Trends In FCPA Enforcement

Tuesday, May 1, 2007 - 01:00

In recent years, the United States Department of Justice (DOJ) and the Securities and Exchange Commission (SEC) have aggressively pursued enforcement of the Foreign Corrupt Practices Act (FCPA), levying large civil and criminal penalties, as well as seeking disgorgement of profits for violations of the Act. Consequently, the cost of settlements in the last six years has swelled. As worldwide initiatives to stop bribery gain momentum, companies today face not only FCPA enforcement actions in the United States, but the possibility of enforcement actions in other jurisdictions as well.

Enacted by the U.S. Congress in 1977, the FCPA has greatly affected how companies do business worldwide. The FCPA was a Congressional attempt to curtail bribes paid to foreign government officials to obtain business in their countries. It was enacted in response to a government study in the 1970s which revealed that over 400 U.S organizations had bribed foreign government officials. The FCPA prohibits the corrupt payment or offer of payment of "anything of value" to a foreign official, political party or a candidate for public office to obtain or retain business. Under the FCPA, offers of payments or payments to influence an official's act or decision in his official capacity, induce the official to violate his lawful duty or even to secure an improper advantage in business (e.g. reduce taxes, avoid duties, get regulatory/licensing approvals) are also illegal.

The FCPA consists of anti-bribery provisions and accounting provisions. The FCPA accounting provisions require issuers to make and keep books and records that accurately and fairly reflect the transactions of their organization and to devise and maintain an adequate system of internal accounting controls. Since the FCPA does not contain a standard for materiality even inaccuracies or "sloppy" accounting in small dollar transactions can be violations of the accounting provisions. Significantly, management cannot plead ignorance of a transaction to avoid liability since an issuer can be held accountable for what it should reasonably have known, particularly when adequate internal controls are lacking. The accounting provisions apply to all companies whose securities are listed in the United States, both domestic and foreign and their subsidiaries and joint ventures.

Increasingly, FCPA investigations by the SEC and DOJ are initiated when companies voluntarily disclose potential violations uncovered in the course of completing their Sarbanes Oxley responsibilities. A company that voluntarily discloses potential violations and cooperates with the subsequent SEC and/or DOJ investigation often benefits from the settlement, either through a deferred prosecution agreement with the DOJ or consent order with the SEC. While the debate as to the advantages of self reporting continues and the definition of what constitutes "cooperation" continues to evolve, there are some trends in FCPA enforcement that are worth noting. For example, settlement terms typically call for full disclosure of the wrongdoing; disgorgement of illicitly obtained profits or benefits; fines and penalties; a commitment to implement or strengthen compliance programs and internal controls; and intent to actively cooperate in the prosecution of employees, agents and possibly foreign government officials.

With the possibility of both civil and criminal penalties being imposed on both the company as well as individuals, there is much at stake. Civil penalties for issuers accused of violating the accounting provisions of the FCPA can reach up to $25 million and up to twice the benefit the entity sought to obtain through the violation under the Alternative Fines Act. Increasingly, regulators are requesting such disgorgement of profits for FCPA violations, which in many cases practically doubles the cost of settlement. In addition, penalties appear to be amplified when the accused company lacks sufficient internal controls to prevent FCPA violations. The largest penalty assessed by the SEC to date of $28 million ($13 million penalty and $15 million in disgorgement) was imposed on a United States-based military intelligence and communications company in March 2005 for funneling $3.5 million to the President of Benin and improperly recording such payments. This case and the ones below demonstrate the progressively high costs for businesses accused of violating the FCPA:


The SEC and DOJ settled with a Switzerland-based corporation, ABB LTD, trading on the NYSE, for $5.9 million in disgorged profits and $10.5 million in a civil penalty for illicit conduct totaling approximately $1.1 million in July 2004. The SEC noted in the settlement papers that this corporation lacked sufficient internal controls to detect and prevent FCPA violations. The ABB division involved, Vetco Grey, recently reported additional violations and paid additional amounts for continuing violations.


The SEC and DOJ required United States-based Schnitzer Steel Industries in 2006 to disgorge $6.3 million (and $1.4 million in prejudgment interest) for improper recording of cash payments or gifts given to managers of government owned steel mills in China in the form of "commissions" and "refunds." The SEC noted the severe deficiencies in the entity's FCPA internal controls, which allowed it to continue improper payments after the activity was uncovered and which did not prevent document destruction by its Korean subsidiary evidencing such payments.


Statoil, a Norwegian oil giant trading on the NYSE, paid the DOJ a $10.5 million criminal penalty and the SEC $10.5 million in disgorged profits for FCPA violations in October of 2006, in connection with bribes allegedly paid to Iranian officials for oil and gas rights. The SEC administrative order cited a lack of internal controls as a root cause of the misconduct.


In February 2005, InVision Technologies, Inc., a United States company, paid the SEC a civil penalty of $500,000.00 and $589,000.00 in disgorged profits in addition to an $800,000 criminal penalty for violating the bribery provisions of the FCPA. According to the non-prosecution agreement with the DOJ, the company improperly recorded payments made to Chinese distributors/agents and lacked sufficient internal FCPA controls. The company's voluntary disclosure of the conduct appears to have mitigated the fines it was required to pay.


In May 2005, United States-based Diagnostic Products disgorged $2.8 million in profit to the SEC and $2 million to the DOJ for incorrectly recording the bribes paid by its Chinese subsidiary of $1.6 million and because it lacked sufficient internal controls.

The cost of the fines and penalties are just part of the story. It is well known that in recent years companies spend tens of millions of dollars investigating potential violations and representing themselves before the government. When a potential violation is reported, the company often has to conduct extensive reviews in many jurisdictions to ensure that this conduct is not pervasive throughout the organization. Since the investigation should include a review of the compliance program elements that were in place at the time of the potential violation, this can be an expensive undertaking. Furthermore, the company must take remedial action to guarantee the activity cannot continue. All of this must be documented in a manner sufficient to satisfy the regulators who may possibly end up reviewing these materials. So the indirect cost of a potential violation can be as great if not greater than the direct cost of the fines and penalties.

More recent trends on the domestic front include an increase in the number of cases being handled by both the DOJ and SEC. This is being followed by a recent increase in the presence of resources by the respective law enforcement and regulatory agencies. The DOJ has recently dedicated several prosecutors to FCPA full time. The FBI has recently dedicated four of its Special Agents to work the FCPA violations full time. The SEC is increasing resources by allowing these violations to be worked in its branch offices as opposed to the headquarters in Washington. Principal jurisdiction at the DOJ will remain in Washington, DC but additional regional prosecutors and agents are being used on specific cases and prosecutions are taking place around the country.

On the international front, in the last 10 years many nations have implemented anti-bribery laws. This has been encouraged by the Organization for Economic Cooperation and Development (OECD), which took effect in 1999, and has spurred laws in 35 countries, imposing criminal penalties on companies found guilty of bribing foreign government officials. Before that, the United States was virtually the only country with such legislation.

Prosecutions for bribery abroad are growing in number yet there remain few enforcement actions for improper accounting and recording of such transactions. Some of the most recent international investigations into bribery, listed below, show the increasing dedication of nations to weeding out bribery.


In Costa Rica, the Attorney General and the National Congress are currently investigating allegations a subsidiary of a French company made payments in the form of "commissions" to influence government officials and representatives of the state owned telephone company to secure contracts. While the investigation is ongoing, the company has been excluded from competing in future contract bids in Costa Rica. In a concurrent investigation, a United States Grand Jury has already indicted individuals associated with this alleged conduct.


In August 2006, the World Bank and Indonesian government launched an investigation of a British consulting company for allegedly paying more than $350,000 to Indonesian government officials in connection with two World Bank road projects.


In France, an investigation is underway to determine if a consortium indirectly paid bribes to Nigerian government officials through a Gibraltar company, in connection with the construction of a natural gas liquefaction complex. The bribes are alleged to have totaled as much as $180 million. In 2004, Nigeria's House of Representatives Committee on Public Petition launched its own investigation into this activity.


In 2005 India's defense ministry initiated a probe into all contracts awarded to a South African Arms firm, by the previous Hindu national government. The company was alleged to have made illegal pay-offs to win a multi-million dollar army contract in India.

Increasingly nations are piggybacking off SEC and DOJ investigations, launching their own investigations into the same activity when their national interests are involved as listed below.


German federal authorities joined U.S. investigations of alleged FCPA violations by a German-based company, finding their own transactional bribery laws may also have been violated. The company's business unit is accused of maintaining numerous slush funds to make payments to foreign government officials and failing to properly record such funds on its financial statements. Multiple countries have launched enforcement actions against this company as a result.


Just days after a United States-based company settled with the SEC and DOJ for $1.5 million in 2006 for allegations that it made improper payments to Indonesian government officials, the Indonesian Corruption Eradication Commission began its own investigation.


Thailand began investigating bribes paid to Thai officials in connection with the sale of baggage screening machines at the new Bangkok Airport, after a United States investigation of the conduct was settled. Although the government appointed investigation committee cleared Thai politicians and officials, the Thai Senate investigation committee has responded by accusing executives at the Airport of breaking Thai procurement and anticorruption laws for accepting bribes.

Over the last 10 years nations around the world have committed to eradicating bribery. The global climate has changed dramatically and anti-bribery statutes will increasingly be enforced and prosecuted based on recent trends. Companies will continue to face large penalties and disgorgement of profits in the United States for bribery and violations of FCPA accounting provisions and may very well face simultaneous actions for the same alleged conduct in other affected nations. The costs of not complying with laws like the FCPA are high, and getting higher.

Elliott Leary, a Partner based in Washington; Joseph P. Dooley, a Director based in New York, and Nicole Stryker, a Senior Associate, are with KPMG LLP's Forensic practice. KPMG LLP, the audit, tax and advisory firm (www.us.kpmg.com), is the U.S. member firm of KPMG International. KPMG International's member firms have 104,000 professionals, including 6,700 partners, in 144 countries. The views and opinions expressed herein are those of the authors and do not necessarily represent the views and opinions of KPMG LLP. The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity.

Please email the authors at eleary@kpmg.com, jpdooley@kpmg.com or nstryker@kpmg.com with questions about this article.