Bribes, creative accounting don't cut it in international business
Houston Business Journal - by Michael E. Clark and Robert A. Rowland III Special to Houston Business Journal
Legal actions relating to the Foreign Corrupt Practices Act and the penalties imposed have reached record levels. The act was enacted 30 years ago to deal with bribes and accounting practices by U.S. companies operating in foreign countries.
For example, in 2007:
§ Baker Hughes Inc. paid over $40 million in fines and disgorged profits in exchange for a deferred prosecution agreement, while some of its officers and directors were named in follow-on shareholders' derivative actions.
§ Pride International Inc. reported it had voluntarily informed the Department of Justice and Securities and Exchange Commission about possible FCPA violations discovered while investigating its dealings with customs or merchant marine authorities in Saudi Arabia, Kazakhstan, Brazil and the Republic of the Congo.
§ Cameron International Corp. reported it was one of many oilfield services companies that received a DOJ request for information about its business dealings with a freight forwarder and customs clearance broker in Nigeria and Angola.
Currently there are about 60 active FCPA investigations, and nearly 40 enforcement matters were brought last year compared to 15 in 2006. Reasons for the heightened enforcement activities include:
§ The increasing globalization of business and the enactment by other countries of similar legislation.
§ A large increase in the number of regulators dedicated to overseeing FCPA compliance.
§ Businesses are more rapidly and fully disclosing material information due to Sections 302 and 404 of the Sarbanes-Oxley Act.
§ Companies are self-reporting violations and cooperating with regulators to avoid prosecution or limit other bad consequences.
In sync with the government's increased FCPA enforcement, plaintiffs' attorneys have filed follow-on lawsuits under various theories seeking damages claimed to have resulted from FCPA violations.
These lawsuits are low risk for plaintiffs' counsel, because most businesses will waive their attorney-client and other legal privileges in an effort to appease the government. Consequently, it is relatively easy for plaintiffs' attorneys to obtain internal investigation reports and documents that help to establish liability.
For company directors and executives, on the other hand, these suits are particularly dangerous since directors' and officers' insurance policies commonly exclude fines and penalties from coverage.
In 2007, for example, two shareholders' derivative suits asserting similar theories were filed in Houston against Baker Hughes and some officers and directors. Other plaintiffs have filed securities fraud class actions that charge companies and key officials with not adequately or timely disclosing known FCPA violations.
The Titan Corp. was named in such a lawsuit soon after its failed merger with Lockheed Martin Corp. The plaintiffs claimed that the defendants didn't reveal that consultants working on Titan's behalf had improperly paid foreign government officials and that Titan had improperly accounted for these payments in its records.
Among other assertions, other plaintiffs have filed wrongful termination suits against their prior employers alleging they were the victims of retaliation by individuals who didn't want them to blow the whistle on discovered FCPA violations.
As the Titan case illustrates, in order to avoid successor liability, companies should proactively use counsel, often independent counsel, to conduct focused due diligence in all mergers or acquisitions involving entities that conduct business in emerging foreign markets:
§ Examining the reputations, associations, activities and ethics of potential partners, investors or key hires.
§ Confirming or refuting rumors of criminal or questionable business practices.
§ Identifying undisclosed liabilities or questionable financial reporting.
§ Researching unusual offshore structures and unexplained financial arrangements associated with potential merger, acquisition or joint venture targets.
§ Clarifying the nature of relationships between target companies and various individuals, including government officials.
In addition, counsel can work proactively by helping companies recognize and assess various red flags that may signal an increased risk of FCPA violations. According to Nina B. Finston of the SEC, these include:
§ Operating in a country or an industry that is a high risk for bribery.
§ Operating a joint venture with a foreign government entity.
§ Consulting and agency arrangements with persons acting as intermediaries with a foreign government.
§ Employing intermediaries who control a foreign venture's financial expenditures or reporting.
§ Unusual payments to foreign agents in light of the prevailing local rates and the nature of services.
§ Making bonuses for employees working in foreign operations contingent on reaching unduly aggressive operating results.
FCPA violations can result in administrative, civil or criminal actions -- and businesses can be liable for the foreseeable acts of their employees, agents, or contractors. Notably, the Act prohibits companies from indemnifying employees for fines or penalties imposed for FCPA violations and from deducting such costs from their taxes. FCPA violations also can lead to significant collateral consequences -- debarment from government contracting, the loss of export privileges and follow-on civil suits by private plaintiffs.
Companies can limit their overall risks (and costs) under the FCPA by being proactive.
However, if faced with FCPA issues it is often critical that the company hire specialized independent outside counsel to oversee internal investigations to assess what information should be publicly reported, deal with the media and work with regulators.
Michael E. Clark is a partner with Hamel Bowers & Clark (www.lawyers.com/hamelbowers&clark) and an adjunct professor at the University of Houston Law Center. Robert A. Rowland III is a senior partner with the Law Offices of Robert A. Rowland III & Associates (www.robrowland.com). Both focus on internal corporate investigations.