Avoiding the “Al Capone” version of an FCPA enforcement action—Are your internal controls in order?

Notorious gangster Al Capone likely was guilty of numerous crimes, including bootlegging, maintaining a house of prostitution, bribery, racketeering and multiple counts of murder.  Yet he was never convicted of those crimes.  He ultimately was convicted of tax evasion and contempt of court in 1930.  Although federal prosecutors were unable to obtain the evidence necessary to convict him for his more well-known crimes, by addressing his failure to maintain accurate books and records (in this case, his tax filings) they were able to send him to jail for 11 years, including a lengthy stint at the notorious Alcatraz Federal Penitentiary. The United States Government, through the Securities Exchange Commission (“SEC”) or the Department of Justice (“DOJ”), sometimes employs a similar tactic when prosecuting persons engaged in foreign bribery as well as in other violations of federal law.  The most well-known section of the Foreign Corrupt Practices Act (“FCPA”) is the bribery provisions, the primary U.S. law used to prosecute the bribery of foreign government officials.  15 U.S.C. § 78dd-1 et seq.  The bribery provisions prohibit offering to give anything of value to a foreign official with the corrupt intent of gaining an improper business advantage.  Lesser known is the FCPA’s requirement that issuers keep accurate books and records and maintain and devise a system of internal accounting controls.  15 U.S.C. § 78m(b)(2).  These requirements are known as the “accounting provisions” and never mention the word “bribery.”  The accounting provisions only apply to “issuers,” which are generally thought of as those companies listed on U.S. stock exchanges (including their non-U.S. operations and majority-owned subsidiaries).  Because foreign entities sometimes issue their...

A Bribe is a Bribe

Last week the SEC reported that Diebold, Inc. agreed to pay more than $48 million in fines and prejudgment interest to settle SEC civil charges and DOJ criminal charges that it had violated the Foreign Corrupt Practices Act. Diebold also agreed to appoint an “independent compliance monitor.” I don’t usually pay much attention to FCPA enforcement news releases, but a quote in this one from Scott W. Friestad, an Associate Director in the SEC’s Division of Enforcement, caught my eye: “A bribe is a bribe, whether it’s a stack of cash or an all-expense-paid trip to Europe.” According to the SEC’s complaint, Diebold provided numerous international leisure trips and related entertainment to officials of government-owned banks in China and Indonesia to the tune of approximately $1.7 million. Destinations reportedly included such places as the Grand Canyon, Napa Valley, Disneyland, Las Vegas, Paris, Amsterdam, Florence and Rome. The SEC alleged other misconduct, as well, such as direct cash payments hidden by phony service contracts. The SEC charged that Diebold violated the Securities Exchange Act by: providing improper gifts to foreign officials to obtain and retain business (Section 30A), failing to have internal controls in place to detect and prevent the misconduct (Section 13(b)(2)(B)), and falsely recording improper payments as legitimate business expenses (Section 13(b)(2)(A)). This is yet another reminder of the FCPA’s restrictions and the severe consequences of violations. I can’t help but wonder about how much (or little) Diebold profited from the alleged misconduct, the reputational impact of the settlement announcements, the total cost of investigating and defending the charges and the hassle of dealing with an “independent compliance...

An Anti-Corruption Compliance Reminder

With the US Department of Justice’s frequent press releases announcing large fines and wide-reaching investigations into allegations of foreign bribery under the Foreign Corrupt Practices Act, it’s easy to see why it makes good legal sense to comply with US anti-corruption laws.  But compliance also makes good business sense.  Why?  Here are five common sense reasons. [jbox radius=”1″ jbox_css=” background-color:#3bace1; border:0px;” content_css=”color:#FFFFFF;”]Reputation:  When it becomes public knowledge that a company has violated FCPA, customers and potential business partners wonder what other shortcuts the company has taken.  Will the company still be around to do business if it is faced with large fines for non-compliance?  Will doing business with the company drag a potential partner into an investigation?[/jbox] [jbox radius=”1″ jbox_css=” background-color:#3bace1; border:0px;” content_css=”color:#FFFFFF;”]Employee Conduct:  By modeling good behavior and exhibiting an unwillingness to tolerate corruption, employers let their employees know they expect compliance with legal and ethical standards throughout the company. [/jbox] [jbox radius=”1″ jbox_css=” background-color:#3bace1; border:0px;” content_css=”color:#FFFFFF;”]Simplicity:  A straight forward policy of compliance is much easier to administer and easier for employees to follow without subjecting the company to liability. [/jbox] [jbox radius=”1″ jbox_css=” background-color:#3bace1; border:0px;” content_css=”color:#FFFFFF;”]Deterrence:  When a company consistently refuses to pay bribes, corrupt foreign officials often realize the futility of asking and move on to weaker targets. [/jbox] [jbox radius=”1″ jbox_css=” background-color:#3bace1; border:0px;” content_css=”color:#FFFFFF;”]Snowball Effect:  The more a company pays bribes, the more foreign officials will ask for them (and for higher amounts). [/jbox] And if those reasons weren’t enough, bear in mind that the US isn’t the only country with a robust anti-corruption enforcement program.  Many countries now have anti-corruption laws with a wide...

Don't Pay Me, or Else! Extorted or Culturally Compelled Payments to Foreign Officials

Most executives know that handing a foreign official a bag of cash to gain business is a bad idea. Many may even know that it’s illegal under the Foreign Corrupt Practices Act (FCPA), and that such a payment could quickly land them in jail and their company in bankruptcy. But what if it’s not a bag of cash? What if it’s a handout to a customs agent so that your shipment clears customs on time? What if the work is in, say, Afghanistan? Or China? What if your shipment has already cleared customs, but the agent says he’ll withhold it until you pay him a handout? Oh, and did I mention that he’s armed? What do you do then? These sorts of scenarios play out daily all over the world, and to the extent that management ever learns of any resulting payments, they typically write them off as the cost of doing business overseas. “Well,” they shrug, “I guess that’s just the way you get things done over there.” Wrong answer. Making these kinds of payments – whether they’re extorted, culturally expected, or both – still violates the FCPA, and thus the SEC and Department of Justice could very well bury your company in fines and send management to prison. Extortion is Almost Never a Defense Broadly speaking, the FCPA prohibits bribing foreign officials to obtain or retain business. Bribery means paying for better-than-fair, or preferential, treatment. Extortion, on the other hand, is the opposite of bribery; it’s where corrupt payment is demanded under the threat that you will otherwise suffer worse-than-fair, or discriminatory, treatment. The customs scenario above...