Anti-Corruption
QUARTERLY
Q1 2017
IN THIS ISSUE
NEWS
NEWS
New DOJ Guidance Clarifies
Expectations for Compliance Programs............ 1
FCPA Accounting Charges in
SEC Administrative Proceedings:
The Path of Least Resistance to
Substantial Penalties........................................... 3
Things of Note..................................................... 4
IN THE INTERIM................................................. 5
NEW DOJ GUIDANCE CLARIFIES EXPECTATIONS
FOR COMPLIANCE PROGRAMS
On February 8, 2017, the DOJ’s Fraud Section issued a new
guidance document, entitled “Evaluation of Corporate Compliance
Programs.” Despite being the Fraud Section’s first written guidance
under the new presidential administration, the guidance appeared
with little fanfare, arriving unannounced on the Fraud Section’s
website.
The guidance, which is organized by 11 key compliance program
evaluation topics, sets forth sample questions under each topic
that prosecutors may ask when evaluating a company’s compliance
program in the context of a criminal investigation. Significantly, the
guidance shows that the Fraud Section’s compliance expectations
and evaluation process are becoming increasingly sophisticated,
and that companies will be expected to keep pace in order to meet
these evolving standards.
Under the United States Attorney’s manual, federal prosecutors
are counseled to consider several principles when investigating
and deciding whether to charge corporate entities. These factors,
commonly known as the “Filip Factors,” include two that focus
on a company’s compliance program: (1) “the existence and
effectiveness of the corporation’s pre-existing compliance
program” and (2) the company’s remedial efforts “to implement an
effective corporate compliance program or to improve an existing
one.” The intent of the new Fraud Section guidance is to provide
more specific examples of how federal prosecutors should probe a
company’s compliance program under these factors in the process
of conducting corporate investigations, making charging decisions,
and negotiating resolutions.
The questions set forth in the new guidance reveal a broad-based
“pressure testing” of a company’s compliance program in the
context of the underlying misconduct identified as part of the
DOJ’s investigative process. While the guidelines acknowledge
that the Fraud Section cannot use any rigid formula to assess the
effectiveness of corporate compliance programs, because each
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company’s risk profile and solutions to mitigate its risks are unique, the guidance provides
compliance-focused questions organized under the following 11 general topics:
1. Analysis and Remediation of
Underlying Conduct
7. Confidential Reporting and Investigation
2. Senior and Middle Management
3. Autonomy of Resources
9. Continuous Improvement, Periodic Testing and Review
4. Policies and Procedures
10.Third-Party Management
5. Risk Assessment
11.Mergers and Acquisitions
8. Incentives and Disciplinary Measures
6. Training and Communications
…the questions posed are
designed to look behind
a company’s paper
program and evaluate
how the program has been
implemented, refined, and
enforced in practice.
The substance of the new guidance will not be a surprise to companies familiar with the
DOJ’s prior guidance on compliance programs over recent years. The questions and topics
reflect distilled guidance from a variety of sources, including the United States Sentencing
Guidelines, the DOJ and SEC’s joint November 2012 Resource Guide to the U.S. Foreign
Corrupt Practices Act (which has a section entitled “Hallmarks of Effective Compliance
Programs”), past Fraud Section corporate resolution agreements, and, perhaps reflecting an
emphasis on global standards, guidance from the Organization for Economic Cooperation
and Development. For each topic, the questions posed are designed to look behind a
company’s paper program and evaluate how the program has been implemented, refined,
and enforced in practice.
The guidance also reaffirms that the DOJ expects a company to go beyond just remediation
of the specific misconduct identified and conduct a broader evaluation of the misconduct in
the context of the company’s overall compliance program. Prosecutors will evaluate a
company’s compliance program in light of the identified misconduct as well as the
implications of the misconduct on the “big picture” compliance environment, including,
for example, whether adequate resources are devoted to compliance, how management
reinforces compliance, and whether the company’s board of directors has appropriate
oversight of the program.
…the recent guidance
presents clear “ground
rules” for the evaluation of
the compliance program
of a company that is the
subject of an investigation
or prosecution by the
Fraud Section.
…companies not currently
under investigation should
review the guidance and
evaluate their compliance
programs in light of
the questions posed
to ensure they are
adhering to the DOJ’s
view of best practices.
Importantly, the guidance underscores the Fraud Section’s increasing focus on compliance
programs. Indeed, this guidance is the latest directive released under the Fraud Section’s
“compliance initiative,” which began when the Fraud Section hired Hui Chen as a full-time
compliance expert in November 2015. And while the DOJ has previously articulated the
characteristics of an effective compliance program, the recent guidance presents clear
“ground rules” for the evaluation of the compliance program of a company that is the
subject of an investigation or prosecution by the Fraud Section.
Because the guidance provides general insight into the government’s expectations of how
a corporate compliance program should operate in practice, it has broader utility, even for
companies that do not have an identified problem. The guidance makes clear that it is not
enough for a company to have strong written policies and procedures; a company should
have a program that is effectively put into practice, is subject to continuous improvement,
and is enforced through appropriate incentives and disciplinary measures. The Fraud Section
also acknowledges in the guidance that each company’s business and risk profile is different,
and, therefore, each company’s compliance program should be tailored to reduce the
specific risks that the company faces. The questions in the guidance are well suited to guide
companies customizing compliance programs based on their individualized business model
and risk profile.
While companies currently under investigation by the DOJ should consider the new
guidance when highlighting the strength of their compliance programs, companies not
currently under investigation should review the guidance and evaluate their compliance
programs in light of the questions posed to ensure they are adhering to the DOJ’s view of
best practices.
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FCPA ACCOUNTING CHARGES IN SEC ADMINISTRATIVE PROCEEDINGS:
THE PATH OF LEAST RESISTANCE TO SUBSTANTIAL PENALTIES
The combination of the
lower evidentiary burden
in an accounting-only
FCPA case and the SEC’s
procedural advantages in
the administrative forum
suggest that the SEC is
now taking a path of least
resistance to obtaining
substantial monetary
penalties in FCPA
investigations.
The prevalence of
accounting-only FCPA
enforcement actions in
2016, however, suggests
that the SEC may be
relying more heavily on
the violations that are
easier to prove in marginal
enforcement matters.
In this administrative
forum, companies charged
with accounting-only
violations under the FCPA
still face penalties that are
typical of bribery FCPA
enforcement actions.
In 2016, two FCPA enforcement trends converged at the SEC. First, more than half the FCPA
enforcement actions brought by the SEC relied on accounting-only charges and did not
include a bribery charge. Although those cases included less serious charges, they still
resulted in a total of $73 million in disgorgement and prejudgment interest in 2016. Second,
except for two matters resolved by non-prosecution agreements, the SEC brought all these
FCPA accounting cases in its internal administrative forum instead of federal court. The
combination of the lower evidentiary burden in an accounting-only FCPA case and the
SEC’s procedural advantages in the administrative forum suggest that the SEC is now taking
a path of least resistance to obtaining substantial monetary penalties in FCPA investigations.
The FCPA includes separate offenses for bribery and accounting violations. Proving a
violation of the anti-bribery provisions requires showing an employee acted corruptly in
furtherance of offering a payment to a foreign official for the purpose of influencing an
official act or securing an improper advantage in order to obtain or retain business.
Conversely, the accounting provisions of the FCPA require issuers to make and maintain
accurate records and devise a system of adequate internal controls. While derived from
the same legislation, the accounting provisions do not require proof of a foreign official’s
involvement, a business nexus, or corrupt intent. Thus, the accounting provisions provide a
lower evidentiary hurdle for the SEC to bring charges under the FCPA and may be used to
pursue offenses unrelated to foreign officials or even bribery. While Congress intended
that the accounting provisions operate independently from the anti-bribery provisions,
many FCPA investigations conclude with charges of both kinds of violations. The prevalence
of accounting-only FCPA enforcement actions in 2016, however, suggests that the SEC may
be relying more heavily on the violations that are easier to prove in marginal enforcement
matters.
At the same time, the SEC is increasingly opting to resolve FCPA enforcement actions
through its own administrative proceedings. The Dodd-Frank Wall Street Reform and
Consumer Protection Act of 2010 significantly expanded the range of persons who may
be subject to SEC administrative proceedings and the penalties that may be imposed
by internal administrative law judges. Since then, the SEC has increasingly relied on these
administrative proceedings, which it claims are more efficient, to pursue enforcement
actions, including FCPA matters. Critics have argued that the rules of the administrative
forum favor the SEC, with limited scope of discovery, lack of a jury, and inapplicability
of the federal rules of evidence. In this administrative forum, companies charged with
accounting-only violations under the FCPA still face penalties that are typical of bribery
FCPA enforcement actions.
Significantly, the SEC has routinely been using remedies in FCPA accounting violation
enforcement actions that are typically reserved for wrongdoing that goes beyond
accounting inaccuracies. In bribery cases, for example, where a company is charged
with bribing a foreign official to obtain a contract, the government often seeks to have
the company disgorge the gains earned as a result of the contract won through bribery.
Disgorgement is a historic equitable remedy through which courts are able to attempt to
restore the status quo as if the misconduct had not occurred by ordering a defendant to
disgorge ill-gotten gains. Where a contract is won through bribery, it makes some sense
to impose disgorgement to deprive the company of the economic benefit caused by the
corrupt contract. Where a company is charged only under the FCPA’s accounting provisions,
however, the causal connection between the violation and any profits to be disgorged is
often attenuated or absent. Disgorgement in such cases appears to be more like a monetary
Anti-Corruption | Q1 2017 • 3
Anti-Corruption
Resolving FCPA cases
with accounting-only
charges in administrative
proceedings is clearly the
path of least resistance
for the SEC to add to
its enforcement statistics
and score significant
monetary settlements.
QUARTERLY
penalty, which some critics argue is unnecessarily punitive. It is worth noting that this term,
the Supreme Court will consider a case, Kokesh v. SEC, deciding whether disgorgement
should be subject to the five-year statute of limitations applicable to SEC enforcement
proceedings because it is punitive and not merely remedial.
Resolving FCPA cases with accounting-only charges in administrative proceedings is clearly
the path of least resistance for the SEC to add to its enforcement statistics and score
significant monetary settlements. If these two trends continue their apparent convergence,
the targets of FCPA enforcement may face larger settlement demands in situations where it
is both procedurally and substantively more difficult to defend themselves.
THINGS OF NOTE
SEC Resource Extraction Rule Nullified by Congress and President
On February 14, 2017, President Trump approved a joint resolution of the House of
Representatives and the Senate to repeal the SEC’s resource extraction issuer payment
disclosure rule. This rule would have required public companies engaged in the commercial
development of oil, natural gas, or minerals to disclose payments made to the U.S.
government or to foreign governments. The rule would have required public filings with
the Commission on Form SD no later than 150 days after the end of the company’s fiscal
year. It was initially adopted by the SEC on June 27, 2016, pursuant to the Dodd-Frank Wall
Street Reform and Consumer Protection Act. The rule was designed to curb corruption by
increasing transparency about payments related to resource extraction. The resource
extraction industry, however, argued that the rule was unnecessary because the FCPA
already outlawed bribes to foreign officials. In February, Congress took advantage of the
Congressional Review Act (CRA), which allows a simple majority of both chambers to nullify
any recently finalized federal regulation, subject to the President’s signature. A rule
eliminated under the CRA is treated as one that has not taken effect.
FCPA Pilot Program Continues under Trump Administration
On March 10, 2017, Acting Assistant Attorney General Kenneth A. Blanco announced that
the DOJ will continue the FCPA “Pilot Program” after its year-long rollout period. Blanco
stated that after the Program’s initial rollout period expires on April 5, the DOJ will evaluate
its “utility and efficacy.” Blanco explained that the Program would continue in full force
until the DOJ reaches a final decision about the Program going forward. The Pilot Program
was launched in April 2016 to “promote greater accountability for individuals and
companies that engage in corporate crime.” The Program defined requirements for
voluntary self-disclosure, cooperation, and remediation in FCPA cases. Companies that
have participated in the Pilot Program have been eligible to receive reduced fines and
penalties or declinations.
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IN THE INTERIM
January 11, 2017: The DOJ brought FCPA charges against two individuals, Ban Ki Sang and
Dennis Bahn, in connection with the planned $800 million sale of Vietnam’s tallest building.
The charges are particularly notable because the two individuals are, respectively, the
brother and nephew of Ban Ki-moon, the former United Nations Secretary-General. Federal
authorities allege that Sang, an executive at the company who owned the building, and
Bahn, a broker at a Manhattan real estate firm, plotted to secure an investor willing to finance
the purchase of the building by bribing an individual who claimed to be an agent of a foreign
official. The recipient of the bribe instead stole the money, but Bahn furthered the scheme
by forging emails to make it look like a deal was imminent. No deal ever materialized and
the fraud was eventually discovered.
January 12, 2017: Medical device maker Zimmer Biomet Holdings Inc. reached an
agreement to resolve DOJ and SEC investigations into the company’s repeated violations
of the FCPA. The company agreed to pay a total of $30.5 million and retain an independent
compliance monitor for three years. The company first faced FCPA charges in 2012. It paid
nearly $23 million and retained an independent compliance monitor to settle those
enforcement actions. In 2013, the company learned about more potential violations in
Brazil and Mexico and notified the compliance monitor. The agreement states that the
company allowed a Mexican subsidiary to use third parties to bribe Mexican customs
officials to allow imported dental implants across the border despite lacking proper
registration and labeling. The DOJ found that the 2013 violations constituted a breach of
the 2012 settlement agreement.
January 17, 2017: Sociedad Quimica y Minera de Chile, a Chilean chemicals and mining
company, agreed to pay a criminal penalty of more than $15 million to settle charges that
it violated the FCPA by making payments to politically-connected individuals in Chile. The
company admitted to making donations totaling $630,000 to foundations controlled or
closely tied to Chilean politicians between 2008 and 2015. The company also admitted to
falsifying its books and records, logging the payments as consulting and professional
services that it never received. In addition to paying the penalty, the company will also
undertake reforms to its compliance program and internal controls. A few days earlier,
on January 13, 2017, the company agreed to pay a $15 million penalty to the SEC to settle
related charges.
January 17, 2017: Rolls-Royce plc agreed to pay a criminal penalty of $170 million under
a deferred prosecution agreement with the DOJ related to charges that it engaged in a
long-running scheme to bribe government officials in exchange for government contracts.
The DOJ action was part of a broader global investigation conducted by U.S., UK, and
Brazilian authorities. Overall, Rolls-Royce will pay more than $800 million in penalties.
Rolls-Royce admitted that between 2000 and 2013, it conspired to violate the FCPA by
paying more than $35 million in bribes to foreign officials in various countries in exchange
for confidential information and government contracts. Relevant resolution considerations
included, on the one hand, that the company cooperated with the investigation and
undertook significant remedial measures, and, on the other hand, the fact that the company
did not disclose the criminal conduct until after it was reported by the media.
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January 18, 2017: The SEC announced that medical device company Orthofix agreed to
admit wrongdoing and pay more than $14 million to settle charges that it violated the
FCPA and lacked adequate accounting procedures. Orthofix admitted that it improperly
booked revenue in certain instances and made improper payments at government-owned
hospitals in Brazil. The SEC’s order noted that fake invoices were used for the purported
services. The penalty consists of $8.25 million to resolve the accounting violations and
$6 million in disgorgement and penalties to settle the FCPA charges. Four former executives
of Orthofix also agreed to pay penalties ranging from $20,000 to $35,000.
January 26, 2017: The SEC brought civil charges against Michael Cohen and Vanja Baros,
two former executives of a major asset manager, related to alleged bribes in Africa. The
SEC alleges that Cohen and Baros led an investment strategy that involved teaming with
business partners that had high-level political connections in Africa and using those
connections to source deals for the organization’s funds and navigate political issues in the
various countries. Bribes were allegedly paid to officials in Niger, Chad, the Democratic
Republic of Congo, and other countries. The charges against Cohen and Baros follow prior
civil and criminal charges brought against the asset manager, Och-Ziff Capital Management
Group, that were settled in September 2016 for $412 million.
February 2, 2017: Panasonic stated in a press release that it is cooperating with an
investigation being conducted by the DOJ and SEC into possible FCPA and securities law
violations. The investigation concerns a subsidiary, Panasonic Aviations Corporation (“PAC”),
that develops in-flight entertainment and communications systems. The Wall Street Journal
first reported the existence of the probe in March 2013. It reported that the company
distributed a retention notice on January 20 of that year, instructing recipients to preserve
documents “concerning any benefits or gifts provided, or the payment of anything of value,
by Panasonic or PAC to any airline employee or government officials.” The notice was
apparently sent to executives in Asia, Europe, and the Middle East.
February 9, 2017: Houston-based Cobalt Energy received a declination decision from the
DOJ in connection with an FCPA investigation into the company’s operations in Angola
following allegations of connections between senior Angolan government officials and
Nazaki Oil and Gas, S.A., an Angolan company that partnered with Cobalt on offshore oil
projects in Angola. Cobalt, a public company since 2009, received a declination decision
from the SEC in January 2015.
February 13, 2017: Tomas Morvai, a Hungarian citizen and former executive of the Hungarybased Magyar Telekom, settled five-year-old civil allegations with the SEC before trial in the
SDNY that was scheduled to begin in May. Morvai agreed to pay the SEC a $60,000 penalty
without admitting or denying the charges that he violated or aided and abetted the violation
of the FCPA. The SEC sued Morvai and two other former Magyar executives in December
2011—after the company and its majority owner, Deutsche Telekom, paid the DOJ and SEC
$95 million to settle FCPA charges—alleging that they circumvented the company’s internal
controls, falsified books and records, and made false statements to the company’s auditor. In
2013, Judge Richard Sullivan denied Morvai and the two other defendants’ motion to dismiss
the complaint based on lack of personal jurisdiction in its entirety and said they must stand
trial on the charges.
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February 24, 2017: Citigroup announced that the DOJ is investigating the company in
connection with its hiring of candidates “referred by or related to foreign government
officials” that might violate the FCPA.
March 2, 2017: Atlanta-based Crawford & Company, which provides insurance claims
management services, received a declination decision from the SEC in connection with an
undisclosed FCPA investigation that the company self-disclosed to the SEC and DOJ in 2015.
According to the company’s 10-K, “[u]pon discovery, the Company, with the oversight of the
Audit Committee and Board of Directors, proactively initiated an investigation into this
matter with the assistance of external legal counsel and external forensic accountants.”
March 10, 2017: Kenneth Blanco, the Acting Assistant Attorney General for the Criminal
Division, announced during a speech to the ABA National Institute on White Collar Crime
that the one-year Pilot Program launched last April will not expire on April 5, but will
continue while the agency evaluates how the program has worked and whether it should
be extended or changed. The DOJ Pilot Program, which so far has issued five declination
letters, gives companies incentives to self-disclose, cooperate, and remediate FCPA
violations. Two of the five declinations involved privately-held companies from whom the
DOJ required the disgorgement of profits, creating a new category of FCPA enforcement
action resolutions.
March 24, 2017: U.S. authorities, along with Dutch prosecutors, are investigating
Netherlands-based ING bank for money laundering and corruption in Uzbekistan. In its
annual report, ING disclosed that the bank was “the subject of criminal investigations by
Dutch authorities regarding various requirements related to the on-boarding of clients,
money laundering, and corrupt practices,” and had also received “related information
requests from U.S. authorities.”
March 31, 2017: Magnolia, Texas resident Douglas Ray, who pleaded guilty in October to
conspiracy to violate the FCPA by helping to bribe officials in Mexico, was ordered to pay
$590K in restitution and sentenced to 18 months in prison. Ray was one of six co-defendants
in a $2 million bribery scheme to win aircraft service and maintenance contracts in Mexico.
Anti-Corruption | Q1 2017 • 7
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QUARTERLY
FCPA GOVERNMENT INVESTIGATIONS AND CORPORATE SETTLEMENTS
127
112
FCPA-Related Cases*
DOJ
SEC
49
28
16
19
8 9
2006
20
14
26
23 25
15
21 20
11 12
28
19
11
10
13
13
3
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
6
2017 Pending
Investigations**
* New criminal or civil cases (settled or contested) instituted by year
** Based upon public disclosures of investigations
2436.99
Corporate
FCPA-Related
Penalties*
1885.12
(in U.S. millions)
1569.71
803
731.1
644.6
502.7
87.2
2006
260.3
155.1
2007
143.195
2008
2009 2010 2011 2012
2013 2014 2015 2016
87.1
12
2017 Pending
Settlement**
* Includes disgorgement; does not include non-U.S. fines
** Includes publicly disclosed reserves for future FCPA settlements
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THE FCPA/ANTI-CORRUPTION PRACTICE OF SIDLEY AUSTIN LLP
Our FCPA/Anti-Corruption practice, which involves over 90 of our lawyers, includes creating
and implementing compliance programs for clients, counseling clients on compliance issues
that arise from international sales and marketing activities, conducting internal investigations
in more than 90 countries and defending clients in the course of SEC and DOJ proceedings.
Our clients in this area include Fortune 100 and 500 companies in the pharmaceutical,
healthcare, defense, aerospace, energy, transportation, advertising, telecommunications,
insurance, food products and manufacturing industries, leading investment banks and other
financial institutions.
CONTACTS
WASHINGTON, D.C.
NEW YORK
Henry H. Ding
Kristin Graham Koehler
Timothy J. Treanor
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[email protected]
Karen A. Popp
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Zhengyu Tang
+1 202 736 8053
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David L. Anderson
+86 21 2322 9318
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Leslie A. Shubert
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Joseph B. Tompkins Jr.
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Scott R. Lassar
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LONDON
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[email protected]
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