By Orrick, Herrington & Sutcliffe LLP | October 27th, 2015

by David Klein and 

Led primarily by the U.S. DOJ and SEC, global anti-corruption efforts have escalated markedly over the past decade. The increased number of investigations and high-dollar penalties associated with FCPA have caught the attention of the both insurers and insureds, even leading some companies to purchase standalone liability policies that cover FCPA-like violations. But while a number of significant international treaties promoting the fight against corruption were enacted beginning in the mid-1990s, member states beyond the U.S. have been somewhat slow to join the enforcement brigade. UK prosecutors have shown some desire to bring cases under the UK Bribery Act, but thus far their efforts have not nearly approached those of prosecutors in the U.S. But in the past few years, a completely new player has emerged: the World Bank.

The World Bank (and other multi-lateral development banks) has its own anti-corruption enforcement authority and framework through which it investigates, prosecutes, tries, and sanctions private-sector companies for misconduct (i.e., fraud, corruption, collusion, coercion, and/or obstruction) in relation to Bank-financed projects. Whenever a company signs a Bank-financed contract, such as a government contract to perform work on a development project financed by World Bank funds, it submits to this jurisdiction.

The World Bank is now showing that it’s not shy about exercising this authority. In fiscal year 2015 alone, the Integrity Vice Presidency (“INT”), the World Bank’s investigatory arm, opened 323 preliminary inquiries pertaining to 86 countries; selected 99 of those inquiries for full investigation; and found sufficient evidence to conclude in 60 of those investigations that it was more likely than not that sanctionable misconduct had occurred. (Unlike in criminal proceedings in U.S. courts, the World Bank can impose sanctions merely upon a finding that it is “more likely than not” that sanctionable misconduct occurred.)

The World Bank’s aggressive enforcement efforts will have serious implications for many companies engaged in development work and other work in the developing world. First, sanctions can include restitution and, more critically, temporary or permanent “debarment”. Debarment not only makes a company ineligible to participate in future Bank-funded projects, it can extend to affiliates, successors and assigns, can result in either formal or informal “cross-debarment” by other development banks, and results in publication of the company’s name on a list of debarred entities. Moreover, as when facing a DOJ investigation into possible FCPA infractions, the cost of investigation and response to a World Bank inquiry itself can be very expensive. Given the relative novelty of World Bank anti-corruption enforcement, targets of investigation may not always consider whether their insurance covers these large expenses. But they should.

Read more

By Orrick, Herrington & Sutcliffe LLP | October 24th, 2014
by , Justyna Walukiewicz Lee and 

In recent years, the DOJ and SEC have significantly increased their Foreign Corrupt Practices Act (FCPA) enforcement efforts, and in the process, have successfully advocated the theory that state-owned or state-controlled entities should qualify as instrumentalities of a foreign government under the FCPA. The FCPA defines a foreign official as “any officer or employee of a foreign government or any department, agency or instrumentality thereof.” In August 2014, the government’s broad definition of who constitutes a “foreign official” came into question for the first time when two individuals (Joel Esquenazi and Carlos Rodriguez) filed a petition for writ of certiorari with the Supreme Court to challenge their convictions under the FCPA and argued for the high court to limit the FCPA’s definition of the term. However, on October 6, 2014, the Supreme Court declined to consider the potential landmark case effectively upholding the government’s broad view of the term “foreign official.”

A federal jury had convicted Messrs. Esquenazi and Rodriguez, former executives of Terra Telecommunications Corp., for their roles in a scheme to bribe officials at Haiti’s state-owned telecommunications company, known as Haiti Teleco. Esquenazi was sentenced to fifteen years in prison (the longest such sentence in FCPA history), and Rodriguez received seven years. On appeal, the defendants argued that Haiti Teleco did not fall under the FCPA definition of an “instrumentality” because it is a foreign state-owned business as opposed to a government agency. Thus, the Haiti Teleco officials who received the bribes were not “foreign officials” under the FCPA.

The Eleventh Circuit disagreed with their arguments and affirmed the convictions. In so doing, the appeals court defined an “instrumentality” as any entity controlled by the government of a foreign country that performs a function that the controlling government treats as its own. However, what constitutes control and what constitutes a function of the government are fact-bound questions to be decided on a case by case basis. The Eleventh Circuit, therefore, essentially adopted the DOJ’s fact based approach looking at who runs the company, who appoints executives, and where the company’s profits end up when determining whether the employees of that company qualify as “foreign officials.”

The Supreme Court’s denial of review means that the Eleventh Circuit’s broad definition of “foreign official” will continue to be used by both the DOJ and SEC in their FCPA enforcement efforts. During oral argument before the Eleventh Circuit, the DOJ argued that governmental ownership of as little as 10% of an entity in conjunction with other factors could satisfy the DOJ’s interpretation of “instrumentality.” As the settlement values for resolving FCPA enforcement actions continue to increase and the government has made it clear that they intend to cast a wide net, this recent development is a further reason why it is imperative for all US companies doing business abroad to carefully continue scrutinizing foreign companies (if it has any interest owned by the government) and foreign representatives before providing payments or subsidies.

Read original post

By Orrick, Herrington & Sutcliffe LLP | April 24th, 2014

by  and 

On April 9, 2014, the Securities and Exchange Commission announced that Hewlett-Packard had agreed to pay more than $108 million to settle Foreign Corrupt Practices Act actions brought by the SEC and the Department of Justice.  These actions were based on HP’s subsidiaries’ alleged payments of more than $3.6 million to Russian, Polish, and Mexican government officials to obtain or maintain lucrative public contracts.  The settlement is important because it highlights the SEC’s and DOJ’s continued focus on companies’ internal controls, particularly in the FCPA arena.  It also shows that the SEC may be able to use lesser, non-fraud offenses in which the underlying conduct involves a fairly de minimis amount of money to police behavior and subject companies to significant financial consequences.

Under the Securities Exchange Act of 1934, issuers of securities are required to keep books, records, and accounts that are reasonably detailed and accurately reflect the respective transactions and dispositions of assets.  Moreover, they must devise and maintain systems of internal accounting controls to ensure that transactions are accurately recorded.  According to Kara Brockmeyer, chief of the FCPA unit of the SEC’s Enforcement Division, “Companies have a fundamental obligation to ensure that their internal controls are both reasonably designed and appropriately implemented across their entire business operations, and they should take a hard look at the agents conducting business on their behalf.”

According to the SEC, HP’s internal controls missed the mark – they were insufficient to detect, prevent, and/or stop the “pattern of illegal payments to win business.”  The SEC found that HP’s subsidiaries made payments to obtain business in Poland, Russia, and Mexico that were falsely recorded as payments for legitimate services, expenses, or commissions in HP’s consolidated financial statements.  Specifically, the order found that HP’s Russian subsidiary paid more than $2 million to a Russian official to maintain a multi-million dollar contract with the federal prosecutor’s office, that HP’s Polish subsidiary paid more than $600,000 to a Polish official to secure contracts with the national police agency, and that HP’s Mexican subsidiary paid more than $1 million in inflated commissions to a consultant who had close ties to officials of Mexico’s state-owned petroleum company to win a software sale.

Read more

About Orrick, Herrington & Sutcliffe LLP

ANALYSIS: There’s a New Sheriff In Town: Coverage for World Bank Investigations and Sanctions

USDOJ: Criminal Division News  
An error has occurred, which probably means the feed is down. Try again later.