Recent Developments in Foreign Corrupt Practices Arena
On November 14, 2012 the Securities and Exchange Commission (“SEC”) and the Department of Justice (“DOJ”) released their much anticipated Joint Guidance (the “Guide”) on the Foreign Corrupt Practices Act (“FCPA” or the “Act”), a 1977 law that outlaws bribery of foreign government officials and has been the focus of much attention by regulators, companies and shareholders in recent years. Although the Guide does not contain groundbreaking new information or significant policy changes, it does offer a useful summary of the state of the law. The Guide provides a discussion of the law itself, analysis of previous SEC and DOJ enforcement actions, a discussion of SEC and DOJ “guiding principles of enforcement,” and guidelines for creating effective corporate compliance programs. The Guide is a tool for those seeking to learn more about the law, as well as for professionals seeking to understand the SEC’s and DOJ’s approach to enforcement. Its issuance underscores the increasing importance of the FCPA in today’s global economy.
The FCPA, which is jointly enforced by the SEC and DOJ, has three principal components:
- Anti-bribery provisions prohibit U.S. persons from making payments of money or anything of value to foreign officials in order to influence any act or decision of the foreign official in his or her official capacity; or to secure any other improper advantage in order to obtain or retain business. “Anything of value” can include cash, gifts, travel and entertainment expenses, or other things of value. There is no materiality threshold for violation of the anti-bribery provisions of the FCPA. A $50 payment could create liability. In addition, corporations are liable for the acts of their directors, officers, employees or agents who, acting within the scope of their employment, commit FCPA violations intended, even in part, to benefit their employer.
- Books and records provisions require public companies to maintain their books, records and accounts in reasonable detail so that they accurately and fairly reflect the transactions and dispositions of the company’s assets. This provision is particularly important because bribes are often concealed on a company’s books and records as legitimate payments, such as commissions or consulting fees. In cases where a company is not charged with violating the anti-bribery provisions, it still may be liable under the books and records provisions of the Act if improper payments are inaccurately recorded.
- Internal controls provisions require public companies to devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that they: (1) execute transactions in accordance with management’s general and specific authorization; (2) record transactions as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain accountability for assets; (3) permit access to assets only in accordance with management’s authorization; and (4) compare the recorded accountability for assets with the existing assets at reasonable intervals, and take appropriate action with respect to any differences.
FCPA Violations Can Be the Basis of a Securities Fraud Claim
The books and records and internal controls provisions of the FCPA are important not only for SEC and DOJ lawyers seeking to enforce the Act, but also for shareholders concerned with securities fraud. Often illegal payments are disguised as legitimate payments on a company’s books and records and, once discovered, must be correctly reclassified. Further, companies who violate the FCPA may have made material false statements about compliance with anti-bribery laws. The costs of FCPA violations to a company and the news of FCPA violations can trigger a significant stock drop. Accordingly, these material misstatements of “legitimate payments” can be the foundation for FCPA-related securities fraud class actions, such as City of Brockton Retirement System v. Avon Products, Inc., et al., 11-Civ-4665 (S.D.N.Y.), in which Berman DeValerio serves as a member of the plaintiffs’ executive committee.
Potential FCPA violations usually come to shareholders’ attention when companies announce an internal investigation or an SEC and/or DOJ investigation or enforcement action. While SEC and DOJ investigations and internal company investigations can provide a useful blueprint to shareholders seeking to bring FCPA-related securities fraud class actions, FCPA-related class actions do present challenges, particularly the need to prove that high-level officers had the requisite knowledge of illegal activities. Nevertheless, shareholders have had success in prosecuting FCPA-related securities fraud class actions. Settlements in certain cases have exceeded the amount of fines imposed by the SEC and DOJ. For example, Nature’s Sunshine Products Inc. paid $6 million to settle a class action suit relating to FCPA violations when the company paid only $600,000 to resolve the SEC action. Similarly, Faro Technologies Inc. paid $6.9 million to shareholders to settle a class action and paid $2.9 million to resolve the matter with the SEC and DOJ.
It is clear the SEC and DOJ will continue to focus on FCPA enforcement. In the past five years, the FCPA has seen a four-fold increase in the number of prosecutions by the SEC and DOJ, as well as a dramatic increase in penalties paid to resolve violations. In 2010, companies paid a record-shattering $1.8 billion in financial penalties to the DOJ and SEC, due in large part to huge fines against Alcatel-Lucent S.A. ($137 million), BAE Systems plc ($400 million), Snamprogetti Netherlands B.V. and its former parent company ENI S.p.A. ($365 million) and Technip S.A. ($338 million). In 2011, sanctions topped $500 million. Further, the SEC has created a specialized unit to focus on FCPA enforcement and the DOJ has repeatedly stated its intention to continue to focus on the law. Regulators also have a new tool in their arsenal as a result of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which created new incentives for whistleblowers to report potential FCPA violations. Whistleblowers who report a violation that leads to a successful SEC enforcement action and monetary sanctions in excess of $1 million dollars are now eligible to receive a payment of between 10 percent and 30 percent of the amount collected.
As a result of this increased regulatory activity, companies have focused attention on internal compliance programs and many have begun making public disclosures about their efforts to comply with the law. As companies seek to grow their businesses in the ever-expanding global economy the FCPA will remain an important force. Shareholders should expect to see more companies announcing FCPA violations. For that reason, investors should be aware of the law and take note of companies’ efforts to comply with it. Failure to do so can be costly.
For those seeking to familiarize themselves with the FCPA, the Guide will provide a thorough education. The Guide can be found here.
*In August 2017, our firm name changed to Berman Tabacco. Case references and content published before that date may refer to the firm under our prior name, Berman DeValerio.