FCPA Individual-Liability Prosecutors Want YOU!

Over the last ten years, U.S. corporations conducting business outside the country have witnessed a dramatic increase in the enforcement of the Foreign Corrupt Practices Act (FCPA) and the severity of the financial penalties assessed. Over the past five years, they have also experienced a significant rise in the passage and enforcement of anti-corruption laws in countries outside the U.S. Efforts to parlay violations into various private civil lawsuits have also emerged. And now, the slate of available enforcement options appears to be expanding beyond the corporate entity. Both the Department of Justice (DOJ) and the Securities and Exchange Commission (SEC) have recently announced that they will not only prosecute the individuals involved in paying the bribes, but also the executives who arguably should have prevented it.

Enforcement officials have set their sights squarely on the culpable individual as high up in the organization as possible. Individual liability could be more of a danger in cases under the laws of other countries. In China, for example, it has been a matter of losing one's head.

A Brief History

These are unusual times in the prosecution of FCPA violations. Historically nearly every case has settled with some form of monetary payment. However, in the last year, a number of cases have gone to trial. It has been reported that over 60 investigations are currently ongoing into suspect activity. Companies subject to investigation indicate that the government requires them to find and turn over all culpable individuals before a settlement is considered. Many foreign anti-corruption laws nearly require that an individual be identified and prosecuted since the corporate entity cannot be found guilty of a crime as in the US. The pressure is on.

Individual Liability under The FCPA

The FCPA's anti-bribery provisions clearly provide that not only is the offending corporation liable, but so are all those who individually participated in the corrupt activities. The statute requires that the individual “know” of the violation. Recently, several senior-level managers have been convicted or settled with the DOJ regarding their direct involvement in bribery schemes.

Leo Winston Smith was the director of sales and marketing for Pacific Consolidated Industries. He pled guilty on Sept. 9 to bribing an official from the UK Ministry of Defense to secure orders for Pacific Consolidated.

In August, Oscar H. Meza settled a civil action with the SEC. As sales director in Asia for Faro Technologies, Inc. he allegedly “authorized bribery payments to employees of Chinese state-owned companies in order to obtain contracts, and that in order to conceal the bribes Meza instructed that account entries be altered.” Meza paid over $50,000 as part of the settlement.

These are examples of the more typical cases in which the culpable individual high up in the company was turned over for prosecution by the company as part of its negotiations with the government. A company in today's enforcement environment must be willing to find those individuals that have violated the law and terminate them from the organization and cooperate with their prosecutors.

Another case, however, was decided this summer that should keep executives in multi-national companies up at night. In July of this year, Frederick Bourke was found individually guilty of FCPA violations on the grounds that he had constructive knowledge that he ignored. In this case it was shown that at least one person warned Mr. Bourke of the bribery and corruption being carried out by Victor Kozeny in his attempts to take over the Azerbaijani State-owned oil company. There was no evidence that he had actual knowledge, only that he was made aware at some point in time and ignored the warning. Mr. Bourke was a major financial backer of Kozeny and faces possible imprisonment and several hundred thousand dollars in fines. In mid-November, he was sentenced to one year and one day in prison. U.S. District Judge Shira Scheindlin in Manhattan also ordered Bourke to pay a $1 million fine and to serve three years' supervised release after he completes his prison term.

The case creates a new and significant concern for corporate executives, investors and others who may benefit from the corrupt actions of persons within the organization. “Knowing” may not require actual knowledge. If one has been told, but chooses to “stick his head in the sand,” that is good enough. If there is a stray e-mail on a server somewhere, a note or verbal warning from an underling that was ignored, some unusual financial information in the statements, or anything else that would indicate that the executive or investor was warned of the illegal conduct and did not act, the individuals who received that warning face the same potential fate as Mr. Bourke or considerably worse. Mr. Bourke was found guilty of only two violations. He was only an investor. The next executive with constructive knowledge may very well find himself on the hook for much more.

SEC Rules

But that is not the most chilling aspect. For public companies, the bar was recently raised to ever more dangerous levels for executives. The SEC has added a new task force focused on FCPA violations and intends to use “control person liability” theories derived from Sarbanes Oxley and securities laws to broaden the scope of individual liability under the FCPA. The SEC also intends to work more with foreign counties on multi-jurisdictional prosecutions.

On Aug. 5, 2009, in a speech before the New York City Bar, Robert Khuzami, Director of the Enforcement Division SEC, emphasized enhanced enforcement, especially creation of specialized units such as the Foreign Corrupt Practices Unit, which will “focus on new and proactive approaches to identifying violations of the FCPA.” Director Khuzami emphasized that while the SEC has been “active in this area, more needs to be done, including being more proactive in investigations, working more closely with ' foreign counterparts, and taking a more global approach to these violations.”

The SEC's recent charging of corporate officers with violations of the antifraud, issuer reporting, books and records and internal controls provisions of the federal securities laws in their capacities as “control persons” should drive executives from sleepless to full-blown insomnia. The SEC charged the Chief Executive Officer and former Chief Financial Officer of Nature's Sunshine Products Inc., with violations of the FCPA as “control persons” under U.S. securities laws. The allegations claimed that cash payments were made in 2000 and 2001 by the Brazilian subsidiary to facilitate the importation of products into Brazil in violation of recent reclassification laws. As control persons, the SEC did not allege that either the CEO or CFO had even constructive knowledge of the violations. They were culpable because they had responsibility for the part of the business that paid the bribes, and failed to institute adequate internal controls to prevent them. Each paid fines of $25,000. The SEC files civil actions, so imprisonment is not an available option.

Corporate Response

Are your executives potentially liable for FCPA violations that might occur within your company? Has anyone in the executive group been warned of corrupt activity? Is there an e-mail out there providing a warning? Has there been a “hotline” call that has not been fully investigated? Do financial records clearly indicate a problem? Have these warnings been ignored? Are your internal controls adequate? Are they being enforced?

It is very clear that the DOJ and SEC are looking to pursue the most highly ranked individuals in the organization. Prosecutors know that it is one thing for the corporation to pay some fines, but enforcement is much more effective if those at the top face serious repercussions should the company violate the law.

Any executive in an international company should demand that the company do the following to make sure that no part of the entity, or its contract partners, agents or intermediaries are violating the FCPA or local anti-corruption laws:

• Insure that a “zero tolerance” message with regard to bribery emanates from the most senior officers.
• Institute a comprehensive anti-corruption program including training and specific controls related to bribery.
• Periodically test the existing controls to measure their effectiveness and the current state of compliance with such controls.
• Perform a thorough internal investigation should any suspect activity or allegation of wrongdoing come to light.
• Continually evaluate the company's control environment and institute stronger controls where applicable to prevent future violations.
• Set up an internal independent monitor to verify that the controls are working.
• And most important: Find the truly culpable individuals.

If the company fails to do these things, the DOJ or SEC may hold corporate leaders personally responsible. It is too late once the U.S. or foreign government catches the company and begins an investigation. Once that happens, one or more individuals are going to pay.

If there are violations in your company, you should consult highly experienced attorneys to determine whether you should approach the authorities.

Conclusion

For hundreds, perhaps thousands of years, bribery of government officials was the way business was done around the world. In the last ten years, efforts by governments around the world have intensified to stop this process. Once a concern for the corporation, the governments of the world, and more specifically the DOJ and the SEC have decided that the quickest way to end this practice is to punish those at the top of the organization, whether they were directly involved or even knew of the corruption at all.

John Rahie was the executive director of Global Investigations for General Motors Corporation based in Detroit. Recently, Rahie has joined the global advisory services firm, Freeh Group International Solutions, as a managing partner. Jeffrey Harfenist is a managing director of UHY Advisors FLVS, Inc.; the Houston Practice Leader for the Forensic, Litigation and Valuation Services Group; and the National Fraud and Forensic Service Line Leader.

Over the last ten years, U.S. corporations conducting business outside the country have witnessed a dramatic increase in the enforcement of the Foreign Corrupt Practices Act (FCPA) and the severity of the financial penalties assessed. Over the past five years, they have also experienced a significant rise in the passage and enforcement of anti-corruption laws in countries outside the U.S. Efforts to parlay violations into various private civil lawsuits have also emerged. And now, the slate of available enforcement options appears to be expanding beyond the corporate entity. Both the Department of Justice (DOJ) and the Securities and Exchange Commission (SEC) have recently announced that they will not only prosecute the individuals involved in paying the bribes, but also the executives who arguably should have prevented it.

Enforcement officials have set their sights squarely on the culpable individual as high up in the organization as possible. Individual liability could be more of a danger in cases under the laws of other countries. In China, for example, it has been a matter of losing one's head.

A Brief History

These are unusual times in the prosecution of FCPA violations. Historically nearly every case has settled with some form of monetary payment. However, in the last year, a number of cases have gone to trial. It has been reported that over 60 investigations are currently ongoing into suspect activity. Companies subject to investigation indicate that the government requires them to find and turn over all culpable individuals before a settlement is considered. Many foreign anti-corruption laws nearly require that an individual be identified and prosecuted since the corporate entity cannot be found guilty of a crime as in the US. The pressure is on.

Individual Liability under The FCPA

The FCPA's anti-bribery provisions clearly provide that not only is the offending corporation liable, but so are all those who individually participated in the corrupt activities. The statute requires that the individual “know” of the violation. Recently, several senior-level managers have been convicted or settled with the DOJ regarding their direct involvement in bribery schemes.

Leo Winston Smith was the director of sales and marketing for Pacific Consolidated Industries. He pled guilty on Sept. 9 to bribing an official from the UK Ministry of Defense to secure orders for Pacific Consolidated.

In August, Oscar H. Meza settled a civil action with the SEC. As sales director in Asia for Faro Technologies, Inc. he allegedly “authorized bribery payments to employees of Chinese state-owned companies in order to obtain contracts, and that in order to conceal the bribes Meza instructed that account entries be altered.” Meza paid over $50,000 as part of the settlement.

These are examples of the more typical cases in which the culpable individual high up in the company was turned over for prosecution by the company as part of its negotiations with the government. A company in today's enforcement environment must be willing to find those individuals that have violated the law and terminate them from the organization and cooperate with their prosecutors.

Another case, however, was decided this summer that should keep executives in multi-national companies up at night. In July of this year, Frederick Bourke was found individually guilty of FCPA violations on the grounds that he had constructive knowledge that he ignored. In this case it was shown that at least one person warned Mr. Bourke of the bribery and corruption being carried out by Victor Kozeny in his attempts to take over the Azerbaijani State-owned oil company. There was no evidence that he had actual knowledge, only that he was made aware at some point in time and ignored the warning. Mr. Bourke was a major financial backer of Kozeny and faces possible imprisonment and several hundred thousand dollars in fines. In mid-November, he was sentenced to one year and one day in prison. U.S. District Judge Shira Scheindlin in Manhattan also ordered Bourke to pay a $1 million fine and to serve three years' supervised release after he completes his prison term.

The case creates a new and significant concern for corporate executives, investors and others who may benefit from the corrupt actions of persons within the organization. “Knowing” may not require actual knowledge. If one has been told, but chooses to “stick his head in the sand,” that is good enough. If there is a stray e-mail on a server somewhere, a note or verbal warning from an underling that was ignored, some unusual financial information in the statements, or anything else that would indicate that the executive or investor was warned of the illegal conduct and did not act, the individuals who received that warning face the same potential fate as Mr. Bourke or considerably worse. Mr. Bourke was found guilty of only two violations. He was only an investor. The next executive with constructive knowledge may very well find himself on the hook for much more.

SEC Rules

But that is not the most chilling aspect. For public companies, the bar was recently raised to ever more dangerous levels for executives. The SEC has added a new task force focused on FCPA violations and intends to use “control person liability” theories derived from Sarbanes Oxley and securities laws to broaden the scope of individual liability under the FCPA. The SEC also intends to work more with foreign counties on multi-jurisdictional prosecutions.

On Aug. 5, 2009, in a speech before the New York City Bar, Robert Khuzami, Director of the Enforcement Division SEC, emphasized enhanced enforcement, especially creation of specialized units such as the Foreign Corrupt Practices Unit, which will “focus on new and proactive approaches to identifying violations of the FCPA.” Director Khuzami emphasized that while the SEC has been “active in this area, more needs to be done, including being more proactive in investigations, working more closely with ' foreign counterparts, and taking a more global approach to these violations.”

The SEC's recent charging of corporate officers with violations of the antifraud, issuer reporting, books and records and internal controls provisions of the federal securities laws in their capacities as “control persons” should drive executives from sleepless to full-blown insomnia. The SEC charged the Chief Executive Officer and former Chief Financial Officer of Nature's Sunshine Products Inc., with violations of the FCPA as “control persons” under U.S. securities laws. The allegations claimed that cash payments were made in 2000 and 2001 by the Brazilian subsidiary to facilitate the importation of products into Brazil in violation of recent reclassification laws. As control persons, the SEC did not allege that either the CEO or CFO had even constructive knowledge of the violations. They were culpable because they had responsibility for the part of the business that paid the bribes, and failed to institute adequate internal controls to prevent them. Each paid fines of $25,000. The SEC files civil actions, so imprisonment is not an available option.

Corporate Response

Are your executives potentially liable for FCPA violations that might occur within your company? Has anyone in the executive group been warned of corrupt activity? Is there an e-mail out there providing a warning? Has there been a “hotline” call that has not been fully investigated? Do financial records clearly indicate a problem? Have these warnings been ignored? Are your internal controls adequate? Are they being enforced?

It is very clear that the DOJ and SEC are looking to pursue the most highly ranked individuals in the organization. Prosecutors know that it is one thing for the corporation to pay some fines, but enforcement is much more effective if those at the top face serious repercussions should the company violate the law.

Any executive in an international company should demand that the company do the following to make sure that no part of the entity, or its contract partners, agents or intermediaries are violating the FCPA or local anti-corruption laws:

• Insure that a “zero tolerance” message with regard to bribery emanates from the most senior officers.
• Institute a comprehensive anti-corruption program including training and specific controls related to bribery.
• Periodically test the existing controls to measure their effectiveness and the current state of compliance with such controls.
• Perform a thorough internal investigation should any suspect activity or allegation of wrongdoing come to light.
• Continually evaluate the company's control environment and institute stronger controls where applicable to prevent future violations.
• Set up an internal independent monitor to verify that the controls are working.
• And most important: Find the truly culpable individuals.

If the company fails to do these things, the DOJ or SEC may hold corporate leaders personally responsible. It is too late once the U.S. or foreign government catches the company and begins an investigation. Once that happens, one or more individuals are going to pay.

If there are violations in your company, you should consult highly experienced attorneys to determine whether you should approach the authorities.

Conclusion

For hundreds, perhaps thousands of years, bribery of government officials was the way business was done around the world. In the last ten years, efforts by governments around the world have intensified to stop this process. Once a concern for the corporation, the governments of the world, and more specifically the DOJ and the SEC have decided that the quickest way to end this practice is to punish those at the top of the organization, whether they were directly involved or even knew of the corruption at all.

John Rahie was the executive director of Global Investigations for General Motors Corporation based in Detroit. Recently, Rahie has joined the global advisory services firm, Freeh Group International Solutions, as a managing partner. Jeffrey Harfenist is a managing director of UHY Advisors FLVS, Inc.; the Houston Practice Leader for the Forensic, Litigation and Valuation Services Group; and the National Fraud and Forensic Service Line Leader.