Recent FCPA Enforcement Activities

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1 November 2006 Recent FCPA Enforcement Activities By William F. Pendergast, Matthew R. Fowler and Jennifer D. Riddle This client alert provides a synopsis of recent Foreign Corrupt Practices Act ( FCPA ) enforcement activities and a discussion of trends we see developing in the arena of FCPA enforcement. During 2006, prior to October, there had been ten separate FCPA enforcement actions, involving two companies and eleven individual executives. During a three day period in October 2006, the Securities and Exchange Commission ( SEC ) and the Department of Justice ( DOJ ) announced two new FCPA enforcement actions against Statoil and Schnitzer Steel Industries, Inc. and issued a review release regarding a DOJ interpretation of the FCPA. Below we discuss the two new enforcement actions and the DOJ opinion release, and highlight apparent trends in FCPA enforcement. I. MOST RECENT ENFORCEMENT ACTIONS A. Schnitzer Steel: Voluntary Disclosure of Bribes in China and South Korea On October 16, 2006, the DOJ and the SEC announced that Schnitzer Steel Industries, Inc., based in Portland, Oregon, had voluntarily disclosed the payment of bribes to steel mill managers in China and South Korea. As a result of those payments, Schnitzer Steel agreed to a deferred prosecution agreement with the DOJ and a cease and desist order with the SEC against future violations of the FCPA, and agreed to disgorge profits of US $6,279,095 and prejudgment interest of US $1,446,106. Schnitzer Steel also agreed that its Korean subsidiary, SSI Korea, would plead guilty and pay a penalty of US $7,500, Facts From at least 1999 to 2004, Schnitzer Steel paid cash bribes and gifts amounting to nearly US $1.9 million to managers of both government controlled and privately owned steel mills in China, and to managers of privately owned steel mills in South Korea. Those payments were made in order to induce the managers to purchase scrap metal from Schnitzer Steel. Schnitzer Steel paid standard kickbacks out of the revenue it earned on the scrap metal sale. It also paid a second type of kickback whereby the steel mill would overpay Schnitzer Steel for the steel purchase and Schnitzer Steel would repay the overpayment to the manager of the steel mill as a refund or rebate. The amount of those payments ranged from US $3,000 to US $15,000. Schnitzer Steel wired the payments to the mill managers using secret bank accounts in South Korea. As part of its efforts to influence the mill managers, Schnitzer Steel also gave gifts, including a US $2,400 watch and gift certificates worth US $10,000. In May 2004, when Schnitzer Steel introduced a new compliance and ethics program, the company s compliance department uncovered the improper payments and started an investigation. Schnitzer Steel voluntarily disclosed the payments to the DOJ and the SEC and cooperated with their investigations. 2. Penalties Pursuant to its agreement with the DOJ and the SEC, Schnitzer Steel must: pay more than US $7.7 million in disgorgement of profits and prejudgment interest; direct its subsidiary, SSI Korea, to pay a penalty in the amount of US $7.5 million; abide by the cease and desist order; retain for an independent compliance consultant for three years (under the terms of the deferred prosecution agreement Schnitzer Steel must choose one of two consultants selected by the DOJ); and 17 Offices Worldwide Paul, Hastings, Janofsky & Walker LLP

2 adopt all of the recommendations to be made by the independent compliance consultant. These penalties were likely less than they could have been, as the DOJ considered the following factors in its penalty determination: voluntary disclosure by the company; cooperation with the DOJ and SEC during the company s internal investigation, which was performed by outside counsel; prompt sharing of information and results of the internal investigation with the DOJ and SEC; remedial steps undertaken by the company to address compliance and internal controls issues; and disciplinary actions taken against offending employees. B. Statoil: Reports by Norwegian Press Trigger U.S. Investigation On October 13, 2006, the DOJ and the SEC announced that Statoil, an international oil company headquartered in Norway, had accepted a three year deferred prosecution agreement and payment of a US $10.5 million penalty (with credit for US $3.5 million paid in Norway) arising from its payment of bribes to an Iranian public official. Statoil also agreed to disgorge US $10.5 million in profits resulting from the bribes. Statoil, which is subject to the jurisdiction of the U.S. enforcement agencies as a company listed on the New York Stock Exchange, acknowledged that it made bribe payments to an Iranian official to secure oil and gas contracts in Iran. 1. Facts In June 2002 and January 2003, Statoil paid bribes amounting to US $5.2 million to the head of the Iranian Fuel Consumption Optimizing Organization, a subsidiary of the National Iranian Oil Company. Those payments were made to assist Statoil in obtaining a contract to develop phases of the South Pars oil and gas field in Iran, and to influence the award of future projects in the Iranian oil and gas industry. Statoil made those payments through an intermediary, with whom Statoil entered into a consulting contract that required Statoil to make initial payments of US $200,000 and US $5 million, as well as ten subsequent annual payments of US $1 million each. Statoil made the initial payments through a U.S. bank in New York to a bank account in Switzerland. In exchange, the Iranian government official used his influence to assist Statoil in various ways, including providing Statoil nonpublic information concerning oil and gas projects in Iran, and giving Statoil copies of the bid documents of its competitors. Statoil was awarded the South Pars contract in Statoil s internal audit department reported the payments to Statoil s CFO in late March 2003, and an internal Statoil report stated that there was strong evidence that the consultant was involved in corrupt practices. When the matter was brought to Statoil s CEO in June 2003, the CEO ceased payments to the Iranian government official, but did not terminate the contract. The Norwegian press reported details of the contract with the Iranian intermediary on September 6, Statoil then terminated the consulting contract on September 10, 2006, before making any of the ten annual payments of US $1 million. The next day the Norwegian authorities announced an investigation into the contract, and the U.S. government contacted Statoil on September 23, Statoil cooperated with the DOJ and the SEC, producing documents and information, including documents protected by the attorney client privilege pursuant to a non waiver agreement, making employees available for interviews, and retaining outside counsel to conduct an investigation of the consulting contract and other non Norwegian contracts and provide the results to the DOJ and the SEC. 2. Penalties Pursuant to its agreement with the DOJ and the SEC, Statoil must: pay a penalty of US $10.5 million (with credit of US $3.5 million for Norway penalty already paid); pay US $10.5 million in disgorgement of profits; retain an independent compliance consultant for three years (as noted above for Schnitzer Steel, we understand that the consultant must be selected from a panel of two provided by the DOJ); and adopt all of the recommendations to be made by the independent compliance consultant. 2

3 II. FCPA OPINION RELEASE The DOJ s opinion procedure was established by statute and allows companies and individuals to request the DOJ s opinion as to whether a proposed transaction or conduct violates the FCPA. At the American Bar Association FCPA Conference ( ABA Conference ) this past October, Alice Fisher, the Assistant Attorney General for the DOJ Criminal Division, encouraged the use of the DOJ s FCPA opinion procedure. As discussed in detail in the following paragraphs, the DOJ issued such a release on October 16, 2006, stating that it would not seek an enforcement action with respect to a proposal by a U.S. company. That company proposed paying US $25,000 to a regional customs department or the Ministry of Finance in an undisclosed African country as part of a project to improve local enforcement of anti counterfeiting laws. The requesting company (the Requestor ), a Delaware corporation with headquarters in Switzerland, stated that counterfeiting has become a serious problem for manufacturers and is often not a priority for customs officials. In an effort to provide a financial incentive for local customs officials to thoroughly inspect goods for counterfeit products, the Requestor proposed a pilot program in an African country whereby local customs officials would receive incentive awards for seizing counterfeit products. The Requestor would execute with the African country a memorandum of understanding that would: encourage the customs officials and the Requestor to exchange information related to the trade of counterfeit products; set up procedures for local customs officials to receive financial awards as incentive to seize and destroy counterfeit products; create criteria by which the eligibility for and calculation of the incentive awards would be judged, including the process for distributing the awards; and require that incentive awards be given to the local customs officials by the counterparty or the local customs offices. The Requestor proposed to undertake a number of procedural safeguards to ensure that the funds would be used for their designated purposes. The DOJ included the normal caveats with its statement that it does not intend to take enforcement action with respect to the proposed payment. III. FUTURE ENFORCEMENT TRENDS These cases bear out some apparent trends in FCPA enforcement, as outlined below. Given this flurry of enforcement activity, the other ten cases filed so far in 2006 and the seven cases filed in 2005, it appears that pursuing FCPA violations will continue to be a priority for the DOJ and the SEC. In addition, several recent developments indicate that FCPA and other anticorruption enforcement actions are receiving more attention abroad. This leads us to four observations: A. Significant Increase in International Cooperation We have seen increased international cooperation and information among enforcement agencies with regard to corruption. From the nature of the settlements in the Schnitzer Steel and Statoil cases, for example, we infer that there was international cooperation in the U.S. investigation. There is an improved structure to facilitate such cooperation which may help sustain the recent wave of anti bribery enforcement activity in Europe. The U.N. Convention Against Corruption (the U.N. Convention ) entered into force on December 14, 2005 and has been ratified by 63 countries and signed by 140 countries. This is a legally binding instrument with global reach. Its signatories are obligated to criminalize a wide range of acts of corruption and to afford one another mutual legal assistance (e.g. taking evidence or statements from persons, effecting service of judicial documents, and providing any other type of assistance not contrary to domestic law), etc. In addition, earlier international anti corruption agreements, notably the OECD Anti Bribery Convention, have resulted in increased enforcement activities in Europe. It was recently reported that ten top U.K. businesses are being investigated over allegations that the companies paid cash to win overseas contracts. Though foreign bribery has been illegal in the U.K. since 2002, such enforcement actions have been very rare. Increased pressure from the OECD and the United States is, according to press reports, part of the U.K. s motivation for these current investigations. In addition, French authorities have begun an investigation into several companies, including one of Halliburton s subsidiaries, based on allegations that the companies paid kickbacks to obtain contracts in 3

4 Nigeria. Norwegian authorities also conducted an investigation into the South Pars oil field contract and sanctioned Statoil with a penalty of approximately US $3.5 million. B. More Voluntary Disclosures The enforcement divisions of the DOJ and SEC have indicated an increase in voluntary disclosures and resulting enforcement actions. These voluntary disclosures frequently arise from merger and acquisition activities and from the internal controls requirements found in Section 404 of the Sarbanes Oxley Act. In her remarks at the ABA Conference, Alice Fisher noted that the result of voluntary disclosure is uncertain and may not result in the company getting a complete pass, but emphasized that there is always a benefit to corporate cooperation. C. Harder to Hide One reason why voluntary disclosure has become more important is the increased risk of the DOJ or the SEC uncovering FCPA violations on their own. Increased foreign referrals in light of the U.N. Convention and other treaties will increase the likelihood that U.S. enforcement agencies will learn of activities in other countries. In addition, the DOJ has also increased its coordination with the FBI, and the FBI has placed FCPA investigations in a program with a higher profile and more resources. As a result, FBI field offices are receiving specific training regarding the investigation of FCPA cases, and FBI officials are reporting greater cooperation with foreign law enforcement and investigators. whether to impose an independent monitor the DOJ considers the strength of the company s existing management and compliance team, the pervasiveness of the problem, and the strength of the company s existing FCPA policies and procedures. IV. CONCLUSION The U.S. enforcement agencies continue to actively pursue the investigation and enforcement of FCPA violations. Recent settlements of such actions, including Statoil and Schnitzer Steel, have resulted in heavy financial penalties, disgorgement of profits and, increasingly, the imposition of independent monitors. Increased U.S. enforcement activity and penalties seems likely given the increased number of voluntary disclosures, increased investigative resources at the FBI, the requirements of the Sarbanes Oxley Act and increasing international cooperation. Significant increases in foreign enforcement activity also seems likely, given the terms of different anti corruption conventions. As a result, over the next five years we expect a steady stream of enforcement actions, mostly through settlements based on voluntary disclosures. In addition, we expect that more executives will be prosecuted and incarcerated for FCPA violations. Accordingly, it is important for all companies with FCPA risks to take proactive compliance steps to minimize the likelihood of violations. D. More Monitors Independent monitors have been imposed by the SEC and DOJ to review the internal controls and compliance programs of a number of companies, and are an increasingly prominent feature of FCPA settlements. In the Schnitzer Steel and Statoil actions, the DOJ not only required companies to retain independent monitors, but established that it will take an active role in the selection of those monitors. While the imposition of monitors is increasingly common, we note that in her remarks at the ABA Conference, Alice Fisher said that monitors will not be required in every FCPA settlement and that the DOJ takes a case by case approach to independent monitors. According to Ms. Fisher, when considering 4

5 If you have any questions regarding this alert, please do not hesitate to contact: William F. Pendergast Washington, D.C. Matthew R. Fowler Jennifer D. Riddle StayCurrent is published solely for the interests of friends and clients of Paul, Hastings, Janofsky & Walker LLP and should in no way be relied upon or construed as legal advice. For specific information on recent developments or particular factual situations, the opinion of legal counsel should be sought. Paul Hastings is a limited liability partnership. Copyright 2006 Paul, Hastings, Janofsky & Walker LLP. IRS Circular 230 Disclosure: As required by U.S. Treasury Regulations governing tax practice, you are hereby advised that any written tax advice contained herein or attached was not written or intended to be used (and cannot be used) by any taxpayer for the purpose of avoiding penalties that may be imposed under the U.S. Internal Revenue Code. 5