Dodd-Frank and the UK Bribery Act: Two Compelling Reasons to Focus on Anti-Bribery Compliance

Transcription

1 Anti-Corruption Dodd-Frank and the UK Bribery Act: Two Compelling Reasons to Focus on Anti-Bribery Compliance Contributed by William F. Johnson, James Kitching, Joshua D. Roth and Steven M. Witzel, Fried, Frank, Harris, Shriver & Jacobson LLP Anti-bribery laws have been on the books in the United States and elsewhere for decades, and in the United Kingdom for more than a century, 1 but law enforcement authorities worldwide have only recently started to aggressively prosecute companies and individuals for corrupt business practices. In the United States, for example, the Foreign Corrupt Practices Act ( FCPA ) was largely unenforced between its enactment in 1977 and 2003, averaging a paltry three cases per year. Beginning in 2004, however, law enforcement authorities in the United States dramatically ramped up their FCPA enforcement efforts, filing about twenty-four cases per year through 2009 and initiating thirty-six cases in the first six months of 2010 alone, including a first-of-its-kind FCPA undercover sting operation. 2 Other jurisdictions in Europe and Asia have similarly increased their antibribery and anti-corruption enforcement activity. Two recent developments the enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act ( Dodd-Frank Act ) in the United States, with its unprecedented whistleblower provision, and the enactment of the Bribery Act 2010 (the Bribery Act ) in the United Kingdom foreshadow that the upward trend of anti-bribery and anti-corruption enforcement will continue. This article examines the substantial impact that the Dodd-Frank Act and the Bribery Act will have (and already have had) on many United States companies that do business internationally, and includes recommendations about how impacted companies might prepare for the challenges ahead. The Dodd-Frank Act An easily overlooked provision in the nearly 900 page Dodd-Frank Act creates a new whistleblower program that authorizes substantial cash rewards and provides strong job protections to whistleblowers who voluntarily provide the Securities and Exchange Commission ( SEC ) with information leading to the successful prosecution of securities laws violations, including violations of the FCPA. 3 Law firms have already reported a significant increase in the number of calls that they are receiving from whistleblowers seeking to report securities law violations since Dodd-Frank was enacted on July 21, The SEC has also reported a similar surge in tips from whistleblowers, characterizing many of the tips as very high quality. 5 The FCPA, the principal federal anti-bribery statute in the United States, generally makes it unlawful for a company or people acting on its behalf to offer... promise to give, or authoriz[e]... the giving of anything of value to foreign officials to obtain or retain business. 6 In addition, the FCPA contains accounting provisions that require issuers to maintain accurate internal books and records and to implement a system of internal accounting controls. 7 FCPA violators are subject to both criminal and civil penalties, and the Department of Reports is a registered trademark and service mark of Bloomberg Finance L.P. 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 Justice ("DOJ") and the SEC share enforcement responsibilities under the Act. 8 Under the Dodd-Frank Act, the SEC is required to pay whistleblowers cash rewards of between 10% and 30% percent of any monetary sanctions in excess of $1,000,000 that the government, as a result of the whistleblowers assistance, recovers through either civil or criminal proceedings based on a violation of the securities laws by private or public companies. 9 Specifically, the whistleblower program applies to monetary sanctions recovered by the SEC, the DOJ, self regulatory organizations, state attorneys general and other specified regulators. 10 In order to qualify for such rewards, whistleblowers must provide the SEC with original information. 11 Original information (i) must be derived from the independent knowledge or analysis of a whistleblower; (ii) cannot be known to the Commission from any other source; and (iii) cannot be exclusively derived from an allegation made in a judicial or administrative hearing, in a governmental report, hearing, audit, or investigation, or from the news media. 12 Nevertheless, a whistleblower may still be entitled to a cash reward even when bits and pieces of the whistleblower s information were known to the media prior to the emergence of the whistleblower so long as the whistleblower provides additional information that is critical to the government s case. 13 Moreover, a whistleblower can recover a reward even if he or she is found to be civilly liable for the securities violation itself so long as the whistleblower is not convicted of a criminal violation. 14 The Dodd-Frank Act gives the SEC wide discretion to determine the specific dollar amount of any cash reward within the ten to thirty percent range by considering, among other factors, the significance of the information provided by the whistleblower, the degree of assistance provided by the whistleblower, and the programmatic interest of the Commission in deterring violations of the relevant securities laws. 15 Notably, the Dodd-Frank Act prohibits the SEC from considering the amount of money available in the Securities and Exchange Commission Investor Protection Fund, which the Dodd-Frank Act created, in part, to pay whistleblower rewards. 16 Whistleblowers cannot, however, appeal the SEC s reward determinations so long as they fall within the prescribed 10% to 30% range. 17 While the SEC has 270 days from when President Obama signed the Dodd-Frank Act on July 21, 2010 to issue regulations implementing the new whistleblower program, whistleblowers are eligible for rewards based on tips made on or after July This new whistleblower initiative dramatically expands the SEC s pre-existing whistleblower program, which applied solely to insider trading cases and limited whistleblower rewards to a maximum of 10% percent of any monetary sanctions recovered by the government in civil and criminal proceedings, with no minimum reward guaranteed. 19 Since its inception in 1989, the SEC s insider trading whistleblower program has paid out less than $160,000 to just five whistleblowers. 20 In response to those dismal statistics which may have resulted in part from would-be whistleblowers weighing harsh employment reprisals against the prospect of low rewards for raising concerns about wrongdoing in a company 21 Congress included in the Dodd-Frank Act a minimum cash reward of 10% of any monetary sanctions recovered by the government to encourage individuals to take the enormous risk of blowing the whistle in calling attention to fraud. 22 The Dodd-Frank Act also protects whistleblowers from employer retaliation and provides whistleblowers with a private cause of action to recover damages stemming from any such conduct, including double damages for back pay. While Section 806 of the Sarbanes-Oxley Act similarly prohibits public companies from retaliating against employee whistleblowers, it does not protect employees of private companies. The well publicized failure to detect Bernard Madoff s fraud also spurred the SEC to endorse a more expansive whistleblower program in the hope of detecting other frauds more quickly. 23 Given that monetary sanctions in several recent FCPA enforcement actions have resulted in

3 settlements far exceeding $100 million, 24 would-be whistleblowers now have a compelling financial incentive to report corrupt behavior. Consequently, it should come as no surprise that the number of whistleblower complaints filed with the government surged following the enactment of the Dodd-Frank Act, and will likely continue to increase in the future. Unfortunately, the carrot of multimillion dollar rewards may tempt some to report information that is speculative or unconfirmed, leading to burdensome and ultimately fruitless investigations by law enforcement authorities. Moreover, as cooperation among international law enforcement authorities continues to increase, companies may find themselves under investigation for the same underlying conduct in multiple jurisdictions. 25 In addition, employees who would have previously reported suspicious behavior to their supervisors or in-house lawyers and compliance officers are now far more likely to report suspicious behavior in the first instance to the SEC. Designing an Effective Whistleblower Policy Despite the fact that the Dodd-Frank Act seems to encourage whistleblowers to report suspected wrongdoing to the government (rather than within an organization), companies should still ensure that their internal whistleblower policies are robust. Media coverage of external whistleblowers, in combination with these internal policies, may also encourage reporting within the organization. For example, whistleblower policies should require employees to report any suspected wrongdoing, including, but not limited to, securities law violations, to designated personnel (typically inhouse lawyers and compliance officers). In addition, employee handbooks and whistleblower policies should clearly state that the company will not retaliate in any way against employees who, in good faith, report suspected wrongdoing. Nevertheless, given that some employees may still feel uncomfortable directly reporting such activity, companies should also allow employees to make anonymous reports through a well-publicized telephone hotline or by dropping a note in locked and monitored drop-boxes. In the event that a company receives a report about suspected wrongdoing, management should take even seemingly unfounded reports seriously, following-up on every report in proportion to the gravity of the allegation and carefully documenting the company s investigation. Ideally, internal investigations should be directed and supervised by counsel to increase the likelihood that any relevant communications and work product (interview notes, reports from forensic accountants, remediation plans, etc.) are properly protected by the appropriate privilege, and not inadvertently disclosed in the event of a government investigation. The European Court of Justice s recent decision that communications between inhouse counsel and company employees are generally not protected from disclosure should particularly inform companies operating in Europe to consider retaining outside counsel to conduct any internal investigations. 26 Finally, senior management and the company s board of directors should be notified about any reports of suspected wrongdoing, and they should be kept abreast of any related investigations and their ultimate dispositions. The Question of Whether to Self-Report If, after conducting an investigation, a company determines that one or more of its employees or agents engaged in wrongdoing, management and counsel must determine the most appropriate next steps. In addition to disciplining or terminating any employees or agents who were involved in the wrongdoing and remediating any internal control weaknesses, companies must ultimately decide whether to self-report the wrongdoing to the relevant authorities. 27 While companies are generally not required to self-report, the Federal Sentencing Guidelines for Organizations, which sets forth suggested penalties for organizational defendants in federal court, encourages selfreporting in exchange for some degree of leniency at sentencing (i.e., a reduced fine). 28 Speaking in May 2010, the Assistant Attorney General for the Criminal Division, Lanny Breuer, extolled the benefits of self-reporting, stating that selfreporting and cooperation carry significant

4 incentives by working with the Department, no charges may be brought at all, or we may agree to a deferred prosecution agreement or nonprosecution agreement, sentencing credit, or a below-guidelines fine. 29 Because the Dodd-Frank Act provides would-be whistleblowers with a financial incentive to report previously unknown and suspected wrongdoing to the authorities, companies may have an increased incentive to selfreport before a whistleblower contacts the government first. However, many white-collar defense attorneys have long questioned the value of self-reporting, especially given the possibility of tag-along followup investigations and private litigation. In an attempt to answer that question, a recent academic study examined forty DOJ and SEC initiated FCPA cases that were brought against companies from 2002 through 2009 and compared the ratio between bribes paid and penalties imposed, including fines and disgorgement of profits, for companies that self-reported and those that did not. 30 The author determined that companies seem to face a penalty one and a half times larger if they voluntarily disclose FCPA violations as compared to companies that do not. 31 These findings appear to belie the claim that companies that self-report are treated more leniently, at least with respect to fines. The author s findings are not directly apposite to the current environment, given that he was examining cases initiated prior to the Dodd-Frank Act when the incentives for whistleblowers were dramatically reduced. However, his findings still generally speak to certain disadvantages associated with self-reporting even if they do not directly address the potential benefits of self-reporting over having the whistle blown. Nevertheless, companies may still choose to selfreport for other reasons, including the need to demonstrate that they are good corporate citizens. Companies that self-report may also be able to manage how and when to disclose wrongdoing, potentially mitigating any harm to the company. In light of the Dodd-Frank Act, companies need to make a relatively quick decision about self-reporting in order to minimize the likelihood that a would-be whistleblower will turn them in first. This is a significant change from past practice, when such decisions typically took months if not years because of the relatively low likelihood of the government uncovering the practice in question. As such, companies should not delay investigating allegations of wrongdoing, and should retain experienced outside counsel as soon as possible. The United Kingdom Bribery Act 2010 While the Dodd-Frank Act is likely to increase the level of FCPA enforcement in the United States, the recent enactment of the Bribery Act will also have a substantial impact on United States companies that operate abroad, particularly within the United Kingdom. 32 The Bribery Act will come into force in April 2011, with guidelines to be issued by the Ministry of Justice early next year. It aims to tackle bribery more effectively, in response to criticism that existing United Kingdom bribery rules were not fully compliant with international standards, including the Organization for Economic Cooperation and Development s ( OECD ) international anti-bribery convention. 33 The Bribery Act includes two general prohibitions on giving and receiving bribes, 34 a specific prohibition on bribing foreign public officials, 35 and, introduces a new corporate offence of failing to prevent bribery. 36 The corporate offence is strict liability, meaning that the prosecutor is not required to prove that the company s directors, officers or employees knew or should have known of any misconduct. 37 It is, however, a complete defense for a company to establish that it had implemented adequate procedures to prevent bribery. 38 This represents a significant distinction between the Bribery Act and the approach taken under the FCPA, where having an effective compliance program (while critically important) may only be a mitigating factor in the context of sanctions, but would not constitute an outright defense. While the Bribery Act does not specify the type of procedures that will ultimately be deemed adequate, it directs the Secretary of State to publish guidance about procedures that relevant commercial organizations can put in place to

5 prevent persons associated with them from engaging in corrupt business practices. 39 There are a number of other factors that distinguish the Bribery Act from the provisions of the FCPA and suggest that it will be wider, and potentially more serious, in its application to international companies. For example, The Bribery Act prohibits all forms of bribery (e.g., in a commercial and business context) and is not limited to bribes relating to foreign government officials. It is also notable that directors and senior officers may face prosecution in a personal capacity if they have consented to or participated in the commission of a bribery offence by their company. A commercial organization can be convicted of bribery if any person associated with the organization commits bribery with intent to obtain or retain business for the organization (e.g., an employee or agent). Significantly, the prosecution need not establish that the associated person, or misconduct, has any connection to the United Kingdom. It follows, that a United States company with a satellite office in the United Kingdom may potentially be held liable for the activities of its agents in any other part of the world. Unlike the FCPA, there is no exception for facilitation payments under the Bribery Act. 40 Penalties for bribery under the Bribery Act have increased to include imprisonment of up to 10 years plus an unlimited fine per offence. Further, a convicted company may face debarment from tendering for public contracts and individual directors may be disqualified for up to 15 years. enforcement activity both in the United Kingdom and abroad, as a result of increased international co-operation between law enforcement agencies. Because many United States companies do at least some business in the United Kingdom, the potential impact of the Bribery Act on United States companies cannot be overstated. Moreover, because the Bribery Act is significantly broader than the FCPA, United States companies that are FCPA compliant may not necessarily be compliant with the Bribery Act. Therefore, United States companies that do business in the United Kingdom should tailor their anti-bribery and anti-corruption policies to comply with the FCPA, the Bribery Act and any other relevant anti-bribery and anti-corruption schemes. Additionally, given that the G reaffirmed its commitment to jointly combating international economic corruption at its June 2010 meeting, other G-20 members may likely soon follow the United Kingdom s lead of enacting tougher anti-bribery and anti-corruption legislation. As such, companies should periodically reexamine the effectiveness of these policies and be prepared to update them as needed. Conclusion Given the increasing level of anti-bribery and anticorruption enforcement and international cooperation, United States companies should seek to foster a corporate culture of zero-tolerance for corrupt business practices. In order to do so, companies must place a high priority on maintaining comprehensive anti-bribery and anticorruption compliance programs. Companies should, among other things, regularly audit the effectiveness of these compliance programs and provide employees with ongoing training about related issues. While companies will undoubtedly face increased scrutiny relating to anti-bribery and anti-corruption issues in the future, effective compliance programs are an important first step towards encouraging honest business practices among employees while minimizing exposure to potentially substantial sanctions. It is expected that implementation of the Bribery Act will be accompanied by a significant rise in

6 William F. Johnson and Steven M. Witzel are litigation partners, and Joshua D. Roth is a litigation associate in the New York office of Fried, Frank, Harris, Shriver & Jacobson LLP. James Kitching is a dispute resolution partner in the firm s London office. 1 In addition to being a common law criminal offence, bribery has been prohibited by statute in the United Kingdom since See Public Bodies Corrupt Practices Act, 1889, 52 & 53 Vict., c. 69 (U.K.). 2 Federal agents arrested twenty-two executives and employees of companies in the law enforcement and military equipment industry on January 18, 2010 for allegedly engaging in a scheme to bribe a minister of defense in an unspecified country in Africa in order to secure contracts to provide military and law enforcement supplies to the country's presidential guard. See Howard W. Goldstein, Kevin J. Harnisch, William F. Johnson and Steven M. Witzel, Undercover DOJ Sting Operations for FCPA Violations: A New Level of Enforcement, FRIED FRANK MEMORANDUM TO OUR FRIENDS AND CLIENTS, Jan. 21, 2010 (available at 33). 3 Dodd-Frank Act, 111th Cong. 922(b)(1) (2010). Under the Dodd-Frank Act, securities laws is defined by reference to Section 3 of the Securities Exchange Act of 1934 (the 1934 Act ). Id. at 2(15)(A). Section 3 of the 1934 Act defines securities laws as the Securities Act of 1933, the Securities Exchange Act of 1934, the Sarbanes-Oxley Act of 2002, the Public Utility Holding Company Act of 1935, the Trust Indenture Act of 1939, the Investment Company Act of 1940, the Investment Advisers Act of 1940, and the Securities Investor Protection Act of (citations omitted). Given that the anti-bribery provisions of the FCPA amended the 1934 Act (see 30A of the 1934 Act), violations of those provisions constitute securities laws violations under the Dodd-Frank Act. 4 Sue Reisinger, Firms Face a Sudden Rush of Whistleblower Claims: Will the Dodd-Frank Wall Street Reform and Consumer Protection Act encourage bogus claims against companies?, CORPORATE COUNSEL, Sept. 9, Jessica Holzer & Fawn Johnson, Larger Bounties Spur Surge in Fraud Tips, WALL STREET JOURNAL, Sept. 7, In fact, the Wall Street Journal has reported that the SEC has been receiving at least one tip a day about potential foreign bribery violations since the Dodd- Frank Act became law. After Dodd-Frank, SEC Getting At Least One FCPA Tip A Day, WALL STREET JOURNAL, Sept. 30, U.S.C. 78dd1-3, 78ff U.S.C. 78m U.S.C. 78m(b), 78ff. 9 Dodd-Frank Act at 922(b)(1). 10 Id. at 922(h)(2)(D)(i)(I)-(IV). 11 Id. at 922(a)(3). 12 Id. 13 S. Rep , at 111 (2010). 14 Dodd-Frank Act at 922(c)(2)(B). 15 Id. at 922(c)(1)(i)(I-IV). 16 Id. at 922(c)(1)(ii). 17 Id. at 922(f). 18 Dodd-Frank Act at 924(a). Although the SEC has 270 days from when the Dodd-Frank Act was enacted to issue regulations implementing the new whistleblower program, it intends to propose new regulations as soon as November See Implementing Dodd-Frank Wall Street Reform and Consumer Protection Act Upcoming Activity (available at U.S.C. 78u 1(f). 20 S. Rep , at Dodd-Frank Act at 922(h). 22 S. Rep , at SEC Office of Inspector General, Report No. 474, Assessment of SEC s Bounty Program, at ii (Mar. 29, 2010). 24 See, e.g., SEC Charges Technip with Foreign Bribery and Related Accounting Violations, Litigation Release No (June 28, 2010) (Technip agreed to pay $98 million in disgorgement and prejudgment interest and a $240 million criminal penalty to settle charges that it bribed Nigerian government officials to obtain government contracts); SEC Charges Daimler AG with Global Bribery, Litigation Release No (Apr. 1, 2010) (Daimler paid $93.6 million in criminal fines and $91.4 million in disgorgement to settle charges that it made hundreds of improper payments worth tens of millions of dollars to foreign officials in at least 22 countries); Press Release, DOJ, BAE Systems PLC Pleads Guilty and Ordered to Pay $400 Million Criminal Fine (Mar. 1, 2010) (BAE paid a $400 million criminal fine to resolve charges that it made illegal payments to foreign officials in various countries to secure defense contracts); SEC Charges Siemens AG for Engaging in Worldwide Bribery, Litigation Release No (Dec. 15, 2008) (Siemens paid $350 million in disgorgement to settle the SEC s charges, and a $450 million fine to the DOJ to settle criminal charges, that it made payments worth at least $1.4 billion to foreign officials to obtain or retain

7 business and that it intentionally violated the FCPA s internal controls and books and records provisions). 25 For example, in addition to paying $800 million in fines and disgorgement in the United States to settle corruption charges brought by the SEC and DOJ, Siemens AG paid 596 million to settle related charges brought by the Munich Office of Public Prosecution. With respect to the international nature of the Siemens investigation, the lead DOJ prosecutor praised *t+he coordinated efforts of U.S. and German law enforcement authorities, and said that it set the standard for multi-national cooperation in the fight against corrupt business practices. Press Release, DOJ, Siemens AG and Three Subsidiaries Plead Guilty to Foreign Corrupt Practices Act Violations and Agree to Pay $450 Million in Combined Criminal Fines: Coordinated Enforcement Actions by DOJ, SEC and German Authorities Result in Penalties of $1.6 Billion, Dec. 15, 2008 (available at html). 26 See Case C-550/07, Akzo Nobel Chemicals Ltd v Commission, 2010; Alasdair Balfour & Ianis Girgenson, EU Court Limits the Scope of Legal Professional Privilege, FRIED FRANK MEMORANDUM TO OUR FRIENDS AND CLIENTS, Sept. 14, 2010 (available at A DB66F4E55A3FADA.pdf). 27 Public companies may also have an affirmative obligation to disclose material instances of wrongdoing; however, any such disclosure issues are beyond the scope of this article. 28 U.S. SENTENCING GUIDELINES MANUAL 8C2.5(g)(1) ( If the organization (A) prior to an imminent threat of disclosure or government investigation; and (B) within a reasonably prompt time after becoming aware of the offense, reported the offense to appropriate governmental authorities, fully cooperated in the investigation, and clearly demonstrated recognition and affirmative acceptance of responsibility for its criminal conduct, subtract 5 points *from the organization s total culpability score.+ ) 29 Lanny Breuer, Assistant Att y Gen. Crim. Div., Prepared Remarks to Compliance Week th Annual Conference for Corporate Financial, Legal, Risk, Audit & Compliance Officers (May 26, 2010) (available at speech.pdf). 30 Bruce Hinchey, Punishing the Penitent: Disproportionate Fines in Recent FCPA Enforcements and Suggested Improvements (available at 31 Id. at See Neil Macleod, The New UK Bribery Act, FRIED FRANK MEMORANDUM TO OUR FRIENDS AND CLIENTS, May 11, 2010 (available at 96). 33 The OECD s international anti-bribery convention requires signatories to enact legislation that criminalizes the act of bribing foreign government officials. In addition, signatories to the convention agree to provide mutual legal assistance in the prosecution of international corruption. Thirty-eight countries have ratified the OECD Convention (including the U.S., France, Germany and the U.K.). 34 Bribery Act 2010, 2010, c. 23, 1-2 (U.K.). 35 Id. at Id. at Id. 38 Id. at 7(2). 39 Id. at 9(1). The U.K. Ministry of Justice published preliminary guidance on September 14, 2010 seeking feedback from impacted parties. See Consultation on guidance about commercial organisations preventing bribery (section 9 of the Bribery Act 2010), U.K. MINISTRY OF JUSTICE, Sept. 14, 2010 (available at 40 Facilitation payments are small payments made to low-level officials, typically in countries with pervasive corruption problems, in order to expedite or secure the performance of non-discretionary routine governmental actions, such as providing phone service or picking up trash. While the FCPA permits facilitation payments under a narrow range of circumstances, companies should carefully scrutinize any such payments. 41 The G-20 is a group comprised of finance ministers and central bank governors of the world s leading economies. With respect to combating international economic corruption, the G-20 members agreed to form a working group to provide members with practical recommendation on how they can work together to enforce strong rules against bribery, to prevent corrupt individuals from accessing the global financial system, to cooperate in the recovery of illicit assets, and to protect whistle-blowers who stand up against corruption. See Press Release, The White House, G-20 Toronto Summit: Progress Since Pittsburgh, June 27, 2010.