Prompt reporting on federal, state, and international developments in the regulation of securities and futures trading, with objective coverage of the Securities and Exchange Commission,...
By Stella Tsai
Stella Tsai is an attorney with Archer & Greiner PC. She is a business litigation partner in the Philadelphia office with a practice concentrating in regulatory compliance and ethics. Tsai represents both individuals and multinational businesses in transactional, regulatory, and litigation matters, including trial and appellate work.
Time well spent. While the Securities and Exchange Commission (SEC) focused a lot of its time and resources planning and coordinating resolutions of Foreign Corrupt Practices Act (FCPA) cases in 2015, it is proving to pay off in 2016. The SEC has already collected a staggering $895 million plus this year in resolutions with four pharmaceutical and life sciences companies, five tech companies, a casino operator and three individuals.
The SEC's landmark resolution with Vimpelcom, a Dutch telecommunications giant, is the indisputable headliner. Vimpelcom paid $795 million to resolve alleged violations of the FCPA and certain Dutch laws for funneling over $114 million in “old-fashioned” bribe payments to a shell company and charities associated with a government official in Uzbekistan, presumed to be the Uzbek President's daughter (48 SRLR 352, 2/22/16). This case seems tailor-made for prosecution under the anti-bribery provisions that the FCPA is generally known for, although the SEC did charge Vimpelcom with “books and records” violations under the FCPA, observing that “(t)hese old-fashioned bribes, hidden through sham contracts and charitable contributions, left the company's books and records riddled with inaccuracies.”
The SEC also charged California-based SciClone Pharmaceuticals with anti-bribery and “books and records” violations for a scheme in which employees of SciClone's subsidiaries gave money, gifts, and other things of value to health-care professionals, resulting in millions of dollars in sales of pharmaceutical products to China's state health institutions. SciClone agreed to pay $9.426 million in disgorgement of sales profits plus $900,000 in prejudgment interest and $2.5 million in penalties.
The SEC settled for a seasonal low of $75,000 with an individual, Ignacio Cueto Plaza, an executive for Chilean airline, LAN Airlines. To help LAN Airlines penetrate the Argentine market, Sr. Cueto allegedly arranged to make payments of $1.15 million to the Virginia-based brokerage account of a third party consultant, an honorary Cabinet advisor to the Argentinian Department of Treasury, who “may have” directed funds to the unions to induce them to accept lower wages and compromise over other terms of employment. Even though the allegations against Sr. Cueto sounded in anti-bribery, the SEC confined its charges to violations of the generic “books and records” requirements under the FCPA.
Pharmaceutical company Nordion Inc. and a Russian employee settled for a total of $500,000 to resolve “books and records” charges where the employee had paid officials for drug approvals and Nordion “lacked sufficient internal controls to detect and prevent the scheme.” Software company SAP-SE agreed to disgorge $3.7 million in profits because “its deficient internal controls enabled an executive to pay bribes to procure business in Panama.” The Swiss-based pharmaceutical company Novartis AG settled for $25 million to resolve “books and records” charges against the backdrop of an alleged “pay-to-prescribe” scheme of its China-based subsidiaries to increase sales. To resolve FCPA “books and records” violations for a “slush fund” for Russian and other foreign distributors, Massachusetts-based Analogic Corp. agreed to disgorge $7.7 million in profits and pay $3.8 million in prejudgment interest to the SEC; its Danish subsidiary paid $3.4 million in criminal fines to the Department of Justice (DOJ) in parallel criminal proceedings and the subsidiary's former CFO paid $20,000 in penalties to the SEC.
The mundane, but potent, “books and records” provisions of the FCPA require “issuers” of securities registered under Section 12 of the Securities Exchange Act of 1934 (the “Act”) or entities obligated to file reports under the Section 15(d) of the Act to:
The SEC investigates and brings civil enforcement actions against alleged violators of the “books and records” provisions. The DOJ is responsible for criminal prosecutions of “willful” violations of these provisions and the applicable SEC rules.
Unlike the anti-bribery provisions, there is no scienter requirement in the “books and records” provisions, nor does the conduct have to involve bribery overseas. See cases involving Stein Mart (material misstatement of pre-tax income) and Muscle Pharm (failure to disclose executive perks) (47 SRLR 1832, 9/21/15). The SEC has been strategic in charging and settling with companies with the more technical violations of the FCPA's generic bookkeeping and internal controls requirements in lieu of the anti-bribery provisions where a case may lack, among other things, the requisite jurisdictional nexus with the U.S. or the evidence to prove an actor's “corrupt intent” to bribe foreign officials.
When the SEC charges companies and individuals under the anti-bribery provisions (or the “books and records” provisions for that matter), cases rarely reach the courts. Without the checks and balances of judicial review, the enforcement agencies have had the opportunity to develop and expand their own prosecution and enforcement theories that, at times, seem to stray from the actual language of the statute and legislative intent.
In a 2015 client alert, the lawyers at WilmerHale aptly describe recent trends in SEC enforcement in the context of several resolved travel and entertainment cases: “if there were benefits provided to a government decision maker, the benefits must have been improper. Whether such allegations would be sufficient to satisfy the FCPA's `corruptly' standard in litigation remains to be seen.” Due to the scarcity of FCPA litigation, however, what the SEC or the DOJ will actually have to show to meet its burden of proof may never be seen.
This is not meant to be critical of companies which elect to resolve cases in lieu of protracted litigation. Whatever the merits of the charges, there are rational arguments for publicly held companies to settle their differences with the SEC and the DOJ for some money, rather than endure the economic and reputational downsides of having to report the existence of an ongoing FCPA investigation in their public disclosures. Rather, this is an open invitation to those in authority to give due consideration to legislative purpose in addition to common sense, fairness, and transparency in the exercise of prosecutorial discretion.
Bribery of foreign officials to secure a business advantage was not always illegal. In fact, in some European countries, a foreign bribe could be deducted as an expense from corporate tax returns.
After Watergate, the Senate convened the Senate Select Committee to Study Governmental Operations with Respect to Intelligence Activities, also known as the Church Committee, named for its chair, former Sen. Frank Church (D-Idaho). The Church Committee held a number of hearings that addressed questionable corporate payments overseas. According to U.S. House Report 95-640, at least 400 U.S. corporations had admitted spending $300 million or so in corporate funds bribing foreign government officials, including a prime minister, politicians, and political parties. The SEC reported that United Brands had disclosed in public filings that it paid Honduran officials to cut the tax on bananas (but had declined to make a second payment) and the Church Committee revealed that Lockheed had spent millions bribing foreign officials in Italy, Japan, and the Netherlands—after U.S. taxpayers bailed it out in 1971.
In its report, the House Committee enumerated many policy reasons to prohibit companies from bribing foreign officials and politicians:
President Jimmy Carter recalled that he ran into a “hornet's nest” when the bill was being considered for passage. Leading commercial organizations informed President Carter that they could not compete for sales with companies in France and Great Britain, which had no such restrictions. But the FCPA passed both houses and the final bill, H.R. 3815, was signed into law by President Carter on Dec. 19, 1977.
The FCPA also became a timely vehicle to address existing deficiencies in the SEC's laws and regulations that allowed the bribery of foreign officials to go undetected, as recounted by Professor Mike Koehler, an FCPA expert and former practitioner, in The Story of the Foreign Corrupt Practices Act. Until the FCPA was passed, no SEC law or regulation explicitly prohibited the falsification of corporate books and records with respect to illegal or improper domestic or foreign payments or imposed affirmative requirements to maintain accurate books and records. Former Sen. William Proxmire (D-Wis.) observed that the inclusion of the generic books and records and internal control provisions in the FCPA would “go a long way towards eliminating improper payments, which—almost by definition—require concealment.”
As stated in House Report 95-640, the purpose of the FCPA is to prohibit the corrupt use of the mails or other means and instrumentalities of interstate commerce by U.S. corporations, directly or indirectly, to bribe foreign officials, foreign political parties, or candidates for foreign political office.
The House Committee deliberately used the word “corruptly” to distinguish between payments or gifts which cause an official to misuse his or her discretion to direct business to the payor or a client or secure favorable legislation or regulations and those which do not. Congress created an exemption for “grease payments” or “facilitating payments” to account for the fact that while such payments “may be reprehensible in the United States … they are not necessarily so viewed elsewhere in the world.” Thus the House did not intend the bill to reach a gratuity paid to a customs official to speed the processing of a customs document or to secure permits, licenses, or expedite the performance of duties of an essentially ministerial or clerical nature.
But the proverbial devil is in the details—and enforcement. The statutory distinction between payments that have been made “corruptly” and those that secure the performance of ministerial or “routine” governmental action is fact-intensive and has been blurred by the enforcement agencies.
Today's SEC and DOJ FCPA Guidelines ( https://www.justice.gov/criminal-fraud/fcpa-guidance) do not provide much comforting advice on how the term “corruptly” will be enforced. With little case law to cite from, the agencies rely on legislative history—and allegations from their own complaints: “[t]he corrupt intent requirement protects companies that engage in the ordinary and legitimate promotion of their businesses while targeting conduct that seeks to improperly induce officials into misusing their positions.” The Guidelines also note that “[t]he word ‘corruptly’ means an intent or desire to wrongfully influence the recipient” and that “[b]y focusing on intent, the FCPA does not require that a corrupt act succeed in its purpose.”
As noted above, the 1977 House Report recognized that the U.S. could not unilaterally eradicate all necessary “grease” or “facilitating” payments that would “merely move a particular matter toward an eventual act or decision or which do not involve any discretionary action.” To that end, Congress articulated a specific exemption for “routine governmental action,” also known as “facilitating payments.”
Congress's pragmatic rationale for creating an exception for “facilitating payments” made to motivate a foreign official to perform his or her duties is not difficult to grasp in theory. The exception nevertheless creates confusion when applied in the real world, especially since the SEC seems to be skeptical of any payments which a company classifies as “facilitating payments.”
As recapped by Professor Koehler,SEC v. Jackson provides a rare glimpse into actual SEC litigation that nearly went to trial in 2014. The SEC alleged that two officers of Noble Corp. violated the FCPA by carrying out a bribery scheme to obtain “illicit” Temporary Import Permits (TIPs) for oil rigs in Nigeria to retain business under lucrative drilling contracts. Previously, in 2010, Noble Corp. entered into a $5.6 million “books and records” settlement of an SEC complaint based on the same set of facts. This time, the SEC alleged that the officers had bribed the Nigerian officials by making payments for the import permits, which were “discretionary” acts under Nigerian law.
During a pre-trial hearing, the presiding judge, Hon. Keith Ellison of the U.S. District Court for the Southern District of Texas, expressed his own frustration on the subject of facilitating payments and how it relates to the rest of the statute: “I have such trouble understanding the facilitating payment exception … I mean, it almost swallows the rest of the statute.”
The SEC may have compounded Judge Ellison's concerns with its explanation:
The SEC then acknowledged that the permit extensions at issue were, in fact, routinely granted, with a payment and referred to the payment as a “facilitating payment,” but continued to argue that the payments were illegal bribes:
Also, to get at the issue of scienter, Judge Ellison asked the SEC to clarify whether the permit extension would have been granted without any payment to the government worker. The SEC, however, said it did not have that information because the only thing that really mattered was that the payment had been made.
Ultimately, the SEC's answer was not good enough for the judge.
Judge Ellison then took issue with SEC's circular position that the defendants violated the FCPA's books and records provisions by recording the payments for routine temporary import permits as facilitating payments. Noble Corp. argued that it had booked the payments for permit extensions in a specific facilitating payments account based on the good faith belief that they were indeed facilitating payments:
At trial, Judge Ellison put the SEC to its burden of proof. In the jury instructions, Judge Ellison held that to prove “corrupt intent” the SEC had to show “that Defendants knew they were not entitled to permit extensions as a matter of right upon satisfying certain basic threshold requirements.” The case settled on the eve of trial—and it is telling that the defendants paid nothing and consented to a final judgment permanently restraining them from violating the books and records provisions of the FCPA, that is, they promised not to break the law.
Since its passage in 1977, the FCPA has helped the U.S. make substantial progress toward purging the culture of corruption that a large number of influential U.S. companies had promoted overseas. The FCPA has also helped the U.S. establish a better reputation for ethical behavior and fair competition. Moreover, the SEC and DOJ have leveraged their prosecutorial power under the FCPA to recover millions of dollars for taxpayers and persuade companies to invest in compliance programs that will help promote ethical culture and thwart employees who seek to gain a business advantage through corruption. And the DOJ recently introduced a pilot program to ensure that companies which self-report and address potential FCPA violations in a timely manner receive appropriate credit for their compliance efforts against any potential penalties (48 SRLR 734, 4/11/16). The SEC recently announced that Akamai, a Massachusetts-based tech company, and Nortek, a Rhode Island building products company, paid $650,000 and $350,000, respectively, to resolve claims involving alleged bribes to Chinese officials, but neither were charged with FCPA violations because they self-reported and cooperated with authorities (48 SRLR 1182, 6/13/16).
Companies that are subject to the “books and records” provisions of the FCPA should not let themselves become vulnerable to the SEC's most effective tool for prosecution. Indeed, sound accounting practices and internal controls can protect the company from fraud, embezzlement, and theft by insiders in settings where there may have been a less disciplined approach to books and records.
While the SEC has relied less frequently on the FCPA's more familiar anti-bribery provisions to charge companies under its jurisdiction, they cannot be ignored. Companies should understand how broadly the SEC interprets terms such as “corruptly” in routine transactions with foreign officials and examine business practices to forestall costly investigations and perhaps even more costly SEC civil complaints.
Copyright © 2016 The Bureau of National Affairs, Inc. All Rights Reserved.
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