Navigating Turbulent FCPA Waters

Next, the DOJ suffered a high-profile setback in the highly touted “Catch-22″ case from 2009, in which 22 defendants were ultimately dismissed ' uncaught, so to speak. As reported here in September, the Goncalves case highlighted the ambiguity in the FCPA's intent requirement ' such that the government shifted its investigation midstream “to avoid the use of the term 'bribe'” and instead induced promises of payments of amorphous “commissions,” a term that commonly refers to lawful payments. See David S. Krakoff and Lauren R. Randall, FCPA: Were the Sting Trials Doomed from the Start?, Bus. Crimes Bull., Sept. 2012 at 1.

In addition to setbacks in criminal cases against individual executives, the SEC and corporate defendants now face increasing difficulty in gaining approval for settlements, at least in Judge Leon's courtroom in Washington, DC, where he has, to date, refused to approve FCPA settlements negotiated with Tyco (September 2012) and IBM (March 2011). On Jan. 31, 2013, he held a closed hearing in the Tyco matter, which remains unresolved. The IBM case, now nearly two years after the settlement agreement was signed, has stalled in light of Judge Leon's unilateral insistence that IBM be subject to more expansive disclosure requirements than the parties negotiated.

The Response

In the midst of this turmoil, the DOJ and SEC upped their profile on the staffing and policy fronts. As to staffing, the enforcement boots are now on the ground in offices throughout the country after the establishment, in January 2010, of a specialized FCPA unit in the SEC's Enforcement Division; there are now dedicated investigators in D.C. and six regional field offices (Boston, Los Angeles, Miami, Salt Lake City, San Francisco, and Fort Worth). The pace of enforcement actions may re-accelerate and will certainly be more geographically dispersed, as several of these offices previously had no dedicated FCPA enforcement resource. With the anecdotal evidence of large FCPA investigations underway nationally and reports of more than 100 open matters at DOJ and SEC, combined with a recent group of marquee corporate settlements, it would be premature to predict that a couple of years of slipping numbers and in-court disappointments portend an extended downward enforcement trend.

Perhaps the best evidence of the regulators' robust commitment to bringing FCPA actions is the SEC and DOJ's jointly authored Resource Guide to the U.S. Foreign Corrupt Practices Act (Guide), released Nov. 14, 2012.

What the Guide Says

At this time last year, those in both the corporate and white-collar defense worlds were hoping for clarity in a number of areas of the FCPA, among them: 1) the tangible benefits (if any) of voluntary disclosure and an adequate compliance program; 2) the limits of parent-subsidiary, principal-agent, and successor liability; and 3) who counts as a “foreign official.” Unfortunately, as discussed below, most of these issues remain unresolved.

1. Voluntary Disclosure/Compliance Program

The most positive aspect of the Guide may be its effort, albeit somewhat indirect, to make concrete the potential benefits of a robust compliance program and self-disclosure in terms of inducing prosecutorial discretion. In addition to a detailed discussion of compliance programs, the Guide devotes a section to encouraging “Self-Reporting, Cooperation, and Remedial Efforts.” The Guide first points to the broad factors set forth in the Sentencing Guidelines, DOJ's Principles of Federal Prosecution of Business Organizations, and the SEC's Seaboard Report. In an effort to allay concerns by many that self-disclosure yields little benefit, the Guide also includes several anonymized case studies in which business entities voluntarily disclosed and the SEC and DOJ declined to prosecute. At a minimum, the DOJ and SEC seem committed to fostering the perception that they give genuine credit for a company's decision to self-report. The examples also provide touchstones for defense advocacy on a company's behalf.

The Guide does not provide the hoped-for “affirmative defense” of “adequate compliance programs,” but it does reference international “best practices,” provides an overview of 10 “hallmarks” of effective compliance programs, and as noted above, lays out several case studies ' including the Morgan Stanley investigation ' as examples of “robust” compliance programs that resulted in decisions to decline corporate prosecution. These best practices and case studies offer valuable starting points for companies evaluating their compliance systems and useful benchmarks for counsel advocating for declinations.

2. Parent-Subsidiary/Principal-Agent/Successor Liability

The Guide advises that there are two ways in which a parent company may be held liable for bribes paid by its subsidiary. One is if it participated sufficiently in the activity to be directly liable. The other relies on traditional principles of agency: If an agency relationship exists, “a subsidiary's actions and knowledge are imputed to its parent,” and “under traditional principles of respondeat superior, a company is liable for the acts of its agents, including its subsidiaries and their employees.” While there is little comfort to be found in the expansive reiteration of agency principles, two recent SEC settlements entered into after the Guide was released suggest that in the absence of the parent's actual knowledge of corrupt payments, the DOJ may be persuaded not to bring a separate action.

In Allianz SE, no criminal charges were brought where the parent company discovered improper payments by its subsidiary and instructed the subsidiary to stop making the payments, but the subsidiary continued making improper payments without the parent's knowledge. See Allianz SE, Exchange Act Release No. 68448, Adm. Proc. No. 3-15132, Order Instituting Settled Proceedings (Dec. 17, 2012). And in SEC v. Eli Lilly & Co., the SEC alleged improper payments by subsidiaries in Brazil, China, Poland and Russia, but charged solely the Russian improper payments, where evidence showed that parent company Eli Lilly had knowledge of the Russian subsidiary's improper payments but not of those of its other foreign subsidiaries. See SEC v. Eli Lilly & Co., No. 1:12-cv-02045, Final Judgment (D.D.C. Dec. 20, 2012).

As with cooperation and self-disclosure, the Guide again seeks to induce approved behaviors with a promise of leniency when considering successor liability. Starting with the observation that only “in limited circumstances” have the enforcement agencies “taken action against successor companies,” the Guide encourages acquiring companies to conduct comprehensive FCPA due diligence with the observation that “[i]n a significant number of instances, DOJ and SEC have declined to take action against companies that voluntarily disclosed and remediated conduct and cooperated with DOJ and SEC in the merger and acquisition context.”

3. Defining 'Foreign Official'

A particularly persistent FCPA problem is the murky definitions of “foreign official” and “instrumentality.” Again, bright-line guidance is not to be found. The Guide references a “non-exclusive” list of 11 factors involved in the “fact-specific” determination as to whether a particular entity is a government instrumentality such that its employees are foreign officials subject to FCPA prohibitions. Beyond conceding that “as a practical matter an entity is unlikely to qualify as an instrumentality if a government does not own or control a majority of its shares,” there is little black letter guidance here, in a particularly difficult area where many had hoped for clarity.

Conclusion

While there have been high-profile setbacks to be sure, there is little reason to expect FCPA enforcement actions ' characterized by some as a tool in the war on terror ' to decline. Hopefully, the increased guidance about the regulators' approach, particularly as to questions of cooperation and compliance, is a first step toward clearer and more consistent standards of enforcement.

Joseph F. Savage, Jr. ([email protected]), a member of this newsletter's Board of Editors, is a partner in the Boston office of Goodwin Procter LLP and a former federal prosecutor. Maren Klawiter is a litigation associate in the same office, and a former medical sociologist and health policy professor.

In February 2010, Assistant Attorney General (AAG) Larry A. Breuer appeared at the ABA National Institute on White Collar Crime and heralded 2009 as “the most dynamic single year in the more than 30 years since the FCPA [Foreign Corrupt Practices Act (FCPA)] was enacted.” Riding the wave of the so-called “Catch-22″ sting arrests in United States v. Goncalves et al., No. 09-cr-00335 (D.D.C.), he promised even more aggressive FCPA enforcement in 2010. Since then, all has not gone smoothly. Indeed, in 2012, the number of FCPA cases declined for the second straight year and total recoveries slid again as well.

Bumps in the Road

In addition to declining case loads, the bumps in the road for regulators in the cases actually pursued have been real. An early example came in January 2012, when the U.S. District Court for the Southern District of Texas entered a directed verdict acquitting John O'Shea, an executive of a Texas-based subsidiary of a Swiss company, on 12 substantive FCPA violations arising out of allegedly corrupt dealings with officials of Mexico's Comisi'n Federal de Electricidad. United States v. O'Shea, No. H-09-cr-00629, Order on Acquittal (S.D. Tex. Jan. 17, 2012). A few weeks later, the court granted the Government's motion to dismiss with prejudice the remaining counts. United States v. O'Shea, No. 4-09-cr-00629, Final Dismissal (S.D. Tex. Feb. 9, 2012).

Next, the DOJ suffered a high-profile setback in the highly touted “Catch-22″ case from 2009, in which 22 defendants were ultimately dismissed ' uncaught, so to speak. As reported here in September, the Goncalves case highlighted the ambiguity in the FCPA's intent requirement ' such that the government shifted its investigation midstream “to avoid the use of the term 'bribe'” and instead induced promises of payments of amorphous “commissions,” a term that commonly refers to lawful payments. See David S. Krakoff and Lauren R. Randall, FCPA: Were the Sting Trials Doomed from the Start?, Bus. Crimes Bull., Sept. 2012 at 1.

In addition to setbacks in criminal cases against individual executives, the SEC and corporate defendants now face increasing difficulty in gaining approval for settlements, at least in Judge Leon's courtroom in Washington, DC, where he has, to date, refused to approve FCPA settlements negotiated with Tyco (September 2012) and IBM (March 2011). On Jan. 31, 2013, he held a closed hearing in the Tyco matter, which remains unresolved. The IBM case, now nearly two years after the settlement agreement was signed, has stalled in light of Judge Leon's unilateral insistence that IBM be subject to more expansive disclosure requirements than the parties negotiated.

The Response

In the midst of this turmoil, the DOJ and SEC upped their profile on the staffing and policy fronts. As to staffing, the enforcement boots are now on the ground in offices throughout the country after the establishment, in January 2010, of a specialized FCPA unit in the SEC's Enforcement Division; there are now dedicated investigators in D.C. and six regional field offices (Boston, Los Angeles, Miami, Salt Lake City, San Francisco, and Fort Worth). The pace of enforcement actions may re-accelerate and will certainly be more geographically dispersed, as several of these offices previously had no dedicated FCPA enforcement resource. With the anecdotal evidence of large FCPA investigations underway nationally and reports of more than 100 open matters at DOJ and SEC, combined with a recent group of marquee corporate settlements, it would be premature to predict that a couple of years of slipping numbers and in-court disappointments portend an extended downward enforcement trend.

Perhaps the best evidence of the regulators' robust commitment to bringing FCPA actions is the SEC and DOJ's jointly authored Resource Guide to the U.S. Foreign Corrupt Practices Act (Guide), released Nov. 14, 2012.

What the Guide Says

At this time last year, those in both the corporate and white-collar defense worlds were hoping for clarity in a number of areas of the FCPA, among them: 1) the tangible benefits (if any) of voluntary disclosure and an adequate compliance program; 2) the limits of parent-subsidiary, principal-agent, and successor liability; and 3) who counts as a “foreign official.” Unfortunately, as discussed below, most of these issues remain unresolved.

1. Voluntary Disclosure/Compliance Program

The most positive aspect of the Guide may be its effort, albeit somewhat indirect, to make concrete the potential benefits of a robust compliance program and self-disclosure in terms of inducing prosecutorial discretion. In addition to a detailed discussion of compliance programs, the Guide devotes a section to encouraging “Self-Reporting, Cooperation, and Remedial Efforts.” The Guide first points to the broad factors set forth in the Sentencing Guidelines, DOJ's Principles of Federal Prosecution of Business Organizations, and the SEC's Seaboard Report. In an effort to allay concerns by many that self-disclosure yields little benefit, the Guide also includes several anonymized case studies in which business entities voluntarily disclosed and the SEC and DOJ declined to prosecute. At a minimum, the DOJ and SEC seem committed to fostering the perception that they give genuine credit for a company's decision to self-report. The examples also provide touchstones for defense advocacy on a company's behalf.

The Guide does not provide the hoped-for “affirmative defense” of “adequate compliance programs,” but it does reference international “best practices,” provides an overview of 10 “hallmarks” of effective compliance programs, and as noted above, lays out several case studies ' including the Morgan Stanley investigation ' as examples of “robust” compliance programs that resulted in decisions to decline corporate prosecution. These best practices and case studies offer valuable starting points for companies evaluating their compliance systems and useful benchmarks for counsel advocating for declinations.

2. Parent-Subsidiary/Principal-Agent/Successor Liability

The Guide advises that there are two ways in which a parent company may be held liable for bribes paid by its subsidiary. One is if it participated sufficiently in the activity to be directly liable. The other relies on traditional principles of agency: If an agency relationship exists, “a subsidiary's actions and knowledge are imputed to its parent,” and “under traditional principles of respondeat superior, a company is liable for the acts of its agents, including its subsidiaries and their employees.” While there is little comfort to be found in the expansive reiteration of agency principles, two recent SEC settlements entered into after the Guide was released suggest that in the absence of the parent's actual knowledge of corrupt payments, the DOJ may be persuaded not to bring a separate action.

In Allianz SE, no criminal charges were brought where the parent company discovered improper payments by its subsidiary and instructed the subsidiary to stop making the payments, but the subsidiary continued making improper payments without the parent's knowledge. See Allianz SE, Exchange Act Release No. 68448, Adm. Proc. No. 3-15132, Order Instituting Settled Proceedings (Dec. 17, 2012). And in SEC v. Eli Lilly & Co., the SEC alleged improper payments by subsidiaries in Brazil, China, Poland and Russia, but charged solely the Russian improper payments, where evidence showed that parent company Eli Lilly had knowledge of the Russian subsidiary's improper payments but not of those of its other foreign subsidiaries. See SEC v. Eli Lilly & Co., No. 1:12-cv-02045, Final Judgment (D.D.C. Dec. 20, 2012).

As with cooperation and self-disclosure, the Guide again seeks to induce approved behaviors with a promise of leniency when considering successor liability. Starting with the observation that only “in limited circumstances” have the enforcement agencies “taken action against successor companies,” the Guide encourages acquiring companies to conduct comprehensive FCPA due diligence with the observation that “[i]n a significant number of instances, DOJ and SEC have declined to take action against companies that voluntarily disclosed and remediated conduct and cooperated with DOJ and SEC in the merger and acquisition context.”

3. Defining 'Foreign Official'

A particularly persistent FCPA problem is the murky definitions of “foreign official” and “instrumentality.” Again, bright-line guidance is not to be found. The Guide references a “non-exclusive” list of 11 factors involved in the “fact-specific” determination as to whether a particular entity is a government instrumentality such that its employees are foreign officials subject to FCPA prohibitions. Beyond conceding that “as a practical matter an entity is unlikely to qualify as an instrumentality if a government does not own or control a majority of its shares,” there is little black letter guidance here, in a particularly difficult area where many had hoped for clarity.

Conclusion

While there have been high-profile setbacks to be sure, there is little reason to expect FCPA enforcement actions ' characterized by some as a tool in the war on terror ' to decline. Hopefully, the increased guidance about the regulators' approach, particularly as to questions of cooperation and compliance, is a first step toward clearer and more consistent standards of enforcement.

Joseph F. Savage, Jr. ([email protected]), a member of this newsletter's Board of Editors, is a partner in the Boston office of Goodwin Procter LLP and a former federal prosecutor. Maren Klawiter is a litigation associate in the same office, and a former medical sociologist and health policy professor.