FCPA Investigation Costs ' Are You Covered?

The FCPA “anti-bribery” provisions forbid payments of money or anything else of value made corruptly to influence any act or decision of a foreign official, political party or political party official, or candidate for political office, in his official capacity or to induce the official to use his influence to affect a government act or decision so as to assist a company in obtaining or retaining business or directing business to any person or to secure any improper advantage.

The Act defines “foreign official” to include any officer or employee of a non-U.S. government or any instrumentality of the government, or any person acting in an official capacity for or on behalf of the non-U.S. government or its instrumentality. The enforcement agencies take the position that employees of foreign state-owned companies are also “foreign officials.” Even if a company is not wholly owned by the state, it may be considered an “instrumentality” of a government if the government exercises substantial control over the company.

Payments, authorizations, promises or offers to any other person are also prohibited if there is knowledge that any portion of the payment is to be passed along to a foreign official or foreign political party, official or candidate for a prohibited purpose. “Knowledge” is defined very broadly and is present when one knows an event is certain or likely to occur; even purposely failing to take note of an event or being willfully blind can constitute knowledge

Enforcement Actions

Between 2004 and 2010, FCPA enforcement actions initiated by the DOJ and SEC increased nearly fifteen-fold, from five to 74. The pace of enforcement actions slowed somewhat in 2011, but the apparent slowdown is attributable to the fact that there were multiple FCPA jury trials as well as multiple criminal cases working their way through the system. The enforcement agencies recently reported that there are currently more than 150 open FCPA investigations.

Aside from the breathtaking multi-million dollar FCPA settlements (for example, Siemens paid over $800 million and Halliburton paid $559 million), the costs of simply conducting an internal investigation into a potential FCPA violation can be astronomical. For example, Avon has reported that its FCPA-related investigative costs in 2009-2010 were nearly $130 million. Reportedly, the investigation costs for Siemens were in excess of $850 million. A routine FCPA investigation can often cost millions of dollars in attorney and accountant fees. For a whole host of reasons (not the least of which is the recently enacted whistleblower provision of the Dodd-Frank law), internal investigations of FCPA issues are often a necessity. The significant costs of investigation are incurred regardless of whether an actual violation is found.

These substantial investigative costs naturally lead those in charge of compliance and risk management to ask obvious questions: Are these costs covered under any of our company's existing insurance policies? Are there policies available that might help our company more effectively manage the risk associated with these issues?

What Companies Should Do

Companies should start by looking at their existing Directors and Officers (D&O) liability policies. Companies that carry “D&O” liability insurance may already have some limited protection for the costs of an FCPA investigation and related fines/settlements. The scope of coverage for the costs of an FCPA investigation will likely vary from one D&O policy to the next. The actual coverage for costs will depend on the policy's definition of “claim” as well as the definition of “securities claims” (for many publicly traded companies, the coverage for the entity is limited to only claims related to the offering and sale of the company's own securities). While a D&O policy might be the most likely source of some coverage for FCPA investigations, it must be closely scrutinized to determine the exact scope of that coverage.

In response to the potential gaps in coverage for FCPA investigations, new insurance products are beginning to come to market that may cover at least some of this exposure. For example, Chartis is now offering an “FCPA Investigation Extension,” which states that the “corrupt practices” exclusion contained in
the Chartis' standard investigations response policy no longer applies. The “FCPA Investigation Extension” applies to any investigation of any actual or suspected bribery of foreign government officials located in any identified country in violation of the FCPA, or in violation of that portion of any similar foreign law that prohibits bribery of foreign government officials. The “FCPA Investigation Extension” does not appear to cover, however, any amounts characterized in the settlement documents as fines, penalties, interest or disgorgement. The limit of coverage under the “FCPA Investigation Extension” also appears rather modest compared to the significant costs of a worldwide FCPA investigation (although it can be reasonably inferred that higher limits can be negotiated).

Marsh has also introduced a branded “FCPA Corporate Response” product, which is stated to provide worldwide coverage for both the organization and individuals for FCPA investigations and acts as primary insurance to a D&O policy. Based on the product's fact sheet, similar to the “FCPA Investigation Extension,” it does not appear that the “FCPA Corporate Response” reimburses companies for any fines or penalties assessed in connection with an FCPA violation.

The potential advantages of these new products are at least two-fold: 1) they specifically cover the costs of FCPA investigations, largely taking away the questions that routinely arise under the typical D&O policy as to the exact scope of coverage and when it is triggered; and 2) they leave the D&O policies limits intact for other claims. Insurance buyers should nevertheless carefully review these and similar products and evaluate whether the specific purchase of an FCPA cover is needed in the circumstances of the company's business. For example, a company should evaluate whether FCPA investigation cost insurance is already included in the D&O policy. It should also consider its FCPA risk profile, paying special attention to where in the world it does business, how it goes to market in high FCPA risk countries, and who its customers are. Furthermore, the company should evaluate whether the FCPA coverage provides meaningful protection based on available limits and premiums charged. As part of that analysis, the company should determine whether the product covers only investigations against the company, or whether the product also covers investigations against individual employees, officers, and directors

Conclusion

The insurance industry's efforts in offering meaningful and innovative products that protect the companies against the risk of FCPA-related investigative costs represent a positive development. In the era of increased enforcement activity relating to the FCPA compliance, companies would benefit from a clear pronouncement that any FCPA-related investigative costs are covered. The FCPA investigative costs insurance should eliminate the questions that often arise under a typical D&O policy on whether expenses incurred either in connection with an informal investigation by an enforcement agency or an internal corporate investigation are covered. That said, potential purchasers of these products must carefully scrutinize the products and perform a cost/benefit analysis to determine if the new coverage would be beneficial to them. Last, the potential purchaser should evaluate its own risk profile and assess whether its internal compliance policies are sufficiently robust to make sure that FCPA insurance is not viewed as a substitute for corporate culture prohibiting corrupt payments or a signal to the enforcement agencies that the company has a subpar compliance program.

Much has been written recently about the unprecedented growth in the number of enforcement actions brought under the Foreign Corrupt Practices Act, 15 U.S.C. ' 78dd-1 et seq. (FCPA). Settlements of enforcement actions in the tens of millions of dollars have become commonplace, and settlements in the hundreds of millions of dollars not unheard-of. The enforcement authorities (the Securities and Exchange Commission [SEC] and the Department of Justice [DOJ]) have made it clear that continued aggressive enforcement of the FCPA is and will continue to be one of their top priorities.

The enormous size of the FCPA enforcement actions settlements as well as the outsized cost of investigating and defending FCPA actions has led the insurance industry to offer new FCPA insurance products, which are intended to offset the FCPA investigation and settlement costs. These products, however, should be reviewed carefully by the companies to determine their utility in light of the companies' FCPA exposure, existing insurance, and, of course, cost.

The 'Anti-Bribery' Provisions

The FCPA “anti-bribery” provisions forbid payments of money or anything else of value made corruptly to influence any act or decision of a foreign official, political party or political party official, or candidate for political office, in his official capacity or to induce the official to use his influence to affect a government act or decision so as to assist a company in obtaining or retaining business or directing business to any person or to secure any improper advantage.

The Act defines “foreign official” to include any officer or employee of a non-U.S. government or any instrumentality of the government, or any person acting in an official capacity for or on behalf of the non-U.S. government or its instrumentality. The enforcement agencies take the position that employees of foreign state-owned companies are also “foreign officials.” Even if a company is not wholly owned by the state, it may be considered an “instrumentality” of a government if the government exercises substantial control over the company.

Payments, authorizations, promises or offers to any other person are also prohibited if there is knowledge that any portion of the payment is to be passed along to a foreign official or foreign political party, official or candidate for a prohibited purpose. “Knowledge” is defined very broadly and is present when one knows an event is certain or likely to occur; even purposely failing to take note of an event or being willfully blind can constitute knowledge

Enforcement Actions

Between 2004 and 2010, FCPA enforcement actions initiated by the DOJ and SEC increased nearly fifteen-fold, from five to 74. The pace of enforcement actions slowed somewhat in 2011, but the apparent slowdown is attributable to the fact that there were multiple FCPA jury trials as well as multiple criminal cases working their way through the system. The enforcement agencies recently reported that there are currently more than 150 open FCPA investigations.

Aside from the breathtaking multi-million dollar FCPA settlements (for example, Siemens paid over $800 million and Halliburton paid $559 million), the costs of simply conducting an internal investigation into a potential FCPA violation can be astronomical. For example, Avon has reported that its FCPA-related investigative costs in 2009-2010 were nearly $130 million. Reportedly, the investigation costs for Siemens were in excess of $850 million. A routine FCPA investigation can often cost millions of dollars in attorney and accountant fees. For a whole host of reasons (not the least of which is the recently enacted whistleblower provision of the Dodd-Frank law), internal investigations of FCPA issues are often a necessity. The significant costs of investigation are incurred regardless of whether an actual violation is found.

These substantial investigative costs naturally lead those in charge of compliance and risk management to ask obvious questions: Are these costs covered under any of our company's existing insurance policies? Are there policies available that might help our company more effectively manage the risk associated with these issues?

What Companies Should Do

Companies should start by looking at their existing Directors and Officers (D&O) liability policies. Companies that carry “D&O” liability insurance may already have some limited protection for the costs of an FCPA investigation and related fines/settlements. The scope of coverage for the costs of an FCPA investigation will likely vary from one D&O policy to the next. The actual coverage for costs will depend on the policy's definition of “claim” as well as the definition of “securities claims” (for many publicly traded companies, the coverage for the entity is limited to only claims related to the offering and sale of the company's own securities). While a D&O policy might be the most likely source of some coverage for FCPA investigations, it must be closely scrutinized to determine the exact scope of that coverage.

In response to the potential gaps in coverage for FCPA investigations, new insurance products are beginning to come to market that may cover at least some of this exposure. For example, Chartis is now offering an “FCPA Investigation Extension,” which states that the “corrupt practices” exclusion contained in
the Chartis' standard investigations response policy no longer applies. The “FCPA Investigation Extension” applies to any investigation of any actual or suspected bribery of foreign government officials located in any identified country in violation of the FCPA, or in violation of that portion of any similar foreign law that prohibits bribery of foreign government officials. The “FCPA Investigation Extension” does not appear to cover, however, any amounts characterized in the settlement documents as fines, penalties, interest or disgorgement. The limit of coverage under the “FCPA Investigation Extension” also appears rather modest compared to the significant costs of a worldwide FCPA investigation (although it can be reasonably inferred that higher limits can be negotiated).

Marsh has also introduced a branded “FCPA Corporate Response” product, which is stated to provide worldwide coverage for both the organization and individuals for FCPA investigations and acts as primary insurance to a D&O policy. Based on the product's fact sheet, similar to the “FCPA Investigation Extension,” it does not appear that the “FCPA Corporate Response” reimburses companies for any fines or penalties assessed in connection with an FCPA violation.

The potential advantages of these new products are at least two-fold: 1) they specifically cover the costs of FCPA investigations, largely taking away the questions that routinely arise under the typical D&O policy as to the exact scope of coverage and when it is triggered; and 2) they leave the D&O policies limits intact for other claims. Insurance buyers should nevertheless carefully review these and similar products and evaluate whether the specific purchase of an FCPA cover is needed in the circumstances of the company's business. For example, a company should evaluate whether FCPA investigation cost insurance is already included in the D&O policy. It should also consider its FCPA risk profile, paying special attention to where in the world it does business, how it goes to market in high FCPA risk countries, and who its customers are. Furthermore, the company should evaluate whether the FCPA coverage provides meaningful protection based on available limits and premiums charged. As part of that analysis, the company should determine whether the product covers only investigations against the company, or whether the product also covers investigations against individual employees, officers, and directors

Conclusion

The insurance industry's efforts in offering meaningful and innovative products that protect the companies against the risk of FCPA-related investigative costs represent a positive development. In the era of increased enforcement activity relating to the FCPA compliance, companies would benefit from a clear pronouncement that any FCPA-related investigative costs are covered. The FCPA investigative costs insurance should eliminate the questions that often arise under a typical D&O policy on whether expenses incurred either in connection with an informal investigation by an enforcement agency or an internal corporate investigation are covered. That said, potential purchasers of these products must carefully scrutinize the products and perform a cost/benefit analysis to determine if the new coverage would be beneficial to them. Last, the potential purchaser should evaluate its own risk profile and assess whether its internal compliance policies are sufficiently robust to make sure that FCPA insurance is not viewed as a substitute for corporate culture prohibiting corrupt payments or a signal to the enforcement agencies that the company has a subpar compliance program.