In recent years, U.S. and Western European military spending has decreased as military spending in other parts of the world has risen. As a result, aerospace, defense and government services (ADG) companies increasingly rely on sales to foreign governments to grow business revenue and are thus at increased risk of investigation for violating the Foreign Corrupt Practices Act (FCPA). On 16 February 2017, newly-installed Deputy Assistant Attorney General Trevor N. McFadden noted that “[t]he fight against official corruption is a solemn duty of the Justice Department, each generation of Department leaders and line prosecutors takes up this mantle from their predecessors, regardless of party affiliation.”1 His remarks confirmed the Department of Justice’s (DOJ) continued commitment to enforcing the FCPA under the leadership of Attorney General Sessions and did not announce any significant changes in enforcement practices or priorities, although such changes may certainly be on the horizon.
McFadden noted that the DOJ FCPA unit has added 10 prosecutors over the last 18 months and that the FBI has also established three new squads of special agents in New York, Washington, D.C., and Los Angeles devoted to FCPA investigations. These new resources coupled with the increase in U.S. enforcement action in 2016, compared to 2015, suggest that the robust FCPA enforcement will continue. The risk such enforcement actions present to ADG corporations is significant. Since 2008, at least 10 corporations have agreed to pay more than US$300m in penalties to resolve such investigations.
Below is a discussion of the most significant issues likely to shape FCPA enforcement activity in the ADG industry in 2017.
Top 10 FCPA enforcements actions of all time2
|Siemens (Germany)||US$800m in 2008|
|Alstom (France)||US$772m in 2014|
|KBR/Halliburton (U.S.)||US$579m in 2009|
|Teva Pharmaceutical (Israel)||US$519m in 2016|
|Odebrecht/Braskem (Brazil)||US$419.8m in 2016|
|Och-Ziff (U.S.)||US$412m in 2016|
|BAE (UK)||US$400m in 2010|
|Total SA (France)||US$398m in 2013|
|VimpelCom (Holland)||US$397.6m in 2016|
|Alcoa (U.S.)||US$384m in 2014|
DOJ’s FCPA pilot program incentivizes self-disclosure and sets minimum criteria for declinations
Last April, the DOJ released the Foreign Corrupt Practices Act Enforcement Plan and Guidance. This plan outlines a one-year pilot program that allows for fine reductions in FCPA enforcement actions beyond what is available under the U.S. Sentencing Guidelines. DOJ officials have explained that the program’s requirements aim to enhance DOJ’s ability to prosecute individuals by motivating companies to self-disclose FCPA violations and cooperate with investigators.3 Under the pilot program, companies that don’t self-disclose will receive no greater than a 25% reduction from the bottom of the Sentencing Guidelines fine range. In contrast, corporations that meet the program’s other requirements and self-disclose may qualify for a reduction of up to 50% from the bottom of the Sentencing Guidelines fine range or a declination of prosecution. Deputy Assistant Attorney General McFadden recently noted that the pilot program will be “up for review this spring” and that the DOJ will at that time consider whether any “modifications should be made to encourage companies and individuals to comply voluntarily with the FCPA’s requirements.”4
The FCPA pilot program also provides that prosecutors may issue declinations of prosecutions to corporations that self-disclose and meet the program’s other cooperation and remediation requirements. Under the Obama administration, DOJ officials indicated that a declination was unlikely if executive management was involved in the wrongdoing, the company made a significant profit from the misconduct in relation to the company’s size and wealth, the company has a history of non-compliance, or has resolved a separate matter with DOJ within the last five years. DOJ issued five declination letters in 2016.5 We will be watching to see if the Trump administration DOJ significantly increases the pace of declinations or articulates new criteria for securing a declination.
Functional, implemented, and tested compliance programs may impact charging decisions and sentencing
In February 2017, the DOJ Fraud Section issued guidance titled “Evaluation of Corporate Compliance Programs.”6 This long-awaited guidance follows the appointment of Hui Chen as DOJ’s first Compliance Counsel Expert in November 2015. It explains that factors (commonly referred to as the “Filip Factors”) that prosecutors must consider when determining whether to bring charges or when negotiating a plea or other agreement include the existence and effectiveness of a corporation’s pre-existing compliance program and any remedial efforts to implement an effective compliance program or improve an existing one. The guidance acknowledges that DOJ’s expectations for an effective compliance program may vary based on the company’s risk profile and identifies a series of questions organized into 11 topics that may be asked in the course of evaluating such programs.
Compliance programs may be evaluated in accordance with this new guidance to determine eligibility for full remediation credit under the FCPA pilot program, which requires that corporations implement an effective compliance program in order to secure full remediation credit.
FCPA enforcement increasingly relies on cooperation with law enforcement agencies of foreign governments
SEC and DOJ officials have recently explained that cooperation with their foreign counterparts is increasingly crucial to fighting bribery and corruption. Former Assistant Attorney General Leslie R. Caldwell explained that “[c]ollaboration and coordination among multiple regulators in cross-border matters is the future of major white collar criminal enforcement.” Caldwell also noted that some DOJ investigations have relied heavily on cooperation not only from prosecutors but also from law enforcement officials in other countries.
Corporations coordinating investigations in multiple jurisdictions face numerous challenges. Chief among them is attempting to avoid paying penalties to regulators in multiple countries for the same conduct. A recent settlement with Embraer, the world’s largest manufacturer of midsize jets, illustrates an attempt to address such a concern. Embraer, a major Brazilian exporter, agreed to pay more than US$107m in U.S. fines and to disgorge US$98m in profits in order to resolve allegations that its payments to various third parties disguised bribes to government officials in the Dominican Republic and Saudi Arabia. Embraer’s settlement with the SEC allows that the company may receive up to a US$20m credit for disgorgement paid to Brazilian authorities in a parallel civil investigation. Embraer also agreed to appoint a compliance monitor that will report jointly to the SEC and Brazil’s Comissão de Valores. Similarly, Odebrecht SA and Braskem SA resolved a multinational corruption investigation by agreeing to pay penalties and disgorgement totaling approximately US$3.5bn. Through the settlement, U.S. authorities agreed to credit the criminal penalties paid to Brazilian and Swiss authorities. The agreement also reflected an agreement to distribute disgorgement between the three countries involved in the investigation.
Increased global cooperation enabled U.S. enforcement agencies to share the laboring oar on investigations that generated more than US$2.4bn for the U.S. Treasury in 2016. A growing global commitment to enforcing bribery and corruption laws may also begin to quiet critics of the FCPA who have long-asserted that FCPA enforcement puts U.S. corporations at a competitive disadvantage in the global marketplace. These facts further suggest that U.S. officials are unlikely to decrease FCPA enforcement in 2017.
The Trump administration is likely to continue aggressive enforcement of the FCPA despite the president's previous negative comments about the law. A growing commitment to combat fraud and corruption from other countries and increased global cooperation between law enforcement and regulatory agencies has expanded the risk that ADG corporations’ business with foreign governments will come under scrutiny. One FBI veteran has explained that the FBI is likely to focus its resources in geographical regions where it has the best chance of building a strong case.7 The same FBI official reported that the Bureau works most closely with countries in Europe and Latin America, including Brazil and Mexico, and has strong relationships with Australia, Japan, Hong Kong, and Singapore. We, therefore, expect to see steady enforcement efforts in these regions. We will also be watching to see if the DOJ implements significant changes to the FCPA pilot program this month, when the current program expires.
1 Trevor N. McFadden, deputy assistant attorney general, U.S. Dep’t of Justice, Remarks at Global Investigations Review Conference (16 February 16 2017).
2 See www.fcpablog.com
3 The specific requirements for full credit under the pilot program are discussed in our prior client alert available at http://www.hoganlovells.com/doj-fraud-section-announces-fcpa-enforcement-pilot-program.
4 See McFadden supra note 1 at 6.
5 See U.S. Dep’t of Justice, https://www.justice.gov/criminal-fraud/pilot-program/declinations (last visited 11 December 2016).
6 U.S. Dep’t of Justice, Criminal Division, Fraud Section, “Evaluation of Corporate Compliance Programs”, available at https://www.justice.gov/criminal-fraud/page/file/937501/download.
7 Richard Satran, International Graft Crackdown Takes Hold, FBI Official Says, Citing Brazil, Reuters Financial Regulatory Forum (5 Aug. 2016), http://blogs.reuters.com/financial-regulatory-forum/2016/08/05/international-graft-crackdown-takes-hold-fbi-official-says-citing-brazil.