Robbins Umeda* Attorneys Discuss FCPA Compliance in The Recorder’s Special Report on Corporate Governance
Increased FCPA enforcement creates a need for companies to revisit their corporate governance practices and internal controls, advise Robbins Umeda attorneys.
Reducing FCPA Exposure
Wal-Mart Stores Inc. has recently come under fire for purportedly orchestrating a campaign of bribery to achieve market dominance in Mexico. A company whistleblower allegedly informed a senior Wal-Mart attorney in 2005 of a widespread practice of paying bribes to Mexican officials and bureaucrats in order to obtain permits needed to build new stores. In response to these allegations, Wal-Mart commenced an internal investigation, which uncovered more than $24 million in suspect payments, but the investigation was allegedly halted by Wal-Mart executives who actively concealed the bribery scheme for more than six years. These acts have exposed Wal-Mart to potential violations of the Foreign Corrupt Practices Act and the imposition of significant fines, and have also raised significant public attention to this once rarely enforced statute.
THE FOREIGN CORRUPT PRACTICES ACT
The FCPA was enacted in 1977 after calls for legislative action following a report by the U.S. Securities and Exchange Commission on widespread illegal payments made by more than 400 U.S. companies to foreign officials. The FCPA’s anti-bribery provisions prohibit companies from making “corrupt payments,” which are essentially defined as bribes to foreign officials that are intended to help the company obtain or retain business. The FCPA’s “books and records” provision specifically requires companies to keep accurate books and records reflecting the transactions and dispositions of company assets in order to prevent such bribes and kickbacks, and to establish internal accounting controls.
Recently, the U.S. Department of Justice and SEC have dramatically increased the number of FCPA cases prosecuted and the severity of sanctions imposed on companies for violations of the FCPA. Indeed, Wal-Mart is just one of many companies recently being investigated for potential FCPA violations. Since 2008, the government has launched approximately 150 FCPA investigations. In 2010 alone, the government filed more than 70 enforcement actions and imposed approximately $1.8 billion in penalties — the largest amount in the history of FCPA enforcement. This “new era” of increased enforcement of the FCPA and the imposition of significant fines — upwards of $2 million per violation — has created a need for companies to revisit their corporate governance practices and internal controls in order to mitigate the risks that an FCPA violation will occur.
Instituting FCPA compliance programs, however, is challenging because the government has provided limited guidance as to how companies can comply with the FCPA. As one commentator has noted, “compliance with the FCPA is an area where faint-hearted efforts will likely fail. The statute provides ambiguous standards and sets thresholds of liability that can come as an unwelcome surprise to the uninitiated. An effective program will be one that educates and motivates the naive, and uses aggressive management techniques to deter and ferret out willful misconduct such as bribery.”
INTERNAL CORPORATE REFORMS ARE LIKELY TO INCREASE FCPA COMPLIANCE
Recent settlements of FCPA enforcement actions brought by the U.S. government, as well as by concerned shareholders seeking corporate reform, provide some examples of effective compliance and governance reforms that should be considered by companies that engage in business within the scope of the FCPA’s prohibitions. The following offers a few examples of the many FCPA reforms that should be seriously considered:
FCPA compliance policy. Because the DOJ factors the existence and extent of a company’s compliance program into its decision whether to bring FCPA charges against a company, companies should have a clearly articulated FCPA compliance policy pledging zero tolerance for bribery and corruption. The policy should establish who is responsible for implementation of the compliance program, identify prohibited conduct, and include a periodic comprehensive assessment of bribery and anti-corruption risks in the countries where it does business. The policy should also detail how the company will control and monitor its relationships with foreign representatives and consultants.
San Diego-based Maxwell Technologies Inc. recently agreed to implement a clear corporate policy in connection with its 2011 settlement of several shareholder derivative lawsuits arising out of the company’s FCPA violations. One of Maxwell’s subsidiaries allegedly made improper payments to its Chinese agent to secure contracts with Chinese customers, resulting in the company’s payment of an $8 million criminal penalty to resolve FCPA charges. Maxwell also agreed to pay in excess of $5.6 million in disgorgement of profits and nearly $700,000 in pre-judgment interest to settle a related SEC civil complaint for violating the FCPA’s anti-bribery, books and records, internal controls and disclosure provisions. The company’s new FCPA compliance policy prohibits bribery and subcontracting kickbacks, and specifically holds individuals accountable for FCPA violations.
Strengthen the tone at the top. Top level commitment is critical to establishing a culture within the company that bribery is unacceptable. Absent strong leadership at the top and a consistent corporate message that bribery is unacceptable, a company’s FCPA compliance efforts are unlikely to be successful. In recognition of this fact, the DOJ has required Maxwell’s senior management to provide “strong, explicit and visible support and commitment to its corporate policy against violations of the anti-corruption laws and its compliance code.”
Internal controls. Effective internal control mechanisms may not only reduce the risk of an FCPA violation, but are specifically required by the FCPA. A company should implement internal controls over financial reporting that are designed to prevent books, records and accounts from being used for the purpose of bribery or concealing bribery. A company should accurately document all transactions in order to prevent and detect corrupt payments, and should establish additional procedures to accurately track expenditures. Particular care should be taken to scrutinize gifts, meals, entertainment and travel for government officials, as potential bribes come in many forms that often appear to be legitimate on their face.
Chief compliance officer. As one commentator has noted, “many FCPA compliance problems can be traced back to a company’s failure to define roles and make individuals accountable for ensuring compliance.” Thus, a member of the company’s senior management team who reports directly to the board should be designated as responsible for developing and implementing the FCPA compliance program. This individual should have operational responsibility for the oversight of compliance policies and should communicate the anti-bribery message to all employees, subsidiaries and partners. In the wake of the recent allegations against the company, Wal-Mart announced that it had created a new FCPA compliance officer to oversee five other FCPA compliance directors around the world.
FCPA training. Training is critical to raise awareness of FCPA. A company should familiarize its senior managers and employees with the corruption risks in its industry and the countries where the company does business. Employees should be able to recognize the red flags of bribery and corruption that are common in their business, and be made aware of the company’s reporting mechanisms. Training materials should be comprehensive and periodically updated and distributed to inform senior management and employees of what behavior is prohibited by the FCPA and the potential consequences associated with noncompliance.
Successor liability. The Justice Department and SEC have held acquiring companies liable for FCPA violations that occurred prior to the acquisition. Thus, in the merger/acquisition context, a company needs to conduct due diligence and risk assessment to unearth past bribery or corruption and take necessary steps to integrate the acquired company into the existing company’s FCPA compliance program. In connection with its 2011 settlement of several shareholder derivative lawsuits arising out of the company’s FCPA violations, Maxwell agreed to ensure that new business entities are only acquired after thorough FCPA and anti-corruption due diligence by legal, accounting and compliance personnel at the company.
Third party liability. The vast majority of FCPA cases brought by the government involve conduct by third parties. The FCPA’s anti-bribery provisions prohibit not only direct payments to a foreign official, but also payments to any third-party while knowing that all or a portion of such money or thing of value will be provided to a foreign official. Because of the FCPA’s third-party provisions, companies that utilize third-parties must conduct pre-engagement due diligence and adopt policies and procedures regarding the engagement and post-engagement obligations of vendors, consultants, agents, suppliers and partners.
Timely investigate potential violations and promptly report them. In the event of a reported instance of bribery or corruption, a company should promptly and thoroughly investigate the alleged wrongdoing. One factor that the DOJ considers in enforcement actions is a “corporation’s timely and voluntary disclosure of wrongdoing and its willingness to cooperate in the investigation of its agents.” Had Wal-Mart reported the bribery scheme when it was discovered through the company’s internal investigation, this would likely be a mitigating factor in the DOJ’s determination whether to prosecute the company for FCPA violations.
COMPANIES SHOULD ACT NOW
Companies should be vigilant in implementing and maintaining internal policies designed to prevent FCPA violations, as there is no foreseeable end to the increased governmental enforcement of the FPCA. As assistant U.S. attorney general Lanny Breuer has commented, “[t]his is precisely the wrong moment in history to weaken the FCPA. There is no argument for becoming more permissive when it comes to corruption.” Secretary of State Hillary Clinton similarly affirmed the government’s commitment to enforcing the FCPA, stating: “We are unequivocally opposed to weakening the [FCPA]. We don’t need to lower our standards. We need to work with other countries to raise theirs.” Companies engaged in business in foreign markets must therefore ensure that they are cognizant of their exposure to FCPA violations so they can design, implement and monitor an effective compliance program in order to mitigate the possibility of costly FCPA violations and protect their reputation and shareholder interests.
Kevin Seely is a partner with Robbins Umeda LLP and a former federal prosecutor. His practice focuses on complex class, derivative, and qui tam actions. He can be reached at email@example.com. Nichole Browning is of counsel at Robbins Umeda LLP. Her practice focuses on shareholder derivative, securities fraud, consumer, and antitrust actions. She can be reached at firstname.lastname@example.org. Gina Stassi is an associate at the firm Robbins Umeda LLP. Her practice focuses on shareholder derivative litigation and she can be reached at email@example.com. The firm was co-counsel in the shareholder derivative action against Maxwell Technologies.
This article is reprinted with permission from the June 25, 2012 issue of The Recorder. © 2012 ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.
* The firm name changed from Robbins Umeda LLP to Robbins Arroyo LLP on January 1, 2013.