July 18, 2016

Lory Stone and Jodi Avergun

Notes from the 2011 National Institute on White Collar Crime's FCPA Panel

 

 By Lory Stone and Jodi Avergun

“The FCPA is a failure,” proclaimed an animated Monty Raphael, Special Counsel at the London firm of Peters & Peters Solicitors LLP and Chairman of the Fraud Advisory Panel, at this year’s panel reflecting on Foreign Corrupt Practices Act (“FCPA”) trends and developments at the 25th Annual National Institute on White Collar Crime in San Diego, California.  Raphael went on to exclaim, to an incredulous panel, that the Department of Justice’s (“DOJ”) record number of enforcement actions shows that the FCPA is not working as an effective deterrent.  Other panelists, in turn, defended the FCPA’s deterrent effect and progressive enforcement over the years. 

In addition to Raphael’s provocative commentary, the panel, comprised of esteemed FCPA experts, had a fruitful and engaging conversation about FCPA trends and developments in 2010.  The panel was moderated by Peter Clark of Cadwalader, Wickersham & Taft and former Deputy Chief of the Fraud Section of DOJ, and included additional panelists Chuck Duross, Deputy Chief of the Fraud Section of the Criminal Division of DOJ; Robert Tarun of Baker & McKenzie LLP and author of The FCPA Handbook; and Mark Mendelsohn of Paul, Weiss, Rifkind, Wharton & Garrison and former Deputy Chief of the Fraud Section of DOJ. 

Staggering Statistics.  The year 2010 saw the highest total number of matters investigated by DOJ and the Securities and Exchange Commission (“SEC”) since the FCPA’s inception.  Specifically, in 2010, DOJ brought a staggering 48 enforcement actions, and the SEC brought 26.[1]  Penalties obtained from settlements also broke previous records, totaling over $1 billion from landmark cases such as Daimler, BAE, Technip, and Panalpina.  The $1 billion mark in 2010 is up from $435.3 million only one year prior. The past year also saw the second highest number of cases brought against individuals. 

Leadership Changes at DOJ.  DOJ’s Fraud Section underwent widespread leadership changes in 2010.  Mendelsohn left DOJ after five years of service as Deputy Chief of the Fraud Section to enter private practice.  Denis McInerney, formerly a Davis Polk partner and before that an Assistant U.S. Attorney in the Southern District of New York, was hired as the new Chief of the Fraud Section, bringing with him many New York and New Jersey assistant U.S. attorneys.  Finally, Kathleen McGovern and Patrick Stokes were promoted to Co-Deputy Chiefs in the Securities and Corporate Fraud Sections, respectively, and Nat Edmonds was promoted to Assistant Chief in the FCPA area.

Industry-Wide Investigations.  The government highlighted its practice of initiating industry-wide investigations in 2010.  While Duross refrained from providing specifics as to how DOJ selects its targets, he explained in general that, if the Department is investigating a particular company, the Department learns more about the industry within which that company operates, and may discover evidence implicating other participants in that industry.  Such evidence could lead to the development of another case.  Clark pointed out that this was the case in Panalpina, in which Panalpina, while cooperating with DOJ, disclosed the names of several of its customers on whose behalf Panalpina paid bribes to foreign customs officials.  In response to questions from Clark and Mendelsohn about DOJ practices generally, Duross stressed that the Department rejects a wholesale or arbitrary approach to targeting companies within a particular industry, and requires information suggestive of wrongdoing before requesting companies to provide information to DOJ.

Corporate Monitorships.  Duross explained that five years ago, DOJ’s “knee-jerk” reaction was to require a monitor.  In 2010, however, Duross characterized DOJ as placing a premium on analyzing individual cases before imposing the requirement of a monitor.  Duross noted that even cases with significant FCPA violations and significant penalties may not require monitorships so long as other types of important remediation are in place, such as self-monitoring and reporting obligations. 

Improved Transparency in Resolutions.  Panelists Clark and Tarun expressed skepticism concerning how the SEC calculates disgorgement for violations of the FCPA’s books and records provisions, and whether disgorgement calculations can be distinguished from DOJ’s calculations of profit in violation of a contract.  Clark stated that the SEC has yet to articulate whether a de facto violation of the anti-bribery clause exists due to a massive failure of internal controls.  He added that the SEC could face problems if the disgorgement penalties were ever litigated.  In addition, panelists generally indicated that it is difficult to specifically define how a company’s cooperation with a government investigation benefits that company.  Tarun stated that the government invites companies to cooperate in investigations, promising discounted penalties.  However, transparency is lacking as to how cooperation plays into the calculation of any discounted penalty.  Tarun emphasized that companies go to great lengths to voluntarily cooperate in FCPA investigations, and that they would, in general, be better served if the government would quantify the benefits a company derives from cooperation. Mendelsohn agreed that the model needs improvement, but also noted that there are many ways in which a company can benefit from cooperating, and sometimes a reduction in penalty or disgorgement amount is not as important as other types of benefits (such as charging a subsidiary rather than the parent company, for example).  Additionally, he stated that DOJ resisted reducing the process to a percentage discount from the overall calculation of penalties because this approach “does not take into account the big picture.”  Duross responded that DOJ is now taking more care to reflect and define cooperation credit, and to walk through its analysis for calculating that credit, in its resolutions. 

Other Notable Topics.  The panelists touched on additional areas of development seen in 2010. Duross explained the increased role of mergers and acquisitions in identifying FCPA violations.  As an example, he cited the LatiNode case where, after eLandia acquired LatiNode, eLandia uncovered bribes and improper payments totaling $2.25 million which had been made by LatiNode to government officials in Honduras and Yemen.  After uncovering the bribes, eLandia promptly disclosed to DOJ the fact of the payments, and kept DOJ apprised of findings in its ongoing investigation.  In addition, Duross recognized that the Organisation for Economic Co-operation and Development (“OECD”) released its Phase 3 Report on the United States in October 2010.  Though the OECD Report identified several good practices by the United States, it also identified areas for improvement, including:  (1) periodic reviews on its policies and approach to facilitation payments, (2) the consolidation of publically available information on the application of the FCPA, and (3) more transparency on reasons why a Deferred Prosecution Agreement or Non-Prosecution Agreement is used.[2]  Duross stated that DOJ – mainly under Mendelsohn – put many resources into responding and addressing these areas.

In the short time allotted for the panel, there was no ability for the panelists to discuss other recent critical developments such as the Department’s continued threats to prosecute individuals; the use of the Travel Act to charge private commercial bribery; or foreign jurisdictions’ ramped-up efforts to bring corruption charges.  Panelist predicted that in 2011, the government will likely see another transformative year with a focus on trials, appeals, the impact of the Dodd-Frank Act, and the enforcement of the U.K. Bribery Act.  At next year’s conference, and in addition to these topics, panelists on the FCPA panel will likely discuss the implications of the recent, first ever FCPA conviction of a corporation, Lindsey Manufacturing.  This case is particularly noteworthy for the defendants’ challenge to DOJ’s definition of “foreign official” as defined in the FCPA.  Specifically, the defendants argued that the Mexican state-owned utility Comisión Federal de Electricidad did not qualify as an “instrumentality” of the Mexican government, and therefore was not a foreign official under the FCPA. U.S. District Judge Howard Matz rejected this argument.  About the conviction, Assistant Attorney General Lanny Breuer ominously warned in the press release:  “Lindsey Manufacturing is the first company to be tried and convicted on FCPA violations, but it will not be the last.”[3]

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Lory Stone is a senior associate in Cadwalader, Wickersham & Taft LLP’s Washington D.C. office where she advises clients on a variety of criminal and regulatory issues, primarily arising under the FCPA.  She has extensive experience conducting sensitive internal investigations as well as risk assessments and due diligence reviews in an effort to eliminate areas of potential exposure under the FCPA.   

Jodi Avergun is a partner in Cadwalader’s Washington D.C. office where she has successfully represented both companies and senior executives in matters before various regulatory bodies including the SEC and the U.S. Drug Enforcement Administration, and in civil and criminal matters in federal court.  Prior to joining the firm, Jodi was a high-level official in the Department of Justice, the U.S. Drug Enforcement Administration, and the U.S. Attorney's Office for the Eastern District of New York.  

[1] See Gibson, Dunn & Crutcher, LLP Publication “2010 Year-End FCPA Update” (Jan. 3, 2011).

[2] See also T. Markus Funk and Caryn Trombino, “Is The Government Listening?,” FCPA Blog (Nov. 10, 2010); T. Markus Funk, “Meeting (and Exceeding) Our Obligations: Will OECD’s Anti-Bribery Convention Cause the Dodd-Frank Act’s ‘Whistleblower Bounty’ Incentives to Go Global?,” 5 White Collar Crime Rep. (BNA) No. 21, at 711 (Oct. 8, 2010).

[3] DOJ Press Release, May 10, 2011, “California Company, Its Two Executives and Intermediary Convicted by Federal Jury in Los Angeles on All Counts for Their Involvement in Scheme to Bribe Officials at State-Owned Electrical Utility in Mexico,” available at http://www.justice.gov/opa/pr/2011/May/11-crm-596.html.

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