The FCPA Blog

It's not hard to find reasons why the DOJ and SEC would rather prosecute corporations instead of individuals.

Here are a few:

Corporations can't defend themselves. They're strictly liable under respondeat superior for crimes committed by employees in the scope of their jobs. That's why no company has fought against FCPA charges in court for more than two decades. Individuals, on the hand, can and do fight in court and sometimes win. Recent examples of tough trials with mixed results include Frederick Bourke and William Jefferson. 

Corporations cooperate. No all companies self-disclose their FCPA offenses, but most do. They hire outsiders to conduct in-depth internal investigations and hand the results over to the government. That makes life easier for prosecutors and in theory benefits the company. Individuals can also plead guilty, of course, and many do. But they usually first try to defend themselves, which increases the government's burden.

Corporations can't run or hide. Domestic companies are all registered in their home states and can be brought to court there. Foreign corporations that are issuers under the FCPA have also submitted to the jurisdiction of U.S. courts. But individuals of any nationality can run. If they make it to another country, they have to be extradited back to the U.S. to face trial, a complicated process that can take years and may not be successful. Some examples include Viktor Kozeny and Jeffrey Tesler.

Corporate cases make headlines. For years, journalists have known that FCPA cases don't generate much buzz with the general public, and cases involving individuals hardly make a ripple (the Bourke and Jefferson cases were exceptions because of the defendants' fame). But giant penalties assessed against well-known global corporations are widely reported. Recent examples are Siemens, KBR, Daimler, and BAE. If the DOJ and SEC want to spread the word about the FCPA, chasing big companies is a good way to do it.

Corporate prosecutions are cost effective. They don't require long and expensive trials, so there's less drain on agency resources. And the payday for the U.S. government can be a quarter or even a half billion dollars per case, swamping the top fines for individuals.

How do any of the above influence prosecutorial decisions, if at all? The DOJ and SEC would say they don't. In other posts, we'll look at the recent enforcement track record, and we'll try to see things from the perspective of the prosecutors.

Here are the top ten FCPA settlements of all time. If our math is right, the financial penalties (criminal fines, civil disgorgement, and prejudgment interest) add up to $2.8 billion, with almost 50% of that coming from the top two settlements. Five of the top six involve non-U.S. companies. The oldest case on the list is Titan Corporation's from 2005; the newest is Snamprogetti / ENI's from July 7, 2010.

They are:

1. Siemens: $800 million in 2008.

2. KBR / Halliburton: $579 million in 2009.

3. BAE: $400 million in 2010.

4. Snamprogetti Netherlands B.V. / ENI S.p.A: $365 million in 2010.

5. Technip S.A.: $338 million in 2010.

6. Daimler AG: $185 million in 2010.

7. Baker Hughes: $44.1 million in 2007.

8. Willbros: $32.3 million in 2008.

9. Chevron: $30 million in 2007.

10. Titan Corporation: $28.5 million in 2005.

Avon Products Inc. on Friday said its expenses for an internal FCPA investigation that started two years ago have increased enough to impact results. Main Justice reported the costs to be $18 million for the last quarter.

In a release, the company said it incurred "significant professional fees associated with the company's internal investigation resulting from an allegation of Foreign Corrupt Practices Act ("FCPA") violations in China."

Last month Avon suspended four employees pending its internal bribery investigation. It put three executives in China and another in New York on administrative leave.

CEO Andrea Jung on Friday said during a conference call that the initial corruption allegations were contained in a letter written to her by an undisclosed whistleblower. The allegations concerned only China and related to travel, entertainment and other expenses. She said the company immediately "began an internal investigation under the oversight of our audit committee and conducted by outside counsel. Most importantly we voluntarily self-reported the allegations to the U.S. Securities and Exchange Commission as well as the Department of Justice."

The investigation has now expanded to at least "four international business units outside of China," she said.

Explaining the wider scope, she said: "I also want to emphasize again the allegation that triggered our investigation was in China only. Conducting compliance reviews in these additional markets is the appropriate thing to do in investigations of this type, and as we stated we've been cooperating with both governmental agencies."

Avon's investigation is following a typical path. Companies that self-report sensitive payments to the DOJ and SEC are always in a hurry to resolve any potential violations. The problem is that the feds need convincing there aren't more payments still left to be uncovered. Before the DOJ and SEC will settle a case, they want to be sure all the cards are on the table.

Siemens, for example, needed about a year more than it hoped to reach a deal with the U.S. government. The company's internal investigation kept uncovering more corrupt payments. So it had to do more and more to convince prosecutors they were seeing all the dirty laundry. In the end, according to some with knowledge of the investigation, Siemens' total costs topped $1 billion. But without the enormous effort, it couldn't have convinced U.S. agencies the case was ripe for resolution.

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Avon's FCPA disclosure in its 2009 annual report (available here) said:

We are investigating Foreign Corrupt Practices Act (FCPA) and related U.S. and foreign law matters, and from time to time we may conduct other internal investigations and compliance reviews, the consequences of which could negatively impact our business. From time to time, we may conduct internal investigations and compliance reviews, the consequences of which could negatively impact our business.

Any determination that our operations or activities are not in compliance with existing United States or foreign laws or regulations could result in the imposition of substantial fines, interruptions of business, termination of necessary licenses and permits, and other legal or equitable sanctions. Other legal or regulatory proceedings, as well as government investigations, which often involve complex legal issues and are subject to uncertainties, may also follow as a consequence. It is our policy to cooperate with U.S. and foreign government agencies and regulators, as appropriate, in connection with our investigations and compliance reviews.

As previously reported, we have engaged outside counsel to conduct an internal investigation and compliance reviews focused on compliance with the FCPA and related U.S. and foreign laws in China and additional countries. The internal investigation and compliance reviews, which are being conducted under the oversight of our Audit Committee, began in June 2008. We voluntarily contacted the United States Securities and Exchange Commission and the United States Department of Justice to advise both agencies of our internal investigation and compliance reviews and we are, as we have done from the beginning of the internal investigation, continuing to cooperate with both agencies and have signed tolling agreements with them.

The internal investigation and compliance reviews, which started in China, are focused on reviewing certain expenses and books and records processes, including, but not limited to, travel, entertainment, gifts, and payments to third-party agents and others, in connection with our business dealings, directly or indirectly, with foreign governments and their employees. The internal investigation and compliance reviews of these matters are ongoing.

At this point we are unable to predict the duration, scope or results of the internal investigation and compliance reviews.

Any determination that our operations or activities are not in compliance with existing laws or regulations could result in the imposition of substantial fines, civil and criminal penalties, equitable remedies, including disgorgement, injunctive relief and other sanctions against us or our personnel. In addition, other countries in which we do business may initiate their own investigations and impose similar sanctions. Because the internal investigation and compliance reviews are ongoing, there can be no assurance as to how the resulting consequences, if any, may impact our internal controls, business, reputation, results of operations or financial condition.

Two former senior managers from Siemens who were central actors in the company's global bribery scandal were convicted by a criminal court in Germany Tuesday but let off with only probation and fines.

Michael Kutschenreuter and Hans-Werner Hartmann, both 55, were found guilty in a Munich court of breach of trust and abetting bribery.

Kutschenreuter, who headed Siemens' telecoms group, was given probation for two years and fined €160,000. Hartmann, former accounting chief at the telecoms unit, was given an 18-month suspended sentence and ordered to pay €40,000 to charity.

In December 2008, Siemens AG pleaded guilty in the United States to violating the Foreign Corrupt Practices Act, reaching settlements with the Department of Justice and the Securities and Exchange Commission. At the same time, the company resolved charges by the Munich Public Prosecutor’s Office based on its corporate failure to supervise its officers and employees.

It paid a criminal fine of $450 million in the DOJ settlement and $350 million in disgorgement of profits under its agreement with the SEC. In the German case, it paid €395 million, on top of the €201 million it had paid in October 2007 to settle a related action brought by the Munich Public Prosecutor.

Siemens has said its global bribery may have topped $1.8 billion. The Justice Department's information charging the company in the biggest FCPA enforcement action ever tells of more than 4,000 payments to foreign officials to obtain or retain business -- and systematic and intentional violations of the FCPA's internal controls and books and records provisions.

According to the U.S. charging documents, Siemens' telecoms unit paid bribes of $5.3 million in Bangladesh and $4.5 million in Nigeria.

At least three other former Siemens executives have been convicted of bribery over the past few years. They were also given suspended sentences of around two years.

No one from the company has been charged in the U.S., possibly because American prosecutors haven't been able to assert jurisdiction over them. This week's convictions of Kutschenreuter and Hartmann may have been the final criminal trials in Germany of Siemens' personnel involved in the company's massive global bribery.

The German defendants' light treatment in their home courts contrasts sharply with this week's U.S. sentencing of American Charles Paul Edward Jumet. He was given 87 months in prison -- the longest sentence ever for FCPA-related offenses.

People ask us why there's so much going on with the FCPA and other anti-corruption laws right now? What's changed? they want to know. And what's coming?

Here's what we tell them:

Human rights. Politicians, activists, and citizens everywhere have a better understanding that graft destroys liberty and freedom and replaces it with fear and repression. Those forced to pay bribes for police protection, medical services, electricity, drinking water, and education are less free than those who don't. Clean government is becoming the new norm.

National and global security. The world's a dangerous place. And countries with corrupt governments aren't reliable allies. They have leaky borders, erratic law enforcement agencies, and weak passport controls. Corrupt countries are safe havens for the bad guys so reducing corruption helps protect the rest of us.

Bang for the buck. How much does it cost a government to bring an enforcement action against a big corporation? And how much does a government get back in penalties? In the Siemens case -- the best example -- the U.S and Germany may have spent, say, $10 or $20 million on the prosecution. They got back $1.6 billion. A great return, and a great argument at budget time for more enforcement resources.

Low-hanging fruit. Some enforcement actions -- lots of them these days -- are falling into the lap of the DOJ, SEC, and now the SFO. Public companies are generally required under the U.S. securities laws to self-report potential FCPA violations. Then they're required to conduct an internal investigation and report the results to the law enforcement agencies. Those agencies then propose proportionate penalties. There's some negotiation but in the end all companies must cut a deal. Case closed. How difficult was that for the feds?

The big mo. Like environmental cases 20 years ago, or drug suits, or waves of antitrust actions -- legal trends come into fashion and then fade. When something is hot, everyone wants in -- prosecutors, private firms, politicians, and NGOs. And when the press joins the party, get ready for take off. Right now the legal tilt is toward anti-corruption enforcement. Are we at the apex? Not yet. Let's see what happens over the next few years.