Today’s post provides equal time to Andrew Ceresney’s (Director of the SEC’s Enforcement Division) FCPA speech to the same audience.
To those well-versed on prior SEC FCPA policy speeches, there was little new information of significance in Ceresney’s speech (and you can assess this for yourself by visiting this subject matter tag which highlights every SEC FCPA policy speech in the public domain over the last several years). Indeed, significant portions of Ceresney’s speech were near carbon copies of prior speeches he delivered at the same event one year ago and two years ago (see here and here for prior posts).
The only new item in Ceresney’s speech was the following statement: “the Enforcement Division has determined that going forward, a company must self-report misconduct in order to be eligible for the Division to recommend a DPA or NPA to the Commission in an FCPA case.”
As a practical matter, this statement is not very significant as the SEC has only used NPAs or DPAs three time since the SEC authorized their use in 2010. Moreover, the SEC has handled voluntary disclosure in the FCPA context in several different ways. In certain instances, civil complaints are filed in connection with voluntary disclosures; in other instances, administrative cease and desist orders are used in connection with voluntary disclosures; and in other instances - as noted by Ceresney – NPAs and DPAs are used in connection with voluntary disclosures.
Prior to excerpting Ceresney’s speech, a few observations about the individual prosecution and BHP Billiton portions of the speech.
Ceresney did not provide statistics for individual prosecutions in connection with corporate SEC enforcement actions so I will. As noted in prior posts here and here, since 2008 83% of SEC corporate FCPA enforcement actions have not resulted in any SEC charges against company employees.
No doubt in recognition of these FCPA specific statistics, Ceresney attempted to articulate why FCPA enforcement actions against individuals “present formidable challenges.” However, most of the factors listed are also present in corporate FCPA enforcement actions. There is however a key difference. In the FCPA’s history, it is not believed that the SEC has ever had to prove a case against an issuer whereas individuals are more likely to, and have, put the SEC’s to burden of proof and the SEC has never satisfied its ultimate burden of proof against an individual when this happens.
Similar to his speech last year at the same event, Ceresney devoted a material portion of his remarks to an FCPA element that is seldom the focus of much discussion: anything of value. In the words of Ceresney “enforcing the FCPA to its fullest extent.”
Ceresney provided a list of questions regarding less tangible things of value that will be of value to compliance practitioners.
However, Ceresney failed to address many of the other criticisms of the enforcement action not necessarily connected to the anything of value element such as corrupt intent, obtain or retain business, and other statutory issues. (See here).
The remainder of this post excerpts Ceresney’s speech.
“Pursuing violations of the FCPA remains a critical part of the SEC’s enforcement efforts. The SEC has taken a lead role in combatting corruption worldwide, enforcing the FCPA vigorously against issuers and individuals within its jurisdiction and working with foreign partners to enhance their anticorruption efforts.
The Division of Enforcement – including its specialized FCPA Unit, as well as other members of the staff – continues to be very active holding wrongdoers accountable for FCPA violations. The Commission’s enforcement efforts over the last ten years, along with those of our partners at the DOJ and FBI, have resulted in a sea change in enhancing the focus on FCPA compliance issues.
I thought I would spend some time this afternoon discussing a few issues that are important to the SEC’s FCPA program: self-reporting and cooperation; holding individuals accountable for FCPA violations; cooperation with foreign regulators; and ongoing efforts to ensure that the FCPA is enforced to its fullest extent.
The Importance of Self-Reporting and Cooperation
I want to start with the importance of self-reporting and cooperation in FCPA cases. The Commission launched its formal cooperation program a little more than five years ago, and as I have explained in other contexts, it has been a great success overall. Even before that formal cooperation program was implemented, the SEC was rewarding cooperation in FCPA matters, and it has continued to do so under the more formal program. In the last fiscal year alone, the Commission gave significant credit for cooperation in more than half a dozen cases. These included the settlement with Layne Christensen, which included a significantly reduced penalty of 10% of the disgorgement amount; a settlement with PBSJ, where we entered into a deferred prosecution agreement and the penalty was a small fraction of disgorgement; and a settlement with Goodyear, which was the first case where the Commission agreed not seek any penalty in recognition of the company’s significant cooperation. These cases should send the message loud and clear that the SEC will reward self-reporting and cooperation with significant benefits. Companies should understand that the benefits of cooperating with the SEC are significant and tangible.
Let me spend a moment on self-reporting because that is an issue that has attracted lots of attention in recent years. Self-reporting is critical to the success of SEC’s cooperation program. Self-reporting allows the Enforcement staff to discover misconduct more quickly and reliably than otherwise would be possible. In certain cases, particularly when misconduct occurs overseas, companies may be in a better position to quickly investigate misconduct and the information provided by companies as part of their self-reporting often gives a significant head start on our investigations.
Self-reporting also is a valuable tool for parties who want to maximize the benefits available for cooperation. As the cases I just mentioned make clear, there are significant benefits available to companies who self-report violations and cooperate fully with our investigations. Benefits range from reduced charges and penalties, to deferred prosecution or non-prosecution agreements – known as DPAs or NPAs – in instances of outstanding cooperation, or in certain instances when the violations are minimal, no charges.
However, beyond these benefits, which are the carrot, there is also a stick that should further incentivize self-reporting. Companies that make a decision not to self-report misconduct take the chance that the Enforcement Division will learn of this misconduct through other means. The SEC’s whistleblower program has created real incentives for people to report wrongdoing to us. If the Enforcement Division finds the violations through its own investigation or from a whistleblower, the consequences to the company will likely be worse and the opportunity to earn additional cooperation credit may well be lost. As I’ve said before, when discussing our cooperation program in general and specifically in the FCPA context, companies are gambling if they fail to self-report FCPA misconduct to us.
Given the importance of self-reporting to our FCPA investigations, the Enforcement Division continues to looks for ways to encourage self-reporting of violations through our cooperation program. Towards that end, the Enforcement Division has determined that going forward, a company must self-report misconduct in order to be eligible for the Division to recommend a DPA or NPA to the Commission in an FCPA case. I am hopeful that this condition on the decision to recommend a DPA or NPA will further incentivize firms to promptly report FCPA misconduct to the SEC and further emphasize the benefits that come with self-reporting and cooperation.
It is important to note here that while the Division will require a company to self-report in order to be eligible for a DPA or NPA, self-reporting alone is not enough. Determinations of how much credit to give an entity for cooperation, including whether to take the extraordinary step of entering into a DPA or NPA, are made by evaluating the broad factors set out by the Commission in the Seaboard report. In addition to self-reporting, these factors include a corporation’s self-policing, remediation, and cooperation. While DPAs and NPAs are valuable tools, they reflect a significant level of cooperation and have been a relatively limited part of Commission enforcement practice. I think this is appropriate and should continue to be the case. But the Division will not even consider this step if a company fails to self-report.
Requiring a company to self-report potential FCPA violations in order to be eligible for a DPA or NPA is consistent with the SEC’s practice since the introduction of our formal cooperation program in 2010. In each FCPA case where the SEC entered into a DPA or NPA, the company involved self-reported the violations, and then provided significant cooperation throughout the investigation.
The most recent example is the DPA the Commission entered into with PBSJ Corporation earlier this year. In that case, the Commission charged a former officer of the Florida engineering and construction firm with violating the FCPA by offering and authorizing bribes and employment to foreign officials to secure Qatari government contracts. The Commission determined that a DPA with the company was appropriate. PBSJ self-reported the violations to the SEC, took immediate steps to end the misconduct, and fully cooperated with the investigation, including voluntarily making foreign witnesses available for interviews and providing factual chronologies, timelines, internal summaries, and full forensic images to the SEC. Under the DPA, PBSJ agreed to pay more than $3 million in disgorgement and prejudgment interest and a penalty of $375,000 – approximately 10% of the disgorgement level – and to comply with certain undertakings.
Similarly, in 2013 the Commission entered into its first ever FCPA NPA with Ralph Lauren Corporation in connection with bribes paid by a subsidiary to government officials in Argentina. In determining to enter a NPA with the company, the Commission recognized the company’s prompt self-reporting of the violation – within two weeks of discovering the illegal payments – and its extraordinary cooperation with the SEC’s investigation, which included voluntarily and expeditiously producing relevant documents, providing translations of foreign-language documents, providing witness interview summaries from its internal investigation, making overseas witnesses available, and bringing witnesses to the U.S. The Commission also took into account significant remedial measures undertaken by Ralph Lauren. Under the NPA, the company paid more than $700,000 in disgorgement and pre-judgment interest.
Finally, self-reporting was a key consideration leading to the DPA with Tenaris, S.A., in 2011, which was the SEC’s first DPA since the introduction of the cooperation program. The agreement with Tenaris involved allegations that the global manufacturer of steel pipe products made almost $5 million on contracts obtained through bribes of Uzbekistan government officials during a bidding process to supply pipelines for transporting oil and natural gas. The Commission determined that a DPA with Tenaris was appropriate. The company immediately reported the violations to the SEC, conducted a thorough internal investigation, fully cooperated with the investigation, and implemented significant remediation efforts. Under the DPA, Tenaris paid $5.4 million in disgorgement and prejudgment interest and agreed to enhance its compliance practices. Tenaris paid no penalty.
I hope that by highlighting the benefits of cooperation and detailing the efforts companies took to self-report and cooperate, the Enforcement Division can help provide a blueprint for companies regarding what kind of cooperation and remediation efforts are required to maximize the benefits of the SEC’s cooperation program.
Focus on Individual Liability
The next area I want to talk about today is our focus on individual liability. Holding individuals accountable for their wrongdoing is critical to effective deterrence and, therefore, the Division considers individual liability in every case. Outside the FCPA context in particular, over the last five years, 80% of the SEC’s enforcement actions (excluding follow-on administrative proceedings and delinquent filings) have involved charges against individuals. This focus on individuals also applies to FCPA cases. When we are able to recommend a case against individuals for FCPA violations, we do so.
However, it is also true that FCPA cases often present formidable challenges to establishing individual liability. In most FCPA cases, the individuals most directly involved in the wrongdoing are foreign nationals who live outside the United States. As a result, it is often difficult to establish personal jurisdiction over potential wrongdoers, particularly if they are employees of the foreign subsidiary rather than the parent issuer. In addition, most of the witnesses and documents are located overseas, which presents evidentiary challenges. The cases are very time-consuming and resource-intensive to litigate, and if the wrongdoer is a foreign national with no assets or ties to the U.S., recoveries may be limited. Finally, given the evidentiary challenges and complexity of FCPA investigations, the statute of limitations also complicates these cases. The statute of limitations applicable to Commission actions is not tolled when foreign evidence requests are outstanding.
However, where the Division’s investigations find sufficient evidence to bring charges and establish personal jurisdiction, the Commission brings those cases. Over twenty percent of the SEC’s FCPA cases this past year were brought against individuals, sometimes in conjunction with a case against the issuer, and sometimes before or after the issuer case was brought. In the PBSJ case I discussed earlier, while the Commission entered into a DPA with the company, it charged the former PBSJ officer who orchestrated the scheme with violating the anti-bribery provisions of the FCPA. As set out in the SEC’s order, the officer offered to funnel funds to a local company owned and controlled by a foreign official in order to secure two multi-million Qatari government contracts for PBSJ and also offered employment to a second foreign official in return for assistance as the bribery scheme began to unravel. The officer agreed to settle the charges and pay a significant penalty.
In August, the Commission brought charges against a former executive at a worldwide software manufacturer for violating the FCPA by bribing Panamanian government officials through an intermediary to procure software license sales. As set out in the SEC’s order, the executive orchestrated a scheme to pay bribes to one government official and promised to pay two others in order to obtain four contracts to sell software to the Panamanian government. The executive, who lives in Miami, agreed to settle the charges and disgorge all of his ill-gotten gains.
And earlier this fiscal year, the SEC charged two former employees in the Dubai office of a U.S.-based defense contractor with violating the FCPA by providing government officials in Saudi Arabia with improper benefits to help secure business for the company. The individual employees settled the charges and each agreed to pay a significant penalty.
The Commission is committed to holding individuals accountable and I expect you will continue to see more FCPA cases against individuals.
Effective Coordination with International Regulators and Law Enforcement
One of the reasons we’ve been able to achieve such success in our FCPA cases over the past few years – both against companies and individuals – is the Division’s effective coordination with international regulators and law enforcement. In today’s globalized marketplace, the SEC’s ability to protect investors and maintain fair and efficient markets is often dependent on Enforcement’s ability to investigate misconduct that takes place, at least in part, abroad. This is especially true with FCPA investigations, which routinely rely on evidence obtained from foreign jurisdictions, and often are conducted in parallel with foreign governments.
Over the past five years, the Enforcement Division has experienced a transformation in the ability to get meaningful and timely assistance from international partners. Enforcement has greatly expanded its efforts to obtain evidence of potential wrongdoing from around the globe with the assistance of the SEC’s Office of International Affairs and continues to strengthen our partnerships with other countries. There has also been an important trend of significant growth in focus and legislation on corruption issues worldwide over the last few years. The result has been a tremendous increase in cooperation from other governments and better access to evidence in foreign countries.
This increased coordination helps the SEC successfully conclude significant enforcement actions. For example, assistance from foreign authorities was critical to the Commission’s recent case against Hitachi. The investigation was greatly assisted by the African Development Bank and the South African Financial Services Board. And the resulting case charged Hitachi with violating the FCPA by inaccurately recording improper payments to a front company for the African National Congress – the ruling party in South Africa – in connection with contracts to build two power plants. The company agreed to settle the charges and pay a $19 million penalty for its FCPA violations.
In April of this year, the SEC also charged FLIR Systems, Inc. for violating the FCPA by financing what an employee termed a “world tour” of personal travel for government officials in the Middle East who played key roles in decisions to purchase products from FLIR. The Commission’s order found that FLIR earned more than $7 million in profits from sales influenced by the improper travel and gifts. We received valuable assistance in our investigation from the United Arab Emirates Securities and Commodities Authority. To settle the matter, FLIR agreed to pay more than $9.5 million in disgorgement and penalties and report its FCPA compliance efforts to the agency for the next two years. In the BHP Billiton matter I mentioned earlier, the Division received assistance from the Australian Federal Police.
These are just three recent examples of the Division’s success in working with the international community to receive documents and other types of foreign assistance. I fully expect the pace and extent of foreign agencies’ cooperation in the FCPA space to grow over the coming years as the Division continues to forge new relationships abroad and strengthen those we already have.
Enforcing the FCPA Statute to its Fullest Extent
Finally, I thought I would say a few words about the Commission’s efforts to enforce the FCPA to the fullest extent of the statute. As this audience surely knows, the statute precludes the payment or provision of “anything of value” to a foreign official in order to induce that official to take official action or obtain an improper advantage for the purpose of obtaining or retaining business.
And of course “anything” of value is, on its face, a broad term. Obviously, cash payments count. Similarly, tangible gifts to foreign officials undoubtedly qualify as things of value. But the Commission has also successfully brought FCPA cases where other, less traditional, items of value have been given in order to influence foreign officials. For example, last year, I discussed a series of cases in which the Commission brought bribery charges against companies that made contributions to charities that were affiliated with foreign government officials, provided no-show jobs to the spouse of a foreign official, or paid for the honeymoon of a foreign official’s daughter, all to induce those officials to direct business to the companies. Each of these benefits qualifies as something of value under the FCPA statute.
The SEC’s recent case against BNY Mellon, its first FCPA case against a financial institution, also illustrates this approach. The Commission’s case charged that the firm violated the FCPA by providing valuable student internships to family members of foreign government officials affiliated with a Middle Eastern sovereign wealth fund.
Some have expressed concern about these cases, arguing that it is difficult to draw a clear line between what constitutes a violation and what does not, in cases involving less traditional items of value. In my view, these concerns are unfounded. The line between what is acceptable and what constitutes a violation of the law is in the same place it always has been: when something of value – which can include a gift, donation, favor, or hiring decision – is given or taken with intent to influence the foreign official in his or her official actions or obtain an improper advantage. While this analysis is dependent on the facts and circumstances of each particular case, it is the same analysis companies routinely conduct when considering how their employees interact with government officials in the course of business. The relevant questions include:
- Was the gift, donation, favor, or hiring asked for by the foreign official?
- Did the company official believe that the gift, donation, favor, or hiring would advance their business interests and help them obtain particular business, or at least obtain an improper advantage with the foreign official?
- Was the gift, donation, favor, or hiring consistent with company policy and practice?
- Were the company’s normal procedures followed in connection with the gift, donation, favor, or hiring?
- Would the gift, donation, favor, or hiring have been made if there were no potential business benefit?
In the BNY Mellon case for example, the Commission’s order described the following facts. The sovereign wealth fund officials explicitly and repeatedly requested the internships and the BNY Mellon employees viewed providing the internships as important to keeping the sovereign wealth fund’s business and potentially obtaining new business. Indeed, one BNY Mellon employee stated that failure to provide the internships would “potentially jeopardize our mandate” with the sovereign fund and another stated that providing the internship was “the only way” to increase BNY Mellon’s share of business from the sovereign funds’ European office. In addition, the bank did not evaluate or hire the officials’ relatives through its internship program, which had stringent standards, including a minimum grade point average, relevant prior work experience, and multiple rounds of interviews. In fact, the family members hired did not meet the basic entrance standards for any established BNY Mellon internship program, did not have the requisite academic or professional credentials, and were not even required to interview before being offered the positions.
Under these circumstances, I would suggest that there was ample basis for viewing the internships as something of value to the foreign officials who requested them for their relatives, and for concluding that they were given in an attempt to influence the foreign officials in connection with the performance of their official duties or to obtain an improper advantage from the foreign officials.
As I’ve said before, bribes come in many shapes and sizes. And in my view, the FCPA is properly read to cover providing valuable favors to a foreign official, as well as providing cash, tangible gifts, travel or entertainment.
To sum up, the Enforcement Division is committed to aggressively pursuing violations of the FCPA by entities and individuals. We will continue to use our cooperation program and to coordinate with international regulators and law enforcement to do so more effectively. It is my hope that we can continue to build on the solid foundation we have created for FCPA compliance in the coming years.”