Foreign Companies Prosecuted in the U.S. for Bribes Overseas

Foreign companies may now think twice about listing on a U.S. exchange. A 2006 op-ed co-authored by Senator Charles Schumer and New York City Mayor Michael Bloomberg noted that in 2005 'only one out of the top 24 IPOs was registered in the U.S.' while four were registered in London. 'Next year, more money will be raised through IPOs in Hong Kong than in either London or New York.' (To Save New York, Learn from London, Wall St. J., Nov. 1, 2006.) One reason is that the costs of regulation associated with listing on a U.S. exchange are, according to industry experts quoted by Schumer and Boomberg, '15 times higher than in Britain.' While U.S. regulatory bodies often compete with each other to be the 'toughest cop on the street,' the British regulatory body 'seems to be more collaborative and solutions-oriented.' Meanwhile, FCPA corporate penalties have gone from less than $1 million to tens of millions. Compare SEC Litigation Releases Nos. 17310 (Jan. 15, 2002) and 17169 (Oct. 3, 2001) with Department of Justice ('DOJ') Press Release ##04-465 (July 6, 2004) and 07-296 (April 26, 2007) (record $44 million settlement). The growth rate of FCPA settlements appears to outpace earnings growth.

Prosecuting Foreign Subsidiaries as Agents

Foreign subsidiaries of U.S. companies are not directly subject to the FCPA. Although the original House bill covered subsidiaries, the provision was eliminated at conference because of the 'inherent jurisdictional, enforcement, and diplomatic difficulties raised by the inclusion of foreign subsidiaries of U.S. companies in the direct prohibitions of the bill.' H.R. Conf. Rep. No. 95-831, at 14 (1977). The 1998 amendments to the FCPA did nothing to extinguish this limitation. See U.S. v. Bodmer, 342 F. Supp. 2d 176, 184-85 (S.D.N.Y. 2004). However, the FCPA does cover 'any ' agent' of a U.S. company, 15 U.S.C. ' 78dd-1(a); 15 U.S.C. ' 78dd-2(a), and the DOJ appears to use agency as a basis for criminal enforcement against what otherwise appear to be wholly foreign subsidiaries outside FCPA's reach. Two examples:

Diagnostic Products Corporation ' On May 20, 2005, the Department announced a criminal information and plea agreement to violations of the FCPA with DPC (Tianjin) Co. Ltd., the Chinese subsidiary of Diagnostic Productions Corporation ('DPC'), a Los Angeles-based company listed on the NYSE. See Press Release, Department of Justice, #05-282, DPC (Tianjin) Ltd. Charged With Violating the Foreign Corrupt Practices Act, (May 20, 2005). The Information contains two noteworthy allegations: (1) 'Defendant DPC Tainjin acted as an agent of DPC within the meaning of the [FCPA], 15 U.S.C. ' 78dd-1,' and (2) 'in the Central District of California and elsewhere, defendant DPC Tainjin used electronic mail and other means and instrumentalities of interstate commerce corruptly in furtherance of an offer, promise to pay and authorization of the payment of money ' ' United States v. DPC (Tainjin) Co. Ltd., No. CR 05-482 (C.D.Cal. May 20, 2005). The Statement of Facts asserts that the DPC Tianjin's General Manager, in China, prepared financial statements, budgets and monthly reports and sent them by electronic mail and other means to Los Angeles. These DOJ theories of FCPA criminal liability have not been tested in court and are unlikely to be, since the risk of conviction followed by a 'corporate death sentence' invariably leads companies to seek an out-of-court settlement. The Chinese subsidiary paid a $2 million criminal penalty in addition to the settlement paid by DPC.

Schnitzer Steel ' Last year, the Korean subsidiary of a Portland, OR-based company pleaded guilty to FCPA violations and paid a $7.5 million fine. (DOJ Press Release #06-707, Schnitzer Steel Industries Inc.'s Subsidiary Pleads Guilty to Foreign Bribes and Agrees to Pay a $7.5 Million Criminal Fine, Oct. 16, 2006.) Schnizter Steel concurrently entered into a deferred-prosecution agreement, an SEC consent decree and cease and desist order with a $7.7 million civil penalty, and three-year compliance monitoring. See In the Matter of Schnitzer Steel Industries, Inc., SEC Exchange Act Release No. 54606 (Oct. 16, 2006). A provision in the Deferred Prosecution Agreement reads: 'Schnitzer Steel accepts and acknowledges that it is responsible for the acts of its officers and employees, and those of its wholly owned subsidiary, SSI Korea.' See Deferred Prosecution Agreement, available at www.sec.gov/Archives/edgar/data/912603/000107261306002130/exh10-1_14656.htm. The DOJ Press Release lauds the U.S. company's 'exceptional cooperation' even though improper payments continued after they were discovered
by the parent's compliance department. 'When companies voluntarily disclose FCPA violations and cooperate with Justice Department investigations,' said AAG Fisher, 'they will get a real, tangible benefit. In fact, Schnitzer Steel's cooperation in this case was excellent, and I believe that the disposition announced today reflects that fact.' This may be the first case where a U.S. issuer has acknowledged blanket responsibility for the acts of its foreign subsidiary.

Potential Implications

So what do these cases mean for international corporations, and their counsel? First, DPC, Schnitzer Steel, and other cases show that the 1977 House version of the FCPA extending jurisdiction to foreign subsidiaries, which Congress rejected, has effectively been incorporated into recent DOJ settlements without a bill, a conference, or a vote. This is so because U.S. issuers will assent to a legally questionable charge against a foreign subsidiary rather than risking a trial, increased publicity, enhanced charges and penalties, or collateral consequences for the parent. The resulting settlements allow DOJ officials to expand the apparent reach of the FCPA to foreign companies on wholly untested theories.

Second, as counsel approaches the settlement table with these precedents in place, the DOJ may expect companies to assent to jurisdiction over their foreign subsidiaries as requirement for credit for cooperation in any settlement. Under the Principles of Federal Prosecution of Business Organizations (the 'McNulty Memorandum'), the company's 'willingness to cooperate in the investigation of its agents' is a factor in determining whether to prosecute a corporation. Given that an FCPA bribery case most often involves conduct by a foreign subsidiary, the increase in criminal exposure is quite substantial.

Third, the combined trend of record FCPA fines and enforcement now reaching overseas will give foreign companies another factor to think about in weighing whether they want to list securities in the United States or follow the rush of IPOs to a foreign exchange.

Will DOJ's claims to FCPA jurisdiction level off? Perhaps so ' by the Department's own hand. One of the Department's current FCPA initiatives is to expand prosecutions of individual defendants. Individuals whose liberty is at risk will be less willing to accept the DOJ's expansive jurisdictional theories than corporations for whom a settlement is essentially a business decision. In the coming years, the DOJ will be faced with the choice of limiting its more aggressive jurisdictional theories to corporate cases or testing them against individuals with the risk of rejection by the courts. The latter course would clarify the law and keep the DOJ honest. Or perhaps ' as Senator Schumer and Mayor Bloomberg hope ' U.S. enforcement authorities will learn from London.

Laurence Urgenson ([email protected]) is Chairman of this newsletter's Board of Editors and a partner at Kirkland & Ellis LLP in Washington, DC. He has served as Acting Deputy Assistant General, Chief of the Fraud Section, and Executive Director of the Economic Crime Counsel in the Criminal Division of the Department of Justice. Audrey L. Harris, an associate at Kirkland & Ellis, is Associate Editor of this newsletter.

In an effort to level the playing field for U.S. businesses overseas, many OECD countries adopted the Convention on Combating Bribery of Foreign Public Officials in International Business Transactions in 1998. Nearly 10 years later, the main result may have been to enlarge the playing field of U.S. law enforcement. As discussed in Michael E. Clark's companion article on the left, the 1998 amendments expanding jurisdiction of the Foreign Corrupt Practices Act (FCPA) were just the start of what catapulted the FCPA to the forefront of today's business risks. Foreign subsidiaries of U.S. companies not otherwise subject to the FCPA are now being indicted as 'agents' of their U.S. affiliates. Meanwhile, some foreign companies, wondering whether listing on a U.S. exchange is worth it, are looking around for a new league.

Chilling Effect on U.S. Listing

Last year, the DOJ announced its first criminal enforcement action against a foreign issuer for violating the FCPA. See Press Release #06-700, U.S. Resolves Probe Against Oil Company that Bribed Iranian Official (Oct. 13, 2006). No mere SEC sanction for books-and-records violations, this was a U.S. criminal prosecution for payments overseas, by a foreign company, in violation of FCPA ' 30. United States v. Statoil, ASA , 06 Cr. 960 (S.D.N.Y. Oct. 13, 2006). 'Although Statoil is a foreign issuer,' said Assistant Attorney General Alice Fisher in the DOJ press release, the FCPA 'applies to foreign and domestic public companies alike, where the company's stock trades on American exchanges.' The deferred prosecution included a $10.5 million penalty, further disgorgement of an additional $10.5 million, and compliance monitoring for three years, all in addition to a $3 million fine levied by Norway. Fisher warned that the DOJ is committed to enforce the FCPA vigorously 'against all international businesses whose conduct falls within its scope.'

Foreign companies may now think twice about listing on a U.S. exchange. A 2006 op-ed co-authored by Senator Charles Schumer and New York City Mayor Michael Bloomberg noted that in 2005 'only one out of the top 24 IPOs was registered in the U.S.' while four were registered in London. 'Next year, more money will be raised through IPOs in Hong Kong than in either London or New York.' (To Save New York, Learn from London, Wall St. J., Nov. 1, 2006.) One reason is that the costs of regulation associated with listing on a U.S. exchange are, according to industry experts quoted by Schumer and Boomberg, '15 times higher than in Britain.' While U.S. regulatory bodies often compete with each other to be the 'toughest cop on the street,' the British regulatory body 'seems to be more collaborative and solutions-oriented.' Meanwhile, FCPA corporate penalties have gone from less than $1 million to tens of millions. Compare SEC Litigation Releases Nos. 17310 (Jan. 15, 2002) and 17169 (Oct. 3, 2001) with Department of Justice ('DOJ') Press Release ##04-465 (July 6, 2004) and 07-296 (April 26, 2007) (record $44 million settlement). The growth rate of FCPA settlements appears to outpace earnings growth.

Prosecuting Foreign Subsidiaries as Agents

Foreign subsidiaries of U.S. companies are not directly subject to the FCPA. Although the original House bill covered subsidiaries, the provision was eliminated at conference because of the 'inherent jurisdictional, enforcement, and diplomatic difficulties raised by the inclusion of foreign subsidiaries of U.S. companies in the direct prohibitions of the bill.' H.R. Conf. Rep. No. 95-831, at 14 (1977). The 1998 amendments to the FCPA did nothing to extinguish this limitation. See U.S. v. Bodmer , 342 F. Supp. 2d 176, 184-85 (S.D.N.Y. 2004). However, the FCPA does cover 'any ' agent' of a U.S. company, 15 U.S.C. ' 78dd-1(a); 15 U.S.C. ' 78dd-2(a), and the DOJ appears to use agency as a basis for criminal enforcement against what otherwise appear to be wholly foreign subsidiaries outside FCPA's reach. Two examples:

Diagnostic Products Corporation ' On May 20, 2005, the Department announced a criminal information and plea agreement to violations of the FCPA with DPC (Tianjin) Co. Ltd., the Chinese subsidiary of Diagnostic Productions Corporation ('DPC'), a Los Angeles-based company listed on the NYSE. See Press Release, Department of Justice, #05-282, DPC (Tianjin) Ltd. Charged With Violating the Foreign Corrupt Practices Act, (May 20, 2005). The Information contains two noteworthy allegations: (1) 'Defendant DPC Tainjin acted as an agent of DPC within the meaning of the [FCPA], 15 U.S.C. ' 78dd-1,' and (2) 'in the Central District of California and elsewhere, defendant DPC Tainjin used electronic mail and other means and instrumentalities of interstate commerce corruptly in furtherance of an offer, promise to pay and authorization of the payment of money ' ' United States v. DPC (Tainjin) Co. Ltd., No. CR 05-482 (C.D.Cal. May 20, 2005). The Statement of Facts asserts that the DPC Tianjin's General Manager, in China, prepared financial statements, budgets and monthly reports and sent them by electronic mail and other means to Los Angeles. These DOJ theories of FCPA criminal liability have not been tested in court and are unlikely to be, since the risk of conviction followed by a 'corporate death sentence' invariably leads companies to seek an out-of-court settlement. The Chinese subsidiary paid a $2 million criminal penalty in addition to the settlement paid by DPC.

Schnitzer Steel ' Last year, the Korean subsidiary of a Portland, OR-based company pleaded guilty to FCPA violations and paid a $7.5 million fine. (DOJ Press Release #06-707, Schnitzer Steel Industries Inc.'s Subsidiary Pleads Guilty to Foreign Bribes and Agrees to Pay a $7.5 Million Criminal Fine, Oct. 16, 2006.) Schnizter Steel concurrently entered into a deferred-prosecution agreement, an SEC consent decree and cease and desist order with a $7.7 million civil penalty, and three-year compliance monitoring. See In the Matter of Schnitzer Steel Industries, Inc., SEC Exchange Act Release No. 54606 (Oct. 16, 2006). A provision in the Deferred Prosecution Agreement reads: 'Schnitzer Steel accepts and acknowledges that it is responsible for the acts of its officers and employees, and those of its wholly owned subsidiary, SSI Korea.' See Deferred Prosecution Agreement, available at www.sec.gov/Archives/edgar/data/912603/000107261306002130/exh10-1_14656.htm. The DOJ Press Release lauds the U.S. company's 'exceptional cooperation' even though improper payments continued after they were discovered
by the parent's compliance department. 'When companies voluntarily disclose FCPA violations and cooperate with Justice Department investigations,' said AAG Fisher, 'they will get a real, tangible benefit. In fact, Schnitzer Steel's cooperation in this case was excellent, and I believe that the disposition announced today reflects that fact.' This may be the first case where a U.S. issuer has acknowledged blanket responsibility for the acts of its foreign subsidiary.

Potential Implications

So what do these cases mean for international corporations, and their counsel? First, DPC, Schnitzer Steel, and other cases show that the 1977 House version of the FCPA extending jurisdiction to foreign subsidiaries, which Congress rejected, has effectively been incorporated into recent DOJ settlements without a bill, a conference, or a vote. This is so because U.S. issuers will assent to a legally questionable charge against a foreign subsidiary rather than risking a trial, increased publicity, enhanced charges and penalties, or collateral consequences for the parent. The resulting settlements allow DOJ officials to expand the apparent reach of the FCPA to foreign companies on wholly untested theories.

Second, as counsel approaches the settlement table with these precedents in place, the DOJ may expect companies to assent to jurisdiction over their foreign subsidiaries as requirement for credit for cooperation in any settlement. Under the Principles of Federal Prosecution of Business Organizations (the 'McNulty Memorandum'), the company's 'willingness to cooperate in the investigation of its agents' is a factor in determining whether to prosecute a corporation. Given that an FCPA bribery case most often involves conduct by a foreign subsidiary, the increase in criminal exposure is quite substantial.

Third, the combined trend of record FCPA fines and enforcement now reaching overseas will give foreign companies another factor to think about in weighing whether they want to list securities in the United States or follow the rush of IPOs to a foreign exchange.

Will DOJ's claims to FCPA jurisdiction level off? Perhaps so ' by the Department's own hand. One of the Department's current FCPA initiatives is to expand prosecutions of individual defendants. Individuals whose liberty is at risk will be less willing to accept the DOJ's expansive jurisdictional theories than corporations for whom a settlement is essentially a business decision. In the coming years, the DOJ will be faced with the choice of limiting its more aggressive jurisdictional theories to corporate cases or testing them against individuals with the risk of rejection by the courts. The latter course would clarify the law and keep the DOJ honest. Or perhaps ' as Senator Schumer and Mayor Bloomberg hope ' U.S. enforcement authorities will learn from London.

Laurence Urgenson ([email protected]) is Chairman of this newsletter's Board of Editors and a partner at Kirkland & Ellis LLP in Washington, DC. He has served as Acting Deputy Assistant General, Chief of the Fraud Section, and Executive Director of the Economic Crime Counsel in the Criminal Division of the Department of Justice. Audrey L. Harris, an associate at Kirkland & Ellis, is Associate Editor of this newsletter.