The July 27, 2011 Foreign Corrupt Practices Act (“FCPA”) settlement between UK-based liquor giant Diageo plc and the U.S. Securities and Exchange Commission (“SEC”) was fairly modest by FCPA standards.  The case was resolved through an administrative Cease-and-Desist Order requiring just $16.37 million in penalties, disgorgement and prejudgment interest, no retention of an independent monitor and no specific corrective actions.  However, the Diageo settlement is highly instructive in several key areas that are common pitfalls for corporations operating extensively overseas through subsidiaries and third party representatives, particularly when they have grown through acquisitions. 

The Diageo settlement resolved a ranging investigation that covered six years of alleged improper payments totaling $2.7 million paid to government officials in India, Thailand and South Korea.  In each country, the payments were made through direct and indirect Diageo subsidiaries or joint ventures, with varying levels of involvement by third party representatives, in order to obtain sales, tax and customs benefits.

Lessons to be learned from Diageo include that:

• The retention, use and oversight of third party representatives such as sales agents, promoters and distributors is typically a critical weak spot in many organizations’ anticorruption compliance programs;
• Even low-level personnel within government-owned or affiliated businesses may be considered “foreign officials” under the FCPA;
• Relatively small, traditional and customary payments to government officials can run afoul of the FCPA; and
• It is vital to conduct appropriate pre-acquisition due diligence, and ensure that any issues identified are promptly resolved post-acquisition.

Following close on the heels of a similar challenge, a second U.S. District Court judge in the Central District of California has upheld the DOJ’s interpretation of the term “foreign official” as it applies to the FCPA.  On May 9, 2011, Judge James V. Selna held a hearing on a Motion to Dismiss in United States v. Carson, based in part on a challenge to the DOJ’s assertion that certain officials of state-owned entities qualified as foreign officials based on their companies being “instrumentalities” of a foreign country.  Judge Selna’s written opinion denying the Motion to Dismiss was issued May 18, 2011, and held that “the question of whether state-owned companies qualify as instrumentalities under the FPCA is a question of fact” that turns on several factors.  These include level of ownership or control, how the entity and its personnel are characterized by the foreign government, the entity’s purpose, its obligations and privileges under foreign law including exclusivity or controlling power in its functional area, and the circumstances surrounding its creation.

Judge Selna did not purport to have created an exclusive list of factors, and indicated that “no single factor is dispositive.”  In denying the Motion to Dismiss, he stressed that because it is “a fact-specific question that depends on the nature and characteristics of the business entity,” the question of whether an entity is an instrumentality of a foreign country “is not entirely segregable from the evidence to be presented at trial.”   

Judge Selna’s opinion is consistent with that of U.S. District Court Judge Howard Matz issued last month in the Lindsey case.  These cases mark rare instances where courts have conducted an in-depth analysis of a challenge to the FCPA’s application, and both have now served to solidify the DOJ’s broad interpretation of what qualifies as an “instrumentality” of a foreign country, and who can thereby be considered a “foreign official” for purposes of applying the FCPA.          

Today, the SEC announced that it has entered into its first-ever Deferred Prosecution Agreement (“DPA”).  The agreement brings to light a significant resolution option that may be on the table for companies that discover potential violations of federal securities laws during internal investigations or are already the subject of an SEC investigation or enforcement action.

Last year, the Securities and Exchange Commission announced its plan to use Non-Prosecution Agreements (“NPA”) and DPAs as part of an initiative to encourage companies and individuals to cooperate in ongoing investigations and enforcement actions.  In December 2010, as reported here on Subject to Inquiry, the Commission entered into its first NPA.  The agreement with Tenaris S.A. marks the first time the Commission has made use of a DPA to “facilitate and reward cooperation in SEC investigations.” 

During a “thorough, worldwide internal review of its operations and controls,” Tenaris discovered potential violations of the Foreign Corrupt Practices (“FCPA”) involving the bribery of Uzbekistani government officials.  Tenaris informed the SEC of the violations and “took noteworthy steps [internally] to address the violations and significantly enhance its anti-corruption policies and practices to remediate weaknesses in its internal controls.”  Tenaris also agreed to cooperate with the SEC, Justice Department, and other law enforcement agencies during any related investigations. 

Under the terms of the DPA, the Commission will refrain from prosecuting Tenaris if the company undertakes to further enhance certain policies and procedures, strengthen its FCPA and anti-corruption controls, continue to cooperate with the SEC in its investigation, and report any future violations of anti-bribery or securities laws.  In addition, Tenaris must pay $5.4 million in disgorgement and prejudgment interest.

The DPA is significant to companies for several reasons.  First, it shows that the Commission will, in fact, make good on its promise to consider the use of DPAs in appropriate cases.  Second, it makes plain the importance of periodically conducting comprehensive internal investigations to identify weaknesses in corporate controls and compliance measures.  And, finally, it underscores the potential value of self-reporting in the unfortunate event that a company discovers a violation of the FCPA or securities laws during an internal investigation. 

On Tuesday, May 10, 2011, California-based Lindsey Manufacturing Company (Lindsey) became the first corporate entity to be convicted of a violation of the Foreign Corrupt Practices Act (FCPA) at trial.  A federal jury in Los Angeles returned convictions against the company, two of its employees and a Mexican sales agent.  The defendants had been indicted on eight counts of conspiracy, substantive FCPA violations and money laundering based on the alleged payment of bribes via Mexican sales agents to officials of the Mexican state-owned utility, known as Comision Federal de Electricidad (CFE).  The bribes were allegedly paid in order to secure orders for equipment manufactured by Lindsey.

Prior to the Lindsey case, all previous corporate defendants facing FCPA prosecution had either pled guilty or entered a settlement of the charges via non-prosecution or deferred prosecution agreements.  Counsel for the company and its president, who along with the company CFO was among the defendants convicted on Tuesday, indicated that they would continue to pursue a motion to dismiss the indictment based on prosecutorial misconduct.  Counsel for the Mexican sales agent, who was convicted as well, indicated that they would be seeking an acquittal from the court.  Sentencing for the company and its executives is currently scheduled for September 16, 2011.

Lanny Breuer, Assistant Attorney General for the DOJ’s Criminal Division, described the conviction as “an important milestone in our Foreign Corrupt Practices Act (FCPA) enforcement efforts,” adding that “Lindsey Manufacturing is the first company to be tried and convicted on FCPA violations, but it will not be the last.” 

The Lindsey case had already made waves prior to trial, when U.S. District Judge Howard Matz denied a Motion to Dismiss based in part on a challenge to the DOJ’s interpretation of the term “foreign official” as it applies to the FCPA.  FCPA enforcement is marked by its aggressive interpretation by federal law enforcement, including a broad interpretation of who may be considered a foreign official, and therefore within the scope of the statute’s anti-bribery provisions.  The FCPA has faced limited judicial scrutiny in its 34-year history, including interpretations of what was required for a state-owned or state-run entity such as the CFE to be considered an “instrumentality” of a foreign government, and for its employees to thereby be considered “foreign officials.”

In an April 20, 2011 written order, Judge Matz upheld the DOJ’s position on the issue, finding that the CFE officials alleged to have received bribes were foreign officials for purposes of FCPA liability.  This was the first time a court had directly addressed this question. 

Earlier in the week, on May 9, 2011, the court in United States v. Carson, also pending in the Central District of California, held a hearing on a similar challenge.  Carson is widely seen as presenting a more challenging set of facts that could be more likely to present a narrower interpretation of who may be considered a foreign official.  District Judge James V. Selna concluded the hearing by taking the motion under submission.  A final ruling in the Carson case is expected to be forthcoming.

As discussed in a July 2010 Subject to Inquiry post, DOJ put Big Pharma on notice that it intended to aggressively investigate potential violations of the Foreign Corrupt Practices Act (FCPA) within the pharmaceutical and medical device industry.  Well, they meant what they said.

Johnson & Johnson, the New Jersey-based multi-national pharmaceutical, medical devices and consumer health care company, recently agreed to pay $70 million in criminal penalties to resolve violations of the FCPA, including allegations of kickbacks in connection with the United Nations Oil for Food program.  The criminal penalties included settlements with both the SEC and DOJ: 1) $48.6 million in disgorgement and prejudgment interest to the SEC and 2) $21.6 million as part of a deferred prosecution agreement with DOJ.  The civil penalties to the government agencies relate to allegations that Johnson & Johnson’s subsidiaries provided improper payments to public health officials in Greece, Poland and Romania in attempts to secure: 1) contracts; 2) sales of surgical implants; and 3) prescriptions for pharmaceutical products.  Additionally, the subsidiaries provided kickbacks to Iraqi officials to obtain 19 contracts to provide humanitarian supplies under the Oil for Food program.  Johnson & Johnson did not admit the SEC’s allegations, but consented to the United States District Court for the District of Columbia’s order permanently enjoining Johnson & Johnson from future violations of sections of the ’34 Act.

Despite the criminal penalties, the DOJ and SEC press releases both highlight Johnson & Johnson’s cooperation in the investigations into the alleged violations.  The SEC reported that, “J&J’s internal investigation and its ongoing compliance programs were essential in gathering facts regarding the full extent of J&J’s FCPA violations.”  Johnson & Johnson’s cooperative efforts were recognized by DOJ, with the department considering Johnson & Johnson’s: 1) “timely voluntary disclosure, and thorough…investigation of the underlying conduct;” 2) “extraordinary cooperation” by Johnson & Johnson in providing assistance to DOJ, the SEC and other foreign enforcement authorities; and 3) the “remedial efforts and compliance improvements” initiated by Johnson & Johnson.  In fact, due to Johnson & Johnson’s cooperation and remedial efforts, DOJ reduced the amount of criminal fines and will not require Johnson & Johnson to retain a corporate monitor.  Mythili Raman, the Principal Deputy Assistant Attorney General for the DOJ Criminal Division recently stated, “We are committed to holding corporations accountable for bribing foreign officials while, at the same time, giving meaningful credit to companies that self-report and cooperate with our investigations.”  Johnson & Johnson also received a lesser fine from the UK Securities Fraud Office due to cooperation, agreeing to pay a fine of nearly £5 million ($7.9 million) and additional prosecution costs.

This does not appear to be the end of the DOJ’s efforts against Big Pharma.  According to a recent Reuters article, both Eli Lilly & Co. and Baxter International are under government scrutiny regarding bribery laws.  The article suggests that both companies are cooperating with the inquiries. 

Civil cases based on violations of the Foreign Corrupt Practices Act (FCPA) have proliferated in recent years.  These cases have presented in a number of variations including lawsuits brought by foreign governments against FCPA violators, as shareholder derivative actions, and by business partners and competitors alleged to have been harmed by the underlying bribery.  Private litigants have pursued their civil claims through various avenues including civil RICO claims, claims under federal and state antitrust laws, and through state unfair competition and business conspiracy statutes.  Now, at least one case is seeking to upend the long-accepted idea that the FCPA itself does not confer a private right of action enforceable by civil litigants.

On June 27, 2008, the Republic of Iraq filed a case against ninety-one companies and two individual defendants in the Southern District of New York based on their allegedly improper activities in connection with the UN Oil-For-Food Program.  Among its claims, the Republic of Iraq is seeking to recover damages directly under the FCPA.  A motion to dismiss is currently pending, which among other things takes up the question of whether the court should infer a private right of action under the FCPA.  The Republic of Iraq argues in its briefs that Lamb v. Phillip Morris, Inc., 915 F.2d 1024 (6th Cir. 1990), a long-standing precedent for the notion that the FCPA does not confer a private right of action, was decided in error, and all subsequent cases relying on Lamb are therefore flawed as well. 

The Republic of Iraq has extended an interesting invitation to the court, which has yet to schedule a hearing on the motion to dismiss.  Companies and their counsel on both sides of the issue will surely keep a close eye on this case, and its potential to solidify or second-guess Lamb and its progeny.  Regardless of how the question is resolved, litigation is likely to continue under civil RICO, antitrust and many of the state law claims that currently serve as the basis for most FCPA-based civil litigation.

Last week’s settlement of the long-running Panalpina FCPA investigation is garnering significant attention for the number of entities simultaneously resolving related FCPA investigations and for the size of the fines and disgorgement involved.  And while a total of $236 million in civil and criminal fines and disgorgement across seven companies is noteworthy, it is not what companies with FCPA risks of their own should be focusing on.  Instead, they should be paying attention to the following issues that the settlement highlights:

• First, even the most reputable agents, representatives and joint venturers require close oversight when you are doing business with them in regions and industries that pose significant corruption-related risks.  Panalpina is a well-reputed, publicly-traded Swiss company that is one of the largest, most pervasive and best-known international shipping and logistics companies.  However, it became a central player in a wide-ranging FCPA investigation that came to light in 2007 and pulled in scores of its clients in the oil and gas industries.
• Second, industry-specific scrutiny appears to be a growing FCPA enforcement trend.  In the case of Panalpina, an initial investigation cascaded across an entire industry.  A similar series of investigations by federal law enforcement is now underway in the pharmaceutical and medical device industries.   
• Third, non-U.S. companies have been among the most severely impacted by recent FCPA enforcement efforts.  Following the Panalpina settlement, eight of the top ten FCPA settlements of all time now involve foreign companies.

Cases such as this serve to remind us of the pervasive risk of FCPA liability, the extent of current enforcement efforts and the broad reach FCPA jurisdiction offers to federal law enforcement. 

Companies expanding in foreign countries often engage consultants to assist in marketing to and negotiating with foreign officials.  In recent years, they have become increasingly careful to consider whether payments for such services may implicate concerns under the Foreign Corrupt Practices Act (FCPA).  On September 1, 2010, the DOJ released its third FCPA Opinion Procedure Release of 2010, which should help clarify steps to consider in deciding whether and on what terms to engage a consultant to lobby foreign government officials.

The company that requested the DOJ opinion (“the Requestor”) is engaged in the “development of natural resources trading and infrastructure” and “is pursuing an initiative with a foreign government regarding a novel approach to particular natural resource infrastructure development.”  The Requestor intends to engage a consultant (“the Consultant”) to assist with the business opportunity.  The Consultant is a registered agent under the Foreign Agents Registration Act, and “has previously and currently holds contracts to represent the foreign government and act on its behalf, including performing marketing on behalf of the Ministry of Finance, and lobbying efforts in the United States.”  Despite the Consultant’s contacts with the foreign government, DOJ determined that the consultant was not a “foreign official” under the FCPA and that it would not “take any enforcement action with regard to payments made to the Consultant under the proposed consultancy arrangement.” 

While a consultant can be a “foreign official” for purposes of the FCPA, in this instance DOJ was satisfied that the Requestor had taken the necessary steps to ensure that the “Consultant and its owner are not acting on behalf of the foreign government and therefore are not foreign officials.”  In making its decision, DOJ considered several representations of the Requestor, including:

• Neither Consultant nor its owner have any “decision-making authority on behalf of the foreign government;”
• Under local law, the Consultant and its owners are not employees or officials of the foreign government (confirmed by a local law opinion secured by the Requestor); and
• The arrangement will be disclosed to the Ministry of Finance of the foreign government.

The Requestor also implemented several safeguards to prevent a FCPA violation, which were designed to prevent any finding that the Consultant was acting on behalf of the foreign government in performing the consulting contract.  These safeguards included, among others:

• The owner of the Consultant would personally cease to lobby on behalf of the foreign government;
• The Consultant would establish a wall between employees lobbying the foreign government and employees representing the Requestors;
• The Consultant would not represent the foreign government beyond the current contractual arrangements; and
• None of the Consultant’s employees or affiliates is or would become a foreign official under local law.

While FCPA Opinion Releases are only binding with respect to the party requesting the opinion, this release demonstrates that payments to consultants who have long-standing relationships with a foreign government are not per se prohibited by the FCPA.  Companies considering such consultancy arrangements should exercise proper due diligence before engaging the consultant, implement appropriate safeguards to prevent improper payments and other conflicts of interest, and closely monitor the relationship during the pendency of the consultancy arrangement. 

In a November 2009 speech before the Tenth Annual Pharmaceutical Regulatory and Compliance Congress in Washington D.C., Assistant Attorney General Lanny A. Breuer put big pharma on notice that DOJ intended to aggressively investigate potential violations of the FCPA within the pharmaceutical and medical device industry.  The DOJ’s FCPA team appears to be backing that warning up with a broad investigation into drug trial-related activities occurring in foreign locations.

The focus of the investigation appears to be whether drug companies conducting clinical trials outside the United States may be offering improper inducements to influence the outcomes of those trials, either directly or through third parties.  Utilizing data from foreign clinical trials is an increasingly prevalent pattern among companies seeking approval of new drugs.  According to a June 22, 2010 report from the Department of Health and Human Services’ Office of Inspector General that may have been a trigger for this investigation, it is “estimated that between 40 percent and 65 percent of clinical trials investigating FDA-regulated products are conducted outside the United States.” The report cited a survey that found “the 20 largest United States-based pharmaceutical companies were conducting one-third of their clinical trials exclusively at foreign sites.”  It further noted that “[e]ighty percent of approved marketing applications for drugs and biologics contained data from foreign clinical trials,” with 78 percent of all subjects who participated in clinical trials enrolled at foreign sites and 54 percent of all trial sites located outside the United States.  The report was critical of the FDA’s monitoring of foreign clinical trials, and noted that the reliance on such trials appears likely to grow.  

The link to the FCPA, which prohibits bribery of foreign officials, is the expansive view the DOJ has taken as to who may be considered a “foreign official,” particularly in the context of countries where healthcare and government can be closely intertwined.  In his November speech, Mr. Breuer said “it is entirely possible, under certain circumstances and in certain countries, that nearly every aspect of the approval, manufacture, import, export, pricing, sale and marketing of a drug product in a foreign country will involve a ‘foreign official’ within the meaning of the FCPA.” 

It has been reported that a number of large drug manufacturers have already been targeted by the DOJ’s pharma initiative, with several having received letters of inquiry.  Given that Mr. Breuer has noted that a significant focus of this enforcement effort will be the investigation and prosecution of senior executives, it can be expected that many drug companies will soon be taking a fresh look at how they handle key aspects of their non-U.S. activities, including their affiliations with third-party clinical research organizations (“CROs”), due diligence for those and other third party partners and representatives, and relationships with government-affiliated or state-run academic and health care facilities.

The Honorable Henry E. Hudson, U.S. District Judge for the U.S. District Court for the Eastern District of Virginia struck an ominous note for individuals facing FCPA scrutiny when he handed down the stiffest individual penalty to date at the April 19, 2010 sentencing of Charles Paul Edward Jumet.  Jumet was given 87 months (over 7 years) in prison for his convictions on conspiracy to violate the FCPA and making false statements to federal agents.  He had pled guilty on November 13, 2009. 

The charges against Jumet (pdf), the former president of the Virginia-based Ports Engineering Consultants Corporation (PECC), stemmed from a six-year scheme whereby Jumet and several others paid over $200,000 to Panamanian officials in order to win contracts.  Following the sentencing, Jumet’s attorney described him as “a good man who got caught up in a bad situation in Panama, and made some bad choices.”  Judge Hudson has given Jumet a significant period of time in which to consider those choices, and has sent a strong message to other individuals that FCPA enforcement carries real consequences.  He has an opportunity to drive that message home even further on May 14 when a co-worker who pled guilty subsequent to Jumet faces sentencing for his role in the same scheme.

Prosecutors from the U.S. Attorney’s Office for the Eastern District of Virginia had asked the court to sentence Jumet to 97 months in jail, which should not be surprising given the recent tenor of public comments from key DOJ officials regarding FCPA enforcement and individual prosecutions. 

In a February 2010 address, Mark Mendelsohn, then Deputy Chief of the DOJ’s Fraud Section within the Criminal Division, discussed FCPA enforcement trends, highlighting the rise in prosecutions of individuals from 25 total for the years 2006 to 2008, to 44 in 2009 alone.  This echoed comments made by Assistant Attorney General for the Criminal Division Lanny Breuer in late 2009, where he stressed the importance of investigating and prosecuting senior executives and stated that “for our enforcement efforts to have real deterrent effect, culpable individuals must be prosecuted and go to jail.”

In a speech the day following Mendelsohn’s February remarks, Breuer described a new era of “proactive and innovative white collar enforcement,” that will include the use of investigative tools such as wiretaps and undercover operations, and will use “the aggressive prosecution of individuals” as a means to “make it clear to every corporate executive, every board member, and every sales agent that we will seek to hold you personally accountable for FCPA violations.”

The Jumet sentencing gives real substance to Breuer’s and Mendelsohn’s statements.  As Breuer stated in the DOJ press release following the Jumet sentencing, the sentence “is an important milestone in our effort to deter foreign bribery.  As this case confirms, foreign corruption carries with it very serious penalties, which can include substantial prison time for individuals who violate the law.”

It is too soon to say whether the Jumet sentencing is a prologue or an outlier.  However, it is clear that the DOJ focus on prosecution of culpable individuals under the FCPA is real and is here to stay.

In interviews and public appearances last week, several high ranking members of federal law enforcement discussed their intention to increase and reshape the resources and tools dedicated to investigating and prosecuting white collar crimes, such as financial fraud and Foreign Corrupt Practices Act (FCPA) violations.

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This week’s Shot Show in Las Vegas started off with a bang, courtesy of the DOJ.

The FBI used the annual firearms industry trade show as an opportunity to sweep up 21 of the 22 defendants targeted by a large-scale undercover sting operation. The defendants were charged in 16 indictments with violations of the Foreign Corrupt Practices Act (FCPA), and conspiracy to violate the FCPA and to commit money laundering. Each defendant faces up to 30 years in prison if convicted on all counts.

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