FCPA Enforcement Officials Up the Ante on Self-Disclosures

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1 FCPA Enforcement Officials Up the Ante on Self-Disclosures Patrick M. Collins and Gina L. Ori, Perkins Coie Whether to self-disclose a possible Foreign Corrupt Practice Act (FCPA) violation, and when to do so, can be two of the most difficult decisions a company may have to make. Disclosing a violation may subject the company to aggressive prosecutorial action, substantial financial penalties and reputational harm for conduct that but for the disclosure may go undetected. With disclosure, there is also the voluntary ceding of control to the federal government on a sensitive and discretion-laden issue with uncertain benefits. Yet, the risks of not disclosing can be equally vexing and perilous. It is the rare legal officer who is comfortable "sitting" on an FCPA violation even if strong corrective measures have been taken to remedy the problem. As a company considers whether to disclose, it also needs to consider the related timing issue as well. That is, under what circumstances should a company bring the government inside the fold at the front end of the investigative process to ensure maximum cooperation credit, rather than await the results and recommendations of its own internal FCPA investigation? The Department of Justice's (DOJ) recent aggressive actions and the companion pronouncements by the Securities and Exchange Commission (SEC), its FCPA partner, are most assuredly designed to push companies toward the early, prodisclosure option. Yet, that might not always be in the company's self-interest, particularly in the case of more discrete and contained FCPA violations. Applying the dynamic risk/reward factors to company-specific fact patterns is a challenging process. In making the best decision for the company, legal officers and their advisors must take stock of the recent DOJ developments and emerging trends in the FCPA arena. Of all the trends in the FCPA arena, the increase of government-initiated enforcement actions relative to the percentage of self-disclosure actions perhaps best reflects the steadily shifting sands. In 2007, a top DOJ official stated that approximately 23 of the past 26 FCPA prosecutions had been the result of voluntary disclosures. 1 By contrast, in 2009, a year of significantly increasing volume of FCPA investigations, the percentage of new investigations generated by self-disclosure reportedly dipped below 50 percent. Now, according to DOJ officials, the majority of confirmed FCPA investigations are generated externally through the government's own investigative efforts. 2 What should that mean to a legal officer with an FCPA problem who is considering self-disclosure? In addressing that and related questions, we first must look at the The discussions set forth in this report are for informational purposes only. They do not take into account the qualifications, exceptions and other considerations that may be relevant to particular situations. These discussions should not be construed as legal advice, which has to be addressed to particular facts and circumstances involved in any given situation. Any tax information contained in this report is not intended to be used, and cannot be used, for purposes of avoiding penalties imposed under the United States Internal Revenue Code. The opinions expressed are those of the author. Bloomberg Finance L.P. and its affiliated entities do not take responsibility for the content contained in this report and do not make any representation or warranty as to its completeness or accuracy.

2 recent FCPA pronouncements and initiatives by DOJ and SEC. Within the last year, the government has announced: An expanded prosecutorial force that includes more DOJ and SEC prosecutors, as well as a new SEC FCPA unit based in San Francisco, with plans for other domestic-based units in the works; An enhanced FBI Strike Force utilizing techniques that include undercover FCPA sting operations and wiretaps; A new SEC Cooperation Initiative that encourages individual cooperation as well as corporate cooperation; Several individual prosecutions with record-setting sentences imposed for FCPArelated violations; The targeting of particular industries (pharmaceutical, life sciences and telecommunications) and regions (China and emerging markets in Southeast Asia); and Renewed threats to debar government contractors that are convicted of FCPArelated offenses. Of course, from the perspective of the DOJ/SEC enforcement partnership, these recent efforts reinforce the maxim of "early and often" self-disclosure. The government wants corporate America to believe that a failure to self-report eventually will result in enforcement officials exposing the FCPA violation on its own, with more severe penalties. Encouraging companies to investigate proactively and disclose even discrete FCPA violations makes companies partners with the federal government in ferreting out international corruption and infuses the government coffers with financial penalties and disgorged profits. From the government's view, now more than ever, self-disclosure is the most appropriate avenue for a company to get ahead of the FCPA game and mitigate its financial, legal and market risk. Compared to the possibility of becoming the target of a covert government investigation or losing control over disclosure to a whistleblowing employee, the government contends that self-disclosure and its accompanying benefits are the better choice. 3 While enforcement officials undoubtedly have raised the stakes, every company must examine its particular FCPA fact-pattern to make an informed decision. The fact remains that self-disclosure will be costly and may directly result in a public case whether civil or criminal for conduct that might otherwise go undetected. Further, a review of recently-filed FCPA matters shows a marked uptick in SEC "books and records" violations, many of which are self-disclosed violations that still resulted in substantial fines, a public press release and reputational damage to the company. While DOJ officials repeatedly dangle the carrot of "meaningful credit" for self-disclosing cooperators, such benefits are, by their very nature, difficult to measure, particularly at the front end of the process. If a self-disclosing company receives half of the financial penalty it might otherwise have received, that might appear, at first blush, to be a good result. However, a company must also examine the likelihood, in the absence of self-disclosure, that the FCPA transgression will be exposed by a third party or the government. More generally, how should a responsible company factor these probabilities into the risk/reward analysis?

3 FCPA Overview: What's at Stake Given the enhanced regulatory environment, most in-house counsel and senior company officials have a working knowledge of the two broadly-phrased components of the FCPA: the prohibition of bribe payments to foreign government officials and the requirement that companies and their subsidiaries keep accurate books and records and establish and maintain a system of internal accounting controls. The essence of an FCPA bribe violation 4 is providing anything of value to a non-u.s. governmental representative, official or employee, with the intention that in exchange for the payment, that person will do something that benefits the bribe payor. Beyond government officials, the statute covers payments to officials and employees of international organizations and state-owned entities such as airlines or healthcare facilities, as well as officials of political parties and even candidates for public office. In addition to the anti-bribery provisions, the FCPA's accounting provisions 5 require issuers and domestic concerns, and all of their subsidiaries and related entities, to keep books and records that accurately reflect each and every transaction of the company, no matter how small. Further, these companies and their related entities must also maintain internal accounting controls that ensure that the company's books and records are accurate. Thus, even a small bribe to a customs agent in Beijing that is recorded as a third-party clearing agent fee (or not reported at all) could theoretically result in an FCPA accounting violation. Beyond large financial penalties and reputational risk, a violation of the FCPA can have serious consequences for a company's ability to obtain or retain certain governmental contracts and licenses and may result in the suspension or debarment of a company from doing business with the U.S. government or other countries around the world. Earlier this year, the U.S. State Department announced that it was considering a "temporary administrative hold" on weapons export licenses for BAE Systems or companies using BAE Systems' products, after the company pleaded guilty to FCPArelated offenses. 6 While the government did not follow through on the threat, it sent a strong signal of the potential collateral consequences facing a company that acknowledges FCPA wrongdoing. The House of Representatives recently picked up on the theme and is considering legislation such as the Overseas Contractor Reform Act 7, which would prohibit any company that violates the FCPA from obtaining federal government contracts. That bill is currently under review by the House Oversight and Government Reform Committee. Finally, in June, Fitch Ratings, a global credit ratings provider, issued a statement indicating that an indictment for an alleged FCPA violation might trigger a ratings review that could negatively impact a company's Fitch rating. 8 The Numbers Demonstrate a Heightened Enforcement Climate A quick skim of the 2010 FCPA headlines strongly suggests that the DOJ is focused on a more proactive approach to address FCPA violations. In January, 22 individuals from the military and law enforcement products industry were indicted as a result of a massive undercover FCPA sting. 9 The ensuing indictments alleged that the

4 defendants engaged in a scheme to pay bribes to the minister of defense for a country in Africa in return for a contract to provide weapons for the country's presidential guard. In reality, the defense minister was a fictitious person and the sales agent to whom the bribes were offered was an undercover FBI agent. Moreover, the undercover operation involved two years of investigation, the use of over 150 FBI agents executing 14 search warrants in states across the U.S., including Florida, Virginia and California, and the use of additional law enforcement techniques such as wire taps. The prosecution has been trumpeted as an example of how the government will pour law enforcement resources more typically seen in domestic corruption cases into FCPA cases. While no doubt true, the facts of this case indicate that the alleged conduct was at the egregious end of the spectrum. Another recent case that garnered headlines this year was the prosecution of two Hollywood movie producers convicted of paying $1.8 million in bribes to a Thai official in exchange for contracts to produce the Bangkok Film Festival. 10 DOJ is quick to point out that this case focused on individuals and was the result of proactive enforcement efforts. For instance, the criminal charges against the producers, Gerald and Patricia Green, were supported by an affidavit from an FBI special agent describing an undercover investigation that included a multiple-agent trip to Thailand to witness Mr. Green meeting with the Thai official. The Greens' sentencing, which has been postponed several times, is currently scheduled for August Again, a message was sent that the government is going outside the self-disclosure context to make cases including cases against individuals. Given that the government is devoting more investigative resources to FCPA matters, it is only a matter of time until more cases result. Earlier this year, DOJ officials said the FCPA enforcement unit "may grow as much as 50 percent in size in the next year or two." 11 The FBI has also publicized its naming additional supervisory special agents to the FCPA frontlines. On the civil enforcement front, the SEC announced a reorganization of its Enforcement Division, which includes the creation of a new unit to focus on FCPA enforcement. The current head of this new SEC unit has indicated that proactive enforcement, including "targeted sweeps and sectorwide investigations, alone and with other regulatory counterparts both here and abroad" will be part of its primary mission. 12 In January, the SEC also announced a groundbreaking cooperation initiative that provides its Enforcement Division attorneys with a variety of tools to incentivize individuals and companies to cooperate with Commission investigations and enforcement actions. These tools include cooperation agreements, deferred prosecution agreements and non-prosecution agreements. While the program is still in its infancy, it is generally expected to increase the number of FCPA actions stemming from cooperating witnesses. Moreover, Congress, recently passed legislation that establishes a new program to reward whistleblowers who assist the SEC in investigating securities violations, including violations of the FCPA. Under the Restoring American Financial Stability Act 13, whistleblowers providing "original information" leading to a successful enforcement action resulting in monetary sanctions exceeding $1 million could potentially be paid between 10 and 30 percent of any money the government collects as a result of the information provided. In practical terms, the impact of such a reward for FCPA whistleblowers is a potential game-changer. For example, a whistleblower in the BAE Systems action, which settled earlier this year for $400 million, 14 could have received compensation

5 between $40 and $120 million. With millions of dollars on the table for employee whistleblowers, the impact for companies that depend on internal reporting of potential violations as part of their FCPA compliance program could be immeasurable. The Self-Disclosure Checklist: Factors to be Weighed in Making the Critical Decision While it remains to be seen what the long-term impact will be of these high-profile cases and announcements, legal advisors must pay close attention to the tangible results of those initiatives. To be sure, the DOJ and SEC's increased enforcement efforts and pronouncements have introduced significant new variables into the already difficult analysis of whether to make a voluntary disclosure of an FCPA violation. Now, in addition to conducting a self-disclosure analysis, a company must analyze the FCPA landscape and also consider whether potential violations will be detected through proactive means, such as covert investigations or whistleblower employees. The concern regarding proactive investigative means should also include foreign-based investigations and referrals. For instance, a violation of the recently enacted U.K. Bribery Act could trigger a parallel or multijurisdictional enforcement action by U.S. authorities, as well. 15 Of course, an important component in the self-disclosure decision process is the timing of the prospective disclosure to the government. Historically, disclosures have occurred only after a thorough internal investigation and a comprehensive analysis of the potential violation. Unless otherwise obligated, responsible corporate officials should be, and have been, loathe to disclose a problem prematurely. However, recent rhetoric from the DOJ indicates that the pressure is building for unprecedented early involvement of enforcement officials when an FCPA violation is suspected. Although there may be benefits to involving the government early in an FCPA investigation, including positioning the corporation for maximum cooperation credit, corporations must proceed with caution before hitching their wagon to an uncertain benefit for a problem of undefined scope. Making a decision to self-report early is an extraordinary decision, and one that should be made, even in the current environment, with great caution and care. Once a company does identify an FCPA issue and begins the self-disclosure analysis, it should continue to review its own self-interests, as well as the stated objectives of the enforcement officials, including the DOJ's Principles of Federal Prosecution of Business Organizations. Generally, key factors in the analysis should include the following: A critical evaluation of the company's corporate compliance efforts, including efforts to implement or upgrade its compliance program in conjunction with an internal investigation; whether or not the company opts to disclose, a first step must be to identify and fix the FCPA problem to the satisfaction of an objective outsider; Whether the industry or region in which the violation occurred is currently being targeted by enforcement authorities; under the emerging paradigm, a pharma business operating in China will be at greater risk than a consumer goods operation in Europe; The nature and seriousness of the potential FCPA violation, including the

6 pervasiveness and duration of wrongdoing within the corporation, and the complicity, if any, of corporate management; Whether the FCPA compliance failures are confined to relatively discreet, nominal payments or are more systemic; Recentness and duration of the potential violations; The likelihood that the government will unearth other misconduct within the corporation or its subsidiaries as a result of an investigation ensuing from selfdisclosure; and Business consequences, such as adverse publicity, loss of government contracts and licenses and a negative impact on credit ratings. Additionally, there may be certain situations under which the FCPA violation itself triggers reporting obligations. For example, the SEC has asserted that failure to disclose FCPA violations can result in material misrepresentations or omissions actionable under Section 10 of the Securities and Exchange Act of 1934 and Rule 10b-5. Moreover, provisions of the Sarbanes-Oxley Act that require CEOs and CFOs to certify the company's controls and financial statements may necessitate disclosure under some circumstances. Lastly, companies engaged in initial public offerings or mergers or acquisitions may be required to disclose violations of the FCPA in filings submitted to the SEC. Determining the Benefit of Self-Disclosure: Terms and Conditions May Apply Depending on the severity of the FCPA violations, it is imperative to consider the benefit the company will receive for having cooperated with enforcement authorities. A company that chooses to self-disclose an FCPA violation will likely be in a better position than one fending off criminal charges arising from an undercover government investigation or whistleblower action. However, in the real world, the options are rarely so black and white, as there is typically no firm understanding as to whether the FCPA problem will be detected. To be sure, cooperation can be a positive development for companies grappling with a compliance failure. While the DOJ has touted "meaningful credit" for voluntary disclosure, the practical impact of cooperation is, by nature, difficult to measure, particularly before the fact. For instance, in public statements regarding the benefits of self-disclosure, DOJ officials have highlighted the case of Helmerich & Payne 16, a company that selfdisclosed potential FCPA violations in The case was resolved through a DOJ non-prosecution agreement with a penalty of $1 million and compliance selfreporting by the company for a period of two years. The company was also required to disgorge to the SEC $320,604 plus prejudgment interest of $55,077 for books and records and internal controls violations. In referencing the company's financial penalty, the DOJ has noted that the $1 million fine Helmerich & Payne ultimately received was about 30 percent below the bottom of the range recommended by the Sentencing Guidelines. Even short of self-disclosure, the DOJ has pointed to its $450 million settlement with Siemens as a case where a company reaped extraordinary benefits by cooperating with the government. 17 As the DOJ has repeatedly noted, the $450 million fine was substantially lower than the advisory range of $1.35 to $2.7 billion called for by the U.S. Sentencing Guidelines. DOJ officials have also noted that, "Siemens received a

7 penalty that was 67 to 84 percent less than what it otherwise could have faced had it not provided extraordinary cooperation and carried out such extensive remediation." Though the DOJ points to the Helmerich & Payne and Siemens settlements as models for voluntary disclosure and cooperation, the two cases highlight that cooperation credit is difficult to measure and largely at the discretion of enforcement officials. In the case of Helmerich & Payne, the fine ultimately imposed may be thirty percent below the lower end of the applicable sentencing guidelines, but as in many cases of self-disclosure, there was no guarantee that the government would ever have uncovered the alleged misconduct on its own or recouped a fine within the applicable sentencing guidelines. Moreover, in Siemens' case, the company did not disclose its conduct to the DOJ until after German authorities raided several of its offices and the homes of several employees. Yet as the government explains it, Siemens received 67 to 84 percent less than what it otherwise could have faced under the Sentencing Guidelines, while Helmerich & Payne, who actually did self-disclose, received only a 30 percent reduction. Both cases also illustrate that regardless of a company's cooperation with the DOJ, there will still be potentially significant penalties to pay to the government in the form of disgorgement of ill-gotten gains. In sum, the decision to self-disclose has become increasingly difficult as enforcement authorities have attempted to shift the risk/reward calculus to more favorable prodisclosure terrain. Under appropriate circumstances, self-disclosure and cooperation can lead to "meaningful credit" for companies that have uncovered potential FCPA violations. On the flip side, under DOJ and SEC prosecution guidelines, enforcement authorities are unlikely to forego or defer prosecution of a company that fails to voluntarily disclose its FCPA violations. Yet, self-disclosure can be a resourceintensive and costly decision, with uncertain corresponding benefits for having done so. In addition to critically evaluating the benefits that other companies in similar situations have received for self-disclosing FCPA violations, companies that are considering a voluntary disclosure should take stock of their particularized circumstances in the context of the government's FCPA portrait. Conclusion As the FCPA landscape experiences a heightened period of unprecedented regulatory activity, the pressure has increased for companies to consider the self-disclosure option. Yet, the ultimate decision can only be made after a careful and individualized measure of the possible risks and rewards. Enforcement officials can and have upped the ante, but corporations must continue to proceed cautiously in deciding if they want to play the game. Patrick Collins is a Chicago-based partner in Perkins Coie's Investigations and White Collar group. Collins specializes in conducting internal investigations for corporations, including investigations and compliance matters pertaining to the FCPA. Gina Ori is a Chicago-based associate in Perkins Coie's Investigations and White Collar group. Ori specializes in commercial litigation, white-collar defense and internal investigations.

8 1 Mark Mendelsohn, Deputy Chief, Fraud Section, U.S. Dep't of Justice, Remarks before the Dist. of Columbia Bar Assoc., Current Developments in FCPA Enforcement and Compliance (Sept. 27, 2007). 2 Lanny A. Breuer, Assistant Attorney General, Criminal Division, Address to the 22nd National Forum on the Foreign Corrupt Practices Act (Nov. 17, 2009). 3 See Breuer, supra note 2 (noting that "[t]he Sentencing Guidelines and Principles of Federal Prosecution of Business Organizations obviously encourage [voluntary disclosure] and the Department has repeatedly stated that a company will receive meaningful credit for that disclosure and cooperation."); see also Breuer, Remarks to Compliance Week 2010, 5th Annual Conference for Corporate Financial, Legal, Risk, Audit & Compliance Officers (May 26, 2010)( stating that "self-reporting and cooperation carry significant incentives by working with the Department, no charges may be brought at all, or we may agree to a deferred prosecution agreement or non-prosecution agreement, sentencing credit, or a below- Guidelines fine.") U.S.C. 78dd, et seq. 15 U.S.C. 78m. William Mathews, U.S. Puts Hold on Export Licenses for BAE: State Dept., Defense News (Mar. 3, 2010). 7 H.R. 5366, 111th Cong. (2010), Peter Welch (D-Vt.-At Large) 8 Grace Barnett and Weslie Moultrie II, U.S. Foreign Corrupt Practice Act No Minor Matter, Fitch Ratings Special Report (June 1, 2010). 9 Press Release, U.S. Dep't of Justice, "Twenty-Two Executives and Employees of Military and Law Enforcement Products Companies Charged in Foreign Bribery Scheme" (Jan. 19, 2010). 10 United States v. Green, et al., No. 07 CR 2090 (C.D. Cal. sealed cmplt. filed Dec. 7, 2007). 11 Mark Mendelsohn, Deputy Chief, Fraud Section, U.S. Dep't of Justice, Remarks before the 2010 Global Ethics Summit (Feb. 24, 2010). 12 Cheryl J. Scarboro, Chief of the Foreign Corrupt Practices Act Unit, Remarks at News Conference Announcing New SEC Leaders in Enforcement Division (Jan. 13, 2010). 13 H.R. 4173, 111th Cong. (as passed by Senate, July 15, 2010) United States v. BAE Systems plc, No. 10 CR 035 (D.D.C filed Feb. 22, 2010). Bribery Act 2010, 2010 c. 23 (Apr. 8, 2010). In the Matter of Helmerich & Payne, No (July 30, 2009). Inc., Exchange Act Release. 17 United States v. Siemens Aktiengesellschaft, No. 08 CR 367 (D.D.C. filed Dec. 12, 2008).