More FCPA Cases in Pipeline, Brockmeyer Says; Some Administrative

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July 16 -- The Securities and Exchange Commission has a number of Foreign Corrupt Practices Act cases in the pipeline, Kara Brockmeyer, chief of the SEC Enforcement Division's FCPA unit, said July 10.

In an interview, she told Bloomberg BNA that some of these cases “absolutely” will be brought in the agency's administrative forum. Cases will include individuals, not just corporations, as respondents or defendants.

The commission also is looking to expand its cooperation program, especially in the FCPA arena, Brockmeyer continued. She noted that in 2013, the commission entered into its first non-prosecution agreement in an FCPA action .

We routinely get some great leads from whistle-blower complaints and other tips, complaints and referrals.

That case--relating to alleged bribes paid by employees at Ralph Lauren Corp.'s Argentina subsidiary--was “an excellent example of how a company can cooperate and speed up the investigation and get a significant reward. So I think you're going to see more of those come through.”

The timing, however, can be less than certain. It takes time to get an FCPA case over the finish line, Brockmeyer said. Such lawsuits tend to be big cases, she noted, often focusing on overseas conduct.

In addition, many cases include a parallel U.S. Department of Justice action. “They take a little time,” Brockmeyer said, “but we have a number of them in the pipeline. I think there's a few that you'll see coming through in the next few months.”

Recent Case Law.

One such parallel action involved SEC and Justice Department charges against two former executives of a Miami telecommunications firm who allegedly bribed Haiti officials. In the criminal case, the U.S. Court of Appeals for the Eleventh Circuit resolved an issue of first impression by defining--broadly--what constitutes a foreign “instrumentality” for FCPA purposes .

United States v. Esquenazi was a very significant decision for the government, Brockmeyer said. She noted that the ruling marks only the second time a federal appeals court has examined the FCPA. “It's also the second time an appellate court has taken an expansive reading of the statute, looking to the legislative history and also to the Organization for Economic Cooperation and Development's commentary on foreign bribery to give meaning to the words in the statute.”

“So we think that's a positive trend,” Brockmeyer said. “It's also a very positive decision for the government, because the 11th Circuit agreed with the way the government and the lower courts have been interpreting instrumentality.”

She also said that the recent resolution of a case involving bribes to Nigerian officials was “a very good settlement for us,” even though the defendants, who agreed to be barred from future violations, were not required to pay civil penalties .

The SEC's ability to get penalties “was significantly limited” by the U.S. Supreme Court's decision in Gabelli v. SEC--issued shortly after the case was filed--that the general five-year statute of limitations pertaining to government civil penalty actions runs from the time the fraud occurred .

Great Leads From Whistle-Blowers.

Currently, Brockmeyer's unit acquires its cases in a number of different ways. “We routinely get some great leads from whistle-blower complaints and other tips, complaints and referrals,” she said. The unit also is receiving an increasing number of cases as referrals from foreign authorities, who may be looking into what for them is a domestic corruption issue.

Sometimes, Brockmeyer added, even without a referral from a foreign regulator, “we see in the paper that somebody has been arrested in another country for allegedly giving a bribe to a foreign official and that will start our investigation.”

I think we have gotten much better in sourcing cases ourselves.

In addition, she said, about a third of the unit's caseload, including cases still under investigation, begin as self reports. In some of those cases, the conduct in question was relatively small, the company found it very quickly and the staff does not launch an investigation.

However, Brockmeyer said, in addition to those sources, “I think we have gotten much better in sourcing cases ourselves. We have an increasing number of investigations that are either outgrowths of existing investigations or were begun in another way.”

For example, she explained the unit may get one case through a whistle-blower, but during the investigation it appears that the conduct of the particular company “is something that appears to be endemic to the industry. So that can start us looking at their competitors.”

Less frequently, the unit will be looking at an area in which there is reason to believe that issuers are not paying enough attention to their FCPA and internal control risks.

“We go out and just ask a few questions,” Brockmeyer amplified. “And if we can't get answers that are very good ones, that may lead us to an investigation.”

Overseas Complications.

Nonetheless, Brockmeyer acknowledged, investigating overseas conduct can present complications.

For example, she explained, in a non-FCPA investigation, the staff can subpoena the information it wants located within the U.S. In an FCPA case, the documents and witnesses are typically located overseas. Although the company can provide the staff with information from its foreign subsidiaries, “that usually takes a little longer because there may be certain local laws they have to work through.”

Meanwhile, the unit works with its foreign regulatory counterparts and with DOJ through the MLAT--Mutual Legal Assistance Treaty--to obtain information from foreign law enforcement. The staff also uses ordinary investigative tools--“We call people up and ask if they'll talk to us. We put out border watches. We've gotten very good about using proactive investigative techniques to try to get the information.”

More broadly, Brockmeyer said, the unit is greatly aided by the increasing attention in the international space to corruption issues. She said that in the past few years, the staff has obtained assistance “from countries that five or six years ago we just were not getting assistance from. That has really broken open some investigations.”

“The U.S. is not the only cop on the block anymore. There are more and more other regulators and prosecutors throughout the world that are looking at these issues.”

Holistic View.

Are there red flags that might indicate an FCPA problem? There are.

“Obviously,” Brockmeyer said, “the first red flag for a company should be, 'Are you doing business with government entities in a high-risk area?'”

However, she continued, the staff wants issuers to take a very holistic view of that. “The question is not just, 'Am I trying to win business from a government entity?' It can be the issuer's other connections and the interaction it has with government officials.”

For example, Brockmeyer posited, is it possible that the customs agent or broker the issuer is using is being bribed to get the company's goods through customs?

That's really where companies fall down. They see things that might be a red flag and they just don't dig far enough.

Another thing the staff looks at very early on--“and that we want companies to focus on”-- is the issuer's internal controls. “If you have a customs broker, do you have all the documentation and supporting documentation that you would expect? Are the expenses for that customs broker in line with what you would expect the service to be? If they're not, if they're higher, or if you see unexplained charges, is there documentation that appears to support a legitimate reason why you're paying that customs broker more than the going rate?”

“If there aren't, then you really need to dig further,” Brockmeyer continued. “That's really where companies fall down. They see things that might be a red flag and they just don't dig far enough.”

In that situation--whether a third-party agent is paying bribes or an employee at a subsidiary has worked out a kickback deal with the agent--“either way, from the SEC's perspective, as a public company you have a problem and you're not being a very good steward of your investors' assets.”

High Risk Areas, Industries.

On a related point, Brockmeyer acknowledged that certain areas of the world tend to be higher risk than others. “It has a lot to do with transparency and the rule of law.”

There also are certain industries that tend to have a higher risk profile than others, she noted: either because they're in a less regulated area or, “like the extractive industries, we see them again and again in our cases” because they do business in places where there is a high risk of corruption.

Asked about what other types of industries might be problematic, Brockmeyer commented that companies sometimes take comfort from the fact that a case hasn't been brought in their particular industry, so they believe the risk must be low. “Six or seven years ago, that's probably what the pharmaceutical industry was saying: 'we don't really need to worry about this because there hasn't been any activity.' I think a lot of pharmaceutical companies have learned the hard way that they really weren't paying enough attention to the risk factors that they had.”

In addition, she continued, the SEC also wants to ensure that small and medium sized businesses going overseas for the first time or moving into an emerging market are paying enough attention to their internal controls and FCPA risks.

In terms of problem areas, third-party intermediaries and travel and entertainment have factored in FCPA cases “pretty much from the dawn of time,” Brockmeyer said.

Regarding third-party intermediaries, she said, the unit is seeing a shift from the typical third-party agent whose job it is to acquire business for the company to bribes being funneled through third parties that may appear to be more legitimate, such as customs brokers, or distribution or channel partners. “We just want to remind companies that we are still seeing this as a risk area for them.”

Travel and Entertainment.

In terms of travel and entertainment, Brockmeyer noted that the FCPA permits the payment of reasonable business and promotion expenses to foreign officials. “For example, if you sell your goods to a foreign government official, it is perfectly appropriate for you to fly them over to your factory, give them a tour, let them see your product before they buy it.”

However, she said, in some cases, “that's not really the reason why they're taking people on travel. They may go to the factory, but it may be for two hours. And then for the rest of the three week tour they're going to Disney World and the Grand Canyon, they're going to Paris and Casablanca. That's where companies run into problems.”

Investor Protection Mandate.

Why is FCPA enforcement central to the commission's investor protection mandate? This topic “is sort of close to my heart,” Brockmeyer said. “The reason why we care about this is that public companies hold their assets in trust for their shareholders and the SEC has jurisdiction over public companies.”

Companies that have FCPA problems don't have good internal controls.

She said the real issue is not just the bribery, but the company's internal financial controls. “At the root, companies that have FCPA problems don't have good internal controls.”

Although in some rare instances, the company's upper management is engaged in the unlawful conduct, a more common scenario is that a subsidiary is engaged in the misconduct and the parent doesn't know what the subsidiary is doing--“not just in the area of bribery but quite often in other financial areas as well.”

Wal-Mart executives have come under fire in a similar fact pattern, regarding possible bribery in Mexico, among other places (see related story, page 857).

Moreover, Brockmeyer continued, FCPA violations involve a significant risk that isn't being disclosed to shareholders. “If you're getting business in a particular country by bribing a foreign official, the problem is that if that foreign official decides to leave or is deposed, you're now stuck. Because the business that you bought through bribery is at risk.”

By Phyllis Diamond  

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