Foreign Corrupt Practices Act-- DOJ, SEC put sting into FCPA prosecutions Agencies now targeting small to mid-size companies

By John Minnis

Legal News

In January, 22 executives and employees of companies in the military and law enforcement products industry were indicted for engaging in schemes to bribe foreign government officials to obtain or retain business.

According to the Department of Justice, it was the largest single investigation and prosecution against individuals in the history of DOJ's enforcement of the Foreign Corrupt Practices Act (FCPA), a law that prohibits U.S. persons and companies, and foreign persons and companies acting in the United States, from bribing foreign government officials for the purpose of obtaining or retaining business.

Some 150 FBI agents executed 14 search warrants across the country. In addition, the London police executed seven search warrants in connection with investigations into companies involved in the foreign bribery conduct that formed the basis for the indictments.

"This ongoing investigation is the first large-scale use of undercover law enforcement techniques to uncover FCPA violations and the largest action ever undertaken by the Justice Department against individuals for FCPA violations," said Assistant Attorney General Lanny A. Breuer. "The fight to erase foreign bribery from the corporate playbook will not be won overnight, but these actions are a turning point. From now on, would-be FCPA violators should stop and ponder whether the person they are trying to bribe might really be a federal agent."

"Corrupt payments to foreign officials to obtain or retain business erode public confidence in our free market system and threaten to undermine foreign governments," said Washington, D.C., U.S. Attorney Channing Phillips. "These indictments set forth serious allegations and reflect the Department's commitment to aggressively investigate and prosecute those who try to advance their businesses through foreign bribery."

Grand Rapids attorney Mark E. Spitzley, a partner with Warner Norcross & Judd, specializes in international law and the FCPA. He said the January bust set precedents on many fronts.

"This was very big news. This was a very big change," he said. "This was putting it (FCPA enforcement) on steroids. It's much broader than one would think."

For one, the January arrests resulted not from real-life bribery attempts of foreign officials but from a sting operation set up by the DOJ and the FBI.

According to the DOJ, the defendants allegedly agreed to pay a 20 percent "commission" to a sales agent who the defendants believed represented the minister of defense for a country in Africa in order to win a portion of a $15 million deal to outfit the country's presidential guard. In reality, the "sales agent" was an undercover FBI agent. The defendants were told that half of that "commission" would be paid directly to the minister of defense. The defendants allegedly agreed to create two price quotations in connection with the deals, with one quote representing the true cost of the goods and the second quote representing the true cost, plus the 20 percent "commission." The defendants also allegedly agreed to engage in a small "test" deal to show the minister of defense that he would personally receive the 10 percent bribe.

Enacted in 1977 following Watergate, the FCPA has been a "pretty sleepy statute" until now, Spitzley said. Previously, prosecutions were primarily against large corporations as the result of whistle-blowing by disgruntled former employees or competitors. Today, the DOJ and SEC are targeting small to medium-sized companies and their CEOs and CFOs -- "control persons."

According to an article in the Securities Regulations Law Journal, there were only five FCPA prosecutions in 2004. Last year, there were 42.

"There's no question that the DOJ and SEC have stepped up FCPA prosecutions," Spitzley said.

In 2004, Schering-Plough, the huge New Jersey-based pharmaceutical company, was indicted by the SEC when its subsidiary in Poland donated $76,000 to a charity headed by the director of a health fund that was a public body. The SEC also criticized the pharmaceutical company for not having adequate accounting controls. Schering-Plough ended up paying a $500,000 civil penalty.

In 2008, Siemens, the global German technology company with a seat on the New York Stock Exchange, agreed to pay $800 million in combined fines and penalties and to disgorge $350 million in profits to settle FCPA charges for engaging in a pattern of bribery the DOJ termed "unprecedented in scale and geographic scope."

The SEC alleged that Siemens violated the FCPA by engaging in a "widespread and systematic practice of paying bribes to foreign government officials to obtain business."

In December, UTStarcom Inc., a Delaware-based global telecommunications company, agreed to pay a $1.5 million fine for violations of the FCPA by providing travel and other things of value to foreign officials, specifically employees at state-owned telecommunications firms in China.

In February, a Virginia man pleaded guilty to one charge of bribing Panamanian officials and agreed to forfeit $331,000 in proceeds resulting from the crime. He also faces up to five years in prison and a minimum $250,000 fine.

In March, BAE Systems, a multinational defense contractor with headquarters in the United Kingdom, pleaded guilty to FCPA criminal charges and was fined $400 million. In the BAES case, the company was not charged with bribing foreign officials. Rather, it was prosecuted for failing to create and implement policies and procedures to ensure its compliance with the anti-bribery provisions of the FCPA and then lying about it.

Nexus Technologies Inc., a Philadelphia-based export company, faces a maximum $27 million find in connection with a conspiracy to bribe Vietnamese government officials in exchange for lucrative contracts to supply equipment and technology to Vietnamese government agencies in violation of the FCPA. In addition, three of the company's officers and agents face maximum sentences of more than 30 years in prison.

Last October, Nature's Sunshine Products, a leading Utah-based nutritional supplement seller, was fined $600,000 for bribing Brazilian officials to allow its products into that country. Further, the company's CEO and a former officer were each required to pay $25,000.

"They went after the CEO and CFO as the 'control person,'" Spitzley said. "They were ultimately responsible. They (the DOJ and SEC) really want compliance plans in place. It wouldn't surprise me at all that Nature's Sunshine did not have these things in place."

The stepped-up enforcement of the FCPA is largely due to the adoption and implementation of the Anti-Bribery Convention by the Organization for Economic Cooperation and Development (OECD) in 1999. The OECD is a Paris-based international economic organization comprising 30 member countries, including the United States. It was initially formed to help implement the Marshall Plan.

OECD policies and conventions are considered "soft law" -- nonbinding -- and enforcement is dependent on "peer pressure" from member countries.

"In order to have these other countries put similar regulations in place -- and enforce them -- the U.S. cannot be made out to be hypocritical and can lead by example, effectively placing additional pressure on the other countries to step up their enforcement," Spitzley said. "This, in turn, helps U.S. companies by leveling the playing field, i.e., ensuring their non-U.S. competitors are subjected to similar restrictions."

To prevent running afoul of the FCPA, Spitzley has six "tips" he gives to clients doing international business:

1) Know with whom you are dealing.

2) Have written FCPA compliance plans, including a "no bribery" clause.

3) Have all employees and agents sign certificates of compliance with the FCPA.

4) Institute proper accounting controls.

5) No big slush funds.

6) Written contracts with all sales people, distributors, agents and third parties containing anti-bribery provisions.

7) Don't stick your head in the sand.

"The obvious advice," Spitzley concludes, "is don't bribe anyone."

Published: Wed, Apr 28, 2010

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