The San Francisco Regional Office of the Securities and Exchange Commission (“SEC”) has confirmed the opening of a San Francisco regional unit dedicated to the enforcement of the Foreign Corrupt Practices Act (“FCPA”), the law criminalizing improper payments to foreign officials performing a public function. The news follows the announcement in August 2009 by Robert Khuzami, the SEC’s director of the Division of Enforcement, of the launch of a special unit dedicated to enforcement of the FCPA, led by Cheryl J. Scarboro. The civil and criminal provisions of the FCPA are enforced jointly by the United States Department of Justice (“DOJ”) and the SEC. Generally, the SEC prosecutes the accounting standards portion of the FCPA through civil and administrative proceedings, while the DOJ prosecutes both the anti-corruption and accounting standards portions of the FCPA through criminal prosecutions.
1. Trend Towards Increased Number of Prosecutions
The number of FCPA cases brought annually has steadily increased. In the three-year period from 2004 to 2006, DOJ brought 29 FCPA enforcement actions, an average of less than 10 each year. In 2007 and 2008, DOJ initiated 38 and 33 FCPA enforcement cases, respectively. In 2009, DOJ brought a record of over 40 FCPA enforcement actions. As of April 2010, 28 enforcement actions have been brought, lining up 2010 to surpass 2009’s numbers. According to Assistant Attorney General Lanny Breuer of the DOJ’s Criminal Division, approximately 140 companies and/or individuals are under investigation for potential FCPA violations as of January 2010.
2. Trend Towards Larger Penalties
In addition to the increased number of prosecutions, in the past 18 months, fines and sentences in FCPA cases has risen. The DOJ and SEC have obtained hundreds of millions of dollars in fines in FCPA cases, including:
- $1.6 billion from Siemens AG and three of its subsidiaries in December 2009, consisting of a $450 million fine to DOJ, $350 million disgorged profits to SEC and $856 million to German officials, for improper payment of more than $1 billion to government officials to win infrastructure contracts
- $40.2 million global settlement in March 2010 with Innospec, a Delaware-incorporated chemical company, for $9.2 million in illegal bribes to Iraqi and Indonesian government officials
In addition, a $447 million settlement between BAE Systems and the U.K. SFO on FCPA-related charges is currently pending court approval, and 2010 settlements of $339 million for ENI and $333 million for Technip are probable.
3. Trend Towards Longer Sentences for Individuals
Another trend has been the aggressive prosecution of individuals and the longer sentences they are receiving from the courts. For example, on April 19, 2010, Charles Jumet was sentenced to 87 months in prison, the longest sentence ever in an FCPA-related case. Jumet pleaded guilty in November 2009 in the U.S. District Court for the Eastern District of Virginia, to conspiring to violate the FCPA and to making a false statement to federal agents. Prosecutors said $212,400 in bribes made by Jumet, a vice president of Ports Engineering Consultants Corp., and others to Panamanian officials between 1997 and 2003 were designed to secure maritime contracts, including the maintenance of lighthouses and buoys along Panama's waterways.
Assistant Attorney General Breuer called the sentence “an important milestone in our effort to deter foreign bribery” and that the case confirmed that FCPA violations carry serious penalties, including “substantial prison time for individuals who violate the law.” According to Immigration and Customs Enforcement Special Agent in Charge John Torres, the sentence should serve “as a warning to those who engage in corrupt business dealings.”
4. Focus on California Companies and Asia
With the opening of the new FCPA unit of the SEC in San Francisco, it is clear that the trend of heightened enforcement activity will not soon subside. Tracy L. Davis, the assistant regional director in charge of the FCPA unit, has indicated that the new San Francisco unit demonstrates a desire to aggressively enforce the FCPA with a clear focus on Asia: “The fact that we have a significant presence of companies in Silicon Valley who do business internationally, especially in Asia, makes us well-suited for addressing these kinds of issues.”
FCPA enforcement has traditionally taken an industry-specific focus, with scrutiny on industries such as the oil and oil-services industry, medical devices and pharmaceutical industry, military and law enforcement products and services industry, and telecommunications industry. Although the types of companies typically located in Silicon Valley — technology companies — have a “lower risk profile” than defense or oil companies, according to Mike Koehler, a Butler University assistant professor of Law and an FCPA expert, the exposure may be significant if relevant conduct is found. Furthermore, with the rise of China as a consumer of technological goods and services, special considerations arise because FCPA governs improper payments to government officials, and the Chinese economy is heavily influenced and controlled by state-owned enterprises. For example, on December 31, 2009, the San Francisco office of the SEC filed a complaint against UTStarcom, a Bay Area telecommunications company, alleging payment of nearly $7 million for hundreds of overseas “sightseeing” trips by employees of the Chinese government-controlled telecommunications companies that were customers of UTStarcom. The broad definition of “foreign officials,” especially in the Chinese context, will require a thorough program for risk assessment and compliance tailored to the specific country and industry.
5. FCPA as Part of the SEC Enforcement Reorganization
The creation of an FCPA office in the San Francisco regional office of the SEC is part of a larger reorganization of the SEC’s Division of Enforcement. SEC Enforcement Division Director Khuzami has created five cross-office units within the division to focus on priority areas for the SEC’s enforcement program which in his view require specialized expertise. In addition to FCPA, the other special units include (1) asset management (mutual funds, hedge funds and investment advisers); (2) market abuse (manipulation, short-selling and other trading issues); (3) structured and new products (CDOs, CMOs, structured notes, reverse convertibles, etc.); and (4) municipal securities and municipal pension advisers. Approximately 20 percent of the SEC’s enforcement attorneys have been assigned to the new units. The SEC’s San Francisco office has historically focused primarily on disclosure and accounting issues at public companies (especially in Silicon Valley), and more recently has brought a series of cases involving insider trading and Ponzi schemes. A focus on FCPA issues, and the office’s new market abuse unit, represent a new set of priorities for that office.
With trends indicating that the DOJ and SEC are continuing to step up their efforts to combat corruption among individuals and companies doing business with foreign officials, we encourage all clients in such a situation to contact counsel early in the process for analysis and guidance to prevent possible investigation or enforcement actions. Bingham lawyers are available to assist in addressing any questions you may have regarding these issues.
Please contact any of the lawyers listed below should you need assistance in a federal criminal investigation, securities litigation, trial, sentencing or appellate matter.
Nathan J. Hochman, Partner, White Collar Investigations and Enforcement Group
firstname.lastname@example.org, 310.225.9025, 202.373.6774
Michael N. Levy, Co-chair, White Collar Investigations and Enforcement Group
Raymond C. Marshall, Co-chair, White Collar Investigations and Enforcement Group
Mark E. Robinson, Co-chair, White Collar Investigations and Enforcement Group
Dale E. Barnes Jr., Co-chair, Securities Litigation Group
W. Hardy Callcott, Partner, Broker-Dealer Group