By ：Meg Utterback and Aaron Wolfson
2019 has already seen substantial developments around compliance and several major enforcement actions arising out of the Foreign Corrupt Practices Act (“FCPA”). When the U.S. Department of Justice (“DOJ”) relaxed the “all or nothing” requirements for corporations to receive cooperation credit when identifying individuals involved in corruption allegations in late 2018, it remained to be seen how the new policy would be implemented. As we approach the midpoint of 2019, it is still too early to tell what the full ramifications of the relaxation of the cooperation requirements will be, but it is clear that the Securities and Exchange Commission (“SEC”) and DOJ have no intention of relaxing when it comes to enforcement of the FCPA’s anti-bribery and accounting provisions.
This report provides a brief overview of the FCPA, then discusses a recent revision to DOJ policy relating to the FCPA. This report also reviews a number of corporate and individual DOJ enforcement actions that have been resolved in the first half of 2019. Finally, the report notes several ongoing FCPA cases to watch in the second half of the year.
I. OVERVIEW OF THE FCPA
The FCPA generally prohibits the payment of bribes to foreign officials for the purpose of assisting in obtaining—or retaining—business. Specifically, the FCPA contains anti-bribery provisions that prohibit the willful use of “the mails or any means or instrumentality of interstate commerce corruptly in furtherance of an offer, payment, promise to pay, or authorization of the payment of any money,” or in furtherance of an “offer, gift, promise to give, or authorization of the giving of anything of value to any person,” while knowing that all or a portion of such money or thing of value will be offered, given or promised, directly or indirectly, to a foreign official to influence the foreign official in his or her official capacity, induce the foreign official to do, or omit to do, an act in violation of his or her lawful duty, or to secure any improper advantage in order to assist in obtaining or retaining business for or with, or directing business to, any person.
Since its enactment in 1977, the FCPA has applied to all U.S. persons and to certain foreign issuers of securities. In 1998, the anti-bribery provisions of the FCPA were amended to extend their application to foreign firms and persons who cause, directly or through agents, an act in furtherance of such a corrupt payment to take place within the territory of the United States.
A violation of the anti-bribery provisions of the FCPA can result in criminal penalties for both corporations and individuals. Corporations can be fined up to $2 million per violation or, under the Alternative Fines Act, up to twice the pecuniary gain to itself or loss to another. Individuals can be fined up to $100,000 per violation and imprisoned up to five years or, under the Alternative Fines Act, fined up to $250,000 per violation or twice the pecuniary gain to him- or herself or loss to another.
In addition to anti-bribery provisions, the FCPA also has accounting provisions that apply to issuers of securities on U.S. markets and those acting on their behalf. These accounting provisions, which were designed to work in conjunction with the anti-bribery provisions of the FCPA, require subject corporations to: (a) make and keep books, records, and accounts, which, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the corporation; and (b) devise and maintain an adequate system of internal accounting controls.
Violations of the accounting provisions of the FCPA can result in criminal penalties of up to $25 million per violation for a corporation and up to $5 million per violation and 20 years’ imprisonment for individuals.
II. FCPA DEVELOPMENTS RESOLVED IN 2019
DOJ Revision of FCPA Corporate Enforcement Policy
On March 8, 2019, the DOJ announced a revision to its FCPA Corporate Enforcement Policy that loosens the requirements companies had to comply with to receive full credit for timely and appropriate remediation of FCPA violations.
Under the prior policy, to receive full cooperation credit for timely and appropriate remediation, companies had to prohibit employees from using software that generates but does not appropriately retain business communications, such as mobile messaging apps like WhatsApp and WeChat. Recognizing that such a position is unrealistic considering the ubiquity of such services and their usefulness to modern business, the DOJ revised the requirements necessary to receive full cooperation credit for timely and appropriate remediation. Under the updated policy, companies are only required to implement appropriate guidance and controls on the use of personal communications and ephemeral messaging that undermine the company’s ability to appropriately retain business records or communications.
III. FCPA CORPORATE ENFORCEMENT ACTIONS IN 2019
A. Cognizant Technology Solutions Corp.
On February 15, 2019, the SEC and DOJ announced the first FCPA corporate enforcement resolution of 2019 against Cognizant Technology Solutions Corp., which agreed to pay $25 million to settle charges that it violated the FCPA. Two of the company’s former executives were charged for their roles in facilitating and covering up the payment of millions of dollars in a bribe to an Indian government official for a construction project.
The SEC’s order found that the company violated Sections 30A, 13(b)(2)(A), and 13(b)(2)(B) of the Securities Exchange Act of 1934 (the “Exchange Act”), which are anti-bribery, books and records, and internal accounting controls provisions of the federal securities laws. Without admitting or denying the allegations, the company agreed to pay disgorgement and prejudgment interest of approximately $19 million and a penalty of $6 million. It further agreed to pay just under $19.4 million in disgorgement to the DOJ, against which its disgorgement to the SEC was credited, leading to a total penalty of $28 million for Cognizant.
B. Mobile TeleSystems Public Joint Stock Company (“MTS”)
On March 6, 2019, one of Russia’s biggest telecommunications providers, MTS, entered into resolutions with the DOJ and SEC to pay a combined total penalty of $850 million to resolve charges arising out of a scheme to pay bribes in Uzbekistan.
According to the SEC, MTS bribed an Uzbek official related to the former President of Uzbekistan to use her influence over the Uzbek telecommunications regulatory authority to gain access to the Uzbek telecommunications market. MTS made at least $420 million in illegal payments to obtain and retain business that allowed it to operate in Uzbekistan for eight years and generate more than $2.4 billion in revenue. MTS funneled the bribes through front companies controlled by the Uzbek official and disguised them in its books as acquisition costs, option payments, purchases of regulatory assets, and even charitable donations.
MTS consented to the SEC’s order finding that it violated the anti-bribery, books and records and internal accounting control provisions of the Exchange Act. MTS agreed to pay the SEC a $100-million civil penalty. In a related matter, MTS entered into a deferred prosecution agreement with the DOJ, and its subsidiary pleaded guilty in federal court and agreed to pay a criminal fine and forfeiture in the amount of $850 million, against which its disgorgement to the SEC was credited. Under the agreement, MTS must also retain an independent compliance monitor for at least three years.
C. Fresenius Medical Care AG & Co. KGaA (“FMC”)
On March 29, 2019, the SEC announced that FMC had agreed to pay more than $231 million to resolve parallel SEC and DOJ investigations relating to its repeated violations of the FCPA in at least seventeen countries over nearly a decade.
FMC, a German-based global provider of products and services for individuals with chronic kidney failure, engaged in a pattern of misconduct in Saudi Arabia, Morocco, Angola, Turkey, Spain, China, Serbia, Bosnia, Mexico, and eight countries in the West African region. The SEC found that the company failed to have sufficient internal accounting controls. FMC used a variety of schemes to make its improper payments, including sham consulting contracts, falsifying documents, and funneling bribes through a system of third-parties. Despite many obvious signs that corruption was taking place since the early 2000s, FMC devoted insufficient resources to compliance. In some countries, FMC did not take basic precautions such as providing anti-corruption training or performing due diligence on its agents. On multiple occasions, senior executives actively engaged in corruption schemes and directed employees to destroy records of the misconduct. All told, FMC paid nearly $30 million in bribes to government officials and others to procure business.
According to the SEC’s announcement, FMC agreed to pay $147 million in disgorgement and interest to the SEC as well as a criminal fine of $84.7 million as part of a non-prosecution agreement announced by the DOJ. FMC must retain an independent compliance monitor for two years and self-report its FCPA compliance efforts for the year after the monitor expires. FMC may have avoided harsher penalties because it brought the corruption to the attention of the authorities itself, fired many of the individuals involved, and voluntarily began anti-corruption training.
D. Telefônica Brasil S.A. (“Telefônica”)
On May 9, 2019, without admitting or denying the SEC findings, Telefônica, the largest telecommunications company in Brazil, agreed to a cease-and-desist order and to pay a $4.125 million civil penalty.
The charges stemmed from a hospitality program that the company hosted in connection with the 2013 Confederations Cup and the 2014 FIFA World Cup, which was held in Brazil. The SEC alleged that Telefônica offered and provided tickets and hospitality to government officials who were directly involved with, or in a position to influence, legislative actions, regulatory approvals, and business dealings involving the company.
According to the SEC’s order, Telefônica failed to devise and maintain sufficient internal accounting controls over the hospitality program, which led to Telefônica allegedly providing World Cup tickets and related hospitality to approximately 93 government officials, and Confederations Cup tickets and related hospitality to approximately 34 government officials. The company spent over $5.5 million to buy tickets that then were not accurately reflected in its books and records. As a result, the SEC charged Telefônica with violating the books and records and the internal accounting controls provisions of Sections 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act.
E. Wal-Mart Stores, Inc. (“Walmart”)
On June 20, 2019, the SEC charged Walmart with violating the FCPA by failing, for more than a decade, to operate a sufficient anti-corruption compliance program. Walmart agreed to settle with the SEC for more than $144 million and to resolve parallel criminal charges by the DOJ for $138 million.
The SEC’s order found that Walmart failed to sufficiently investigate or mitigate certain anti-corruption risks and allowed subsidiaries in Brazil, China, India, and Mexico to employ third-party intermediaries who made payments to foreign government officials without reasonable assurances that they complied with the FCPA. Walmart consented to the SEC’s order finding that it violated the books and records and internal accounting controls provisions of the Exchange Act.
IV. FCPA INDIVIDUAL ENFORCEMENT ACTIONS RESOLVED IN 2019
A. Chi Ping Patrick Ho
Chi Ping Patrick Ho was Hong Kong’s former Home Secretary. After being found guilty of FCPA and money laundering offenses in December 2018, he was sentenced to three years in prison on March 25, 2019 for his role in a multi-year, multimillion-dollar scheme to bribe top officials of Chad and Uganda in exchange for business advantages for CEFC China Energy Company Limited (“CEFC China”). Ho was convicted of one count of conspiring to violate the FCPA, four counts of violating the FCPA, one count of conspiring to commit international money laundering, and one count of committing international money laundering.
Using an NGO based in Hong Kong and Virginia, Ho offered a $2-million cash bribe hidden in gift boxes sent to the President of Chad in hopes of securing valuable oil rights from the Chadian government. Surprisingly, the president rejected the bribe but later agreed to accept the money as a charitable contribution to his country.
Having been rebuffed in Chad, Ho later paid a $500,000 bribe to the Foreign Minister of Uganda in exchange for meetings with the President and other high-level officials of the Ugandan government. He requested that they help CEFC China acquire a Ugandan bank as a first step to further investment in the country and offered to partner with the Foreign Minister and President, making clear that both would share in CEFC China’s future profits.
B. Frank James Lyon and Master Halbert
On May 14, 2019, the DOJ announced that Frank James Lyon, owner of a Hawaii-based engineering and consulting company, was sentenced to 30 months in prison after he pleaded guilty to an charges filed in the District of Hawaii charging him with conspiracy to violate the anti-bribery provisions of the FCPA and to commit federal-program fraud.
Between 2006 and 2016, Lyon and his co-conspirators paid bribes to foreign officials in the Federated States of Micronesia (“FSM”) and to Hawaii state officials in exchange for their assistance in obtaining and retaining contracts for Lyon’s company valued at more than $10 million. The bribes included, among other things, cash to FSM and Hawaii officials, and vehicles, gifts and entertainment for FSM officials.
V. ONGOING FCPA ENFORCEMENT LITIGATION TO WATCH
A. Alleged Bribes and Kickbacks Paid to Mozambican Government Officials and Investment Bankers
On January 3 and March 4, 2019, indictments were unsealed in a case charging two executives of the Privinvest family of maritime services companies, several former Mozambican government officials, including the former Finance Minister, and several former high-ranking investment bankers at an international investment bank for their roles in a $2-billion fraud and money laundering scheme benefitting Mozambican government officials and investment bankers. Each defendant is charged with wire fraud conspiracy and money laundering conspiracy, and the three investment banker defendants are charged with conspiracy to violate the anti-bribery and internal controls provisions of the FCPA.
The indictments allege that, between 2013 and 2016, defendants and their co-conspirators arranged for the investment bank and another foreign investment bank to extend more than $2 billion in three loans to three companies owned and controlled by the Mozambican government. The loaned funds were said to be intended to fund three maritime projects for which Privinvest was to provide the equipment and services.
The indictments charge that, instead, the defendants and their co-conspirators illegally facilitated Privinvest’s criminal diversion of more than $200 million of the proceeds of the loans, much of which it used to bribe Mozambican government officials to ensure that companies owned and controlled by the Mozambican government would enter into the loan arrangements, and that the government of Mozambique would guarantee those loans. In addition, Privinvest diverted approximately $50 million in kickback payments to the investment bankers, who assisted the co-conspirators to obtain financing for the loans.
[Allegedly, the] loans were subsequently sold in whole or in part to investors worldwide. The participants in the scheme are alleged to have conspired to defraud these investors by misrepresenting how the loan proceeds would be used, the amount and maturity dates of other financial obligations held by Mozambique and the ability of the government of Mozambique to repay the loans, which it has not been able to do.
B. Gordon J. Coburn (“Cobum”) and Steven E. Schwartz (“Schwartz”)
In an action relating to the corporate enforcement action filed against Cognizant (see above), the SEC charged Coburn, the former President of Cognizant, and Schwartz, former Chief Legal Officer, for their roles in facilitating the payment of millions of dollars in a bribe to an Indian government official.
The SEC’s complaint alleges that, in 2014, a senior government official of the Indian state of Tamil Nadu demanded a $2 million bribe from the construction firm responsible for building Cognizant's 2.7-million square foot campus in Chennai, India, and that Coburn and Schwartz authorized the contractor to pay the bribe and directed their subordinates to conceal the bribe by doctoring the contractor's change orders.
On February 15, 2019, the SEC charged Coburn and Schwartz with violating Sections 30A and 13(b)(5) of the Exchange Act, aiding and abetting Cognizant’s violations of Exchange Act Sections 30A, 13(b)(2)(A), and 13(b)(2)(B), and violating Exchange Act Rules 13b2-1 and 13b2-2. The SEC is seeking permanent injunctions, civil monetary penalties, and officer and director bars against Coburn and Schwartz.
C. Rafael Enrique Pinto Franceschi (“Pinto”) and Franz Herman Muller Huber (“Muller”)
Pinto and Muller, sales representative and president, respectively, of a Miami-based supplier of Venezuela’s state-owned energy company, Petroleos de Venezuela S.A. (“PDVSA”), were charged on foreign bribery, wire fraud and money laundering charges for their alleged roles in a scheme to corruptly secure business advantages, including contracts and payment on past due invoices, from PDVSA. According to the indictment, bribes paid to PDVSA officials resulted in additional contracts, inside information, and payments on past due invoices. When the Miami company received a payment, it would notify the PDVSA officials, who would send a fake invoice from a Panamanian shell company to be paid into a Swiss bank account.
This is part of a wider investigation into bribery at PDVSA under which 21 individuals have been charged, 15 of whom have pleaded guilty.
D. Gulnara Karimova (“Karimova”) and Bekhzod Akhmedov (“Akhmedov”)
In addition to the resolution reached by MTS with the SEC and DOJ (see above), on March 7, 2019, charges were unsealed against a former Uzbek official with influence over the Uzbek telecommunications regulator and against a former CEO of an MTS subsidiary.
Karimova allegedly used her official position to solicit and accept more than $865 million in bribes from three large telecoms and then laundering that money through the U.S. financial system. Akhmedov worked with her to solicit the bribes from the telecom companies and is charged in the same indictment with one count of conspiracy to violate the FCPA, two counts of violating the FCPA, and one count of conspiracy to commit money laundering. Karimova’s and Akhmedov’s cases are assigned to U.S. District Judge Kimba Wood of the Southern District of New York.
If you have any questions related to these or other corruption related matters, do not hesitate to contact Aaron Wolfson at [email protected] or Meg Utterback at [email protected] at King & Wood Mallesons.