2010: A Scammer's Delight

President Obama has called the fight against corruption ‘one of the great struggles of our time’, and his administration has followed through, continuing efforts started under the Bush administration to aggressively enforce the Foreign Corrupt Practices Act (FCPA), which criminalizes the act of bribing foreign officials.

In 2010 alone, the Department of Justice (DoJ) imposed the highest criminal penalties in FCPA-related cases ‘in any single 12-month period: well over $1 billion,’ according to Lanny Breuer, the assistant attorney general. Those targeted include foreign companies doing business in the US, which are also liable under US laws.

Breuer notes that in 2009 and 2010, ‘we have charged more than 50 individuals with FCPA-related offenses – compared with, for example, two individuals in 2004, and five in 2005.’

Those individuals include Charles Jumet, who was sentenced last April to 87 months in prison for his role in a conspiracy to bribe former Panamanian government officials to award Ports Engineering Consultants Corporation a contract to maintain lighthouses and buoys along Panama’s waterways. It was the longest prison sentence in FCPA history, and it’s perhaps those individual prosecutions that are sending the largest shivers down the spines of corporate leaders.

‘In my consulting with various companies around the world, I find the biggest deterrent is having some of these top officials investigated and hauled into court,’ notes Errol Mendes, a University of Ottawa law professor and ethics consultant. ‘This is hugely damaging to brand equity, and most head offices don’t want something like that to happen.’ Individual prosecutions are, Mendes believes, part of a deliberate DoJ strategy.

‘More and more, companies are facing exposure based on the conduct of third-party agents acting on their behalf in other nation,’ says Paul Friedman, partner at Morrison & Foerster and co-chair of its FCPA and anti-corruption task force. In one of the most recent cases, he notes, French telecommunications company Alcatel-Lucent agreed to pay more than $137 million in fines and penalties – the seventh-largest FCPA settlement ever – to resolve SEC charges of illicit payments in Costa Rica, Honduras, Malaysia and Taiwan. Alcatel was held liable for bribe payments made by agents acting on its behalf, and former Alcatel executive Christian Sapsizian was sentenced in September 2008 to 30 months in prison.

‘In this case, the firm’s business model at the time was to pursue business opportunities in foreign countries using third-party agents and consultants,’ Friedman says. ‘The punch line here is that there is a premium on having a meaningful and effective compliance program. You have to rein in and control the people who are acting on your behalf around the world.’

The war against corruption isn’t likely to abate any time soon. Speaking at UN headquarters in New York in December 2010 to celebrate World Anti-Corruption Day, Breuer dismissed complaints leveled by some critics of the FCPA and encouraged corruption fighters to be even more aggressive.

‘I have been told that some companies complain that they do not understand what it means to violate the FCPA,’ he said. ‘This may be an acceptable legal argument to make or litigation position to advance. But I am asking you, my friends, to do more than try to test the edges of the law. I am asking you to conduct business responsibly across the globe, and to fulfil your commitment to work against corruption in all its forms. Indeed, you are on the front lines of this fight.’

Just the beginning

The FCPA may be just the beginning. The recently enacted Dodd-Frank Act contains a provision that offers corporate whistleblowers a bounty – in the form of a percentage of fines levied – when they tip off the government to perceived violations of the FCPA and other corruption statutes. And during 2010 the UK enacted an anti-bribery law that in some ways goes even further than the US law.

Mendes notes that the UK regulation outlaws exceptions carved out in the FCPA for ‘facilitating payments’ – smaller bribes to customs officials, for instance, who demand payments for allowing products into developing nations. The FCPA exceptions are ‘an acknowledgement that businesses could really be harmed if, for instance, their products aren’t allowed into the country,’ Mendes says. ‘But the UK law says even those payments are unlawful, which will create all sorts of problems.’

Yogesh Bahl, partner and northeast leader of anti-fraud programs and control practices at Deloitte Financial Advisory Services, says a number of corporate boards are creating compliance committees and ordering compliance officers to report directly to them. In addition, Bahl and his team are finding that the delineation is melting away between fraud (the misrepresentation of facts for personal gain) and corruption (abuse of power by a public authority).

‘What I’m continuing to see is a focus on expanding overseas, and the devil is in the details in that expansion,’ Bahl says. ‘You need to ask: how are we going to do this? What are the risks in doing this? And have we looked at the corruption and fraud schemes that could occur while we are doing this?’

Protective measures

Regular audits, better training and clear communication are key. ‘If you see someone who has great sales in a particular month or quarter, you should have someone asking, What is making that person so effective in that month? Bahl says. ‘There needs to be some mechanism in place to monitor that on a regular basis.’

Friedman notes that training is essential for any overseas partners. ‘The issue is how to set clear guidelines and convey those guidelines in a way your team in  that country is going to understand and follow, and know that there will be adverse consequences for not following – that there will be benefits to displaying ethical conduct,’ he says. ‘You really need to address cultural differences as to how business is conducted in different countries.’ The bounty provisions in Dodd-Frank, he adds, make it essential that an environment is created where potential whistleblowers feel confident that their complaints are taken seriously in-house.

‘We find whistleblowers are often employees who tried to raise issues internally through the company ethics hotline and felt their concerns were not being taken seriously,’ Friedman says. ‘That is what frequently prompts them to call a plaintiff’s lawyer or government directly. So one of the lessons here is that companies need to fine-tune and enhance their compliance programs and really get across to employees that their concerns will be taken seriously.’

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