SEC Internal Controls Cases Show ‘Sea Change’ in FCPA Enforcement

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By Yin Wilczek

Feb. 27 — The Securities and Exchange Commission is signaling, through three recent actions, a “sea change” in how it will enforce the Foreign Corrupt Practices Act going forward, a consultant said Feb. 26.

All three actions—In re Smith & Wesson Holding Corp., In re Layne Christensen Co. and In re Bio-Rad Laboratories Inc.—involved internal controls violations and were brought in the SEC's administrative forum, said Thomas Fox, founder of Houston law firm and creator of the FCPA Compliance and Ethics Blog.

“I think internal controls are going to be the wave of the future,” Fox said. “I think we'll move towards strict liability under that.”

Fox also remarked that FCPA fines are “trending upwards significantly.”

“It won't surprise me to see a fine of $1 billion” for FCPA violations in 2015 or 2016, he said.

Fox is an independent consultant focusing on FCPA compliance. He spoke at a webcast sponsored by The Network.

Prior Actions 

Fox noted that in the SEC's previous FCPA internal controls actions—including that against Weatherford Inc.—there was clear evidence of culpable intent and the tying of bribery activity to attaining or retaining business.

Smith & Wesson was the first case in which the SEC tied the internal controls violations to the company's failure to have an adequate anticorruption program rather than to the paying of bribes to attain or retain business, Fox said.

Fox also noted that the SEC largely went it alone in all three cases. The Department of Justice declined to bring parallel charges against Smith & Wesson and Layne Christensen. Bio-Rad entered into a nonprosecution agreement with the DOJ in which the company paid a $14.35 million fine.

Other commentators have questioned the SEC's interpretation of Section 13(b)(2)(B)—the 1934 Securities Exchange Act's internal accounting controls provision—in enforcing the FCPA. 

Section 13(b)(2)(B) directs organizations to establish appropriate systems of internal controls.

Alcoa Settlement.

Larry Ellsworth, a partner at Jenner & Block LLP, Washington, told Bloomberg BNA that it might be “a little much to peg” Layne Christensen, Bio-Rad and Smith & Wesson as actions representing a strict liability approach to FCPA enforcement.

“In Layne Christensen and Smith & Wesson, the SEC specifically alleged that corporate officers of the charged companies knowingly authorized improper gifts or payments,” Ellsworth said. “In the case of Bio-Rad, the SEC charged that corporate officers exhibited a conscious disregard of the probability that improper payments were being made, and listed multiple red flags that the officers allegedly ignored.”

However, Ellsworth added that the SEC did “come close” to finding strict liability in its settlement with Alcoa Inc. in January 2014.

In Alcoa, the commission specifically acknowledged that it made “no finding” that an Alcoa officer, director or employee knowingly engaged in a bribery scheme, Ellsworth said. “Rather, it rested liability for Alcoa Inc. on a theory that its subsidiaries had acted as agents of the parent which exercised general control,” he said. “That comes close to a strict liability theory for parents regarding the action of their subsidiaries.”

Ramp-Up in Penalties 

In other trends, Fox said that FCPA fines have increased dramatically. He observed that in 2014, only 10 companies entered into FCPA settlements with the DOJ and SEC, but the year yielded the second highest amount of fines and penalties—$1.565 billion—in the statute's history.

Fox added that although Avon Products Inc. paid only a $135 million fine to resolve civil and criminal FCPA allegations, that did not take into account the hundreds of millions of dollars the company spent in internal investigations and remediation efforts.

That is a “hefty multiple” of what Avon obtained in benefits from bribing Chinese officials, Fox said. “That's a huge cost of doing business,” and speaks to the justification for companies engaging in overseas business to implement adequate FCPA controls and policies.

Fox also said that he and others are seeing more and more instances in which companies are imposing extensive FCPA compliance obligations on their business partners and suppliers through contract clauses and codes of conduct. It is the “business solution” to the FCPA, he said. “I think business is going to drive compliance in large part going forward.”

Fox attributed the privatization of compliance concept to Scott Killingsworth, senior counsel in Bryan Cave LLP's Atlanta office.

Sigelman Trial 

In other comments, Fox said the ongoing criminal trial of Joseph Sigelman, the former co-chief executive officer of PetroTiger Ltd., offers lessons on the attorney-client privilege.

Sigelman is defending against criminal allegations that he bribed a Colombian official to secure a $39.6 million contract. In December a federal judge in New Jersey declined to allow Sigelman to suppress a recording of a conversation between himself and the company's former general counsel, ruling that communications are subject to attorney-client privilege only if they occur for the purpose of obtaining legal advice.

“Most CEOs think that the general counsel is their lawyer and that anything they say” to the GC is privileged, “but that's not true,” Fox said. “You have to be seeking legal advice and you, the client, have to ask the questions.”

Fox also warned that individuals who fight FCPA allegations must be aware of the costs of going to trial and losing their case. He cited the case of Gerald and Patricia Green, two Los Angeles film makers who were found guilty in September 2009 of bribing Thai officials to obtain government contracts.

The Greens got a slap on the wrist in terms of their jail sentence, but they lost everything—including their home, shares and savings—through civil forfeiture, Fox said. “So if you go to trial and lose, you are looking at just a draconian loss of everything.”

To contact the reporter on this story: Yin Wilczek in Washington at

To contact the editor responsible for this story: Kristyn Hyland at


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