The case had all the elements of a spy novel: A "sales agent" for the defense minister of an unnamed African country demanded a 20 percent commission on a $15 million deal to outfit the country's presidential guard with tear gas grenades, rifles and other military gear. Half the commission would be paid directly to the minister of defense.

 

The sales agent was actually an undercover Federal Bureau of Investigation agent. When the two-and-half-year sting operation ended in January, 22 employees and executives of several military gear suppliers were arrested and indicted on charges of scheming to bribe foreign government officials.

 

It was the largest action so far against individuals for violations of the Foreign Corrupt Practices Act, and also the first large-scale undercover investigation to enforce the 1977 law. The Justice Department trumpeted it as a signal of its renewed vigor in enforcing anti-bribery laws. "The fight to erase foreign bribery from the corporate playbook will not be won overnight, but these actions are a turning point," announced Lanny A. Breuer, assistant attorney general for the Justice Department's Criminal Division. "From now on, would-be FCPA violators should stop and ponder whether the person they are trying to bribe might really be a federal agent."

 

Once upon a time, the federal government brought only a handful of FCPA cases every year. Fines were small, jail time was rare, and far too many companies took a "when in Rome" approach to bribing foreign officials.

 

Now, enforcement of anti-corruption laws is a top federal priority for both the Justice Department and the Securities and Exchange Commission, and investigators are pulling out all the stops to track down perpetrators. Meanwhile, new incentives for whistleblowers under the recently passed Dodd-Frank Wall Street Reform and Consumer Protection Act promise to further escalate the number of FCPA cases.

 

"In this landscape, companies subject to the FCPA must have in place codes of conduct that prohibit bribery, as well as controls in place to detect bribery if it occurs," says John S. (Jay) Darden, who joined Patton Boggs in May as a partner after serving as assistant chief in the Justice Department's Fraud Section, the office responsible for investigating and prosecuting FCPA cases. "If you have guidelines in place to prevent and detect [potential bribes], it's much more likely that if there is ever a violation, it's going to be an isolated incident and not result of institutional corporate policy," says Darden.

 

Increased Enforcement

Experts trace the rise in FCPA cases to the confluence of several factors. The Sarbanes-Oxley Act, which took effect in 2002, put a renewed focus on companies' accounting and internal controls. The Act required increased disclosure to boards of directors and auditors of breakdowns in accounting and internal controls, and required corporate officers to personally sign off on the accuracy of financial statements, with stiff civil or even criminal penalties for failing to do so. Sarbanes-Oxley also included whistleblower provisions that protected company employees who disclosed alleged violations to authorities.

 

Then, in 2003, the Justice Department revised its prosecution guidelines to state that it would consider a company's voluntary disclosure and cooperation in determining whether to prosecute the company criminally. In the wake of investigations at Enron and Arthur Andersen, these changes prompted more companies to self-report FCPA violations.

 

Against a backdrop of increasing globalization, the Justice Department and the SEC have increased their resources devoted to FCPA enforcement. In the Justice Department, the number of prosecutors handling FCPA cases has steadily grown larger. In 2007, the FBI created a squad to focus specifically on bribery, and the SEC has followed suit. And as more cases have been brought, more companies and individuals cooperate with the government, which in turn leads to even more cases.

 

Since 2005, the Justice Department has brought more FCPA cases than in the previous 28-year history of the statute. The six largest corporate cases, in terms of criminal and criminal fines, have all been brought in the past 18 months. In 2009, the Justice Department and the SEC brought 40 FCPA cases resulting in more than $1.5 billion in penalties against companies and years-long prison sentences against individuals. Thirty-six more cases were brought in the first six months of 2010 alone, and Justice Department officials have publicly stated that more than 140 active investigations are in the pipeline.

 

Other countries are also stepping up their own enforcement of anti-bribery laws. A decade ago, bribing foreign officials was not only legal in many countries, it was tax deductible. This is changing, however. As an example, the Organization of Economic Cooperation and Development is now monitoring the progress of the 38 countries that have signed onto its anti-bribery conventions and criminalized bribery.

 

Although some U.S. executives might worry that their inability to pay bribes will put their companies at a disadvantage in countries where bribing is commonplace, the federal government believes the answer does not lie in acquiescence to bribery. "The premise behind the FCPA is that bribery distorts the marketplace, creating an un-level playing field where products are purchased based on the amount of the bribe, rather than the quality of the product," says Darden. "What U.S. companies want is a level playing field. And the U.S. government believes that the best way to level the field is to encourage other countries to sign onto the OECD convention and other international agreements that prevent bribery and corruption. Significant progress has been made on this front in the 30 years since the FCPA was first passed."

 

Big Fines - and Jail Time

The big fines in recent FCPA cases reflect the greater size, complexity and worldwide scope of the conduct. Moreover, FCPA enforcement isn't limited to large U.S. corporations: foreign companies, small businesses and individuals are also being targeted.

 

The Justice Department is working closely with counterparts in other countries to investigate and prosecute fraud. For example, the Justice Department and the Munich Public Prosecutor's Office brought a case in December 2008 against Siemens AG that involved the German parent but also operations in Venezuela, Bangladesh and Argentina in a variety of bribery schemes. The case is still considered a landmark because of its global reach and $1.6 billion in total penalties imposed by the United States and Germany. (Siemens cooperated extensively in the case, prosecutors noted, and was not charged with violating the FCPA's anti-bribery provisions, but rather with failure to maintain internal controls and books and records as required under the law.) The Justice Department has also worked with British authorities on matters involving BAE plc and Innospec Inc.

 

"International companies not based in the U.S. have to be aware of this trend toward greater cooperation among governments," says Darden. "Just because you are not a U.S. company doesn't mean that you're not subject to the FCPA." Indeed, of the six largest corporate cases, all of which have been resolved in the past 18 months, only one was against a U.S. company. The other five were against foreign companies that took actions within the territory of the United States or that had securities traded on U.S. stock exchanges—with some eye-popping penalties. In July, for example, Snamprogetti Netherlands B.V. agreed to pay a $240 million criminal penalty for its part in a decade-long scheme to bribe Nigerian officials for contracts to build a liquefied natural gas (LNG) project valued at $6 billion.

 

The long-running investigation into the Nigerian LNG project sparked headlines when Albert "Jack" Stanley, the former CEO of Kellogg, Brown & Root, Inc., pleaded guilty in September 2008 to conspiring to violate the FCPA for his part in the scheme. He has been cooperating with prosecutors since, which could factor into his sentencing, which has been postponed several times and is now set for January 2011. KBR pleaded guilty in February 2009 for its participation in the scheme and was ordered to pay a $402 million criminal fine, so far the largest FCPA fine against a U.S. corporation. Including guilty pleas by other joint venture partners, the case has resulted in criminal and civil penalties to date of $1.28 billion.

 

Compliance is Key

The new wave of prosecutions is prompting companies large and small to implement meaningful and rigorous FCPA compliance programs. Key to implementing such programs is getting employees at all levels to recognize that not only is bribery a bad business, it's also bad for business.

 

There are many reasons besides the FCPA for not paying bribes, says David Jaffe, general counsel at Guardian Industries, one of the world's largest glass makers, with more than 19,000 employees in 21 countries. Bribes sometimes violate local laws as well as the FCPA. They provide no guarantee that the company will get the favor or contract that they are intended to facilitate. Even more dangerous is the insidious nature of a bribe: "Once you start, you can't stop," Jaffe says.

 

As a result, the Auburn Hills, Michigan-based company has "a five-word policy" on bribery, Jaffe says: "We do not pay bribes." The company extends that rule to commercial contacts, even though the FCPA focuses on foreign government officials. "We used to have a Foreign Corrupt Practices Act policy. We now have an anti-corruption policy," he says.

 

Tailoring training to local cultures, languages and customs is important to ensure the anti-bribery message is communicated clearly. For instance, Guardian conducts frequent anti-corruption training sessions around the globe, in native languages and using local lawyers. Online training modules and sales meetings are also good venues for training. Jaffe also conducts sessions himself, recognizing that it has an impact when the corporate general counsel shows up at sales meetings.

 

But the message is most forceful when driven by operational management, Jaffe notes. In countries in which paying a bribe is a well-established custom, the business managers enthusiastically embrace Guardian's zero-tolerance policy. "The business managers know that it's bad for business if anyone pays a nickel because demands will escalate; it's a form of organized crime and you'll never get yourself out of it," he says.

 

Entertainment has to be related to a business purpose and recorded accurately. Where gifts are permitted under local law, the gift must be of minimal value and not in cash. Modest gifts with the Guardian logo are encouraged, as they are generally thought to fall under the "promotional expenses" exception to the FCPA.

 

According to Darden, "Setting the right tone at the top is of paramount importance in compliance programs, and the Justice Department expects companies to be able to point to concrete examples where executives have done that." Although a written program is necessary evidence of a company's compliance program, it's not sufficient. Companies can demonstrate their commitment to compliance with the FCPA by requiring their employees, suppliers, distributors and foreign business partners to certify that they know and abide by the law. Companies can insist on the right to audit these partners, so they can monitor where their money goes. Finally, when acquiring a foreign company, FCPA compliance must be part of the due-diligence checklist.

 

How top executives react when issues are brought to their attention sends as strong an anti-corruption message throughout the company as a written document prepared by outside counsel, Darden says. When a company learns that an employee has made an improper payment, the company should hold that employee accountable under its business code of conduct, including disciplining or terminating him or her as appropriate. It's also vital to determine whether the violation is the action of a rogue employee or a more systemic issue that reaches higher levels of company management.

 

Should a company discover a potential FCPA problem, there are likely to be many high-stakes and complex legal issues around how to handle the investigation, including whether and how to disclose the conduct to authorities. In any case, the problems must be confronted, Darden says. "Turning a blind eye to something the company prohibits is not a way to show true compliance."

 

What is the FCPA?

The Foreign Corrupt Practices Act of 1977 forbids U.S. companies and foreign companies traded on U.S. stock exchanges from bribing foreign government officials to get or retain business.

 

The FCPA also requires companies whose securities are listed in the United States to meet its accounting provisions, including the keeping of accurate books and records and internal accounting controls. The accounting and control requirements operate in tandem with the FCPA's anti-bribery provisions.

 

The law applies not only to company executives and employees, but also to joint ventures, partners and third parties such as distributors or suppliers. It extends not just to deliveries of the proverbial cash-stuffed suitcases but also to extravagant gifts, trips and "anything of value." In recent cases, investigators have cracked elaborate schemes to pay bribes using offshore bank accounts, wire transfers and intermediaries.

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