Battling Corporate Crime


Billion-dollar contracts in Argentina. Oil fortunes in Azerbaijan. A sting operation involving fake members of an African defense ministry.

All represent prosecutions for violations of the Foreign Corrupt Practices Act (FCPA), which makes it illegal to bribe foreign officials.

Though passed in 1977, the government only began to rigorously enforce the law in about the mid-2000s. In 2010, the government had a record 23 settlements with companies and netted $1.8 billion in fines.

Actions brought in 2000? Just one.

“We are in a new era of FCPA enforcement, and we are here to stay,” said U.S. Assistant Attorney General Lanny A. Breuer at the November 2010 National Conference on the Foreign Corrupt Practices Act.

The impact has been largely felt by foreign corporations, which have been slower than U.S. companies to create compliance programs. Nine of the 10 largest FCPA cases to date were brought against foreign corporations, according to an analysis by the FCPA Blog.

DOJ Pledge

This uptick in corporate actions by the Department of Justice (DOJ) to criminally prosecute individuals involved in bribery and corruption, rather than simply settling cases with companies, is part of a considered strategy.

It began with Breuer's entrance into office in 2009, when the office tried more individuals than any prior year.

“That is no accident,” said Breuer at that year's National Forum on the Foreign Corrupt Practices Act. “In fact, prosecution of individuals is a cornerstone of our enforcement strategy.”

Those prosecutions, like the recently announced indictments against eight former executives of Siemens for corruption in Argentina, or the conviction upheld in December of a Colorado man for his connections to a scheme to bribe Azerbaijani officials in oil deals, mark an effort by the government to make international corruption a crime that brings not only fines, but prison time.

The DOJ's focus on trials, which consume resources, led to a slight downturn in corporate settlements between 2010 and 2011, when 15 settlements brought $508.6 million in criminal and civil penalties.

There is no single factor that spurred the new era, which began years before the 2008 financial crisis brought calls for greater scrutiny of corporate practices.

Yet some observers such as Richard Cassin of Cassin Law LLC, see links to the September 11th attacks, after which President George W. Bush began to crack down on international corruption, believing it contributed to terrorism.

“I think it was a response to the dangers in the world,” said Cassin, who also writes at the FCPA Blog. “And also I think it was a message to foreign leaders that they had to begin to police their corporations—or we would.”

Others wonder if the moneymaking potential of the FCPA did not also contribute to the increase.

Either way, the new era of enforcement has its critics.

“The FCPA is a fundamentally sound statute,” said Michael Koehler, a leading FCPA expert who teaches at Butler University in Indianapolis, Ind. and runs “But what the statute says and how government agencies are enforcing the statute are not always the same.”

Koehler is particularly critical of the DOJ's heavy reliance in past years on settlement agreements, which has granted the courts little oversight of the law.

Risk-averse corporations, he said, may accept an agreement in order to avoid indictment. But these deals behind closed doors have no outside authority to vet the strength of the government's accusations.

“You have a law that is coming to mean whatever the agencies say it means,” he said.

The increase in prosecutions during 2011, however, brought greater judicial scrutiny of the government's theories and methods in these cases, and on the meaning of a law defined almost exclusively by the agencies that enforce the FCPA.

Judges and juries did not always like what they saw.

Making Deals

The FCPA prohibits U.S. companies and citizens, as well as foreign companies listed on the stock exchange and individuals doing business in the U.S., from bribing foreign officials to obtain business.

The bribe need not actually take place. Many are charged with conspiracy to violate the law.

Most of the recent cases have been resolved through non-prosecution or deferment of prosecution agreements, known as NPAs and DPAs. The DOJ and the Securities and Exchange Commission are the agencies jointly charged with enforcing the law.

The DOJ oversees the anti-bribery provisions, which are a criminal matter, while the SEC is charged with ensuring corporations listed with the SEC follow the FCPA, specifically monitoring provisions regarding books and records, as well as internal controls. The SEC works almost exclusively in civil enforcement.

The agencies often work in tandem when investigating and settling with corporations. Settlements usually require a corporation's agreement to carry out internal investigations, pay fines and implement compliance measures. Executives also agree to cooperate with the government in any ongoing inquiries or subsequent criminal probes.

These deals have proven useful for both sides.

Corporations avoid criminal indictment, which, as in the case of accounting giant Arthur Anderson in the 2002 Enron scandal, can bring ruin. The government nets billions, and avoids the complexity and cost of proving a case in court.

The U.S. law has been successful in getting corporations to self-police, and in spreading enforcement to other countries like the U.K., which in 2010 passed its own anti-bribery act, pressuring other nations to watch their companies more closely as well.

Multinational corporations large and small have set up robust compliance departments, and become increasingly cautious. But it's less clear how these agreements serve to deter individuals from engaging in illegal bribery.

A 2009 report from the Government Accountability Office found that while the government makes frequent use of these agreements, it lacks tools to measure how NPAs and DPAs contribute to combating corporate crime.

There have been efforts by some, including the U.S. Chamber of Commerce, to amend certain provisions of the FCPA, which it believes is overly vague and can prove overly punitive to corporations.

Others, such as former Pennsylvania Senator Arlen Specter, have said the reliance on settlements files down the law's teeth.

Do Fines Deter?

At a November 2010 hearing of the Senate Judiciary Subcommittee, Specter pushed for more prosecutions in the corruption cases, saying that threat of fines alone do not deter individuals from engaging in bribery.

“The only impact on matters of this sort is a jail sentence,” Specter said at the hearing. “Fines added to the cost of doing business end up being paid by the shareholders. Criminal conduct is individual.”

DOJ emphasized that settlements do not preclude prosecution.

“The department has made the prosecution of individuals a critical part of its FCPA enforcement strategy,” said Acting Deputy Assistant Attorney General Greg Andres at the 2010 hearing.

“Corporate prosecutions and resolutions do not and cannot provide a safe haven for corporate officials, and every agreement resolving a corporate FCPA investigation explicitly states that it provides no protection against prosecution for individuals.”

Recent years show a steady increase of charges against individuals: 12 in 2008, 19 in 2009, and 31 in 2010, including a 22-defendent case. Compare that with two in 2004.

The emphasis on prosecutions in 2011 meant a drop in corporate enforcement actions overall as the DOJ focused its resources on going to court. It settled with 15 companies last year, as opposed to 23 the year prior.

15 Years For Conspiracy

These prosecutions have put several notches in the government's belt, including, in October 2011, the longest prison sentence ever in an FCPA case. That came when former president of Terra Telecommunications Corporation was sentenced to 15 years for the conspiracy and commission of money laundering and violations of the FCPA.

But the DOJ has also suffered several black eyes.

One came in December, when a U.S. District Court judge threw out convictions against Lindsey Manufacturing Company, a privately-owned corporation that manufactured equipment used by utility companies, and two of its executives.

In October 2010, the company and two of its executives were charged with violating the FCPA by allegedly using an intermediary to offer bribes—including a Ferrari and a yacht—to employees of Mexico's state-run utility company.

The Lindsey executives were convicted on May 10, 2011. But on December 1, Judge A. Howard Matz of the Central District of California tossed out the convictions in a strongly-worded order in which he excoriated the FBI agent and prosecutors in charge of the case for lying and withholding evidence, as well as misleading the jury and court.

“Africa Sting”

Three weeks later, the DOJ faced another significant setback, this time in the second trial of what has come to be known as the “Africa Sting” case.

A jury last May hung in the criminal prosecution of the first four of 22 individuals accused of violating the FCPA in charges in a 2.5-year undercover operation, the largest of its kind ever in a FCPA case. The individuals allegedly bribed agents posing as representatives of an African defense ministry to secure military and defense contracts.

In late December at the second trial, U.S. District Court Judge Richard J. Leon affirmed the acquittal of one defendant, and dismissed the conspiracy charges against five others. While the five still face FCPA charges, such violations are harder to prove in court, making the ruling a setback for the government.

Judge Leon expressed skepticism about the strength of the case during the second trial when it was revealed the government had not told defendants about some potentially important notes a witness had used to prepare for testimony.

He issued a sharp warning from the bench, calling the failure to disclose a “telling insight into the extent to which the government has consistently strained for every possible advantage in this hotly contested series of cases.”

Testing Government Enforcement

While issues in the Lindsey and Africa Sting cases may be limited largely to individual prosecutors and agents, experts are watching the cases that make it to court for signs of what's to come.

“You're starting to see the government's theories in terms of the scope and extent of the law tested in front of a judiciary, and you're starting to see the government's practices examined,” said Matthew Reinhard, an attorney who specializes in FCPA-related issues at the Washington D.C. based firm Miller & Chevalier.

“For a long time, the FCPA was what the Department of Justice said it was,” Reinhard told The Crime Report. “Now there's at least some part of the judiciary that's looking critically at these cases.”

As the cases move up through the appellate courts, they will also define terms within the law that some say have remained vague for too long.

Lawyers for Lindsey Manufacturing challenged the definition of “foreign official,” a contentious element of the FCPA because the government has defined officials of private companies with state ties as government players.

This poses particular issues for companies working not only in Mexico but also in China, where nearly every business entity has state ties. (An analysis by Koehler found about 60 percent of FCPA cases involved dealings with employees of state-related companies rather than foreign government officials.)

“I'm not in favor of foreign bribery,” said Jan L. Handzlik of Venable LLC, who represented Lindsey. “But the point is that when the government is enforcing a criminal statue there should be a clear definition of what's covered by the statue.”

Siemens Round 2

While many who defend corporations see the increased judicial scrutiny that prosecutions will bring as a boon, there are potential issues on the horizon—ones that may play out in an upcoming, high-profile case.

On December 13, the Department of Justice announced charges against eight former executives of Siemens, the German industrial giant, for allegedly engaging in a decade-long scheme to bribe Argentine government officials to secure a $1 billion contract to make national identity cards.

This case was not new. In 2008, Siemens reached a $800 million deal to settle the corporations' FCPA violations, part of a $1.6 billion deal with international authorities and the largest payout ever under the law. The criminal charges against individuals three years later may prove a pattern in FCPA enforcement—first the government settles with the company, then it goes after individuals within it.

“I think that proves a likely model because it allows the government to continue to reap the benefit of settlements of large multi-nationals,” said Reinhard, noting that this method of entering into settlements, then bringing charges, gives the government an advantage.

“They are in a position where the corporation itself has done much of the legwork to build a case against the individuals.”

This model , however, raises questions about the fairness of the process.

“Corporations who enter into settlements are cooperating with the DOJ, and that means that individuals are prosecuted by the DOJ but also face the full resources of their former employers,” Cassin explained. “The question is, 'is that fair?'”

The Siemens prosecutions might shed light on that question—but first it must get to court.

Because the eight indicted are abroad, observers are waiting to see if any of them return voluntarily, or if the U.S. can successfully extradite them. Such issues mean that while DOJ has started to make good on its pledge to pursue prosecutions, seeing them through to conviction remains a challenge.

“If none of the Siemens defendants are returned for trial, then it means those indictments were symbolic,” said Cassin. “And I don't think that's what the DOJ intended.”

Lisa Riordan Seville is deputy managing editor of The Crime Report. She welcomes reader comments.

Comments are closed.