The US Department of Justice and the US Securities and Exchange Commission continued with their aggressive pattern of anti-corruption enforcement in 2009.
As of 2 December 2009, the agencies had collectively brought actions against eleven corporations and an unprecedented twenty individuals for charges relating to the Foreign Corrupt Practices Act1 which prohibits the bribing of non-US officials. The agencies’ focus on individuals led to three jury trials in 2009 involving FCPA-related charges. As with prior years, the agencies imposed high fines on corporations with the combined monetary penalty of US$579 million assessed against Halliburton and KBR for payments to Nigerian officials setting a record for US companies.
The aggressive position of the agencies is not only reflected in the number of enforcement actions but also in recent statements of top DOJ and SEC officials. As discussed below, these statements indicate that that 2010 will also be an active year.
A. DOJ enforcement strategy
In a recent speech Assistant Attorney General Lanny A. Breuer characterised 2009 as “probably the most dynamic single year in the more than 30 years since the FCPA was enacted3.” Mr Breuer described the DOJ’s activities in investigating and prosecuting FCPA matters and committed to continuing this high-level activity following the expected departure of Mark Mendelsohn as deputy chief of the Criminal Fraud Section at the end of 2009. Since becoming deputy chief in early 2005, Mr Mendelsohn has overseen the upward trend in DOJ enforcement – 58 cases since 2005, reflecting more than the number of prosecutions brought in the prior 28 years, according Mr Breuer. In his speech, Mr Breuer also remarked that the pharmaceutical industry would be under focus in the upcoming year. He noted that pharmaceutical industry involves significant government involvement outside of the United States and is therefore susceptible to corruption. He also stated that the DOJ would be “looking at other areas and industries for stepped-up enforcement where we deem appropriate4”. At the same conference where Mr Breuer gave his remarks, Mr Mendelsohn stated that the DOJ currently had 130 pending investigations, which provides further evidence that 2010 could be another record year.
B. SEC enforcement strategy
The DOJ’s aggressive tactics are mirrored by the SEC. In an August 2009 speech, the Director of the SEC’s Division of Enforcement Robert Khuzami announced a shift in the SEC’s enforcement strategy. Most significantly, Mr Khuzami announced the creation of an FCPA-specific enforcement unit within the SEC, thus providing the agency with additional prosecutorial resources. In addition Mr Khuzami has asked his staff to be as swift and strategic as possible in resolving cases. Noting that a sense of urgency is critical to the SEC’s success, Khuzami stated that he intends to build strong cases that will compel defendants to settle quickly and on the SEC’s terms or “face a trial unit armed with compelling evidence”.
Consistent with this approach, Mr Khuzami also announced a reduction in the number of tolling agreements between the agency and entities under investigation.
Cumulatively, the SEC’s new organisational efficiencies could result in increased and more effective FCPA enforcement activity by the SEC in 2010. The organisational efficiencies could enable the SEC to move more quickly than the DOJ in its FCPA investigations and enforcement actions, which could create problems for companies seeking coordinated settlements with both agencies.
C. Focus on individuals
As noted above, the SEC and DOJ commenced actions against 20 individuals this year – a record number since passage of the FCPA. The uptick in prosecution of individuals is reflected in the DOJ and SEC’s public enforcement strategies. In his recent speech, Lanny Breuer discussed the DOJ’s record number of indictments, convictions and settlements with individuals in 2009. In doing so, Mr Breuer confirmed that the “prosecution of individuals is a cornerstone of [the DOJ’s] enforcement strategy6”. That strategy was demonstrated this year by the Department’s indictment of eight former directors and executives of Control Components Inc, a valve company based in California. In January and February, the DOJ settled charges with two former CCI directors who pleaded guilty to conspiracy to violate the FCPA and causing bribes to be paid, in an effort to obtain and retain contracts from state-owned companies in at least four different countries. In April, the DOJ charged an additional six CCI executives with conspiring to violate the FCPA. The six indictments remain unresolved.
Mr Breuer also seemed to expand the scope of individuals who may be targeted for prosecution, from those with a direct and tangible role in corrupt schemes, to those with more tangential roles. In his speech, Mr Breuer noted that his office will seek to hold “every corporate executive, every board member, and every sales agent” personally accountable for FCPA violations7. This commitment included prosecution of non-US nationals in 2009.
For example, in July, the DOJ charged Ousama Naaman, a Lebanese/Canadian dual national with FCPA-related charges in connection with Mr Naaman’s services as an agent for a US chemical company. In November, Fernando Basunto, a Mexican citizen, pleaded guilty to FCPA-related charges in connection with his activities as an agent for a US company.
Mr Khuzami also announced that the SEC will standardise treatment of individual offenders. In determining whether to prosecute corporations, the SEC currently relies on an internal document know as the Seaboard report, a memorandum that established guidelines for determining how much to credit self-policing, self-reporting, remediation and cooperation. In August, Mr Khuzami revealed that his division is creating a similar ‘Seaboard’ standard to evaluate the level of cooperation afforded by individuals during investigations. Such a standard may prove useful for individuals facing scrutiny. While recent enforcement trends establish that individuals will be prosecuted with increasing regularity, the SEC has offered little direction as to its enforcement strategy. The new Seaboard standard for individuals should provide guidance as to the level of cooperation necessary to receive reduced charges, lighter sanctions or mitigated damages.
D. Jury trials provide clarity
The agencies’ focus on individuals resulted in the unprecedented number of FCPA jury trials that were litigated in 2009. Historically, corporate offenders of the FCPA have entered into settlement agreements with the DOJ and SEC in order to avoid the expense and uncertainty of trial. With personal liberties at stake, however, individuals appear willing to litigate the claims against them. This year saw the conclusion of three FCPA-related jury trials (US v. Bourke, US v. Gerald and Patricia Green, and US v. Jefferson), all of which resulted in guilty verdicts for the defendants on FCPA-related charges.
An important by-product of these jury trials are court decisions interpreting the FCPA. As noted, most corporate defendants do not litigate FCPA matters and there is a paucity of FCPA jurisprudence. The three trials in 2009 provided some much needed guidance regarding the scope of the statute. Most important is the trial of Frederic Bourke, which generated several court opinions. In July 2009, a New York jury convicted Frederick Bourke of conspiracy to violate the FCPA, conspiracy to violate the Travel Act and making false statements to federal law enforcement officials. In November, Bourke was sentenced to a year and a day in prison. The guilty verdicts relate to a corruption scheme, allegedly involving Bourke and a Czech co-conspirator, Viktor Kozeny, concerning the planned privatisation of the Azeri state-owned oil company, SOCAR. Both Kozeny and Bourke bought into the privatisation scheme through two corporations, Oily Rock Ltd, and Minaret Group Ltd. Kozeny allegedly conspired to pay millions in bribes to Azeri government officials to ensure that Oily Rock would gain a controlling interest in SOCAR.
The government originally charged Bourke with numerous violations of the FCPA and Travel Act, as well as conspiracy, money laundering and making false statements to the FBI. On 29 August 2008, the US Court of Appeals for the Second Circuit upheld the dismissal of most of the charges pending against Bourke on grounds that the applicable statute of limitations had expired before his indictment. This decision provided clarity as to when the government can extend the statute of limitations in seeking evidence abroad. Mr Bourke thus succeeded in having all but three of the charges pending against him dropped.
In addition to developing further understanding of the application of the statute of limitations, the court’s pre-trial decisions provided rare instruction on the types of evidence necessary to prove the knowledge element of a conspiracy violation and provided useful insight into judicial interpretation of the conscious avoidance doctrine of the FCPA. The government sought to prove Bourke’s knowledge of the conspiracy’s “unlawful purpose” (ie unlawful payments to Azeri officials to encourage privatisation) through application of the FCPA’s conscious avoidance doctrine, which is part of the Act’s knowledge standard. The Judge ruled that an instruction on conscious avoidance was proper to prove that Bourke was “aware of a high probability of [the unlawful payment’s] existence and consciously and intentionally avoided confirming that fact8”. The judge went on to explain that “[k]nowledge may be proven in this manner if, but only if, the person suspects the fact, realised its high probability, but refrained from obtaining the final confirmation because he wanted to be able to deny knowledge”.
The judge allowed the government to introduce two types of evidence at trial to prove that Bourke “consciously avoided” knowledge of the consortium’s bribes to Azeri officials: (1) background evidence relating to the corruption environment in Azerbaijan at the time of Bourke’s investment in SOCAR, and (2) evidence regarding the knowledge of the consortium’s unlawful activities by individuals other than Bourke to impute that knowledge to Bourke. The admission of this evidence was critical to proving that Mr Bourke was aware of the high probability that Azeri officials were being bribed and that he consciously and intentionally avoided confirming that fact.
With few reported cases on application of the conscious avoidance doctrine, the court’s decisions and the types of evidence admitted to prove conscious avoidance has significant implications for companies, executives and investors operating in corrupt countries. The case provides executives and investors with a clear example of the consequences of not doing due diligence on investments and third parties.
As noted, with 130 investigations in the DOJ pipeline, 2010 is shaping up to be another record year of FCPA enforcement. Companies, including non-US entities, should take heed and implement anti-corruption compliance programmes. The consequences of not doing so can be severe.