Printable Version

Rights/Reprints

COMPANIES

• Ports Engineering Consultants Corporation

On January 18, 2022 twenty-two business executives were arrested and over 100 FBI agents conducted related searches. These actions were based on sealed federal indictments handed down by a grand jury several weeks earlier, which in turn stemmed from a two-and-a-half year undercover operation. The indictments claimed that the defendants believed that they were involved in a scheme to acquire a US$15 million defense contract to outfit the presidential guard of an unnamed country. They allegedly agreed to pay a 20 percent bribe to a sales agent, supposedly representing the defense minister but really an undercover FBI officer. This was the first large-scale use of undercover law enforcement techniques to investigate Foreign Corrupt Practices Act (FCPA) violations.

With those indictments, federal law enforcement officials announced to the world that the FCPA landscape has changed. Although perhaps the most dramatic shift, the use of undercover operatives is only one of several new FCPA enforcement techniques. The legal and business communities now know that the Department of Justice (DOJ) is making good on its promise to crack down on companies which seek to bribe foreign officials in the course of business.

While the FCPA’s record-keeping and internal control provisions apply only to “issuers” – companies with securities traded on a United States stock exchange or otherwise required to file periodic reports with the Securities and Exchange Commission (SEC) – its anti-bribery provisions apply equally to “domestic concerns.” These include “any corporation, partnership, association, joint-stock company, business trust, unincorporated organization, or sole proprietorship” with a principal place of business in the United States or organized under its law. Thus, these provisions apply to public and private companies. Indeed, several recent FCPA enforcement actions targeted foreign activities by private American firms.

Enforcement Trends

The FCPA has existed since 1977, but was initially rarely used. Since 2005, though, several enforcement trends have appeared. First, the DOJ and SEC have increased the number of FCPA prosecutors and investigators and brought more cases. Second, the investigations have grown more aggressive, targeting individuals as well as companies. Third, companies have begun to disclose potential violations to law enforcement officials before an investigation has begun. Finally, and more recently, officials are looking more at small and mid-sized companies.

More cases: Since 2005, the DOJ has brought over 60 FCPA cases – more than the total between 1977 and 2005. The Fraud Section of DOJ’s Criminal Division has developed a group of experienced prosecutors who specialize in this work. Separately, in 2007 the FBI created in its Washington Field Office a squad of dedicated FCPA agents which has since grown in size and experience. The SEC has also created a specialized FCPA unit to focus on new and proactive approaches to identifying violations. At the end of 2009, the DOJ and SEC combined were pursuing more than 120 FCPA investigations.

The penalties can sometimes be dramatic, such as the US$1.6 billion in fines, penalties, and profit disgorgement that Siemens paid in 2008 for FCPA and bribery violations.

Federal officials are not only bringing cases for FCPA violations; they are also charging firms with lying to federal officials about compliance programs. For example, in early 2010 BAE Systems entered separate settlements with the DOJ and Britain’s Serious Fraud Office to settle long-standing investigations of improper payments. The criminal information filed in the American case claimed, in particular, that the company had made certain false and incomplete statements to the United States government and failed to honor its undertakings to scrutinize payments to consultants, consistent with the FCPA. On March 1, 2010, a federal judge approved the settlement in which BAE plead guilty to conspiracy and false statements about its FCPA compliance plan. The company agreed to pay US $400 million to the U.S. and US $47 million to British authorities.

More aggression: As the example at the beginning of this article shows, law enforcement is not simply waiting for a whistleblower or competitor to inform on a company’s overseas activities. The DOJ is employing tactics usually reserved for drug or organized crime investigations. After this success, prosecutors and agents will likely maintain this proactive stance, and undercover operations, wiretaps, and other covert law enforcement tools will be brought into more investigations.

Officials are also increasingly targeting individuals. In 2008, Albert “Jack” Stanley, a former boss of KBR construction, then a Halliburton subsidiary, pleaded guilty to bribing a foreign official in violation of the FCPA. He was sentenced to seven years in prison. Acting Assistant Attorney General Matthew Friedrich used the case to emphasize that “corporate executives who bribe foreign government officials in return for lucrative business deals can expect to face prosecution.”

Indeed, the list of executives going to prison after FCPA convictions is growing. Mark Mendelsohn, Deputy Chief of the DOJ’s Fraud Section noted in 2008 that the number of individuals prosecuted “has risen – and that’s…quite intentional on the part of the Department. It is our view that to have a credible deterrent effect, people have to go to jail… This is a federal crime. This is not fun and games.” Those comments have been supported by convictions and sentencing proceedings in 2009 and 2010.

The damage to companies does not end with high fines and jailed executives. Since Stanley’s conviction, shareholders have sued Halliburton. They alleged that poor oversight and lack of internal controls enabled a pervasive environment of misdeeds and corruption, resulting in enforcement actions and substantial government penalties that have severely damaged investors’ holdings.

More self-disclosure: Law enforcement officials have stated that companies self-disclosing potential FCPA violations will be treated favorably when prosecution and fines are determined. While the United States Sentencing Guidelines allow for mitigation of a sentence based upon a company’s self-disclosure, there is no way for a firm predict exactly what benefit it will receive by coming forward.

The ultimate prize is a deferred prosecution agreement with the DOJ. This allows a company to enact reforms in exchange for the case being dismissed after a period of time. There have been few such agreements related to FCPA cases, but they do exist. In 2005, for example, Monsanto settled FCPA charges by agreeing to pay US$1.5 million in criminal and civil fines and penalties and to be bound by a three-year deferred prosecution agreement.

Despite these uncertainties, companies are better off coming forward once a violation is discovered – usually through pre-merger or other due diligence efforts –rather than waiting for a federal grand jury subpoena. Since 2005, approximately 70% of FCPA cases initiated by the DOJ have been based on self-disclosure. The number of self-reported FCPA violations will rise as law enforcement continues its focus on the FCPA and as small and mid-sized companies begin to scrutinize their overseas work [see below].

Court-enforced monitor relationships may also increase. On January 12, 2010, the United States Sentencing Commission voted to propose changes to the Sentencing Guidelines when probation is ordered. These include not only the retention of an independent corporate monitor to be paid for by the organization, but also unannounced examinations of corporate books, and an amendment to the Guidelines’ application notes – which can be relied upon by a court – to clarify the expectation that, in order to avoid any legal liability, high-level personnel must conform to any policy that is part of an effective compliance program. While some of the fees being paid to monitors have been called into question by federal judges, monitorships are here to stay. In short, the proposals indicate a renewed spotlight on corporate compliance arrangements and their ability to uncover violations.

More focus on small and mid-sized companies: As part of their increased FCPA-related efforts, the DOJ and SEC are expected to look more at small and mid-sized firms which do business overseas. The majority of such companies have a small established compliance program, or none at all, yet some may conduct billions of dollars in foreign transactions.

Companies that are not household names have long believed that they were under law enforcement’s radar. Smaller firms have also thought that the DOJ would not expend the resources to investigate their overseas sales. That comfortable illusion no longer exists. The companies involved in the January sting operation described above, for example, are not well known.

In another recent case, two individuals pleaded guilty to conspiring to make corrupt payments to foreign government officials in order to secure business for Ports Engineering Consultants Corporation (PECC). The company, incorporated under Panamanian law, was affiliated with an engineering firm based in the United States. According to the indictment, PECC was created so that the two individuals, the firm itself, and others could corruptly obtain certain maritime contracts from the Panamanian government.

What makes this prosecution interesting is the small amount of money involved. From 1997 to 2003, the conspirators made corrupt payments totaling approximately $331,000 to the former administrator and deputy administrator of the Panama Maritime Authority and to a former high-ranking elected executive official of the Republic of Panama. That figure pales in comparison to other FCPA cases the DOJ has brought. It clearly demonstrates that the authorities are prepared to seek criminal indictments for individuals and companies that violate the FCPA, regardless of the size of the company or the suspected illegal payment.

American law enforcement officials have signaled to the world that they will aggressively combat FCPA violations. More investigations, indictments, and corporate executives being sent to prison are certain to follow. Companies that do not ensure compliance with the FCPA run a great risk to their organizations, as well as to their executives and directors.

Jeffrey Cramer is a Managing Director and head of the Chicago office of Kroll’s Business Intelligence and Investigations Practice. He is also a former Senior Litigation Counsel for the Department of Justice.