Global Investigations Review - The law and practice of international investigations

The Investigations Review of the Americas 2018

United States: 2017 mid-year FCPA update

09 August 2017

EY

Introduction

2016 was a precedent-setting year for enforcement actions under the Foreign Corrupt Practices Act (FCPA). The Department of Justice (DOJ) and the Securities and Exchange Commission (SEC) announced 53 combined enforcement actions with more than US$2 billion in fines imposed by US regulators and billions more by foreign regulators in parallel enforcement actions. As of mid-June 2017, the DOJ and SEC have announced resolutions in a combined 16 matters. The financial penalties and disgorgement amounts required to be paid in these matters have exceeded US$80 million. While it remains to be seen how the recent US Supreme Court decision in Kokesh v SEC, which held that the ‘catch-all' statute of limitation for government actions in 28 USC section 2462 bars the SEC from obtaining disgorgement in actions brought beyond the five-year limitations period, will impact the enforcement of the FCPA, it is clear that US and non-US regulators will continue to conduct numerous FCPA-related investigations.

As of 14 June 2017, 23 agencies around the globe are involved in open FCPA-related investigations.1 The five government agencies with the most ongoing disclosed open FCPA related investigations are the SEC, DOJ, the UK Serious Fraud Office (SFO), the Brazilian Securities Commission and the Brazilian Federal Prosecutor's Office.2

Both investigations and enforcement actions are becoming increasingly more international in scope. Over the past few years, there has been a growing international consensus against corruption. A number of jurisdictions have passed new and stronger anti-bribery laws. US and non-US regulators are sharing information of potential misconduct on a much more regular basis. And a number of countries are prioritising anti-corruption enforcement actions.

What does this mean for companies and their respective compliance departments? It is unlikely that the number of FCPA-related settlements in 2017, given the transition to a new administration in the US and the turnover of personnel in key regulatory positions, will be higher than those announced in 2016. However, going forward more anti-corruption enforcement and coordination with non-US regulators across the globe will place more pressure on corporate compliance programmes to be even more effective and nimble. US regulators have continued to signal that they will push for speedier resolutions. The Kokesh v SEC decision will likely force the SEC to resolve cases more quickly, and as a result the SEC will have to prioritise its investigative caseloads. An expedited investigative process will require companies to address potential FCPA-related misconduct quickly, competently and correctly. Companies will be under even more pressure to assess the effectiveness of their compliance programmes while taking steps to ensure any misconduct is appropriately remediated.

The domestic and international anti-corruption enforcement and policy developments that have occurred thus far in 2017 continue to highlight the importance of building an effective internal investigation function or enhancing an existing one in order to address compliance with the FCPA.

2017 marks the 40th year anniversary of the FCPA. While much progress has been made over the years, the World Bank recently estimated that businesses and individuals pay an estimated US$1.5 trillion in bribes each year.3 It is clear that much work still remains.

Set forth below is (i) a brief overview of the 2017 settlements announced thus far by the SEC and DOJ; (ii) an analysis of the impact of the DOJ's Pilot Program; (iii) a summary of recent public statements by key policymakers in the US about the continued importance of enforcing the FCPA; (iv) a review of the recent anti-corruption efforts by a number of jurisdictions across the globe; and (v) insights on why companies need to maintain a continued focus on combating corruption.

Settlements in 2017 by the SEC and DOJ

In the first half of 2017, the SEC and DOJ announced 16 distinct corporate and individual FCPA settlements in industries ranging from food processing, mining, gaming and resorts to hedge funds, energy and medical equipment. Each of the matters announced in 2017 continue to reflect the themes and trends that occurred in publicised FCPA enforcement actions in 2016. In almost all of the enforcement settlements, the SEC and DOJ reinforced the importance of ensuring that appropriate internal controls exist to detect bribe payments. Some of the conduct in the settlements include:

  • the lack of third-party due diligence procedures;
  • the non-existence of formal written contracts with third parties;
  • approvals of payments without adequate support;
  • insufficient mechanisms to identify if any services were actually provided; and
  • the lack of remediation of internal audit findings of potential misconduct.

A number of the settlements also required the corporation to retain an independent compliance monitor. In recent years, there has been a material increase in the imposition of a monitor by the DOJ and SEC on corporations as part of the terms of a settlement. In 2015, only one entity was required to hire a monitor. In 2016, the number of entities required to engage a monitor increased to nine. And so far in 2017, four entities have been ordered to hire a monitor.

Lastly, through the first half of 2017, the SEC and DOJ have continued to publicly highlight whether the entity involved in the settlement received cooperation credit in the form of a reduction of a penalty amount or the decision to enter into a non-prosecution agreement. Governmental efforts to encourage cooperation by corporates will continue as evidenced by the implementation of the DOJ's FCPA Pilot Program and recently announced declinations.

Impact of FCPA Pilot Program and 2017 announced declinations

In April 2016, the DOJ announced a one-year trial of the FCPA Pilot Program with the purpose of encouraging self-reporting and accountability. The stated purpose of the Pilot Program was to provide incentives to companies who cooperate with FCPA investigations and who take appropriate remedial actions resulting from the investigations. Such incentives include less harsh settlement terms, including discounts on the defined guidelines.

According to Andrew Weissmann, Chief of the DOJ Criminal Division's fraud section,4 there were 22 companies that made voluntary disclosures during the first year of the Pilot Program.5 This represents an increase from the 13 voluntary disclosures issued in the previous year.6

During the first half of 2017, at least eight companies disclosed that they received declination letters from the SEC and/or DOJ. Most recently, the DOJ announced its first declination in 2017 under its Pilot Program, requiring the company to pay approximately US$11 million in penalties.

In March 2017, Acting Assistant Attorney General Kenneth A Blanco announced that the DOJ plans to extend the Pilot Program. During a speech delivered to the American Bar Association National Institute on White Collar Crime, he stated that the Pilot Program ‘will continue in full force until [the DOJ] reach[es] a final decision' about its efficacy.

While it is unclear how long the DOJ will continue the Pilot Program, the temporary extension indicates that the DOJ will continue to promote the goal of encouraging cooperation, reporting and remediation. Remediation is an important characteristic that the DOJ takes into consideration when giving ‘credit' to companies in the form of reduced fines. The increased number of declinations over the past year does suggest a willingness on the part of the DOJ and SEC to exercise greater prosecutorial discretion, depending on the facts and circumstances, for companies that make a concerted effort to have robust compliance programmes that address misconduct promptly.

Regulators continue to promote compliance with FCPA

In February 2017, the DOJ Fraud Section published a document entitled: ‘Evaluation of Corporate Compliance Programs' (Compliance Program Guidance).7 The Compliance Program Guidance covers a number of topics and addresses questions that the Fraud Section ‘has frequently found relevant in evaluating a corporate compliance program.'8 The issuance of the Compliance Program Guidance along with the extension of the Pilot Program signals that entities should continue to invest in and prioritise corporate compliance.

In February 2017, Acting SEC Chairman Michael Piwowar stated in remarks at the Practising Law Institute's SEC Speaks conference ‘[he was] generally comfortable with assessing civil monetary penalties in Foreign Corrupt Practices Act cases. [And that] [a]ccording to academic literature, there is evidence that when such violations are revealed to the market, the stock price does not always fall, and may even increase.'9

In March 2017, SEC Chairman Jay Clayton expressed, in response to questions posed by Senator Sherrod Brown of Ohio, his support for the role of the FCPA in combating corruption, which he described as an important government mission. Chairman Clayton also stated that he expected continued coordination of enforcement with the DOJ and international regulators on anti-corruption efforts.10

In April 2017 Acting Principal Deputy Assistant Attorney General Trevor McFadden reiterated at a compliance conference the DOJ's focus on enforcing the FCPA.11 He stated that the DOJ intends to:

  • continue to ‘prioritise the prosecutions of individuals who have wilfully and corruptly violated the FCPA';
  • continue to factor in ‘voluntary self-disclosures, cooperation and remedial efforts' when making charging decisions;
  • make a ‘concerted effort to move corporate investigations expeditiously'; and
  • resolve old investigations.12

In April 2017, Attorney General Jeff Sessions stated that ‘[the DOJ] will continue to strongly enforce the FCPA and other anti-corruption laws. Companies should succeed because they provide superior products and services, not because they pay off the right people.'13

All of the aforementioned public statements by government officials both at the DOJ and SEC highlight the continued critical importance of compliance with the FCPA and the need for corporations to remain vigilant in their compliance efforts. While there may be a shift in the approach that the SEC takes with respect to FCPA investigations as a result of the Supreme Court's decision in Kokesh v SEC, FCPA enforcement will likely remain a priority for both the SEC and DOJ. In addition, non-US regulators have made significant strides in attempting to address corruption in their respective jurisdictions.

International anti-corruption efforts

Within the past few years, we have seen enhanced cooperation between regulators in the United States and their foreign counterparts. This shift toward increased international cooperation reflects both the US's commitment to working with non-US regulators on joint settlements and foreign governments taking more aggressive approaches in addressing bribery and corruption.

Toward the end of 2016, we saw two major cases that were globally settled. These multinational investigations were conducted by US regulators in cooperation with the UK's SFO, Brazil's Federal Prosecution Service and/or the Office of the Attorney General in Switzerland. In addition, US regulators received assistance from local law enforcement in Austria, Germany, the Netherlands, Singapore and Turkey during the course of their investigations. As a result of these international investigations, the corporations involved will pay a combined minimum of US$3.5 billion to the regulators to settle the FCPA and other foreign charges.

The increased involvement of international regulators in global corruption settlements is due in part to new anti-bribery legislation appearing around the globe which often contain key principles of the FCPA. One of the most notable was the ‘Proposed Law Regarding Transparency, the Fight Against Corruption and the Modernization of Economic Life' passed by French regulators in November 2016.14 The legislation strengthens the policies to address the enforcement of France's anti-corruption rules. In September 2016, South Korea started to enforce the new ‘Improper Solicitation and Graft Act,' which includes a section that specifically addresses cultural norms of gift giving in the Asian country.15 Under these new rules, both the gift giver and the public employee accepting the gift can be punished.16

Developing nations continue to pass rules of their own and regulations to help combat corruption. In February 2017, the Tunisian parliament passed a 36-article law that criminalises any retaliation against whistleblowers who report bribery and other improper behaviour in a country that has been plagued with corruption.17 More comprehensively, in July 2016 the Mexican president ratified a set of sweeping new laws aimed at curtailing corruption in the country.18 Key features of the new laws include disclosure requirements for public officials, incentives for strong corporate compliance programmes, cooperation among federal and state agencies and steep penalties for corruption-related offences. Companies conducting business in non-US jurisdictions must remain cognisant of changing requirements in order to stay in compliance with local anti-corruption regulations.

Continued compliance vigilance

Government regulators typically do not comment on active investigations; however, companies will often disclose in their financial statements if they are under investigation for an FCPA violation with a potentially material impact on the organisation. According to ‘FCPA Tracker,' which maintains a database of publicly disclosed cases, there are currently more than 100 publicly announced ongoing FCPA investigations.

The typical life cycle of an FCPA enforcement action averages three to five years from the violation to the settlement, so many recent headlines and regulator press releases announcing settlements are a result of infractions that occurred years ago. Given the number of open investigations, it is unlikely that the DOJ and SEC will turn away from enforcing compliance with the FCPA.

As a result, entities must continue to be vigilant in addressing potential fraud and corruption risks. Ernst & Young LLP's 14th Global Fraud Survey (Survey), which provides insights from more than 2,800 senior executives in 62 countries and territories across the world, shows that while many entities have made significant progress in addressing fraud and corruption, there remains a significant level of unethical conduct.19

The Survey found that:

  • 39 per cent of respondents to the Survey consider bribery and corruption to happen widely in their country;
  • 42 per cent of respondents could justify unethical behaviour to ensure they met financial targets;
  • almost half of all finance team members interviewed stated that they would be prepared to engage in at least one form of unethical behaviour to meet financial targets or safeguard a company's economic survival;
  • only 50 per cent of respondents globally are using specialist monitoring software to identify fraud risks; and
  • one in five respondents are not identifying third parties as part of their anti-corruption diligence.20

The Survey and current activity by US and non-US regulators highlight the critical importance of entities adequately resourcing their compliance and investigations functions so that they can proactively engage risks before regulatory action is taken.

Given the continuing regulatory scrutiny and the risks involved, companies should not go it alone in addressing potential fraud and corruption concerns. Improper activities are largely aimed at generating additional revenue or allocating money where it does not belong. A forensic accounting review, including a review of a company's internal controls, is a critical step in any sound compliance program. While every circumstance is different, companies should seek to engage subject-matter resources, as appropriate, in order to implement a robust anti-corruption compliance programme or to help determine the effectiveness of their existing compliance framework and internal controls.

Notes

  1. The FCPA Blog, ‘Top Five Agencies Worldwide Pursuing FCPA-Related Investigations' 14 June 2017. (http://fcpablog.squarespace.com/blog/2017/6/14/top-five-agencies-worldwide-pursuing-fcpa-related-investigat.html).
  2. Id.
  3. World Bank Brief, ‘Combatting Corruption' 11 May 2017. (www.worldbank.org/en/topic/governance/brief/anti-corruption).
  4. Mr Weissmann is currently on leave from the DOJ and has been appointed to serve as an assistant to Special Counsel Robert Mueller.
  5. Reisinger, Susan. ‘FCPA Pilot Program Nets 22 Voluntary Disclosures in Past Year' 17 May 2017. The National Law Journal. (www.nationallawjournal.com/id=1202786528262/FCPA-Pilot-Program-Nets-22-Voluntary-Disclosures-in-Past-Year-DOJ).
  6. Id.
  7. DOJ, ‘Evaluation of Corporate Compliance Programs' 8 February 2017. (www.justice.gov/criminal-fraud/page/file/937501/download?_ga=2.75204945.23693111.1497980706-157053855.1496169638).
  8. Id.
  9. Acting Chairman Michael Piwowar, ‘Remembering the Forgotten Investor' 16 June 2017. (www.sec.gov/news/speech/piwowar-remembering-the-forgotten-investor.html).
  10. In December 2011, Clayton co-authored a report on the impact of FCPA enforcement on international business transactions, in which he discusses the notion that the FCPA may be a burdensome law.
  11. Acting Principal Deputy Assistant Attorney General Trevor McFadden, ‘[Remarks] at Anti-Corruption, Export Controls & Sanctions 10th Compliance Summit' 18 April 2017. (www.justice.gov/opa/speech/acting-principal-deputy-assistant-attorney-general-trevor-n-mcfadden-speaks-anti).
  12. Id.
  13. Attorney General Jeff Sessions, ‘Remarks at Ethics and Compliance Initiative Annual Conference' 24 April 2017. (www.justice.gov/opa/speech/attorney-general-jeff-sessions-delivers-remarks-ethics-and-compliance-initiative-annual).
  14. ‘Sapin II Law: Transparency, the Fight Against Corruption, Modernization of the Economy' 6 April 2016. (www.gouvernement.fr/en/sapin-ii-law-transparency-the-fight-against-corruption-modernisation-of-the-economy).
  15. ‘Improper Solicitation and Graft Act' 27 March 2015. (www.ti-j.org/KoreaImproperSolicitationandGraftAct.pdf).
  16. Id.
  17. ‘Tunisia Parliament Adopts Anti-Corruption Laws' 23 February 2017. (http://english.alarabiya.net/en/News/north-africa/2017/02/23/Tunisia-parliament-adopts-anti-corruption-law-.html).
  18. ‘New Anti-Corruption Laws in Mexico' 3 August 2016. (http://anticorruptiondigest.com/anti-corruption-news/2016/08/03/new-anticorruption-laws-in-mexico/#axzz4kZZYQ4gE).
  19. EY Global Fraud Survey 2016. (www.ey.com/gl/en/services/assurance/fraud-investigation---dispute-services/ey-global-fraud-survey-2016).
  20. Id.

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