There has been a steady flow of articles in recent years telling us how enforcement of the U.S. Foreign Corrupt Practices Act (FCPA) has evolved and moved into a new age: new and increased enforcement capabilities at the Department of Justice and the Securities and Exchange Commission (SEC), new risks in an age of instant communications and global supply chains. But are these risks so new?
In looking at enforcement actions and other developments in the world of FCPA enforcement during the past two years, one is struck by the fact that the big cases continue to involve the same fact patterns as before, and the U.S. Government’s enforcement priorities seem to result from the same dynamics that have been in existence since the earliest days of the FCPA itself. Despite all the memos and articles, despite all the increased awareness about the need for FCPA compliance, despite the newly enhanced policies and procedures and the stronger guardrails that many companies have put in place, human nature remains the same – and similar violations of the FCPA continue to occur.
This article reviews five major takeaways from recent FCPA cases and other developments during the past two years, and it ends with a suggestion to corporate counsel and compliance personnel about what it all means.
1. The classic FCPA fact pattern has not gone away.
When you think of the classic FCPA case, you think of Swiss bank accounts, offshore shell companies in secret jurisdictions, and agents who move funds to government officials under the guise of apparently legitimate consulting agreements. In the early days of the FCPA, before there was much awareness of the need for strong anti-corruption compliance, this was a fact pattern that seemed to crop up frequently. But as awareness and understanding grew in corporate America, and as everyone’s radar for red flags improved, one might have expected such obviously high-risk situations to become extinct. But they have not – far from it. When you look at some of the largest FCPA resolutions from the Department of Justice (DOJ) and SEC in the past couple of years, you realise that this classic fact pattern has never gone away.
Keppel Offshore & Marine Ltd. – Singapore-based shipyard operator and its U.S. subsidiary made payments to officials and a political party in Brazil through an intermediary who was supposedly providing legitimate consulting services. The commissions were paid into accounts held by shell companies controlled by the intermediary and then transferred to accounts controlled by the officials and the political party.
SBM Offshore N.V. – Netherlands-based company and its U.S. subsidiary made payments to officials in Brazil, Angola, Equatorial Guinea, Kazakhstan and Iraq through intermediaries in Brazil and elsewhere in order to obtain contracts with state-owned oil companies. Payments were made into accounts in Switzerland and Monaco held in the name of the intermediaries’ shell companies.
Telia Co. AB – Sweden-based company and its Uzbekistan subsidiary made payments to Uzbek officials through a Gibraltar shell company that company management knew was beneficially owned by an Uzbek official.
United Technologies Corp. – U.S.-based company and its subsidiaries made payments to government officials through various intermediaries to win contracts for elevators in Azerbaijan and aircraft engines in China.
The classic FCPA red flags were readily apparent in all of these cases: commercial agents, little or no due diligence by the companies, high-risk countries and market sectors, offshore shell companies, bank accounts in Switzerland and Monaco. Of the top 10 highest dollar-amount resolutions in the history of the FCPA, four of them have occurred within the past two years, and they all exhibited classic red flags, such as the use of agents in high-dollar transactions.
Why are cases like these still happening? The fact is that the issues giving rise to such “classic corruption” are more persistent than we might have thought. These include economic pressures on companies, the continued corrupt attitudes of foreign officials in certain countries, and the willingness of employees to step across the line in order to bring in business. Despite the fact that the FCPA has been on the books for more than four decades, and despite the well-publicised enforcement actions that have sent individuals to jail and caused companies to pay fines in the many hundreds of millions of dollars, some individuals are still willing to engage in such conduct. And it’s why, even today, these fact patterns still dominate the big FCPA cases. The risks have not gone away.
2. DOJ and SEC like follow-on cases and industry sweeps.
The FCPA resolutions during the past two years provide further evidence that the tried-and-true enforcement strategy of industry sweeps is alive and well. The trend has a long pedigree, going back at least as far as the Bonny Island cases, the Panalpina cases in 2010, and the medical device cases after that. The trend continued in the past year with several FCPA resolutions in a variety of contexts.
FCPA violations premised on giving employment positions to the relatives of government officials is a prominent example. It’s a type of case that emerged in 2015, when the SEC brought an FCPA enforcement action against BNY Mellon for providing internships to family members of foreign government officials affiliated with a sovereign wealth fund in the Middle East. The following year, the SEC resolved a similar action against Qualcomm, Inc., and another one against J.P. Morgan Chase & Co. In July 2018, the DOJ and SEC brought yet another employment-based case, this time against Credit Suisse Group AG and its Hong Kong subsidiary, totaling $77 million.
These enforcement actions have sparked a great deal of discussion and controversy inside corporate compliance departments, because they seem to signal an intent on the part of the U.S. enforcement agencies to broaden the definition of the FCPA’s statutory term “anything of value” beyond tangible items (such as cash or other financial benefits) and into the world of intangible benefits, such as employment for relatives, where the lines between what is permitted and prohibited are murkier than ever.
The contexts in which some of these cases arose are very specific but there is a larger, more broadly applicable takeaway from these enforcement actions. There are many ways the DOJ and SEC can learn about improper conduct and initiate investigations. One of the ways is the cascading effect of investigations going on in similar businesses or in the same industry. Just ask anyone in the oil and gas sector, which has been in the FCPA crosshairs for decades. If your company is in one of the industries that has been targeted in the past, increased FCPA scrutiny is a fact of life and it pays to maintain the highest level of vigilance.
3. The DOJ Opinion Procedure is being used less and less.
In theory, the FCPA Opinion Procedure should be a highly useful tool. It provides companies and individuals with a way of obtaining an advisory opinion from the Justice Department regarding a proposed course of conduct that raises potential FCPA issues. In an area of the law such as FCPA enforcement, where there are few bright lines, a favourable opinion is the strongest assurance that a company can get regarding a potential FCPA risk.
But the big story about the Opinion Procedure is this: since 2014, the number of FCPA opinions issued by DOJ is exactly zero.
Why should this be? The Opinion Procedure has never generated big numbers but in an average year, the DOJ will usually issue anywhere from one to four opinions. There have been a few years in the past when no opinions have been issued, but this current stretch is the longest with no opinions since the first opinion was issued in 1980. Why has this number gone down to zero? It’s likely because companies continue to find the Opinion Procedure to be of limited use. There are three reasons why this is so.
First, the DOJ will only issue an opinion regarding prospective conduct and this limits the usefulness of the procedure to a small percentage of cases.
Second, obtaining an opinion takes time, and time is not always available. If a deal is moving quickly, the company may not be able to put on the brakes for the several weeks (at best) that it would take to finalise its opinion request and wait for the DOJ to respond. And if the answer is negative, then a deal could have to be reconfigured or scrapped, and few companies are willing to put a decision like that in the government’s hands.
Third, companies are reluctant to approach the DOJ because they worry about tipping the department off to a situation that might result in a subpoena or governmental investigation. This fear is probably unwarranted; there are ways of testing the waters with the DOJ on a no-names basis before making a formal opinion request. But companies tend to have a visceral antipathy to approaching the government for anything voluntarily, particularly when it involves criminal law.
Companies should make use of the Opinion Procedure if their situation fits within its narrow band of applicability, but they shouldn’t hope that it will ever be something it’s not.
4. Coordination between U.S. authorities and the authorities of other countries continues to deepen.
The FCPA case resolutions of the past two years have reflected increasing coordination between the U.S. enforcement agencies and the anti-corruption authorities in Europe and other countries. Some of the biggest corruption cases on the global docket during the past few years have been resolved simultaneously in the U.S. and in other countries. This reflects a remarkable increase in the level of cross-border coordination since charges in the Siemens case were resolved simultaneously in the U.S. and Germany more than 10 years ago. Cross-border cooperation stands to be the most significant change in the FCPA enforcement landscape in recent years. If there is a meaningful new development in FCPA enforcement, this is it.
This change is apparent in the many case resolutions in the past two years that have included simultaneous resolutions in other countries. Of the current top 10 largest FCPA cases, all of them involved cooperation between the DOJ and SEC and non-U.S. authorities. Of the five most recent cases on the list, four of them included not only cooperation, but also a simultaneous resolution in other countries, including the first-ever resolutions with France’s Parquet National Financier (Société Générale S.A.) and the Attorney General’s Chambers in Singapore (Keppel Offshore & Marine Ltd.).
What stands out is both the number of resolutions including a non-U.S. component and the geographic sweep of the countries coordinating with the DOJ and SEC.
The increasing coordination across borders can be expected to have several significant effects. As contacts among enforcement agencies become more routine, the sharing of information and evidence will become faster and investigations will become more sophisticated worldwide. The pooling and leveraging of prosecutorial resources will extend the reach of investigators. All of this means that companies subject to the FCPA face increased risk of detection and prosecution for violations, wherever in the world they might occur.
5. The DOJ will always push the limit on FCPA jurisprudence, but it won’t always succeed.
The DOJ can always be relied on to take expansive interpretations of the FCPA, particularly when it comes to the scope of the act and the department’s jurisdiction. And almost as reliably, in cases where defendants mount a legal challenge, the courts are often willing to step in to curb the department’s more excessive arguments. One of the areas where the DOJ has consistently tried pushing the boundaries is with respect to foreign nationals and whether they can be brought under the jurisdiction of the act. But this also happens to be one place where the FCPA – which is usually devoid of bright lines – speaks with relative clarity.
In 2018, another of the department’s expansive attempts to charge a foreign national was rejected, this time by the Second Circuit. In U.S. v. Hoskins, count one of the indictment was conspiracy to violate the FCPA, premised in part on an allegation that the defendant, a U.K. citizen, had conspired to bribe Indonesian officials in violation of 15 U.S.C. § 78dd-3. The defendant moved to dismiss that part of the indictment, arguing that he could not have conspired to violate that section because he did not take any action “while in the territory of the United States”, as required under the statute. The district court agreed with the defendant, and the Second Circuit affirmed, holding that a foreign national cannot be held liable for conspiracy to violate the FCPA when that foreign national is not within one of the enumerated categories of persons subject to the act. In reaching its conclusion, the court noted: “The government may not expand the extraterritorial reach of the FCPA by recourse to the conspiracy and complicity statutes.”
There are two takeaways from this ruling. First, the government will always try to push the boundaries of FCPA jurisprudence. Partly this is a function of zealous legal advocacy, and partly it is a function of having had little need over the years to defend its expansive interpretations of the act in court. Second, even though the courts often shoot down the government’s most expansive interpretations, the government often has other ways of reaching violations. Hoskins provides a prime example. Even though the Second Circuit affirmed the dismissal of one object of the conspiracy, the court’s ruling left untouched the second object of the conspiracy, which was premised on the defendant’s being an agent of a domestic concern, which does not require an act occurring while in U.S. territories. So although “within the territory of the United States” still has meaning, it is cold comfort for defendants such as the one in Hoskins, whose prosecution continues to move forward.
What Is the Overarching Lesson for Corporate Counsel and Compliance Personnel?
The big takeaway from these developments is that corporate counsel and compliance personnel should continue to focus on fundamentals. Large-dollar contracts with government customers in risky jurisdictions, third-party agents or distributors receiving commissions or discounts, industries where FCPA violations have already been investigated and prosecuted – there’s a reason why these facts get the most attention from enforcement agencies, and it’s because they carry the most significant risks. In-house lawyers would be well advised to focus attention and resources on understanding and mitigating those risks.
The practical realities of business remain the same as they were when the FCPA was first adopted in 1977, and it is therefore no surprise that many of the “new developments” in the FCPA world may not be so new at all. But the need for strong FCPA compliance is the one thing that hasn’t changed.
Mark Miller is a partner in the Washington, D.C., office of Baker Botts. His practice focuses on FCPA compliance and enforcement.