FCPA and Anti-Corruption Enforcement Update: April - September 2012

[author: John Hynes]

We regularly report on Foreign Corrupt Practices Act ("FCPA") developments and have furnished subscribers with a primer on the FCPA. As expected, 2012 has proven to be yet another busy year for the government in enforcing the FCPA. This article highlights some of the most important recent developments in the anti-corruption and FCPA enforcement world, while a more comprehensive update can be found here.

FCPA Trials

The past six months have seen their fair share of significant rulings and other milestones in FCPA trials. For instance, in April and May of this year, two more individual defendants pled guilty to FCPA violations in a case beginning in 2009 in which the Department of Justice (“DOJ”) charged Controlled Components, Inc. (“CCI”) and six of its employees with FCPA violations for allegedly paying $4.9 million in bribes to officials of state-owned oil, electricity, and nuclear energy companies in China, Malaysia, and the United Arab Emirates in exchange for business. After these two guilty pleas, only one defendant remains – a former CCI Korea employee who remains in South Korea and has not been brought before the court.

Additionally, in July 2012, the court sentenced the Government’s key witness to 18 months in prison and 36 months of probation in the now-infamous SHOT Show sting case that began when undercover FBI agents posed as officials from Gabon seeking $1.5 million in bribes in exchange for a $15 billion defense contract. Though 22 defendants were initially charged, the prosecution fell apart when the first two trials failed to result in any convictions, leading the DOJ to voluntarily dismiss the remaining indictments in March 2012.

In another case signaling the difficulty the Government is having in securing FCPA convictions, the DOJ dismissed its appeal in its FCPA prosecution of two executives of Lindsey Manufacturing Co. In May 2011, the jury convicted the executives of FCPA violations for allegedly paying $5.9 million in bribes through a Mexican sales representative to officials of Comisión Federal de Electricidad (“CFE”) – a Mexican state-owned electric utility company – in exchange for contracts. The judge, however, threw out the convictions in November 2011 on prosecutorial misconduct grounds. While the Government initially appealed the ruling, it voluntarily dismissed the appeal in May 2012, bringing the prosecution to a close.

We also recently have seen the beginnings of what could result in clarification of one of the most litigated aspects of the FCPA – the interpretation of “foreign official.” In August 2011, a federal jury convicted the former president and former vice president of Terra Communications Corp. of FCPA violations for paying more than $890,000 in bribes to officials of Telecommunications D’ Haiti (“Haiti Telco”), Haiti’s state-owned telecommunications company, in exchange for business. The defendants appealed their convictions to the 11th Circuit, arguing that the alleged payments could not have violated the FCPA because employees of a state-owned enterprise like Haiti Telco do not constitute “foreign officials” under the FCPA. Though this issue has been litigated in lower courts and hotly debated by legal scholars, this is the first time it has been brought before a federal appellate court.

FCPA Settlements

Companies and individuals also have entered into significant settlements with the government to resolve FCPA charges over the past six months. In August 2012, pharmaceutical giant Pfizer Inc. agreed to pay a total of $60 million to settle DOJ and SEC bribery allegations in Europe and Asia. In the criminal case, a Pfizer subsidiary admitted that between 1997 and 2006, it paid more than $2 million in bribes to officials in Bulgaria, Croatia, Kazakhstan, and Russia that resulted in more than $7 million in profits. Moreover, in the civil case, the SEC alleged that another Pfizer subsidiary engaged in widespread corruption dating back to 2001, including a rewards club for "high-prescribing” Chinese doctors; a bonus program for doctors in Croatia; and payments of cash, BlackBerrys, and travel incentives to doctors and other officials in China, Indonesia, Pakistan, and Saudi Arabia.

Moreover, in September 2012, the former CFO of Digi International, Inc. settled charges by the SEC that he violated the books and records and internal control provisions of the FCPA by using corporate funds to pay for unauthorized travel and entertainment expenses for Digi employees. The SEC alleged that he developed a system allowing employees in the company’s Hong Kong office to be reimbursed for personal expenses without approval by the CEO as required by company policy and approved cash payments in the Hong Kong office that were not supported by documentation. The amount of the civil penalty has yet to be determined.

Also in September 2012, Tyco International Ltd. agreed to pay more than $13.6 million in criminal penalties to the DOJ and $13 million in civil penalties to the SEC to settle FCPA charges. On the criminal side, the DOJ alleged that a Tyco subsidiary in the Middle East paid bribes to officials of Saudi Aramco, an oil and gas company controlled by the Saudi Arabian government, in exchange for contracts. In the civil case, the SEC alleged that Tyco paid bribes in Germany, China, Thailand, and Turkey, and falsely recorded payments to agents and other third parties as “commissions.”

Other Important FCPA and Anti-Corruption Developments

In addition to trials and settlements, there have been a number of other significant developments in FCPA and anti-corruption enforcement. For instance, oil giant Halliburton announced in July 2012 that it has initiated a new internal investigation into allegations that it paid bribes in Iraq and Angola in exchange for customs and visa clearances. This internal investigation is separate from the one disclosed by Halliburton in October 2011 concerning a whistleblower's accusations that employees bribed Angolan officials for oil contracts, and comes on the heels of a $579 settlement the company paid in February 2009 to resolve unrelated FCPA charges.

Additionally, in a case highlighting the cooperation between international anti-corruption regulatory bodies, the former CEO of Innospec’s U.K. operations pled guilty in June 2012 in a London court to two counts of conspiracy to corrupt in relation to bribery schemes in Indonesia and Iraq. The former CEO was never criminally charged in the U.S. but paid about $230,000 to settle a civil case with the SEC in January 2011. Back in 2010, Innospec agreed to pay $40 million to settle more than a dozen criminal charges in the U.S. and the U.K. relating to FCPA violations, U.N. oil-for-food program offenses, and violations of the U.S. embargo against Cuba.

There also has been an important development relating to the anti-whistleblower retaliation provisions of the Dodd-Frank Act. In July 2012, a federal judge threw out a whistleblower claim against GE Energy (USA) brought by a former employee who claimed he was terminated in retaliation for raising FCPA compliance concerns while GE was seeking a $250 million contract with Iraq’s Ministry of Electricity. The judge dismissed the claim on the ground that the Dodd-Frank anti-retaliation provisions did not cover his extraterritorial whistleblowing activity.

Conclusion

These important developments show that the government remains focused on punishing companies and individuals who violate the FCPA. Some important themes that we can take away from the recent enforcement activity are the continued cooperation between international regulatory authorities to combat corruption, the focus on prosecuting individuals for FCPA violations, and FCPA settlements that highlight the importance of having in place a robust and current anti-corruption program.

To minimize the risk of FCPA violations and to be best prepared in the unfortunate event that they find themselves in the middle of a government investigation, companies must ensure that their compliance programs contain all the elements necessary to prevent and detect corruption and that they periodically are reviewed and updated to adapt to shifts that come about in the anti-corruption landscape as a result of the global effort to eradicate corruption.