Spurred by the Sarbanes-Oxley Act and the increasing likelihood of being caught bribing foreign officials, managers at increasing numbers of U.S. companies are voluntarily disclosing breaches of the Foreign Corrupt Practices Act, a Department of Justice official says.
Since the beginning of March, the Department of Justice has received 11 voluntary disclosures of either clear or potential violations of the Foreign Corrupt Practices Act (FCPA). The law bars people working at publicly traded companies from bribing foreign government officials or taking bribes from them.
The handful of companies that have recently stepped forward amounts to a “boom” in deliberate disclosures, according to Mark Mendelsohn, deputy chief of DOJ’s Fraud Section.
Sarbox is a prime mover behind the disclosure surge, he said at a confab about FCPA held last week in New York by the American Conference Institute. Most of the voluntary bribery disclosures mention inadequate internal controls, for example—an issue under Section 404 of the act.
To be sure, the FCPA’s own internal control requirements, pre-date those of Sarbox 404 by five years. Because of their need to comply with the controls rules and other Sarbox recordkeeping requirements, however, companies are spotting and reporting more violations, Bruce Karpati, an assistant regional director at the Securities and Exchange Commission, said during the conference.
Voluntary disclosures aren’t required by law, nor are they standard business practice. Instead, they’re usually made on a one-off basis depending on business, legal, and reputational-risk considerations, Martin Weinstein, an attorney with Willkie, Farr, and Gallagher LLP, told attendees.
Other than the effect of Sarbox, the motivation behind the disclosures is unclear. After all, as Weinstein notes, the disclosures don’t seem to provide assurance that penalties will be reduced. What they may be offering is a way of lowering the probability that a company will get caught by government investigators, receive harsher handling, and have its name dragged through the mud.
Indeed, the likelihood of being nabbed for bribery is on the rise. Mendelsohn says there’s a new vigilance at DOJ in terms of identifying and prosecuting FCPA violators. Citing nine FCPA charges—both corporate and individual—that have been resolved since 2004, and the DOJ’s public commitment to fight bribery more vigorously, he notes that prosecutors will be homing in on FCPA violators.
Overall, the DOJ is likely to hike the number of individuals it will prosecute under FCPA in the coming year, rather than focusing so heavily on corporations, according to Mendelsohn. He refused to elaborate on the number of prosecutions in the pipeline or why more people would be targeted. The DOJ official noted, however, that the department is ramping up hiring efforts to boost the number of attorneys specializing in FCPA issues.
When it comes to DOJ, executives should especially heed two FCPA-related events that could affect cases going forward. One, a March 23 arrest, marked the first time that Justice used the act’s nationality-jurisdiction provision to charge an individual. Added to the law in 1998, 21 years after its enactment, the amendment enables DOJ to charge U.S. citizens with bribery even though the crime wasn’t committed on U.S. soil or in a U.S. jurisdiction.
In the case, Faheem Mousa Salam, a naturalized U.S. citizen living in Livonia, Michigan, was arrested at Dulles International Airport upon returning from Iraq. The DOJ charged Salam, an employee of defense and telecommunications contractor Titan Corp. who worked in Baghdad with offering a $60,000 bribe to a senior Iraqi police official. Salam allegedly bribed the official to ease Titan’s purchase of armored vests and sophisticated map printers.
Recent evidence also suggests that the consequences of FCPA misdeeds are becoming more onerous. The largest combined criminal/civil FCPA-related penalty, for instance, was levied against Titan last month. On March 1, Titan pleaded guilty to bribery and agreed to pay a $13-million criminal fine to DOJ, as well as $15.4 million in disgorgement and prejudgment interest in a parallel civil case filed by the Securities and Exchange Commission.
To conceal improper payments the company made to a commercial agent doing business in the African country of Benin, Titan solicited false invoices. At Titan’s request, the commercial agent, who claimed to have close ties to President Mathieu Kerekou, submitted false invoices to the U.S. company totaling over $2 million, according to DOJ documents. The agent used the payments to influence a presidential election in Benin, where Titan had built and was operating a wireless telephone network,
Between January 2001 and May 2001, Titan paid the funds asked for in the invoices, and the agent donated the money he collected to Kerekou’s re-election campaign. After the election, Benin officials agreed to quadruple Titan’s management fee, according to published reports at the time. (Kerekou, who won the election, wasn’t implicated in the scandal.)
To understand where the SEC is said, corporations should study a number of recent cases closely, Karpati said. He mentioned Diagnostic Products case settled last year, noting that Chinese subsidiaries will be a likely target for commission probes. In the case, employees at a subsidiary of the medical equipment company in China made a total of $1.6 million in bribes to doctors and lab officials employed in Chinese government hospitals.
Citing the Titan Benin case, Karpati also warned against making “payment without accountability.” Further, he cautioned U.S. companies against hiding behind distributors or commercial agents who make bribes, mentioning the GE InVision case as an example.
In December 2004, GE InVision, a maker of explosive-detection devices, entered into a non-prosecution settlement agreement and paid $1.9 million in penalties to the DOJ and SEC. The agencies charged that the company’s sales agents and distributors made improper payments to government officials to secure or retain business in Thailand, China, and the Philippines.
Karpati also said that a claim of ignorance by headquarters managers isn’t an adequate defense if improper payments are submitted by foreign subsidiaries. That’s what happened in the 2005 Monsanto Co. case, which cost the agribusiness giant $1.5 million in fines, he said. Monsanto voluntarily disclosed that a local company officer authorized a $50,000 bribe to an Indonesian official to help avoid regulatory and administrative burdens associated with conducting an environmental study.
What’s more, claiming that a bribe constitutes an immaterial amount of money won’t get companies off the hook. Indeed, between 1998 and 2003, the U.S. and foreign subsidiaries of the $22-billion conglomerate ABB Ltd. made over $1.1 million worth of “illicit payments” to government officials in Nigeria, Angola, and Kazakhstan to capture or retain business. Although, the bribes were immaterial relative to the company’s sales volume, the company was still found to have broken the law. The misdeed cost ABB $10.5 million.
Even payouts classified as charitable won’t escape SEC penalties if they violate the FCPA. Schering Plough Corp. discovered that when a Polish subsidiary of the company donated $76,000 to the Chudow Castle Foundation, allegedly to induce the foundation’s director to buy pharmaceutical products from the company. Schering Plough paid $500,000 in civil penalties to settle with the SEC.