest foreign individuals and entities have an agency relationship with U.S. issuers or domestic concerns. Or they will seek to show such individuals committed at least some acts in furtherance of the alleged misconduct while in the United States.

The decision is unlikely to slow what has been a growing cooperation among international regulators in fighting corruption. Such cooperation means that even if U.S. authorities cannot pursue some foreign bribery actions, foreign authorities may step in under the authority of their own anti-corruption laws.

Enforcement of the Foreign Corrupt Practices Act (FCPA) continues to be a high priority area for the SEC. In 2010, the SEC's Enforcement Division created a specialized unit to further enhance its enforcement of the FCPA, which prohibits companies issuing stock in the U.S. from bribing foreign officials for government contracts and other business. The following is a list of the SEC's FCPA enforcement actions listed by recent calendar year:

2018

United Technologies – The Connecticut-based company agreed to pay nearly $14 million to settle charges that it made illicit payments to facilitate sales of elevators and aircraft engines. (9/12/18)

Joohyun Bahn – A New Jersey-based real estate broker agreed to settle charges that he attempted to bribe a foreign official while brokering the sale of a high-rise commercial building on behalf of a foreign private issuer. (9/6/18)

Credit Suisse Group AG – Agreed to pay more than $30 million to the SEC and a $47 million criminal penalty to resolve charges that the firm obtained investment banking business in the Asia-Pacific region by corruptly influencing foreign officials in violation of the FCPA. (7/5/18)

Panasonic Corp. – The Japan-based company agreed to pay more than $143 million to resolve FCPA charges involving a lucrative consulting position it offered to a government official at a state-owned airline to induce the official to help its U.S. subsidiary in obtaining and retaining business from the airline. (4/30/18)

The Dun & Bradstreet Corp. – The company agreed to pay more than $9 million in disgorgement, interest and a civil penalty to resolve FCPA violations stemming from improper payments made by two Chinese subsidiaries. (4/23/18)

Kinross Gold – The Canada-based gold mining company agreed to pay a $950,000 penalty to resolve FCPA violations arising from its repeated failure to implement adequate accounting controls of two subsidiaries in Africa. (3/26/18)

Elbit Imaging – The Israel-based company agreed to pay a $500,000 penalty to resolve FCPA violations stemming from payments to consultants for purported services related to a real estate development project in Romania. (3/9/18)

2017

Telia – The Sweden-based telecommunications provider agreed to pay $965 million in a global settlement to resolve violations of the FCPA to win business in Uzbekistan. (9/21/17)

Halliburton – The company agreed to pay $29.2 million and a former vice president agreed to pay a $75,000 penalty to settle charges related to payments made to a local company in Angola in the course of winning lucrative oilfield services contracts. (7/27/17)

Michael L. Cohen and Vanja Baros – The former Och-Ziff executives were charged with being the driving forces behind a far-reaching bribery scheme that paid tens of millions of dollars in bribes to high-level government officials in Africa. (1/26/17)  NOTE: Och-Ziff and other executives settled charges in 2016.

Orthofix International – The Texas-based medical device company agreed to pay more than $6 million to settle charges that its subsidiary in Brazil used high discounts and improper payments to induce doctors under government employment to use Orthofix products. (1/18/17)

SQM - Chilean-based chemical and mining company Sociedad Quimica y Minera de Chile S.A. agreed to pay more than $30 million to resolve parallel civil and criminal cases finding that it violated the FCPA by making improper payments to Chilean political figures and others. (1/13/17)

Biomet - The Warsaw, Ind.-based medical device manufacturer agreed to pay more than $30 million to resolve SEC and Justice Department investigations into the company's anti-bribery violations in Brazil and Mexico. (1/12/17)

Cadbury Limited/Mondelez International - The global snacking business agreed to pay a $13 million penalty for FCPA violations occurring after Mondelez (then Kraft Foods Inc.) acquired Cadbury and its subsidiaries, including one in India that proceeded to make illicit payments to obtain government licenses and approvals for a chocolate factory in Baddi. (1/6/17)

2016

General Cable Corporation - The Kentucky-based wire and cable manufacturer agreed to pay more than $75 million to resolve SEC and Justice Department cases related to improper payments to win business in Angola, Bangladesh, China, Egypt, Indonesia, and Thailand. (12/29/16)

Teva Pharmaceutical - The global generic drug manufacturer agreed to pay $519 million to settle parallel civil and criminal charges that it paid bribes to foreign government officials in Russia, Ukraine, and Mexico. (12/22/16)

Braskem S.A. - The Brazilian-based petrochemical manufacturer agreed to pay $957 million in a global settlement for concealing millions of dollars in illicit bribes paid to Brazilian government officials to win business. (12/21/16)

JPMorgan - The firm agreed to pay $264 million to the SEC, Justice Department, and Federal Reserve to settle charges that it corruptly influenced government officials and won business in the Asia-Pacific region by giving jobs and internships to their relatives and friends. (11/17/16)

Embraer - The Brazilian-based aircraft manufacturer agreed to pay $205 million to settle charges that it violated the FCPA to win business in the Dominican Republic, Saudi Arabia, Mozambique, and India. (10/24/16)

GlaxoSmithKline – The UK-based pharmaceutical company agreed to pay a $20 million penalty to settle charges that it violated the FCPA when its China-based subsidiaries engaged in pay-to-prescribe schemes to increase sales. (9/30/16)

Och-Ziff - The hedge fund and two executives settled charges related to the use of intermediaries, agents, and business partners to pay bribes to high-level government officials in Africa. Och-Ziff agreed to pay $412 million in civil and criminal matters, and CEO Daniel Och agreed to pay $2.2 million to settle charges against him. (9/29/16)

Anheuser-Busch InBev - The Belgium-based global brewery agreed to pay $6 million to settle charges that it violated the FCPA by using third-party sales promoters to make improper payments to government officials in India and chilled a whistleblower who reported the misconduct. (9/28/16)

Nu Skin Enterprises - The Provo, Utah-based skin care products company agreed to pay more than $765,000 for an improper payment made to a charity related to a high-ranking member of China's Communist Party in order to influence the outcome of a pending provincial regulatory investigation in China. (9/20/16)

Jun Ping Zhang - The former chairman/CEO of Harris Corporation's subsidiary in China agreed to pay a $46,000 penalty for violating FCPA by facilitating a bribery scheme that provided illegal gifts to Chinese government officials in order to obtain and retain business for the company. (9/13/16)

AstraZeneca - The U.K.-based biopharmaceutical company agreed to pay more than $5 million to settle FCPA violations resulting from improper payments made by subsidiaries in China and Russia to foreign officials. (8/30/16)

Key Energy Services - The Houston-based oil field services company agreed to pay $5 million to settle charges that it violated the FCPA as a result of payments made by its Mexican subsidiary to an official responsible for negotiating contracts at Mexico's state-owned oil company. (8/11/16)

LAN Airlines - The South American-based airline agreed to pay more than $22 million to settle parallel civil and criminal cases related to improper payments authorized during a dispute between the company and union employees in Argentina. (7/25/16)

Johnson Controls - The Wisconsin-based global provider of HVAC systems agreed to pay more than $14 million to settle charges that its Chinese subsidiary used sham vendors to make improper payments to employees of Chinese government-owned shipyards and other officials to win business. (7/11/16)

Analogic Corp. and Lars Frost - The Massachusetts-based medical device manufacturer agreed to pay nearly $15 million to settle parallel SEC and DOJ actions after its Danish subsidiary acted as a conduit for distributors to funnel money to third parties in hundreds of highly suspicious transactions. Frost, the subsidiary's CFO at the time, agreed to settle SEC charges and pay a penalty. (6/21/16)

Akamai Technologies - SEC announced a non-prosecution agreement (NPA) with the Massachusetts-based internet services provider in which the company will disgorge more than $650,000 in profits connected to bribes paid to Chinese officials by a foreign subsidiary. Akamai promptly self-reported the misconduct and cooperated extensively with the SEC's investigation. (6/7/16)

Nortek - SEC announced a non-prosecution agreement (NPA) with the Rhode Island-based residential and commercial building products manufacturer in which the company will disgorge nearly $300,000 in profits connected to bribes paid to Chinese officials by a foreign subsidiary. Nortek promptly self-reported the misconduct and cooperated extensively with the SEC's investigation. (6/7/16)

Las Vegas Sands - The casino and resort company agreed to pay $9 million to settle charges that it failed to properly authorize or document millions of dollars in payments to a consultant facilitating business activities in China and Macao. (4/7/16)

Novartis AG - The Swiss-based pharmaceutical company agreed to pay $25 million to settle charges that it violated the FCPA when its China-based subsidiaries engaged in pay-to-prescribe schemes to increase sales. (3/23/16)

Nordion Inc. and employee - The Canadian-based health science company and a former employee agreed to collectively pay more than $500,000 to settle FCPA charges. Mikhail Gourevitch, an engineer, arranged bribes to Russian officials for drug approvals and received kickbacks in return. Nordion lacked sufficient internal controls to detect and prevent the scheme. (3/3/16)

Qualcomm - The San Diego-based company agreed to pay $7.5 million to settle charges that it violated the FCPA when it hired relatives of Chinese officials deciding whether to select company's products. (3/1/16)

VimpelCom - The Dutch-based telecommunications provider agreed to a $795 million global settlement to resolve its violations of the FCPA to win business in Uzbekistan. (2/18/16)

PTC - The Massachusetts-based tech company and its Chinese subsidiaries agreed to pay more than $28 million to settle FCPA cases involving bribery of Chinese government officials to win business. (2/16/16)

SciClone Pharmaceuticals - The California-based pharmaceutical firm agreed to pay $12 million to settle SEC charges that it violated the FCPA when international subsidiaries increased sales by making improper payments to health care professionals employed at state health institutions in China. (2/4/16)

Ignacio Cueto Plaza - The airline executive agreed to pay a $75,000 penalty to settle SEC charges that he violated the FCPA when he authorized improper payments to a third-party consultant who he knew could route portions of the money to union officials in the midst of a labor dispute. (2/4/16)

 

SAP SE - The software manufacturer agreed to give up $3.7 million in sales profits to settle SEC charges that it violated the FCPA when its deficient internal controls enabled an executive to pay bribes to procure business in Panama. (2/1/16)

Compliance tips for firms

Make a concerted effort to have and advertise a culture of compliance and ethics that specifically includes the FCPA

A good compliance program must include clear policies pertaining to how to measure the risk involved in doing business with foreign entities and officials. 

The risk must be clearly measured (and reassessed periodically) and resources and controls must be dedicated to the areas creating the greatest sources of risk. 

Clear documentation as to how strict compliance policies were followed and how risk was minimized (if not avoided) must be made available, and all individuals in charge of decision-making in this area should note how they personally handled each case.

When it comes to interpreting the FCPA, remember to take a broad view

As noted above, the FCPA is construed broadly when it comes to who is considered a foreign official, and any improper payment, no matter how small, could jeopardize the reputation of the company, and of that individual.

Although payments and gifts can be made under the FCPA to such officials, the risk of having it be perceived as soliciting a favor or to curry preferential treatment at a later date is always present, and often not worth it.

Employees at all levels must be periodically reminded to ask for help or to report wrongdoing

All employees should be familiar with how to obtain guidance from the company on how to comply with the FCPA, although such guidance should not be a substitute for training (see below).

Employees and third-party contractors should have access to anonymous hotlines enabling them to get guidance and report suspected wrongdoing in strict confidentiality.

Top executives, all supervisors and their direct reports must be trained on the FCPA and how to identify possible violations

All levels of the organization (including board directors) should be trained regularly to ensure they understand the consequences of failing to comply with the FCPA and the company's anti-bribery compliance policies.

And, when required, disciplinary actions against employees that engage in misconduct -- regardless of their title or dollar value to the company -- must be taken.

Meaningful due diligence must be a critical component of every decision regarding interactions with foreign entitles and their personnel and with using a third-party agent to conduct such business.

All entities employed to help conduct business for the company should be trained, monitored and disciplined for misbehavior when it comes to FCPA compliance. 

Red Flags of wrongdoing should be followed up immediately, regardless of the value of the deal at hand or the timetable under which the business is operating. Ignoring red flags not only does not make them disappear, it also ensures a regulatory or law enforcement agency will deem the FCPA compliance program insufficient, prompting a thorough examination.

Although no single step outlined above will insulate a business or individual from an enforcement action, when taken together, and supported by adequate compliance resources, these practices may help prevent FCPA violations.

Source:

1) Julie DiMauro, Regulatory Business Intelligence - Thomson Reuters

2) The SEC https://www.sec.gov/spotlight/fcpa/fcpa-cases.shtml

3) BBC News: BBC News- Business - African corruption 'on the wane'"bbc.co.ukArchived from the original on 2009-04-22.

 

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