National Security and FCPA Investigations

with contributing author James Ervin

In response to the attacks against the United States in 2001, the U.S. Department of Justice (DOJ) shifted resources to prioritize national security investigations over traditional criminal investigations such as the Foreign Corrupt Practices Act (FCPA). Nonetheless, enforcement actions by the DOJ and U. S. Securities and Exchange Commission (SEC) involving violations of the FCPA have increased dramatically during recent years. A review of recent trends in prosecutions suggests that certain industries are targeted for investigation at greater levels than others are. Additionally, a company’s efforts to comply with the FCPA continue to be an important mitigating factor.

The FCPA makes it illegal for U.S. companies and individuals, as well as foreign companies and individuals in certain instances, to offer, promise or pay bribes, directly or indirectly, to foreign officials to obtain a business benefit. Since 1977, the anti-bribery provisions of the FCPA have applied to all U.S. persons and certain foreign issuers of securities. With the enactment of certain amendments in 1998, the anti-bribery provisions of the FCPA now also apply to foreign firms and persons who cause, directly or through agents, an act in furtherance of a corrupt payment to take place within the territory of the United States. Additionally, companies whose securities are listed in the United States are required to comply with the accounting provisions of the FCPA to (a) make and keep books and records that accurately and fairly reflect the transactions of the corporation and (b) devise and maintain an adequate system of internal accounting controls.

In FCPA prosecutions, the U.S. Sentencing Guidelines (the Guidelines) are used to calculate an advisory penalty range. Factors under the Guidelines that can affect a criminal fine include:

the number of employees in the organization
whether high-level personnel were involved in or condoned the conduct
prior criminal history
whether the organization had a pre-existing compliance and ethics program
voluntary disclosure
cooperation
and acceptance of responsibility.

While the Guidelines focus on whether the defendant attempted to comply with the law, government resources and priorities may be greater indicators of whether a company is at risk to be investigated. During the 2^nd Annual Global Competition Review Conference in June 2014, Assistant Attorney General John Carlin provided insight regarding the mechanism used by the DOJ to prioritize investigations, explaining, “In today’s world, we must look beyond the law governing transactions to the full range of laws designed to protect our national security. We protect national security by taking an intelligence-driven, threat-based approach.” Carlin told the audience, “As professionals handling all of the intricacies of global business deals, you share that responsibility. In many ways, you are on the front lines of our national defense. In conducting thorough due diligence in connection with a deal, you may be in the best position to identify where we may become more vulnerable. You may also be in the best position to help minimize our risk.” From these comments, two important points of emphasis can be gleaned regarding FCPA enforcement: (a) companies operating in industries or countries that impact national security will be more closely scrutinized and (b) companies operating in foreign countries will be expected to report known violations of the law.

During his speech, Carlin highlighted several recent prosecutions by the DOJ. The common themes triggering the government’s decision to pursue these cases included the fact the companies were involved in the manufacturing of equipment that was ultimately included in Chinese weapons systems. Additionally, the companies failed to disclose their illegal activity for several years and finally did so only after an investor group queried one of the companies about whether it might be engaging in illegal activity. The companies then made a number of submissions that contained numerous false statements to the government. The government’s burden to prove a defendant intended to commit a crime can be insurmountable. However, efforts to delay the discovery of a crime and the filing of false reports can be used to expose a defendant’s intent. Carlin stated, “As part of our all-tools approach, we will keep bringing charges like these to uphold laws cutting off transactions that threaten our national security.”

In 2014, the Searle Civil Justice Institute (SCJI) released a Report (the SCJI Report) regarding FCPA enforcement actions that yielded the following results:

Targeted firms tend to have a high equity value
Targeted firms concentrate most in the heavy manufacturing, pharmaceutical, health care and oil and gas industries
The arms, defense and military industry has the highest percentage of bribery-related enforcement actions relative to the number of firms in the industry and
Targeted firms paid bribes to foreign officials intending to increase sales rather than obtain political and regulatory favors.

The SCJI Report also analyzed the financial risks associated with violations of the FCPA and found that the announcement of an FCPA investigation decreases the value of a firm. However, firms charged with both bribery and financial fraud experience a substantially larger (-16.3 percent) initial loss in value than firms charged only with bribery (-1.5 percent).

The findings of the SCJI Report are consistent with the SEC’s report regarding 2013–2014 investigations:

The SEC charged a Springfield, Massachusetts-based firearms manufacturer with violating the FCPA when employees and representatives authorized and made improper payments to foreign officials while trying to win contracts to supply products to military and law enforcement overseas. (7/28/14)
The SEC charged a Palo Alto, California-based technology company with violating the FCPA when subsidiaries in three countries made improper payments to government officials to obtain or retain lucrative public contracts. The company agreed to pay $108 million to settle the SEC charges and a parallel criminal case. (4/9/14)
The SEC charged a global aluminum producer with violating the FCPA when its subsidiaries repeatedly paid bribes to government officials in Bahrain to maintain a key source of business. The company agreed to pay $384 million to settle the SEC charges and a parallel criminal case. (1/9/14)
The SEC charged a Swiss-based oilfield services company with authorizing bribes and improper travel and entertainment for foreign officials in the Middle East and Africa to win business. The company agreed to pay more than $250 million to settle cases with the SEC and other agencies. (11/26/13)
The SEC charged a Michigan-based medical technology company with violating the FCPA by bribing doctors and other government officials in five countries to obtain or retain business and make $7.5 million in illicit profits. The company agreed to pay more than $13.2 million to settle the SEC’s charges. (10/24/13)
The SEC charged a France-based oil and gas company for paying bribes to intermediaries of an Iranian government official who then exercised his influence to help the company obtain valuable contracts to develop oil and gas fields. The company agreed to pay $398 million to settle SEC and criminal charges. (5/29/13)
The SEC charged a worldwide drilling services and project management firm with violating the FCPA by authorizing improper payments to a third-party intermediary in order to entertain Nigerian officials involved in resolving the company’s customs disputes. The company agreed to pay $4 million to settle the SEC’s charges. (4/16/13)
The SEC charged a Netherlands-based health care company with FCPA violations related to improper payments made by employees at its Polish subsidiary to health care officials in Poland. The company agreed to pay more than $4.5 million to settle the charges. (4/5/13)

Given the DOJ’s emphasis on using intelligence-driven investigations to address national priorities, the “where, what and why” are good indicators of whether a company is likely to be targeted for an FCPA investigation. Companies that conduct business in certain countries or engage in industries such as energy, health care or the manufacturing of equipment that can be used for military purposes are more likely to come under the scrutiny of the DOJ. Similarly, companies that fail to implement procedures to ensure compliance with the FCPA and file inaccurate reports provide the DOJ with the evidence needed to establish the element of intent. From the perspective of the DOJ, the FCPA is just another tool in the toolbox that can be used to protect the national security interests of the United States.