Guest Blogger, Sharie A. Brown of DLA Piper –

The current financial crisis and market volatility understandably focuses corporate executives and their employees on corporate survival and improved financial performance. In my experience, corporate consolidations, divestitures, restructurings, and employee layoffs create organizational distractions that can distort sound judgment and reward short-term, but ill-conceived business solutions. At a recent General Counsel Forum in Chicago last week focusing on fraud prevention and anticorruption strategies, the attendees from corporate legal departments and financial functions indicated that they will be required to operate with fewer compliance and internal controls resources. None of the attendees thought their companies will be more susceptible to fraud and corruption violations this year compared to other years. Yet, my observations over the years indicate that from late 2009 through 2012, we should expect to see several currently reputable, large U.S. companies and individual corporate managers under investigation for fraud, corruption, and other criminal and civil violations. These companies and individuals will face enforcement scrutiny because they did not fight the tendency of managers and business units to shortcut legal compliance, internal controls, and due diligence procedures designed to prevent and detect financial crimes, particularly violations of the US Foreign Corrupt Practices Act ("FCPA").

One of the most important FCPA compliance and internal controls involves the conduct of appropriate, risk-based due anticorruption diligence on third party intermediaries, agents and consultants, as well as overseas joint venture partners, and international merger and acquisition target companies in high risk countries and industries for public corruption. This risk-based approach requires companies to take into account the following factors, among others: i) the reputation of the party or agent for corruption in the industry; ii) the local country’s reported reputation for public corruption; iii) whether the party is the subject of local media scandal or enforcement scrutiny, or on any international governmental lists; iv) whether the acquiring company has industry contacts that have information about the targeted party; v) the apparent competence and qualifications of the party for the project or activity contemplated; vi) whether the party was referred by a foreign official; vii) the availability and reliability of information about the targeted party in public databases, websites, and business reporting services; viii) whether the party is a foreign government official within the meaning of the FCPA, and whether there is shareholding by a foreign official in the party ; ix) whether the party is an agency or instrumentality of a foreign government; and x) whether the party or its shareholders are a relative or close associate of a foreign government official. Appropriate FCPA anticorruption due diligence would take into account and address these issues.

A more rigorous due diligence is appropriate in situations where the third party relationship or target company acquisition is highly strategic and economic, but the public corruption risks for the country and the industry are well-documented. For this important high-risk acquisition or joint venture relationship, there is no substitute for an in-country review consisting of in-person interviews of the parties and their key personnel, as well as relevant document reviews and sampling by U.S. professionals who regularly apply U.S. FCPA standards, in consultation with local professionals, to ensure that local anticorruption, data protection, and related fraud laws and rules, are recognized. Yet, during times of tight corporate finances, some companies will forgo such FCPA due diligence in favor of database reviews only, or they will rely on background or financial investigators whose reports list "FCPA" in the report title, but unfortunately those reports do not recognize or actually examine high risk FCPA/anticorruption activities. These seemingly cost-effective due diligence shortcuts actually result in expensive FCPA legal exposure for the acquiring company due to the FCPA risk items overlooked or misunderstood by the background investigators.

U.S.enforcement agencies are watching companies, and seem more determined to ensure that FCPA compliance, and other U.S.legal and financial compliance requirements continue to be fulfilled during the financial crisis. The U.S. Securities and Exchange Commission ("SEC") Office of Compliance Inspections and Examinations issued a letter to CEOs of SEC-registered firms to remind them of the important role that compliance programs play in helping companies meet their obligations under the securities laws. The SEC emphasized that even with the current financial crisis, corporate cost cutting-measures should take into account the need to maintain adequate compliance programs and internal financial controls systems. See Lori Richards, Director, Office of Compliance Inspections and Examinations U.S. Securities and Exchange Commission, Open Letter to CEO’s of SEC-Registered Firms (Dec. 2, 2008) (available here). Companies should consider this SEC notice to be an early indication that the financial crisis, standing alone, will not insulate a company against U.S. enforcement actions for fraud, FCPA violations, or other financial and reporting violations arising from a high risk environment created by the failure to maintain controls, or follow FCPA procedures, and test compliance systems.

Aggressive U.S. enforcement of financial fraud, corruption, and other criminal and civil violations is also forecast as a result of Congressional efforts with respect to the Supplemental Anti-Fraud Enforcement Markets Act ("SAFE Markets Act"). This anticipated legislation seeks to materially increase funding for investigative and prosecutorial resources by $110 million for enforcement actions involving financial fraud, corruption, ring the financial crisis may be particularly challenging for companies this year. Senator Charles E. Schumer (D-NY) and Senator Richard C. Shelby (R-Ala) of the Senate Banking Committee believe that 50 new assistant U.S. attorneys and 100 new SEC enforcement employees need to be hired to investigate and prosecute financial crimes.

Further, the U.S. Department of Justice ("DOJ") and the SEC are expected to continue aggressive investigation and enforcement of the FCPA, while imposing several millions (and possibly additional billions) of dollars in fines, penalties, and disgorgements for future violations. Thus, the lesson is clear: in the practice of FCPA due diligence for agents, joint venture partners, and merger and acquisition targets, a due diligence shortcut for savings, could ultimately become the most devastating and costly strategy for companies, managers, individual employees, and corporate boards under the FCPA.

(SAB)

According to a DOJ Press Release "Kellogg Brown & Root LLC (KBR), a global engineering, construction and services company based in Houston, pleaded guilty today to charges related to the Foreign Corrupt Practices Act (FCPA) for its participation in a decade-long scheme to bribe Nigerian government officials to obtain engineering, procurement and construction (EPC) contracts. . ."  The company plead to a "five-count criminal information" and "agreed to pay a $402 million criminal fine." The company issued a press release that stated that:

"[u]nder the terms of the settlement announced earlier today, KBR will make payments totaling $20 million over the next eight quarters to the DOJ. The information contained in the DOJ and SEC settlements note aggregate financial penalties totaling $579 million. The remainder of the penalties will be paid by Halliburton pursuant to indemnities under the 2006 Master Separation Agreement between KBR and Halliburton."

KBR has also agreed "to retain a compliance monitor to review KBR’s continued compliance with anti-corruption laws."  See also the FCPA Blog here

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Check out the FCPA Blog, Halliburton Announces Pending Settlement; Dan Slater, WSJ Blog, Halliburton Breaks FCPA Settlement Record for U.S. Companies.

How much can you fine a company for violating the law? At what point does the fine exceed a cost of doing business and become a deterrent for future conduct, not to mention a general deterrent to other companies?

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Initially discussed here, the Siemens plea is an interesting one. The go-to place for information on this case is the FCPA Blog here. Some observations –

• Unlike many cases involving a company, this does not appear to be a deferred prosecution agreement – but rather is a plea agreement with specified terms.
• The fine is huge, but it allows the company to resolve the case and move forward and the plea is not to an anti-bribery act, but rather the reporting provisions.
• The timing on this resolution is interesting – before the new administration takes over, before the end of the year – or is that reading too much into this.
• Unlike the deferred prosecution agreement in KPMG (here -p. 26) there is no explicit statement in the agreement precluding debarment. Also in Titan (FCPA case) there was a statement by the company that spoke to there being no debarment. One can find a reference to that here:

"Titan announced that it had reached a settlement to avoid debarment from work on U.S. government contracts. Avoiding debarment was particularly important to Titan, which is a leading provider of information and communications systems to U.S. government agencies."

But here again, we are only discussing reporting provisions and not anti-bribery.  And certainly no one should want to hurt innocent people associated with the company.

• At the government press conference it was stated – "Siemens’ cooperation, in a word, has been exceptional.   Siemens has faced facts, accepted responsibility, retained experienced counsel to conduct thorough internal investigations, and has implemented real reforms."  And in the sentencing memo of the government there are repeated references to the extraordinary cooperation of the company.  For example, it states "[t]he reorganization and remediation efforts of Siemens have been extraordinary and have set a high standard for multi-national companies to follow."   The sentencing memo has an incredible description of the internal amnesty program of the company.
• DOJ has a website that provides the FCPA, a lay person’s guide, etc.  A key problem one finds is that because most of the cases are resolved, one is unlikely to find a significant body of reported decisions resolving issues involving companies who were alleged to violate the FCPA.  And as for individuals – the DOJ website lists 2 cases, but notes that they last updated the website in 2004.(here)
• The plea agreement letter provides for cooperation, but does not call for providing any privileged material –  something that is good to see on the part of DOJ. (See FCPA Blog here)
• The agreement does limit the ability of the company from disseminating information regarding this matter without first obtaining the approval of DOJ. It states:

"Press Releases: Defendant agrees that if Siemens AG or any of its direct or indirect affiliates or subsidiaries issues a press release in connection with this agreement, defendant shall first consult the Department to determine whether (a) the text of the release is true and accurate with respect to matters between the Department and defendant; and (b) the Department has no objection to the release. Statements at any press conference concerning this matter shall be consistent with this press release."

A waiver of first amendment rights – is the government fearful of the company saying something?  This may explain why the document on the Siemens website – to investors – is extremely brief –Download 20081215_settlement_eng.pdf

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Addendum – Jordan Weissmann, BLT Blog, Siemens AG Lawyers View $800 Million Fine As a Victory

A DOJ press release is titled – Siemens AG and Three Subsidiaries Plead Guilty to Foreign Corrupt Practices Act Violations and Agree to Pay $450 Million in Combined Criminal Fines – Coordinated Enforcement Actions by DOJ, SEC and German Authorities Result in Penalties of $1.6 Billion.  At a press conference called to announce this settlement, Acting Assistant Attorney General Friedrich stated:

"Under the terms of the plea agreement announced today, first, Siemens AG will plead guilty and has pled guilty to one count of failure to maintain internal controls and a one-count books and records violation.   In addition, three Siemens subsidiaries, those located in Bangladesh, Venezuela and Argentina, have pled guilty to conspiring to violate provisions of the FCPA. 

"Second, Siemens will pay a criminal fine to the United States in the amount of $450 million.   This is far and away the largest criminal fine in FCPA enforcement in U.S. history. 

"Third, Siemens will retain an independent monitor for a period of four years and will continue to implement enhanced controls."

With regard to this last point, the press release states that:

"Under the terms of the plea agreement, Siemens AG agreed to retain an independent compliance monitor for a four-year period to oversee the continued implementation and maintenance of a robust compliance program and to make reports to the company and the Department of Justice.  Siemens AG also agreed to continue fully cooperating with the Department in ongoing investigations of corrupt payments by company employees and agents."

See also FCPA Blog, Final Settlements for Siemens

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A KPMG study released today demonstrates the difficulties faced by companies trying to comply with the Foreign Corrupt Practices Act (FCPA). A Press Release accompanying the study notes that "[m]ost multinational U.S.companies have programs to meet Foreign Corrupt Practices Act (FCPA) guidelines, but many executives surveyed by the audit, tax and advisory firm KPMG LLP acknowledge they still may not know enough about those with whom they do business in other countries." For example, "78 percent said they had trouble identifying and assessing FCPA risk."  The report can be found here – Download postable_pdf.pdf

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