DELAWARE GEORGIA MARYLAND NORTH CAROLINA SOUTH CAROLINA VIRGINIA WASHINGTON, DC A PROFESSIONAL LIMITED A PROFESSIONAL LIMITED LIABILITY COMPANY LIABILITY COMPANY
FCPA ENFORCEMENT ACTION TREND CONTINUES WITH TEXTRON SETTLEMENT September 21, 2007 Last month, the Securities and Exchange Commission announced that it has settled claims against Textron, Inc. under the Foreign Corrupt Practices Act (the “FCPA”).1 In the Textron action, the SEC alleged that Textron knew or was reckless in not knowing that two of its foreign subsidiaries made approximately $650,000 in kickback payments in connection with the sale of humanitarian goods to Iraq and that Textron failed to properly account for the nature of the payments and maintain an adequate system of internal controls to detect and prevent the payments. The Textron case is the latest in a growing list of FCPA enforcement actions brought by the SEC and/or the U.S. Department of Justice. This client alert highlights recent FCPA developments and offers practical guidance for companies engaged in international commerce or with overseas operations to avoid FCPA violations. FCPA: A Brief Overview Congress enacted the FCPA in 1977 to address concerns of rampant bribery of foreign officials by U.S. companies seeking to secure business. The FCPA has two principal components: (i) anti-bribery provisions and (ii) accounting and internal control provisions. The anti-bribery provisions prohibit corrupt payments to foreign officials for the purpose of obtaining or retaining business or directing business to another person. The anti-bribery provisions apply to U.S. persons (citizens, nationals, residents and business entities -- whether public or private -organized under U.S. law), foreign issuers of securities listed in the U.S. and even foreign persons if the act in furtherance of a corrupt payment occurs within the U.S. The anti-bribery provisions also prohibit indirect corrupt payments made through intermediaries such as joint venture partners or agents. The FCPA’s accounting and internal control provisions, which only apply to public companies, require companies to (i) keep books, records and accounts that accurately and fairly reflect the transactions and disposition of assets of the company and (ii) establish and maintain internal accounting controls that provide reasonable assurance that transactions are executed as authorized, that transactions are recorded to allow for proper financial reporting and accounting of assets, and that proper accounting for assets is periodically assessed and reconciled. The consequences of FCPA violations can be severe, potentially resulting in both criminal and civil sanctions. Business entities can be subject to multi-million dollar fines for FCPA violations. Individuals such as officers, directors and agents may also be subject to fines and sentenced to up to five years in prison. In addition to fines and other penalties, FCPA violators can be barred from federal
Foreign Corrupt Practices Act of 1977, 15 U.S.C. §§ 78m-78ff (available at http://www.usdoj.gov/criminal/fraud/docs/statue.html).
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contracting. The DOJ is responsible for criminal enforcement of the FCPA and shares responsibility for civil enforcement of the FCPA’s anti-bribery provisions with the SEC. The SEC is responsible for civil enforcement of the FCPA’s accounting and internal control provisions. Noteworthy FCPA Developments and Trends The following recent FCPA developments and trends merit attention by companies engaged in international commerce or with overseas operations: • Dramatic rise in FCPA enforcement actions. The number of FCPA enforcement actions has dramatically increased in recent years. More than 20 enforcement actions have been brought by the DOJ and SEC in the last 18 months, compared to just two enforcement actions in all of 2003. The DOJ and the SEC have publicly announced anti-corruption initiatives, including a renewed focus on the FCPA. The rise in enforcement actions is consistent with the DOJ and SEC pronouncements and suggests that the trend in vigorous investigation and prosecution of FCPA claims will continue. Record penalties and settlements. The amount of fines and penalties imposed in FCPA enforcement actions has skyrocketed. As part of the recent Textron settlement, Textron agreed to disgorge approximately $2,280,000 in profits and pay approximately $450,000 in pre-judgment interest and $800,000 in civil fines. The SEC’s litigation release2 also indicates that Textron has agreed to pay $1,150,000 in fines pursuant to a non-prosecution agreement with the DOJ. The Textron settlement comes on the heels of an April 2007 SEC settlement with Baker Hughes, Inc.3 As part of that settlement, Baker Hughes agreed to pay $23 million in disgorgement and prejudgment interest and $10 million in civil penalties. In a related proceeding, Baker Hughes and its subsidiary, Baker Hughes Services International, Inc., agreed to pay an $11 million fine as part of an FCPA settlement with the DOJ. The $44 million collective settlement amount represents the largest FCPA sanction to date. Other sizable FCPA sanctions in the past year include a February 2007 settlement between three subsidiaries of Vetco International Ltd. and the DOJ 4 pursuant to which the Vetco International subsidiaries agreed to pay a $26 million criminal fine and October 2006 settlements between Statoil, ASA and the DOJ and the SEC pursuant to which Statoil agreed to pay $21 million in criminal and civil fines and penalties.5 More actions against individuals. The DOJ and the SEC have brought more FCPA claims against individuals in recent years. For instance, in a June 2007 settlement6 between the SEC and Si Chan Wooh, a former executive of Schitzer Steel Industries, Inc., Wooh agreed to pay approximately $40,000 in disgorgement, interest and penalties to settle claims that he violated
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Textron, Inc., Litigation Release No. 20251 (August 23, 2007) (available at http://www.sec.gov/litigation/litreleases/2007/lr20251.htm). Baker Hughes Incorporated and Roy Fearnley, Accounting and Auditing Enforcement Release No. 2602 (April 26, 2007) (available at http://www.sec.gov/litigation/litreleases/2007/lr20094.htm).
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Vetco International Ltd., DOJ Press Release (February 6, 2007) (available at http://www.usdoj.gov/opa/pr/2007/February/07_crm_075.html). SEC Sanctions Statoil for Bribes to Iranian Government Official, SEC Press Release (October 13, 2006) (available at http://www.sec.gov/news/press/2006/2006-174.htm).
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Si Chan Wooh, Litigation Release No. 20174 (June 29, 2007) (available at http://www.sec.gov/litigation/litreleases/2007/lr20174.htm).
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the FCPA’s anti-bribery provisions and that he aided and abetted Schnitzer’s violations of the FCPA’s accounting and internal control provisions by paying over $200,000 in cash bribes and other gifts to managers of government-owned steel mills in China. In a March 2007 settlement 7 between the SEC and Charles Michael Martin, a former Monsanto Company employee, Martin agreed to pay a $30,000 civil penalty to settle claims that he aided and abetted Monsanto’s violations of the FCPA’s anti-bribery provisions and accounting and internal control provisions by authorizing and directing an agent of Monsanto to pay a $50,000 bribe to an Indonesian environmental official and then subsequently falsifying Monsanto invoices to conceal the bribe. In both the Wooh and Martin cases, their employers had previously settled FCPA claims. However, in some cases, regulators have brought actions against individuals and elected not to prosecute their employers. • New legislation proposed. Congress has also demonstrated an increased interest in the FCPA. Two members of the U.S. House of Representatives, Gene Green (D-TX) and Tim Ryan (D-OH), introduced a bill8 on August 3, 2007 that would prohibit government agencies from entering into contracts for goods and services with any person or entity unless that person or entity certifies that the person or entity, and its officers, employees and agents, have not violated the FCPA or any comparable law of any other country. The proposed bill was referred to the House Committee on Oversight and Government Reform on August 3, 2007 and subsequently referred to the Subcommittee on Government Management, Organization, and Procurement on September 7, 2007. Whether this legislation will gain traction and be passed remains to be seen but at a minimum it suggests that the governmental scrutiny of FCPA compliance is likely to continue.
Practical Guidance In light of the recent FCPA enforcement activities, we suggest that companies consider the following: • Implement an effective FCPA compliance program. Effective FCPA compliance programs offer several potential benefits. First, these programs may help detect potential FCPA violations before they occur. Second, they can assist in early identification of an FCPA violation, giving the company an opportunity to address the violation, prevent future similar violations and consider a voluntary disclosure of the FCPA violation. Third, the presence of an effective FCPA compliance program may reduce sanctions in the event of a DOJ or SEC enforcement action. An effective FCPA compliance program should be tailored to address the specific business operations of the adopting company. At a minimum, a compliance program should: designate a compliance officer who is charged with overseeing the program, be communicated to all affected employees and require periodic training programs and periodic testing for internal compliance. Beware of common FCPA misperceptions. Companies with limited FCPA familiarity should beware of common misperceptions about its scope. For instance, the FCPA defines the scope of “foreign officials” very broadly, capturing any foreign official regardless of rank or position. Payments to low-ranking officials fall within the FCPA’s anti-bribery provisions. In addition, companies sometimes misconstrue the scope of specific FCPA exceptions that
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Charles Michael Martin, Litigation Release No. 20029 (March 6, 2007) (available at http://www.sec.gov/litigation/litreleases/2007/lr20029.htm).
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H.R. 3405, 110th Cong. (2007) (available at http://thomas.loc.gov/home/gpoxmlc110/h3405_ih.xml).
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permit very limited types of payments. For instance, an exception permitting certain types of “facilitating payments” is dependent on the type of government action being sought, not the amount of the payment. Any payment, regardless of the amount, can result in an FCPA violation if it is for an improper purpose. Further, the fact that bribes are standard practice in a particular country is not an affirmative defense to the FCPA. Finally, companies may be held responsible for the actions of foreign subsidiaries and agents despite not having actual knowledge of the actions and despite the fact that the foreign subsidiaries and agents are not themselves covered by the FCPA. A company’s failure to investigate suspicious acts of a foreign agent or subsidiary, or ignoring such acts, represent a common factual scenario where FCPA liability may be imposed. • Be especially vigilant when operating in developing countries or overseas jurisdictions known for corruption. With the increasing globalization of commerce, companies often find themselves doing business in developing countries. Developing countries may have immature regulatory regimes and bribes, although not legally permitted, can be standard practice. In an effort to be competitive in the marketplace, employees and agents on the ground in the foreign country may face tremendous pressure to do what others are doing. Companies that operate in developing countries or countries known for their corruption should be especially vigilant overseeing the actions of their employees, foreign subsidiaries and agents. Respond quickly to detected FCPA violations and consider voluntary disclosure to the DOJ and SEC. Responding quickly to FCPA violations and taking corrective actions (such as disciplinary action) to address detected violations and prevent future violations may mitigate sanctions if the DOJ or the SEC ultimately brings an FCPA claim. Although the FCPA does not affirmatively require companies to report FCPA violations, voluntary disclosure -- after first consulting with counsel -- may reduce DOJ or SEC sanctions.
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Additional Information If you have any questions regarding recent FCPA developments, please contact Matthew B. Homan (http://www.wcsr.com/MatthewHoman), the principal author of this client alert, or you may contact either the Womble Carlyle attorney with whom you usually work or one of our Corporate and Securities attorneys listed on the following webpage: http://www.wcsr.com/C&SLawyers. Womble Carlyle client alerts are intended to provide general information about significant legal developments and should not be construed as legal advice regarding any specific facts and circumstances, nor should they be construed as advertisements for legal services. IRS CIRCULAR 230 NOTICE: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this communication (or in any attachment) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed in this communication (or in any attachment).
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