Regulators Flex Foreign Corrupt Practices Act Enforcement Muscles
This statute, quasi-dormant at the SEC for decades, has rapidly developed into one of its most powerful enforcement tools against public companies traded on U.S. markets. And while the act’s record-keeping and accounting provisions were designed to operate in tandem with its criminal anti-bribery provisions, which are enforced solely by the Department of Justice, recent SEC cases demonstrate a new resolve to act alone.
Empirical data underscores the commission’s increased emphasis on the act’s enforcement. Consider both the greater number of SEC enforcement cases and progressively higher settlement amounts in just the past three years. These have resulted in increasingly large monetary remedies, both for disgorgement and civil penalties. And the enforcement pipeline appears full. Since early 2010, the commission has filed more than 30 FCPA cases.
Important are the new enforcement tactics the SEC is using. First, the commission now brings cases even when the Justice Department has decided not to pursue a target on criminal charges. Second, it is now using deferred prosecution agreements, a routine enforcement tool at Justice, but new to the commission.
Historically, the SEC and Justice have worked hand-in-glove on such cases. For the first time this year, Justice declined to pursue two FCPA cases that the commission later took up. In fact, the department did not even enter into non-prosecution agreements with the two companies.
One example of the SEC going solo involved Rockwell Automation Inc., a producer of industrial automation components and software. Alleging that Rockwell failed to accurately record payments made by a subsidiary to Chinese state-owned businesses, the SEC settled with Rockwell for books, records and internal control violations, within the scope of the FCPA’s record-keeping and accounting provisions. Without admitting or denying the allegations, Rockwell paid $1.8 million plus interest for disgorgement, and a penalty of $400,000.
The commission is also borrowing another Justice tool: the deferred prosecution agreement. This is a voluntary alternative to adjudication whereby the enforcing agency — here the SEC — agrees not to bring an enforcement action, in exchange for agreement that a fine be paid and/or certain conditions performed.
In May, the SEC entered into such an agreement with Tenaris S.A., a global manufacturer of steel pipe products charged with FCPA violations for bribing Uzbekistan government officials on government contracts. The SEC alleged that Tenaris made almost $5 million in profits derived from several contracts awarded by the Uzbekistan government. Without admitting or denying the SEC’s allegations, the agreement required a $5.4 million disgorgement, plus prejudgment interest, and other prescribed “undertakings,” to include annual code of conduct updates and certifications, anti-corruption and FCPA compliance training, and certification of the deferred prosecution agreement compliance.
A deferred prosecution agreement can be an attractive settlement option for companies caught in the commission’s cross-hairs. By avoiding an administrative or judicial action, a company may also avoid the expense and uncertainty of an enforcement action. The cost of defending an action must also factor into the settlement analysis as well as the risk of an adverse ruling, and the impact of pending litigation on business and reputation. This is all the more compelling for government contractors, which must consider consequences of suspension or debarment.
This makes clear the importance for companies to focus attention on FCPA compliance. While the benefits of compliance and cooperation can be debated, the words of current SEC Enforcement Director Robert Khuzami should guide any settlement analysis. Commenting on the decision to enter the deferred prosecution agreement with Tenaris, Khuzami said: the “Tenaris foreign bribery scheme was unacceptable and unlawful, but the company’s response demonstrated high levels of corporate accountability and cooperation.”
Recent 2011 settlements prove the SEC places great value in the following: overall commitment to compliance, cooperation and remediation; strengthened anti-corruption policies, procedures and controls; enhanced training; internal investigations; immediate self-reporting; and upon reporting, full cooperation with the SEC staff.
Any robust ethics and compliance program must address these issues, and do so by incorporating procedures for periodic review and improvement. Even when a violation is discovered, these measures are an essential first step in negotiations when the Securities and Exchange Commission comes knocking on the door. What a company does when a potential violation first surfaces, and the concrete steps it takes at that point in time, often can be dispositive of what the SEC, or the Justice Department, does by way of remedy.
Michael A. Piazza is a shareholder (firstname.lastname@example.org) and Lindsay A. Ayers, is an associate (email@example.com) in the Greenberg Traurig LLP securities litigation practice group. The views are solely those of the authors.