Going Global Without Getting Entangled in the Foreign Corrupt Practices Act

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1 Going Global Without Getting Entangled in the Foreign Corrupt Practices Act Risks and Insurance Solutions March 2013 Lockton Companies More than 95 percent of the world s consumers live outside the United States, so it s no wonder companies are going global. Naturally, global commerce comes with the expected challenges of labor costs, technology and trade agreements. However, one unanticipated consequence is that customary practices of doing business abroad may subject companies and their executives to prosecution in the U.S. It is, therefore, crucial to understand the Foreign Corrupt Practices Act (FCPA). The FCPA has landed numerous American companies in hot water, with fines in the tens of millions of dollars. Companies can protect themselves through vigilant compliance and risk management plans that address the exorbitant costs of defending FCPA charges. Fighting global corruption has been a priority for the Justice Department since President Obama appointed Lanny Breuer as head of the Criminal Division in JENNIFER GAITHER Contract Review Specialist Financial Services Practice Group jgaither@lockton.com Contributors WILLIAM A. BOECK Senior Vice President Insurance and Claims Counsel Financial Services Practice Group wboeck@lockton.com CHRIS MCBEE Senior Vice President Financial Services Practice Group cmcbee@lockton.com The Carrot-and-Stick Approach to FCPA Enforcement The Justice Department and the Securities and Exchange Commission (SEC) have taken a carrot-and-stick approach to the enforcement of the FCPA. The stick is the vigorous enforcement of FCPA violations through a dramatic increase in FCPA prosecutions and severe punishment for wrongdoers in the form L O C K T O N C O M P A N I E S

2 of large civil fines and even prison sentences. The carrot is the unprecedented campaign led by Breuer to promote transparency on the reach of the law. On November 14, 2012, the Justice Department and the SEC jointly issued A Resource Guide to the U.S. Foreign Corrupt Practices Act (Resource Guide). According to Breuer, the Resource Guide s purpose is to analyze the central provisions of the Act and provide commentary and analysis for enterprises big and small from small businesses doing their first transactions abroad to multinational corporations with subsidiaries around the world. 1 FCPA Violators Beware: The Consequences Are Costly The Justice Department and the SEC hold nothing back when dealing with violators of the FCPA. Six of the 10 largest settlements for alleged FCPA violations have occurred on Breuer s watch. They include: BAE Systems, PLC ($400 million criminal fine arising from the bribery of Saudi Arabian officials over the sale of jet fighters back in the mid-1980s) Daimler AG ($93.6 million in criminal fines and penalties and $91.4 million in disgorgement of profits for the systemic practice of paying bribes to foreign governmental officials to secure motor vehicle sales in Asia, Africa, Eastern Europe and the Middle East) Alcatel-Lucent ($92 million to resolve criminal charges and $45 million in disgorgement of profits for bribing foreign officials to win telecommunications business in Costa Rica, Honduras, Malaysia and Taiwan). 1 Assistant Attorney General Lanny A. Breuer Speaks at the American Conference Institute s 28th National Conference on the Foreign Corrupt Practices Act, National Harbor, MD, Friday, November 16, 2012; 2

3 More recently, Johnson & Johnson; Pfizer, Inc; Tyco International, Ltd.; BizJet International and its parent company, Lufthansa Technik AG, have all faced multimillion dollar fines. We fully expect this heightened enforcement of FCPA violations to continue beyond Breuer s tenure. As of December 31, 2012, there were at least 88 ongoing investigations of corporations, and the FCPA has become a hot political topic in the media. Most recently, billionaire Sheldon Adelson and his company, the Las Vegas Sands, are suspected of wrongdoing in payments allegedly made to facilitate the building of a Macau casino. compliance program. It includes frequent employee training, a comprehensive payment-approval process designed to prevent bribery and a compliance department with a direct reporting line to the board of directors. The Department of Justice and the SEC have no definitive requirements for a compliance program. Instead, they ask the following questions: Is the company s compliance program well-designed? Is it being applied in good faith? Does it work? The Key Is a Robust Anticorruption Compliance Program A robust anticorruption compliance program based on the Resource Guide is the best first line of defense. The Justice Department and the SEC have shown leniency by lowering the penalty amount or even issuing formal declinations to prosecute when corporations can show that they instituted an effective compliance program before the violation, and that they self-reported violations, fully cooperated in the governmental investigation and took appropriate remedial actions. The Justice Department and SEC will show leniency for organizations that have an in-depth and sincere commitment to anticorruption compliance. Of the 12 formal declinations issued by the Justice Department in 2012, the most celebrated was the Justice Department s decision not to prosecute Morgan Stanley, due largely to the company s robust internal anticorruption Insurance Products Become a Financial Backstop to FCPA Violations Even the most comprehensive compliance program cannot prevent a violation from occurring. Traditionally, FCPA violations are not covered by insurance, but the landscape is beginning to change. It is important that the directors and officers (D&O) policy be as broad as possible to avoid language that can preclude coverage of an FCPA violation. When negotiating policy terms, particular emphasis should be placed on broadening the triggers of coverage under the definition of claim, defining loss to include fines and penalties imposed due to violations, and limiting the application of dishonest and criminal act exclusion until after the litigation is concluded. In addition, companies should examine the adequacy of the policy s limits of liability since defense costs usually are paid within the limits, i.e., deplete the limits under most policies. 3

4 The biggest impediment to coverage under the D&O policy is that extensive legal fees and other defense costs are incurred prelitigation during a Justice Department or SEC investigation. Prominent insurers are now developing policies to cover these costs. Companies may want to consider these policies even if they have D&O insurance, as they often trigger coverage earlier in the process, and they preserve the limits on the D&O policy. Follow-on Civil Litigation Is Potentially Covered by D&O Insurance A direct consequence of the strict enforcement of the FCPA by the Justice Department and the SEC is that companies are increasingly subject to follow-on civil actions brought by shareholders and others. Recently, Alcoa paid an $85 million settlement in a civil lawsuit brought in the U.S. by a state-owned company in Bahrain, alleging financial loss as a result of bribes made to officials in that country. As set forth in Chapter 4 of the Resource Guide, the Department of Justice and the SEC want to see the following attributes in connection with a company s compliance program: (1) Commitment of corporate leaders to a culture of compliance (2) An updated code of conduct outlining responsibilities for compliance within the organization that is clear, concise and accessible to all employees (3) Establishment that senior executives perform oversight and that adequate staffing and resources are devoted given the size, structure and risk profile of the business (4) Adequacy of due diligence and periodic internal audits performed to assess the risks facing the company (5) Implementation of training and certification programs that effectively communicate compliance policies throughout the company (6) Enforcement of the compliance program through appropriate and clear disciplinary procedures that are reliably applied from the board room to the supply room and are commensurate with the violation (7) Third party vetting by performing risk-based due diligence on agents, consultants and distributors who may conduct business on behalf of the company, and by monitoring such businesses or individuals on an ongoing basis (8) A mechanism for employees to report actual misconduct or violations of the company s policies on a confidential basis without fear of retaliation (9) Continuous review and improvement of the program by testing controls and by critically evaluating potential weaknesses and risk areas The most important step in managing the risk of an FCPA loss is to incorporate these nine attributes into your anticorruption compliance program. 4

5 Facing follow-on civil litigation, companies and their As global trade continues to represent a larger portion corporate executives should look toward their D&O of many organizations sales, exposures to FCPA-related liability insurance as a possible source of protection. claims grow. Lockton s team is prepared to help you sort FCPA-related shareholder class actions brought against through the maze of issues and challenges. the company, as well as its directors and officers, would likely be picked up under a typical D&O policy. However, claims brought against the company by parties other than shareholders are potentially not covered, as public company D&O Traditionally, FCPA violations are not covered by insurance, but policies limit entity coverage to the landscape is beginning to change. securities claims. Given the enormous liability exposure that arises from an FCPA investigation, as well as any follow-on civil litigation, companies purchasing D&O coverage should review the entire policy in light of FCPA exposures. 5

6 Our Mission To be the worldwide value and service leader in insurance brokerage, employee benefits, and risk management Our Goal To be the best place to do business and to work Lockton, Inc. All rights reserved. Images 2013 Thinkstock. All rights reserved. g\white paper\gaither\gaither_going global without getting entangled_march13.indd:lkb