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ANTI-CORRUPTION REGULATION IN 2013 AND A REVIEW OF 2012 MAJOR DEVELOPMENTS

In 2012, there were a number of developments in both the United States and around the globe related to anti-corruption enforcement. The U.S. and U.K. enforcement agencies released guidance related to the enforcement of their respective anti-corruption laws, long running corporate cases were settled, individuals were both prosecuted and sentenced, and courts provided some additional guidance on the U.S. Foreign Corrupt Practices Act (“FCPA”). Additionally, enforcement of anti-corruption laws around the globe continued to increase.

Last year, the U.S. Department of Justice (“DOJ”) and Securities and Exchange Commission (“SEC”) imposed over $250 million in corporate penalties through a mixture of deferred prosecution agreements (“DPA”), non-prosecution agreements (“NPA”) and civil settlements relating to alleged FCPA and FCPA-related violations. The alleged conduct occurred in 16 different countries: Argentina, Bulgaria, Brazil, China (three settlements), Croatia, Germany, Greece, Kazakhstan, Lithuania, Mexico (two settlements), Nigeria, Panama, Russia, Saudi Arabia, Thailand, and Turkey. The largest single penalty—over $60 million—was imposed on Pfizer Inc. and a subsidiary for improper payments to publicly-employed regulators and health care professionals in several Eastern European countries, while the smallest penalty—$2 million—was imposed on the NORDAM Group, Inc. for bribing employees of a Chinese government-owned airlines to secure maintenance contracts.

While 2012 did not see any record breaking settlements, the DOJ and SEC did release their highly anticipated guidance, the DOJ’s assault on the pharmaceutical and health science industry continued, the DOJ publicly stated that a company received a declination based, in part, on its compliance program, and several individuals challenged FCPA charges on a variety of grounds. And in an unexpected revelation, Walmart revealed that it is undertaking a massive internal investigation that spawned from allegations related to its Mexico operations but have quickly spread throughout its global operations.

In this forecast and review, we seek to provide a comprehensive overview of FCPA and anti-corruption developments in 2012 and a realistic forecast of some of what global companies can expect in 2013 as they continue to grow internationally while attempting to minimize corruption risk.

TABLE OF CONTENTS

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U.S. ENFORCEMENT DEVELOPMENTS ................................................................................. 1

I. FCPA Guidance from the Department of Justice (“DOJ”) and Securities and Exchange Commission (“SEC”) ..................................................................... 1

II. Individual Prosecutions .......................................................................................... 2

A. Noble Corporation ..................................................................................... 2

B. Lindsey Manufacturing .............................................................................. 4

C. KBR ........................................................................................................... 4

D. Shot Show/Bistrong ................................................................................... 5

E. Control Components, Inc. .......................................................................... 5

F. Latin Node, Inc........................................................................................... 6

G. Telecommunications D’Haiti S.A.M. ........................................................ 7

III. Civil Suits .............................................................................................................. 7

A. Derivative Actions ..................................................................................... 7

B. Whistleblower Actions............................................................................. 10

C. Other Civil Litigation ............................................................................... 11

IV. 2012 Opinion Procedure Releases ....................................................................... 11

A. OPR 12-01 ............................................................................................... 11

B. OPR 12-02 ............................................................................................... 13

V. Dodd-Frank Update.............................................................................................. 14

A. Whistleblower Statistics and Notable Cases ............................................ 14

B. Rule 13q-1 – Resource Extraction Disclosures ....................................... 15

VI. Walmart................................................................................................................ 16

A. Summary of Allegations .......................................................................... 16

B. Potential Lessons To Be Learned ............................................................. 18

VII. Trends in DPA’s/NPA’s ...................................................................................... 24

A. DOJ Confirms Commitment to DPAs and NPAs .................................... 24

B. SEC Slowly Commences Use of DPAs and NPAs .................................. 25

HEADLIGHT DEVELOPMENTS .............................................................................................. 26

I. Financial Institutions ............................................................................................ 26

TABLE OF CONTENTS

(continued)

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A. Morgan Stanley ........................................................................................ 26

II. Pharmaceuticals and Life Sciences ...................................................................... 27

A. Smith & Nephew ...................................................................................... 27

B. Biomet ...................................................................................................... 29

C. Orthofix .................................................................................................... 29

D. Pfizer/Wyeth ............................................................................................ 30

E. Eli Lilly .................................................................................................... 34

F. Grifols S.A. .............................................................................................. 35

G. Olympus Disclosure ................................................................................. 35

H. Lessons Learned ....................................................................................... 36

III. Energy .................................................................................................................. 36

A. Data Systems & Solutions LLC ............................................................... 36

IV. Technology and Innovation .................................................................................. 37

A. Oracle ....................................................................................................... 37

V. Infrastructure, Mining and Commodities ............................................................. 38

A. Tyco International Ltd. ............................................................................. 38

B. Total S.A. ................................................................................................. 41

VI. Transport .............................................................................................................. 41

A. Bizjet ........................................................................................................ 41

B. NORDAM ................................................................................................ 42

C. Embraer .................................................................................................... 43

GLOBAL DEVELOPMENTS ..................................................................................................... 44

I. Europe .................................................................................................................. 44

A. United Kingdom ....................................................................................... 44

B. Italy .......................................................................................................... 49

C. The Netherlands ....................................................................................... 49

D. Germany ................................................................................................... 50

TABLE OF CONTENTS

(continued)

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E. Russia ....................................................................................................... 51

II. Asia Pacific .......................................................................................................... 51

A. China ........................................................................................................ 51

B. India ......................................................................................................... 52

C. Indonesia .................................................................................................. 53

D. Singapore ................................................................................................. 53

E. Australia ................................................................................................... 53

III. Africa ................................................................................................................... 54

A. South Africa ............................................................................................. 54

IV. The Americas ....................................................................................................... 54

A. Canada ...................................................................................................... 54

B. Colombia .................................................................................................. 55

C. Argentina .................................................................................................. 55

WHAT TO EXPECT IN 2013 ..................................................................................................... 55

F U L B R I G H T A NT I -CORRU PT ION REGU LA T ION IN 2013 A ND A REV IEW OF 2012 MA JOR DEVELOPMENTS

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U.S. ENFORCEMENT DEVELOPMENTS

I. FCPA Guidance from the Department of Justice (“DOJ”) and Securities and Exchange Commission (“SEC”)

On November 14, 2012, the DOJ and SEC released a joint guide on FCPA enforcement. Although the guidance was short on details, it did provide some insight:

The guidance provides six examples of past declinations. The questionable conduct included receiving competitor bid information from a third party with connections to a foreign government, bribes discovered by an acquiring company during pre-acquisition due diligence, and small bribes paid to building code inspectors, customs agents, and social security officials. As noted in the guidance, some of the factors considered when issuing the declination included whether the company voluntarily disclosed the misconduct to the government, conducted an internal investigation, took remedial steps, and improved its compliance program.

The guidance clarifies that employees of entities in which a non-U.S. government has a minority ownership can be deemed a “foreign official” if that government maintains a meaningful stake in the company’s decision-making process.

Acknowledging the expansive scope of the statute, the guidance identifies the parties who might have liability under the FCPA’s accounting provisions, conspiracy or aiding and abetting theories, or the obligations applicable to internal auditors, including:

The company itself;

Company employees who commit accounting violations;

Individuals, subsidiary companies, or other entities who are aware of accounting violations and aid and abet the violations, even if they themselves are not issuers or domestic concerns and cannot be directly charged under the act; and

Internal auditors who discover illegal acts and do not report them to the appropriate managers within the company or notify the SEC if the company fails to take action.

Although the FCPA does not prohibit commercial bribery (bribery of private parties), the guidance reminds businesses that the DOJ and SEC can and will prosecute commercial bribery under the Travel Act—an important reminder in light of the U.K. Bribery Act’s prohibition of bribery of both public and private persons.


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When designing a company’s internal controls, the company should take into account its risk profile, including:

The nature of the company’s products or services;

The nature of the company’s work force;

The degree of industry regulation;

The extent of the company’s government interaction; and

The degree to which the company has operations in countries with a high risk of corruption.

With respect to various types of gifts, travel, and entertainment, the guidance discusses expenses that often are provided to government officials and suggests that the provision of cab fare, company promotional items, and reasonable meals and entertainment expenses, by themselves, are unlikely to result in an enforcement action.

The guidance reinforces the DOJ’s view that compliance programs cannot simply be paper programs or “check the box” programs and that a company should develop a compliance program based on its unique risks, needs, and challenges.

II. Individual Prosecutions

A. Noble Corporation

In 2012, the SEC opened a new chapter in the Noble Corporation (“Noble”) prosecution when it charged three Noble executives with violating the FCPA for allegedly participating in a scheme to bribe Nigerian officials to retain business under large oil contracts.1 The DOJ and SEC had previously settled FCPA charges with Noble in 2010, with the company agreeing to pay US$8.1 million in civil and criminal penalties. In the new charges, the SEC alleged that the former Noble CEO, Mark Jackson, along with the current Director and Division Manager of Noble’s Nigerian subsidiary, James Ruehlen, bribed Nigerian customs officials to process false paperwork that purported to evidence the import and export of certain oil rigs, when the oil rigs had not actually been moved. The SEC separately charged Noble’s former Controller and Head of Internal Audit, Thomas O’Rourke, for approving the bribes and allowing the bribes to be improperly recorded in Noble’s books and records.2

1 Press Release, Sec. & Exch. Comm’n, SEC Charges Three Oil Services Executives With Bribing Customs Officials in Nigeria (Feb. 24, 2012), available at https://www.sec.gov/news/press/2012/2012-32.htm. 2 Id.

https://www.sec.gov/news/press/2012/2012-32.htm


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In most FCPA cases brought by the SEC, individual defendants willingly settle rather than defend the charges in litigation. Unlike O’Rourke (who settled with the SEC, agreeing to pay a US$35,000 civil penalty), Jackson and Ruehlen are currently fighting the government’s claims in court. In March 2012, Jackson and Ruehlen filed motions to dismiss the SEC’s complaint, arguing that the SEC failed to state a claim on six grounds: (1) the SEC must specifically identify the government officials for whom the defendants allegedly authorized a bribe; (2) the SEC must specifically allege sufficient facts to support an inference that the allegedly improper payments are not “facilitating payments” under the FCPA; (3) the facilitating payments exception is unconstitutionally vague; (4) the SEC failed to plead sufficient facts to support the inference that the alleged improper payments were made “corruptly;” (5) the SEC failed to sufficiently plead the securities violations, including the failure to specify the books and records that were allegedly falsified; and (6) the statute of limitations had run on the SEC’s claims.3 The SEC filed its responsive brief in June 2012.4 In December 2012, Judge Keith Ellison issued a 61-page opinion dismissing certain SEC claims for monetary damages.5 Judge Ellison ruled that the SEC must plead and prove that the facilitating payment exception does not apply to Jackson and Ruehlen’s case to survive a motion to dismiss, which may be satisfied by pleading facts sufficient to establish that the allegedly improper payments were made with corrupt intent. Judge Ellison also dismissed certain charges on statute of limitations grounds, requiring the SEC to plead adequately that it diligently investigated and brought the claims. In all likelihood, a new set of pleadings and briefings in this matter will be filed in the first half of 2013.

In his opinion, Judge Ellison made several important rulings. Most notably, in failing to grant the motion to dismiss in its entirety, the court rejected the defendants’ contention that the FCPA’s facilitation payment exception operates as an affirmative defense. Despite this holding, Judge Ellison concluded that the SEC still bore the burden of pleading and proving that the facilitating payments exception does not apply, noting that the facilitating payments exception “is best understood as a threshold requirement to pleading that a defendant acted ‘corruptly.’”6 Although Judge Ellison cautioned that blanket assertions that a defendant’s actions are corrupt are insufficient to overcome this burden, he concluded that the SEC pled sufficient facts to support an inference that the payments in question were made corruptly. Accordingly, even though the SEC did not explicitly plead that the payment did not fall within the facilitating payments exception, it carried its burden.

3 See Mots. to Dismiss for Failure to State a Claim, Sec. & Exch. Comm’n v. Jackson, No. 4:12-CV-563 (S.D. Tex. May 8, 2012). 4 See Resp. in Opp. to Mots. to Dismiss for Failure to State a Claim, Sec. & Exch. Comm’n v. Jackson, No. 12-CV-563 (S.D. Tex. June 25, 2012). 5 See Mem. and Order, Sec. & Exch. Comm’n v. Jackson, No. 12-CV-563 (S.D. Tex. Dec. 11, 2012). 6 Id. at 17.


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Judge Ellison also rejected defendants’ contention that the FCPA requires a plaintiff to specifically identify the foreign official whose influence was allegedly sought, or, at the very least, identify the official’s role and responsibility. After examining the legislative history of the FCPA, Judge Ellison held that “it would be perverse to read into the statute a requirement that a defendant know precisely which government official, or which level of government official would be targeted by his agent…”7 Judge Ellison noted that any other reading would encourage parties to avoid potential liability by instructing their agents not to provide any information about the officials being bribed, or the action undertaken by the official in exchange for the bribe.

B. Lindsey Manufacturing

The DOJ ended its prosecution of Lindsey Manufacturing (“Lindsey”) and a number of Lindsey employees in 2012, putting to rest a highly controversial and embarrassing chapter in the DOJ’s FCPA prosecution history. In 2011, the DOJ suffered a stunning defeat in its prosecution of Lindsey and two Lindsey executives. Judge Howard Matz overturned three guilty verdicts and granted a motion to dismiss the superseding indictments, finding multiple instances of prosecutorial misconduct.8 In December 2011, the DOJ filed a notice of appeal with the United States Court of Appeals for the Ninth Circuit. In yet another unusual development in the case, in May 2012, the DOJ filed a motion to voluntarily dismiss its appeal of the dismissal. By filing its motion, the DOJ has ended its case against Lindsey and its executives, and will no longer seek a US$24 million forfeiture from the company.

C. KBR

Three of KBR’s former executives and agents were sentenced in February 2012 as part of the Bonny Island investigation—Albert “Jack” Stanley, Jeffrey Tesler, and Wojciech Chodan.9 The three executives allegedly orchestrated a bribery scheme to obtain liquefied natural gas contracts on Bonny Island, Nigeria. KBR, as part of a joint venture, allegedly made a total of US$182 million in bribes from 1995 through 2004 to secure the contracts.

Stanley, the former Chairman and CEO of KBR, cooperated with authorities following his guilty plea in 2008, and is credited with assisting the authorities in recovering over US$1.6 billion from individuals and joint venture partners during the Bonny Island investigation. After numerous delays, Stanley was sentenced in February 2012 to 30 months in prison and three years of probation following his release. Stanley began his prison term in April 2012. Chodan, a former U.K.-based manager of KBR operations, also cooperated with authorities following his guilty 7 Id. at 11. 8 Order Granting Mot. to Dismiss, United States v. Aguilar, No. 10-CR-1031 (C.D. Cal. Dec. 1, 2011). 9 Press Release, Dep’t of Justice, Former Chairman and CEO of Kellogg, Brown & Root Inc. Sentenced to 30 Months in Prison for Foreign Bribery and Kickback Schemes (Feb. 23, 2012), available at http://www.justice.gov/opa/pr/2012/February/12-crm-249.html.

http://www.justice.gov/‌opa/pr/2012/February/12-crm-249.html

http://www.justice.gov/‌opa/pr/2012/February/12-crm-249.html


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plea in December 2010. Chodan was credited with assisting authorities in prosecuting Tesler, and was sentenced in February 2012 to one year of unsupervised probation.

Tesler, a London lawyer that allegedly helped Stanley deliver bribes to Nigerian officials, pleaded guilty in March 2011 to two counts of violating the FCPA and conspiracy to violate the FCPA. Tesler was sentenced in February 2012 to 21 months in prison, and was ordered to forfeit US$149 million, the largest individual FCPA forfeiture.

D. Shot Show/Bistrong

In late 2011 and early 2012, the government suffered arguably its largest defeat in its history of FCPA enforcement when it voluntarily dismissed indictments of 19 individuals accused of conspiring to bribe the Gabonese Minister of Defense to secure defense equipment contracts. The individuals had been arrested and charged as part of a sting operation. In May and June 2011, a mistrial was declared in the prosecution of five of the individuals, after the jury could not reach a verdict. The DOJ retried the defendants in late 2011. However, in a second stunning blow, the court acquitted two of the five defendants, and the jury could not reach a verdict with respect to the remaining three defendants, resulting in another mistrial. On February 7, 2012, the DOJ asked the court for time to consider whether to proceed with the prosecutions. Two weeks later, the DOJ asked the court to dismiss all the remaining indictments, including the indictments of three individuals that had already pleaded guilty but had not yet been sentenced.

The government’s cooperating witness in the investigation, Richard Bistrong, pleaded guilty to one count of conspiracy to violate FCPA, and to export military products without proper authorization in 2010. At his sentencing hearing in July 2012, the DOJ requested that Bistrong not receive any prison time, citing his cooperativeness throughout the investigation. The court, however, disagreed with the DOJ’s recommendation and sentenced Bistrong to 18 months in prison, followed by 36 months of probation. Bistrong’s sentencing brings the Shot Show prosecution to a tumultuous conclusion.

E. Control Components, Inc.

A number of former Control Components (“CCI”) executives were sentenced in 2012, while two others await trial. CCI pleaded guilty to violating the FCPA and Travel Act in 2009 in connection with a bribery scheme to secure service control valve contracts in a number of countries.10 As part of the scheme, CCI made nearly US$5 million of bribes resulting in sales of nearly US$50 million from 2003 to 2007. The DOJ also charged a number of individuals, including six former CCI executives, for allegedly participating in the scheme. In 2009, two executives, Richard Morlok, CCI’s former Finance Director, and Mario Covino, CCI’s former 10 Press Release, Dep’t of Justice, Control Components Inc. Pleads Guilty to Foreign Bribery Charges and Agrees to Pay $18.2 Million Criminal Fine (July 31, 2009), available at http://www.justice.gov/opa/pr/2009/July/09-crm-754.html.

http://www.justice.gov/opa/pr/2009/July/09-crm-754.html



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Director of Worldwide Factory Sales, pleaded guilty to FCPA charges and began cooperating with the government’s investigation. In 2011, Flavio Ricotti, CCI’s former Vice-President of Sales, pleaded guilty to one count of violating the FCPA. All three are currently awaiting sentencing.

In April 2012, Stuart Carson, CCI’s former President, and his wife, Hong “Rose” Carson, CCI’s former Director of Sales, pleaded guilty to one count of violating the FCPA. In late 2012, Stuart Carson was sentenced to four months in prison, while Hong Carson was sentenced to six months home confinement and ordered to perform 200 hours of community service. Both Carsons were fined US$20,000 as well.

In May 2012, Paul Cosgrove, CCI’s former Director of Worldwide Sales, pleaded guilty to one count of violating the FCPA. Prosecutors initially stated that they would recommend a 15 month prison sentence. However, due to his deteriorating health, the DOJ informed the court that it would be satisfied with home confinement, and Cosgrove was subsequently sentenced to 13 months home confinement and fined US$20,000. In June 2012, David Edmonds, CCI’s former Vice-President of Worldwide Customer Service, pleaded guilty to one count of violating the FCPA. Edmonds was sentenced to four months in prison and fined US$20,000.

F. Latin Node, Inc.

In 2012, four senior officials for Latin Node, Inc. (“Latin Node”) were sentenced in connection with their involvement with an alleged bribery scheme involving Hondutel, the state-owned Honduran telecommunications authority.11 The government alleged that the individuals bribed Hondutel’s officials to obtain business advantages including, but not limited to, preferred pricing rates and continued access to Honduras’ telecommunications system.12

Jorge Granados, Latin Node’s former CEO, received the harshest sentence of the four executives. Granados was sentenced to 46 months in prison. Manuel Salvoch, Latin Node’s former Chief Financial Officer who was arrested in January 2011 and pleaded guilty the next day, was sentenced to ten months in prison and three years of supervised release. Manuel Caceres, Latin Node’s former Vice-President for Business Development, was sentenced to 23 months in prison. Juan Pablo Vasquez, Latin Node’s former Chief Commercial Officer, was the only former executive to avoid a prison term, receiving three years of probation and a US$7,500 fine for his involvement. These sentences should bring the Latin Node prosecution to a close.

11 Indictment, United States v. Granados, et. al., No. 10-CR-20881 (S.D. Fla. Dec. 14, 2010). 12 Id.


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G. Telecommunications D’Haiti S.A.M.

Last year also saw several government officials sentenced in connection with their alleged involvement in a scheme to bribe certain government officials at Telecommunications D’Haiti S.A.M. (“Haiti Teleco”).13 Because the FCPA does not prohibit the acceptance of bribes, prosecutors utilized the U.S. money laundering statutes to convict the individuals. Most notably, Jean Rene Duperval, an official at Haiti Teleco that allegedly laundered bribes from two telecommunications companies, was convicted on two counts of conspiracy to commit money laundering and 19 counts of money laundering. Duperval was sentenced to nine years in prison and ordered to forfeit nearly US$500,000. Another official from Haiti Teleco, Patrick Joseph, pleaded guilty to conspiring to launder money and received a prison sentence of one year and one day. Joseph was also ordered to forfeit US$1 million. A third official, Robert Antoine, had pleaded guilty to money laundering charges and received a four year prison sentence, which was subsequently reduced to 18 months after he testified against the other defendants.

Two former executives at Terra Telecommunications Corp., Joel Esquenazi and Carlos Rodriguez, had previously been convicted and sentenced to 15 years and 7 years in prison, respectively. Esquenazi’s 15 year sentence is the largest sentence ever imposed on an individual for violations of the FCPA. Both men have appealed their convictions.

III. Civil Suits

While much is written about government FCPA investigations, and the related potential costs, fines and penalties, civil litigation resulting from FCPA allegations and violations has been on the rise as well. The need for defending civil proceedings arising from FCPA issues can also severely impact companies both economically and reputationally.

A. Derivative Actions

Shareholder derivative actions against company directors for allowing, failing to detect and prevent, or participating in FCPA violations have been largely unsuccessful; however, history has shown that soon after a company discloses an FCPA investigation, a derivative action suit is often filed. In 2012, following The New York Times’ article detailing Walmart’s alleged FCPA violations, 14 derivative actions related to the allegations against Walmart were filed.14 Also this past year, when Wynn Resorts, Ltd (“Wynn”) disclosed an internal investigation into allegations

13 Press Release, Dep’t of Justice, Two Telecommunications Executives Convicted by Miami Jury on All Counts for Their Involvement in Scheme to Bribe Officials at State-Owned Telecommunications Company in Haiti (Aug. 5, 2011), available at http://www.justice.gov/opa/pr/2011/August/11-crm-1020.html. 14 Those suits were consolidated into two suits. See In re Walmart Stores, Inc. Shareholder Derivative Litig., No. 12-CV-4041, 2012 WL 5935340 (W.D. Ark. Nov. 27, 2012); see also In re Walmart Stores, Inc. Delaware Derivative Litig., No. 7455-CS (Del. Ch. Sept. 5, 2005).

http://www.justice.gov/opa/pr/2011/August/11-crm-1020.html


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of bribes to Filipino gaming regulators and allegations of improper charitable contributions, plaintiffs filed five separate shareholder derivative suits.15

Plaintiffs rarely prevail in derivative actions and several cases in 2012 continued that trend. To survive a motion to dismiss in a derivative action, the plaintiff(s) must demonstrate that they either made a pre-suit demand on the board to bring its own suit, or that such a demand would be futile. In the past year, Tidewater, Inc. (“Tidewater”) prevailed on a motion to dismiss because the plaintiff had failed to make a formal demand, and could not demonstrate that such a demand would be futile.16 To demonstrate futility, the plaintiff was required to satisfy either the Aronson or Rales test. Under Aronson, the plaintiff was required to articulate particularized facts demonstrating reasonable doubt that the directors were disinterested and independent or that the challenged transaction was otherwise the product of a valid exercise of business judgment.17 In the Tidewater case, the plaintiff was unable to demonstrate either that the directors had an interest in not pursuing the litigation, or that a majority of directors had a material interest in the transactions.18 The plaintiff was also unable to plead particularized facts sufficient to create a reasonable doubt that the action was taken honestly and in good faith or that the board was adequately informed in making the decision.19

Under Rales, the plaintiff must create a reasonable doubt that the board of directors could have properly exercised independent and disinterested business judgment in responding to the pre-suit demand.20 Reasonable doubt could be demonstrated by showing that a majority of the directors face a substantial likelihood of personal liability or that the board violated its duties by failing to exercise oversight or by failing to act. Under both the Aronson and Rales tests, the Tidewater plaintiff had to show that the majority of the board had been tainted, but plaintiff’s complaint only contained one phrase regarding nine of the twelve members of the board—that upon information and belief, the directors acquired knowledge of Tidewater’s lack of adequate internal controls and the illegal activities alleged in the complaint when they assumed their position, and despite such knowledge, they failed to address the issues and remedy the damages resulting from

15 See Louisiana Mun. Police Employees’ Ret. Sys. v. Stephen A. Wynn, et al., No. 12-CV-509 (D. Nev. June 6, 2012). 16 Strong v. Taylor, et al., No. 11-CV-00392, 2012 WL 2564907 (E.D. La. July 2, 2012). 17 Id. (citing Aronson v. Lewis, 473 A.2d 805, 814 (Del. 1984)). 18 Strong v. Taylor, et al., No. 11-CV-00392, 2012 WL 2564907 (E.D. La. July 2, 2012). 19 Id. 20Id. (citing Rales v. Blasband, 634 A.2d 927, 932 (Del. 1992)).


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the illegal activities. The court found that these statements contained no particularized facts, and the allegations as to the other three directors also fell “woefully short.”21

Similarly, in 2012, a derivative suit against Hewlett-Packard Company’s (“HP”) board based on alleged violations of the False Claims Act, the Anti-Kickback Act of 1986, the Truth in Negotiations Act, and the FCPA, was dismissed because the plaintiff was unable to prove demand futility.22 Courts also dismissed derivative suits arising from FCPA-related investigations involving Wynn23 and Smith & Wesson Holding Corp.24 for failure to show that demand was futile.

Plaintiffs in the Tidewater and HP cases were unable to prove demand futility even with access to government settlement documents. For plaintiffs attempting to pursue derivative suits prior to government settlements and the conclusion of any internal investigation, overcoming a motion to dismiss can be even more difficult. Except for unusual circumstances, like the Walmart New York Times exposé, shareholders are not privy to facts supporting wrongdoing by a company’s officers and directors unless and until a settlement document details such facts. In 2012, several derivative actions were stayed or dismissed until resolution of government investigations including actions against directors of Avon Products Inc.,25 Bio-Rad Laboratories, Inc.,26 and Las Vegas Sands.27

For those derivative action plaintiffs that did overcome early stage challenges, several gained some measure of success in settlement. Maxwell Technologies (“Maxwell”), Halliburton Company (“Halliburton”), and Johnson & Johnson all settled pending derivative suits in 2012. As part of its settlement, Maxwell Technologies agreed to a number of FCPA compliance measures, including creation of an FCPA compliance program and an FCPA and anti-corruption compliance department, strengthening of audit and control functions, implementation of policies

21 Plaintiff was given leave to amend the complaint, and at the time of publication plaintiff was pursuing a motion to stay the case. 22 Saginaw Police & Fire Pension Fund v. Hewlett-Packard Co. et al., No. 10-CV-4720, 2012 WL 967063 (N.D. Cal. March 21, 2012). 23 La. Muni. Police Employees’ Ret. Sys. v. Stephen A. Wynn, et al., No. 12-CV-509 (D. Nev. Sept. 14, 2012). This decision was later vacated. 24 Holt v. Golden et al., No. 11-CV-30200, 2012 WL 3059387 (D. Mass. July 25, 2012) The Order of Dismissal also found alternative grounds for dismissing the case, namely that issue preclusion barred any claim of demand futility because a previous court decision had found that demand was not futile.(citing In re Smith and Wesson Holding Corp., No. 2008-0099 (Mass. Super. Ct. Jan. 6, 2009)). 25 In re Avon Products, Inc. Shareholder Derivative Litig., No. 10-CV-5569 (S.D.N.Y. Feb. 13, 2012). 26 City of Riviera Beach Gen. Employees’ Ret. Sys. v. David Schwartz, et al., no. MSC11-00854 Superior Court of the State of California, County of Contra Costa, May 21, 2012. 27 Moradi v. Adelson, 2012 WL 3687576 (D. Nev. Aug. 27, 2012).


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regarding sale of stock by insiders, implementation of requirements for directors on the board to satisfy applicable legal standards for director independence, and requirements that new business entities are only acquired after thorough FCPA and anti-corruption due diligence by legal, accounting, and compliance personnel.28 In addition, Maxwell agreed to pay US$3 million for plaintiff’s counsel’s attorney’s fees and expenses.29 Halliburton agreed to pay US$7 million in petitioner’s counsel’s fees, and implement corporate governance and internal control revisions, including a clawback provision of compensation for officers and directors involved in violations or who recklessly supervised someone involved in such a violation.30 Johnson & Johnson agreed to implement and adopt new governance, internal control, risk management and compliance provisions and pay not more than US$10 million in plaintiffs’ counsel’s fees and US$450,000 in expenses.31

B. Whistleblower Actions

Whistleblowers claiming that they were fired or otherwise retaliated against for bringing to light potential FCPA violations, and seeking protection under the Dodd-Frank anti-retaliation provisions, had little success in 2012.

Plaintiff Khaled Asadi claimed that he was fired by GE Energy (USA) for telling supervisors about rumors that a co-worked had been hired to obtain favorable treatment from an Iraqi governmental official. Granting a motion to dismiss, the judge in that case stated that Asadi may not be covered by Dodd-Frank’s anti-retaliation provision because he does not fit within the definition of a whistleblower, which requires reporting to the SEC, and he only reported his concerns within the company. However, the judge ultimately found that Asadi’s claims failed on other grounds, specifically finding that the anti-retaliation provision does not apply extraterritorially and Asadi made the reports while within Jordan. The court also found that, under the facts of the case, Sarbanes Oxley (“SOX”) and the FCPA (as incorporated into the anti-retaliation provision) do not extend the territorial reach of the provision.32 That is, the provision prohibits employers from retaliating against a whistleblower “because of any lawful act done by the whistleblower in making disclosures that are required or protected” under SOX and the FCPA. The judge found that the cited SOX provisions either did not extend jurisdiction extraterritorially themselves or applied only to companies (as opposed to individuals). The judge

28 Stipulation of Settlement, Loizides v. Schramm, No: 37-2010-00097953 (Cal. Super. Ct. Jan. 27, 2011). 29 Id.. 30 Stipulation of Settlement, Policemen and Firemen Ret. Sys. of the City of Detroit, et al v. Cornelison, et al., No. 2009-29987 (Tex. Dist. Ct. June 2012). 31 Stipulation of Settlement, In re Johnson & Johnson Derivative Litig., No. 10-cv-2033, (D. N.J. July 12, 2012). 32 Asadi v. G.E. Energy (USA), L.L.C., No. 12-CV-345, 2012 WL 2522599 (S.D. Tex. June 28, 2012).


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also held that the FCPA did not extend the provisions because the FCPA does not protect or require internal reporting of alleged bribery. The case has been appealed to the Fifth Circuit.

Similarly, in Nollner v. Southern Baptist Convention, Inc., the court found that the plaintiffs’ were not protected by the Dodd-Frank anti-retaliation provision because the reports were not made to the SEC, or not otherwise “required or protected” by laws, rules, or regulations within the SEC’s jurisdiction.33 In addition, the court concluded that because the employer was not an issuer for the purpose of the FCPA, it was not subject to the jurisdiction of the SEC with respect to the FCPA accounting and internal controls provisions, and the alleged violations reported did not relate to other violations of securities laws, therefore, the anti-retaliation provisions did not apply.

Following further developments in case law, it may be that the anti-retaliation provision will apply only to reports: (1) made within the United States; (2) to the SEC; (3) regarding an issuer or company otherwise subject to SEC jurisdiction; and (4) required or protected by SOX or another rule, law, or regulation subject to SEC jurisdiction.

C. Other Civil Litigation

Last year also saw the end to the Alba v. Alcoa lawsuit in which Alba alleged that Alcoa violated the Racketeer Influenced & Corrupt Organizations Act (“RICO”) and committed fraud by bribing Alba officials and overcharging Alba for raw materials. Brought in 2008, the lawsuit was stayed shortly after filing upon the request of the DOJ.34 In late 2011, the stay was lifted, although the DOJ investigation is still pending.35 On October 9, 2012, Alcoa announced that without admitting any liability, it would make a cash payment to Alba of US$85 million payable in two installments, one in 2012 and one in 2013, to settle the lawsuit.36

IV. 2012 Opinion Procedure Releases

A. OPR 12-01

On September 18, 2012, the DOJ released its first Opinion Procedure Release (“OPR”) of 2012, addressing the issue of whether a royal family member is considered a foreign official under the FCPA. An unnamed American lobbying firm submitted an Opinion Procedure Request relating to its prospective representation of the embassy of a foreign country in the United States. As part of this representation, the lobbying firm would open an office in the foreign country and hire a 33 Nollner v. S. Baptist Convention, Inc., 852 F.Supp.2d 986 (M.D. Tenn. April 3, 2012). 34 Aluminum Bahrain, B.S.C. v. Alcoa, Inc., No. 08-CV-299, 2008 WL 7958855 (W.D. Pa. Mar. 20, 2008). 35 Aluminum Bahrain, B.S.C. v. Alcoa, Inc., No. 08-CV-299 (W.D. Pa. Nov. 8, 2011). 36 Press Release, Alcoa Inc., Alcoa and Alba Resolve Civil Litigation (Oct. 9, 2012) available at http://www.alcoa.com/global/en/news/news_detail.asp?pageID=20121009006367en&newsYear=2012.

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local consulting company to provide services, including sponsorship as required by the law of the foreign country. One of the partners in the consulting company the lobbying firm wished to hire is “a member of the royal family of the [f]oreign [c]ountry . . . although he holds no position in the government.” The partner had previously successfully sponsored numerous companies in the foreign country.37 The royal family member’s interactions with government officials on behalf of the lobbying firm would be made in his personal capacity, rather than as a representative of the royal family.

The DOJ concluded that the royal family member did not qualify as a foreign official and stated that “[a] person’s mere membership in the royal family of the [f]oreign [c]ountry, by itself, does not automatically qualify that person as a ‘foreign official.’ Rather, the question requires a fact-intensive, case-by-case determination . . . .”38 The DOJ considered a previous OPR that had addressed whether a consultant under different facts than those being considered in OPR 12-01 was a foreign official and had concluded that he was not.39 The DOJ also considered factors set out in prior case law which had focused on whether a state-owned entity may be an “instrumentality” of a foreign government. Factors that were held to apply in those cases, such as United States v. Carson, No. 09-77 (C.D. Cal. 2009), and which the DOJ found instructive in this instance were:

The foreign state’s characterization of the entity and its employees;

The foreign state’s degree of control over the entity;

The purpose of the entity’s activities;

The entity’s obligations and privileges under the foreign state’s law, including whether the entity exercises exclusive or controlling power to administer its designated functions;

The circumstances surrounding the entity’s creation; and

The foreign state’s extent of ownership of the entity, including the level of financial support by the state (e.g., subsidies, special tax treatment, and loans).

37 FCPA Opinion Release 12-01 (Sept. 18, 2012) at 1, available at http://www.justice.gov/criminal/fraud/fcpa/opinion/2012/1201.pdf [hereinafter OPR 12-01]. 38 Id. at 5. 39 FCPA Opinion Release 10-03 (Sept. 1, 2010), available at http://www.justice.gov/criminal/fraud/fcpa/opinion/2010/1003.pdf.

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Taking the district court decisions and prior OPR into consideration, the DOJ summarized the factors to determine whether an individual is a foreign official:

(i) how much control or influence the individual has over the levers of governmental power, execution, administration, finances, and the like; (ii) whether a foreign government characterizes an individual or entity as having governmental power; and (iii) whether and under what circumstances an individual (or entity) may act on behalf of, or bind, a government. This inquiry is fact-intensive and no single factor is dispositive.40

In the present case, the DOJ determined that the royal family member was not a foreign official because he is not “directly or indirectly represent[ing] that he is acting on behalf of the [r]oyal [f]amily or in his capacity as a member of the [r]oyal [f]amily . . . [T]he [r]oyal [f]amily [m]ember presently has no official or unofficial title or role in the [f]oreign [c]ountry’s government, nor does he have any official or unofficial power over any aspect of the [f]oreign [c]ountry’s governmental decision-making process, executive function, administration, finances, or, indeed, any aspect whatsoever of the government, including specifically the direct or indirect power to award the business the [lobbying firm] seeks.”41

An analysis of whether employees of a particular entity are “foreign officials” under the FCPA will be subject to a fact-based test, in which the DOJ, or a court or jury, will analyze the facts under prior case law addressing the interpretation of “instrumentality”, the factors set out in OPR 12-01, and the analysis applied in the prior OPR which the DOJ considered in reaching its conclusion in this instance. Any company considering a relationship with either a non-U.S. entity or a non-U.S. individual would be well-served by considering these factors in determining FCPA risk and risk mitigation.

B. OPR 12-02

On October 18, 2012, the DOJ released its second OPR of 2012, relating to travel and entertainment expenses for foreign officials.42 A group of 19 unnamed non-profit adoption agencies submitted a request relating to it prospective hosting 18 government officials from a foreign country during two to four day visits to the United States. The foreign officials were involved in the discretionary approval process for adoptions from the foreign country or have indirect influence through roles involving the placement of personnel directly responsible for adoption decisions. The stated purpose of this trip was to allow the government officials to see 40 OPR 12-01, supra note 37, at 6-7. 41 Id. at 7. 42 FCPA Opinion Procedure Release 12-02 (Oct. 18, 2012), available at http://www.justice.gov/criminal/fraud/fcpa/opinion/2012/1202.pdf.




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how the children adopted from the foreign country have adjusted and meet with the adoptive families, to learn about the agencies’ work, to allow the government officials to meet with the agencies’ employees, to inspect their facilities and case files, and for the agencies’ to learn how to ensure that they provide the foreign officials the information necessary to facilitate the adoption process.

The agencies’ intended to provide business class international airfare for high ranking officials and coach airfare for domestic flights, two or three nights hotel stay at a business-class hotel, meals, and transportation. These expenses were to be paid directly to the providers and were permissible under the foreign country’s laws. To allay corruption concerns, the agencies also represented that entertainment events would involve nominal costs, the attendees would be selected by the foreign country’s government, souvenirs would be of nominal value and bear the agencies’ business logo, and the foreign officials would not be given any spending money or stipends.

The DOJ concluded that these proposed payments were permissible and fell within the affirmative defense as reasonable and bona fide expenditures under 15 U.S.C. § 78dd-2(c)(2)(A), noting that the expenses were reasonable under the circumstances presented, were permissible under the laws of the foreign country, and were “directly related to the promotion, demonstration, and explanation” of the services performed by the agencies.

V. Dodd-Frank Update

A. Whistleblower Statistics and Notable Cases

In the first fiscal year since the adoption of the SEC’s whistleblower rules in August 2011, the SEC reported receiving 3,001 whistleblower tips, 115 of which (3.8 percent) related to the FCPA.43 Sean McKessy, Chief of the SEC’s Whistleblower Office, estimated that his office receives approximately eight whistleblower tips per day.44

Despite the numerous tips received, the SEC, to date, has issued only one award—a nearly US$50,000 payout to an individual whose tip helped the SEC stop a multi-million dollar fraud.45 In return for providing the SEC with documents and other “significant information” that hastened the SEC’s investigation, preventing the fraud at issue from impacting additional victims, the whistleblower received the maximum percentage payout allowed by the whistleblower law—thirty percent of the amount collected by the SEC in an enforcement action against the perpetrator. Notably, the SEC refused an award to a second whistleblower in the matter because 43 Sec. & Exch. Comm’n, Annual Report on the Dodd-Frank Whistleblower Program: Fiscal Year 2012 (Nov. 2012). 44 Press Release, Sec. & Exch. Comm’n, SEC Issues First Whistleblower Program Award (Aug. 21, 2012). 45 Id.


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the information provided did not “significantly contribute to” the SEC’s investigation as required by Dodd-Frank.

While the issuance of this first award to date provides some limited insight into the SEC’s whistleblower analysis, much uncertainty remains with respect to the type of information that will entitle a whistleblower to an award and, accordingly, the types of tips that the SEC regularly receives. Adding to this uncertainty, the DOJ and SEC’s recent FCPA Guidance failed to address concerns that the whistleblower rules undermine internal reporting and a company’s related ability to effectively monitor and oversee its compliance program, given that whistleblowers do not have to first inform the company about potential violations.

B. Rule 13q-1 – Resource Extraction Disclosures

On August 22, 2012, the SEC, in a two to one vote, adopted final rules regarding disclosure and reporting obligations of resource extraction issuers with respect to payments made to the U.S. and foreign governments.46 The rule, which implemented Section 1504 of Dodd-Frank,47 directs resource extraction issuers to provide information regarding the type and amounts of payments made to a foreign government or the Federal Government. A foreign government includes: (1) any national government and instrumentalities thereof; (2) any state, province, county, district, municipality, or territory; and (3) any company majority owned by foreign government. Specifically, resource extraction issuers must disclose all payments totaling US$100,000 or more—including taxes, royalties, fees (including licensing fees), production entitlements, bonuses, dividends, and payments—made to the U.S. or foreign governments in connection with projects to commercially develop oil, natural gas, or minerals. The rule applies to either a single payment or series of related smaller payments in the relevant fiscal year that total more than US$100,000. Subject companies will have to begin complying with the rule no later than the first quarter of 2014.

The rule is particularly notable because it does not differentiate between legal and illegal payments, requiring disclosure even of payments made pursuant to local laws. Moreover, because of the large yearly payments required to engage in commercial development of resource-rich countries, it has been noted that the “[US]$100,000 threshold reflects a decision to exclude nothing.”48 Finally, the rule contains no exemption for either: (1) reporting confidential or 46 Disclosure of Payments by Resource Extraction Issuers, 17 C.F.R. §§ 240, 249 (2012); see also Press Release, Sec. & Exch. Comm’n, SEC Adopts Rules Requiring Payment Disclosures by Resource Extraction Issuers (Aug. 22, 2012), available at http://www.sec.gov/news/press/2012/2012-164.htm. 47 Under § 1504 of Dodd-Frank, the SEC was directed to “issue final rules that require each resource extraction issuer to include in an annual report of the resource extraction issuer information relating to any payment made by the resource extraction issuer . . . to a foreign government of the Federal Government for the purpose of the commercial development of oil, natural gas, or minerals . . . .” 48 Commissioner Daniel M. Gallagher, Sec. & Exch. Comm’n, Statement at SEC Open Meeting: Proposed Rules to Implement Section 1504 of the Dodd-Frank Act (Aug. 22, 2012).

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competitively sensitive information; or (2) instances where such reporting would violate foreign law. Although the rule is intended to promote the transparency goals of Dodd-Frank, SEC Commissioner Daniel M. Gallagher, in his dissenting statement, noted concern that compliance with the new reporting requirements will impose substantial costs on affected issuers and place them at a competitive disadvantage with foreign counterparts.49 That cost has been estimated to be between US$44 million and US$1 billion. Nevertheless, the final rule is in place and companies will have to meet broad reporting requirements in slightly over one year. Companies should be preparing now by identifying payments to which the rule applies and upgrading systems and processes to efficiently capture payment information.

VI. Walmart

A 2012 New York Times article alleged extensive potential violations of the FCPA by Wal-Mart Stores, Inc. (“Walmart”) for certain conduct in Mexico, as well as a cover up that involved senior Walmart personnel.50 If the allegations contained within the article are true, Walmart executives repeatedly ignored anti-corruption red flags and company policy and protocol with respect to responding to such red flags, and some executives took serious affirmative steps to avoid the discovery of such violations by Walmart management in the United States. In addition to the underlying FCPA violations, the DOJ and SEC will likely take a very close look at the alleged failures of the company to follow its own policy and conduct an adequate investigation and take the appropriate remedial measures.

The allegations have already spawned a global review and deeper probes in certain countries such as Brazil, China, and India and the company already suspended the CFO of its India joint venture. In its most recent financials, the company noted that it has incurred approximately $157 million in expenses related to the FCPA issues. The breadth of review of and commentary on the allegations to date make it worthwhile to analyze what all companies can learn from the alleged facts, even though it would appear that neither Walmart’s internal investigation into possible FCPA infractions nor the government’s related investigation have concluded.

A. Summary of Allegations

According to the article, Walmart de Mexico (“Walmex”), Walmart’s largest foreign subsidiary, allegedly paid more than US$24 million in bribes in exchange for permits, approvals, reductions in fees, and the allegiance of neighborhood leaders as Walmex sought to grow faster than its competitors could react. These bribes were purportedly paid through gestores, who would

49 Id. 50 See David Barstow, Vast Mexico Bribery Case Hushed Up by Walmart After Top-Level Struggle, N.Y. TIMES, April 21, 2012, available at http://www.nytimes.com/2012/04/22/business/at-Walmart-in-mexico-a-bribe-inquiry-silenced.html?_r=1&ref=business. A print version of this article appeared in the New York Times on April 22, 2012, at A1.

http://www.nytimes.com/2012/04/22/business/at-wal-mart-in-mexico-a-bribe-inquiry-silenced.html?_r=1&ref=business

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deliver envelopes of cash to government officials and then s submit invoices containing secret codes to identify their improper actions. The Times article also alleged that Walmex executives developed a system of fraudulent accounting to disguise the bribes in records as simple legal fees. In addition to these payments, Walmex also ostensibly made contributions and donations of nearly US$16 million between 2003 and 2005 to the Mexican government, apparently for the issuance of licenses.

The article alleged that a former Walmex executive, Sergio Cicero Zapata, informed Walmart of the bribery in September 2005. Mr. Cicero claimed that Eduardo Castro-Wright, Walmex’s Chief Executive, and other executives “received a detailed schedule of all of the payments performed.” Furthermore, according to Mr. Cicero, José Luis Rodríguezmacedo Rivera, Walmex’s General Counsel, removed “significant information” from an internal FCPA compliance audit. Additionally, when Walmart senior management was informed of the allegations in 2005, the company initially hired an outside law firm. Walmart’s outside counsel recommended an independent investigation, tracing all payments to anyone who had assisted in obtaining permits during the preceding five years, scrutinizing payments to government officials, and conducting extensive interviews. Walmart rejected this work plan in favor of an in-house “preliminary inquiry,” after which, if there was a likelihood that laws had been violated, a full investigation was to be considered.

Allegedly, the internal investigation confirmed many of the details from Mr. Cicero’s account of the bribery practices. In addition, the team discovered that the previous year executives had been sent an internal Walmex audit that raised red flags about the gestore payments, and recommended notifying Walmart management about the payments. That recommendation was removed by Walmex’s chief auditor, who Mr. Cicero stated knew about the payments, and the author of the audit was later fired. During the course of the preliminary investigation, the internal investigative team faced opposition from Walmex employees, including an unwillingness to track down relevant documents.

As described in the article, following the “preliminary investigation” the investigators recommended a more thorough investigation, stating that there was reasonable suspicion that the company may have violated U.S. and Mexican laws. Instead, Walmart transferred control of the investigation to Mr. Rodríguezmacedo, a target of the investigation, who wrapped up the investigation and found no evidence of bribes, based largely on the fact that none of his fellow executives admitted to authorizing or making bribes. The article claims that Walmart did not inform U.S. or Mexican law enforcement about the allegations or findings, did not discipline any executives,51 and instead focused on damage control because of concerns about potential legal and reputational harm.

51 In fact, Mr. Castro-Wright was promoted to vice chairman of Walmart despite having been identified as the driving force behind the bribery.


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B. Potential Lessons To Be Learned

Although the facts outlined in the Times article are being investigated currently by the company, and the government is reportedly conducting its own investigation, assuming the facts are as reported, the alleged conduct provides a number of potential key lessons with respect to effective implementation and oversight of a global compliance program in foreign subsidiaries and how to effectively respond to reports of possible anti-corruption law violations.

1. Allegations of bribery involving senior management or significant operations should be investigated by an independent third party.

Over the last decade, the DOJ and SEC have increased FCPA enforcement efforts, leading to ever increasing fines, as evidenced by the fact that eight of the top ten largest fines for FCPA and FCPA-related violations have been imposed since 2008. FCPA enforcement actions generally result from negotiated settlements between defendants and the enforcement agencies. A major factor used by the DOJ and SEC in setting those fines is how the company reacted to and investigated the FCPA allegations. Companies can avoid or mitigate those fines by engaging an independent party to conduct a credible investigation that results in assessment of potential liability. This is especially important for allegations involving senior management or significant operations. Using an independent party removes suggestions that the investigation was influenced by management or others potentially involved in the misconduct. Also, the independent third party with relevant experience in such investigations will have the expertise required to conduct an investigation efficiently, preserve records appropriately, assess the credibility of witnesses, and provide an analysis of potential liability and recommended remedial measures. Using outside legal counsel will also ensure that the investigation is protected by attorney-client privilege and will indicate to employees that the company seriously investigates such allegations of improper conduct. Those measures may include disciplining certain employees (even potentially terminating them) and strengthening a company’s compliance program.

The Times article alleges that senior Walmart executives ignored the advice of their outside attorneys, as well as their own internal investigators, who provided factual evidence of probable FCPA violations and a proposed path forward to investigate those matters and handle the potential issues. Additionally, other internal reports were allegedly modified or altered, sometimes by individuals allegedly involved in the misconduct, to remove incriminating statements. According to the article, Walmart had also engaged in similar non-independent investigations previously, including when a senior vice president was investigated by his own subordinate, who cleared the executive. Depending on whether this conduct impeded an ongoing government investigation, the DOJ may view these acts as obstructionist and could result in additional criminal charges. Regardless of whether any additional charges are brought as a result of this behavior, the conduct will likely be considered when the government assesses the


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company’s culpability and will likely result in larger fines for any FCPA charges. These issues could have been avoided by engaging an independent third party.

To be sure, engaging an outside investigator can raise questions internally, create employee anxiety, and cause significant disruption to day-to-day business operations. However, according to the Times article, Walmex executives and employees were upset by the investigation and treated Walmart’s internal investigators as adversaries. The Walmex executives tried to obstruct the investigation and even raised their complaints to Walmart executives, including Walmart’s then-chief executive. To avoid such internal issues, company personnel, specifically either the legal or compliance department, as appropriate, should make clear to all employees involved in an investigation that the independent third party has been engaged by the company and is acting in the interests of the company. Other employees not alleged to be involved in the misconduct can be recruited to assist in sending that message.

2. Investigations must be overseen by company personnel without a vested interest in the outcome of the investigation.

Even if a company engages an outside investigator to conduct the investigation, company personnel must still be involved in managing the investigation, assisting the outside party with logistics, and making a determination about remedial measures. In all cases, no employee with a vested interest in the investigation, or who was alleged to be involved in the illegal activity, should be involved in any way with the investigation or with related decisions. Any alleged wrongdoers should only serve as a witness or interviewee. To avoid potential spoliation of evidence, alleged wrongdoers should not be involved in, or be provided prior notification of, the collection of potentially relevant data during the investigation. Such individuals may attempt to steer the investigation, ignore certain evidence, or influence individuals subject to investigation. Companies should avoid using such individuals to avoid any appearance of a conflict of interest and to prevent any third party from questioning the efficacy or integrity of the investigation.

For serious allegations of FCPA violations, companies should consider appointing a committee composed of independent directors to oversee and direct the investigation. Companies can form a special committee for this purpose, or appoint the independent directors of the audit committee to oversee the investigation. Furthermore, the board of directors should consider executing a resolution granting the independent committee all authority necessary to take any steps necessary to complete the investigation, including the authority to hire outside legal counsel and any other consultants to conduct a full and independent investigation.

When considering whether to undertake an FCPA investigation, the company must always consider how its decisions will be viewed by the DOJ or SEC should the facts ever be disclosed. By hiring an independent investigator and ensuring that employees with a vested interest in the investigation are not part of the investigatory process, a company can avoid, or at least mitigate


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the risk of, having the government question the integrity of the investigation and the company’s motives when conducting the investigation.

3. Senior management should be familiar with and follow applicable policies and procedures.

As the DOJ and SEC have made clear in enforcement actions and other statements, the enforcement authorities expect companies not only to have written anti-corruption policies and procedures as part of an compliance program, they expect that the program is more than simply a “paper program.” Policies and procedures must be enforced and followed, senior management must create a culture of complying with applicable laws, and employees must be held accountable for any violations of those policies.

Senior management and board members should be especially sensitive to this requirement because of the potential personal liability involved in these investigation. Specifically, senior management must consider the Sarbanes-Oxley certification requirements. If the company fails to take the proper steps in response to potential FCPA violations, individuals making any certifications may expose themselves to personal liability by making those certifications, either to the SEC or outside auditors.52 Management may also be exposed based on a failure to ensure that proper procedures and controls were in place to prevent an FCPA violation or a failure to respond appropriately to alleged violations.53

Even the board of directors could be personally exposed based on corporate FCPA violations. Although the FCPA does not contain a private cause of action, plaintiffs have found alternate means of initiating litigation. For example, shareholders may file a derivative suit against the company’s board of directors for breach of fiduciary duty resulting from failure to implement or sustain appropriate compliance programs necessary to prevent FCPA violations. While the “business judgment rule” requires plaintiffs to establish that a defendant acted fraudulently or in bad faith,54 board members must be able to demonstrate that their conduct should be protected by the business judgment rule. while it is difficult to anticipate what civil liability may result from an FCPA violation, a board of directors should be vigilant and ensure that the company’s anti-corruption compliance policies are both robust and effectively implemented, thus increasing the likelihood of protection by the business judgment rule.

52 In January 2011, the SEC filed claims against the former CEO of Innospec Inc. on a variety of FCPA and FCPA-related violations, including signing false certifications pursuant to the Sarbanes-Oxley Act concerning the company’s books and records and internal controls.. Complaint, Sec. & Exch. Comm’n v. Jennings, No. 11-CV-144 (D.D.C. Jan. 24, 2011). 53 In 2009, executives from Nature’s Sunshine reached a settlement with the SEC based on their failure to maintain and impose accounting processes and controls as required by the FCPA. Complaint, Sec. & Exch. Comm’n v. Nature’s Sunshine Prod., Inc., No. 09-CV-0672 (D. Utah July 31, 2009). 54 In re Caremark Int’l Inc. Derivative Litigation, 698 A.2d 959 (Del. Ch. 1996).


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4. Personnel around the world must be properly trained on FCPA requirements.

Companies subject to the FCPA face the risk that the conduct of employees around the world can create criminal and civil liability for the company. As a result, those employees must be properly trained with respect to FCPA requirements, the company’s policies and procedures, and the potential consequences of FCPA violations. It must be made clear that their acts can create significant issues for the company and that U.S. enforcement authorities aggressively enforce the FCPA around the world. Employees should also be aware of how to report any suspected violations of anti-corruption laws. Walmart seems to have learned this lesson, as Walmart India announced that an outside firm will conduct training on the FCPA and Walmart’s anti-corruption compliance program.55

5. In countries perceived as corrupt, companies should implement heightened compliance procedures.

The DOJ and SEC expect companies operating in potentially corrupt countries to implement compliance procedures commensurate with the corruption risk. This is most commonly done by considering Transparency International’s Corruption Perceptions Index (“CPI”). The CPI ranks a country on a scale of 0 to 100 based on the perceived level of corruption in the country’s public sector. A score of 0 means that a country is perceived as highly corrupt. In 2005, Mexico’s CPI was the equivalent of 35.56 Such a score would necessitate heightened anti-corruption diligence, especially in areas such as licensing and permitting. When assessing anti-corruption risk in their global operations, companies should strongly consider the relevant CPI rankings of the countries in which they operate.

The Times article alleges that some Walmart executives took a different approach to the perception that Mexico is a country with high corruption risk. Instead of strengthening the company’s anti-corruption efforts and oversight of these efforts in Mexico, Walmart executives allegedly chose to consider bribery as endemic in the country’s business culture and a necessity for success in the region. To mitigate risk, companies must be careful to guard against a similar attitude among both in-country and U.S. executives and employees and implement the necessary safeguards when doing business in countries viewed as corrupt.

55 See Sagar Malviya & Chaitali Chakravarty, Walmart India sets up special team for anti-corruption compliance, ECONOMIC TIMES, May 28, 2012, available at http://articles.economictimes.indiatimes.com/2012-05-28/news/31877166_1_bharti-walmart-kpmg-india-bribes. 56 At the time, the scale was only 0 to 10.

http://articles.economictimes.indiatimes.com/2012-05-28/news/31877166_1_bharti-walmart-kpmg-india-bribes

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6. Companies should implement heightened compliance procedures when dealing with regions or operations which have had past allegations of corruption issues.

While not all complaints of potential anti-corruption issues require a thorough independent investigation, the Times article suggests that Walmart ignored red flags indicating that such an investigation was appropriate in this case. According to the article, in 2003, Walmart engaged Kroll Inc. (“Kroll”) to review its internal audit and anti-fraud units. The purported result was a discovery by Kroll that Walmex had been apparently increasing sales by assisting customers in avoiding sales tax obligations and Kroll allegedly found the units it had been retained to review “ineffective.” If the facts reported in the Times article are accurate, the prior Kroll investigation should have alerted the company to then-existing issues within the country, making it important that the issues be addressed and that compliance procedures and processes be reviewed and enhanced. Although it is not clear from the article, it appears that the company’s compliance regimen was in all likelihood not adequately addressed to avoid the issues that came to light in 2005. Furthermore, from the article, it appears that once again ignoring compliance program inadequacies rather than addressing reported issues and correcting compliance program failures was at play once the additional issues were reported in 2005.

7. Anyone acting on behalf of the company (agents, joint venture partners, etc.) should be subject to appropriate risk-based due diligence.

A major risk for companies subject to the FCPA is the conduct of third parties acting on the company’s behalf, especially any third party that interacts with government officials. Almost every FCPA case involves the use of third parties to funnel bribes, making third party risk the most significant FCPA risk-area for companies. Developments in 2012 demonstrated that this remains the case. Under the FCPA, even if the company did not have actual knowledge that the agent made improper payments, a company could be liable for such payments if the company consciously disregarded or was willfully blind to the illegal activity. A company can mitigate the risk of such liability by implementing the appropriate due diligence when engaging third parties.

Although third parties can legitimately conduct business on behalf of a company, they must be vetted appropriately. Third parties who interact with government officials on the company’s behalf must be subject to adequate due diligence, including having the agent respond to a questionnaire, conducting follow-up interviews, and engaging a third party to conduct other background checks. Additionally, all such agents should have a written contract that clearly sets forth the services to be provided by the agent, the compensation for those services and the method of payment. The contract should contain certain anti-corruption provisions such as FCPA (or other applicable anti-corruption law) certifications and audit rights for the company.


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However, due diligence does not stop once the contract is signed. All invoices from and payments to third parties interacting with government officials on behalf of the company should be reviewed regularly by the company’s legal or compliance group. Scheduled audits of the third party, including updated questionnaires and interviews, may be appropriate based on the corruption risk associated with the geographic location, the agent, and/or the services provided by the agent. It may also be prudent to require the third party to attend anti-corruption training and/or receive a copy of the company’s policies (or relevant sections thereof) to ensure that they fully understand the risks and consequences of FCPA violations.

8. A multinational company should be aware of all potentially relevant anti-corruption laws.

The Times article noted on multiple occasions that efforts were allegedly made to keep certain facts and information from U.S. management. However, as noted internally, the activity that allegedly violated the FCPA would have also violated local laws. Assuming the allegations are true, even in-country legal counsel should have raised concerns about local issues and handled an investigation appropriately. Companies with international operations should be focused on “anti-corruption compliance,” not simply “FCPA compliance.” Employees should understand that in addition to complying with laws that have extensive extra-jurisdictional reach (such as the FCPA or the U.K. Bribery Act), the company expects employees to comply with all local laws as well, even if those local laws are not actively enforced.

Additionally, more and more, U.S. enforcement authorities interact with non-U.S. law enforcement agencies to assist with investigations and share information. Thus, a company may find itself in front of the DOJ because of evidenced gathered by a non-U.S. agency.

9. In light of the Dodd-Frank whistleblower provisions, a company may find it difficult to keep FCPA issues outside of the public eye.

The likelihood that a whistleblower might report the conduct to the SEC also should be carefully considered in light of the prospect for personal recovery under the Dodd-Frank whistleblower provisions. In the current enforcement environment, any internal whistleblower may attempt to profit from information about alleged FCPA violations by providing it to U.S. enforcement agencies. Even private companies that are not subject to the SEC’s jurisdiction should be wary of whistleblowers because such whistleblowers may be under the mistaken impression that they would be eligible for a recovery. The SEC has shared information from non-eligible whistleblowers to the DOJ, resulting in a government investigation. Additionally, as the Walmart matter makes especially clear, external groups, such as the media, non-profits, and non-government organizations are attuned to corruption risks and will publicize any potential violations they uncover. When facts come to light in this manner, the potential reputational damage is likely greater than it would otherwise be.


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VII. Trends in DPA’s/NPA’s

A. DOJ Confirms Commitment to DPAs and NPAs

In remarks to the New York City Bar Association in September 2012, then Assistant Attorney General Lanny A. Breuer reaffirmed the DOJ’s commitment to deferred prosecution agreements (“DPA”) and non-prosecution agreements (“NPA”), stating that these settlement tools “have become a mainstay of white collar criminal law enforcement.”57 Under these types of agreements, a company must engage in certain prescribed remedial measures—which may include paying a fine, cooperating with an ongoing investigation, and strengthening compliance programs, among others—in exchange for charges being dismissed or not filed altogether.

Because officers and other individual wrongdoers cannot receive immunity from these corporate resolutions, the DOJ appears intent on shifting penalties from companies to specific individuals. In his speech, Breuer noted the case of Garth Peterson, a senior manager at Morgan Stanley who pleaded guilty, and was later sentenced to prison, for conspiring to evade the bank’s internal FCPA controls in April 2012.58 Because Morgan Stanley cooperated with the investigation, voluntarily disclosed Peterson’s misconduct, and implemented a rigorous anti-corruption program, the DOJ declined to bring an enforcement action against the company.

Breuer stated that in the past, prosecutors “sometimes had to use a sledgehammer to crack a nut”59 by filing financially crippling criminal indictments against corporations for misconduct committed by a select few within the organization. Often, the government refrained from issuing indictments in recognition of the fact that “[i]n large multi-national companies, the jobs of tens of thousands of employees can be at stake. And, in some cases, the health of an industry or the markets are a real factor.”60 Under Breuer’s reign, the DOJ has attempted to engage in “responsible enforcement,”61 which includes an increased reliance on DPAs and NPAs. According to Breuer, this policy ultimately creates “far greater accountability for corporate wrongdoing,” as “[c]ompanies now know that avoiding the disaster scenario of indictment does not mean an escape from accountability.”62

57 Lanny A. Breuer, former Assistant Attorney General, Dept’ of Justice, New York City Bar Association (Sept. 13, 2012), available at http://www.justice.gov/criminal/pr/speeches/2012/crm-speech-1209131.html. 58 Press Release, Dep’t of Justice, Former Morgan Stanley Managing Director Pleads Guilty for Role in Evading Internal Controls Required by FCPA (Apr. 25, 2012), available at http://www.justice.gov/opa/pr/2012/April/12-crm-534.html. 59 Lanny A. Breuer, former Assistant Attorney General, Dept’ of Justice, New York City Bar Association (Sept. 13, 2012), available at http://www.justice.gov/criminal/pr/speeches/2012/crm-speech-1209131.html. 60 Id. 61 Id. 62 Id.

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Despite the fact that DPAs and NPAs may not sound the death knell for companies embroiled in a compliance crisis, critics of Breuer note that his comments may play to irrational fears about the consequences of a criminal indictment. Indeed, one recent study found that the “Arthur Anderson effect”—named after the now-defunct accounting firm that closed its doors in the wake of a conviction relating to the Enron scandal—is factually false.63 Many companies nevertheless agree to DPAs or NPAs “for reasons of risk-aversion and efficiency and not necessarily because the conduct at issue actually violates the law.”64 Breuer himself admitted during his speech that under the DOJ’s current approach, companies “know that they will be answerable even for conduct that in years past would have resulted in a declination.”65 Thus, going forward, companies “are much more likely to face punishment than they were when [the government’s] choice was limited to indicting or walking away.”66 These remarks, when considered in tandem with 2012 statistics reflecting an unprecedented number of settlement agreements with the DOJ, indicate that DPAs and NPAs will play an even larger role in enforcement activities in 2013.

B. SEC Slowly Commences Use of DPAs and NPAs

In January 2010, the Securities and Exchange Commission (“SEC”) entered the DPA and NPA realm, announcing that it would begin using these settlement agreements as a means of “encouraging greater cooperation from individuals and companies in the agency’s investigations and enforcement actions.”67 Since that time, however, the SEC’s only use of this tool in a FCPA context occurred in 2011, when it entered into a DPA with Tenaris, S.A. (“Tenaris”), a Luxembourg-based manufacturer and supplier of steel pipe products, to resolve allegations that the company, through a third party agent, bribed Uzbek government officials to gain access to competitors’ bid information.68

63 Gabriel Markoff, Arthur Andersen and the Myth of the Corporate Death Penalty: Corporate Criminal Convictions in the Twenty-First Century (Aug. 20, 2012), available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2132242. 64 Mike Koehler, Assistant Attorney General Breuer’s Unconvincing Defense Of DPAs / NPAs, (Sept. 17, 2012), available at http://www.fcpaprofessor.com/assistant-attorney-general-breuers-unconvincing-defense-of-dpas-npas. 65 Lanny A. Breuer, former Assistant Attorney General, Dept’ of Justice, New York City Bar Association (Sept. 13, 2012), available at http://www.justice.gov/criminal/pr/speeches/2012/crm-speech-1209131.html. 66 Id. 67 Press Release, Sec. & Exch. Comm’n, SEC Announces Initiative to Encourage Individuals and Companies to Cooperate and Assist in Investigations (Jan. 13, 2010), available at http://www.sec.gov/news/press/2010/2010-6.htm. 68 Deferred Prosecution Agreement between Tenaris, S.A. and the SEC (May 17, 2011), available at http://www.sec.gov/news/press/2011/2011-112-dpa.pdf.

http://papers.ssrn.com/sol3/papers.cfm?‌abstract_id=2132242

http://papers.ssrn.com/sol3/papers.cfm?‌abstract_id=2132242

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HEADLIGHT DEVELOPMENTS69

I. Financial Institutions

A. Morgan Stanley

In April 2012, a former Morgan Stanley managing director in China, Garth Peterson, pleaded guilty to FCPA-related charges, specifically the internal controls requirements. According to the DOJ, he had purposely circumvented the company’s internal controls as part of a corruption scheme.

In an uncharacteristic move, the DOJ not only declined to bring any charges against Morgan Stanley,70 but it also provided a review of the company’s internal controls systems and training program, and praised the company for its efforts to create a culture of compliance. According to the press release, the company’s policies “were updated regularly to reflect regulatory developments and specific risks, prohibited bribery and addressed corruption risks associated with the giving of gifts, business entertainment, travel, lodging, meals, charitable contributions and employment.”71 The DOJ specifically identified seven FCPA training sessions and 35 other communications regarding FCPA compliance over a six year period that Morgan Stanley provided to Mr. Peterson. The DOJ also noted that the company “regularly monitored transactions, randomly audited particular employees, transactions and business units, . . . tested to identify illicit payments, . . . conducted extensive due diligence on all new business partners and imposed stringent controls on payments made to business partners.”72

The DOJ’s stated considerations in declining to pursue charges against Morgan Stanley indicate that it carefully considers the quality of a company’s compliance program when determining whether to pursue alleged FCPA violations. A company should regularly review and examine its anti-corruption program to ensure that it is current and includes all the essential elements expected by the government. Training sessions for employees should be regular and updated based on new developments and trends. A company should conduct regular audits to ensure the effectiveness of company policies and procedures and analyze corruption risks on a regular basis 69 The term “Headlights” signifies our focus on the historical Norton Rose division of global legal services into six key industry sectors, known as headlights, as Fulbright and Norton Rose move toward finalizing our affiliation on June 1, 2013. 70 Because of Mr. Peterson’s extensive efforts to conceal his activity from the company and the fact that no one else from Morgan Stanley was involved in the activity, it probably would have been difficult for the DOJ and SEC to bring corporate charges anyway. Regardless, the DOJ’s statements provide some guidance as to what the government expects in an effective compliance program. 71 U.S. Dep’t of Justice Press Release, Former Morgan Stanley Managing Director Pleads Guilty for Role in Evading Internal Controls Required by FCPA (Apr. 25, 2012), available at http://www.justice.gov/opa/pr/2012/April/12-crm-534.html. 72 Id.



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Although the FCPA does not contain a compliance defense, maintaining a robust program is clearly a factor considered by the DOJ when it determines if it will bring charges against a company.

II. Pharmaceuticals and Life Sciences

Several years ago, the DOJ and SEC initiated an industry-wide sweep of the medical device and pharmaceutical industries. Johnson & Johnson settled the first of the enforcement actions in 2011, resulting in $77 million in penalties, disgorgement, and prejudgment interest. This year, five FCPA settlements came from the medical device and pharmaceutical industries. Moreover, four of the top ten settlements in terms of penalty amounts were in these industries. Only one of this year’s medical device and pharmaceutical settlements—Eli Lilly—did not make the top ten.

A. Smith & Nephew

On February 6, 2012, Smith & Nephew plc and Smith & Nephew, Inc. (collectively “Smith & Nephew”) reached a US$22.2 million settlement with the DOJ and SEC to settle charges that its German and U.S. subsidiaries violated the FCPA by bribing government-employed doctors in Greece.73 According to the SEC complaint, from 1997 to 2008, Smith & Nephew subsidiaries used agents, affiliates, and employees to sell products to a Greek distributor at list price, after which they would pay the distributor a discount into an off-shore account.74 These funds were then used by the distributor to pay cash or offer gift incentive to government-employed Greek health care providers to induce them to use Smith & Nephew products.75

Smith & Nephew was charged with violations of the anti-bribery, books and records, and internal controls provisions of the FCPA.76 Although the company cooperated with the government by conducting its own internal investigation, taking remedial action, and enhancing its compliance program,77 the DOJ required it to submit to a compliance monitor for 18 months.78 Smith & Nephew also agreed to make a number of enhancements to its anti-corruption compliance program:

73 Complaint, Sec. & Exch. Comm’n v. Smith & Nephew plc, No. 12-CV-187 (D.D.C. Feb. 6, 2012) [hereinafter Smith & Nephew Complaint]; Deferred Prosecution Agreement at Attachs. A and B, United States v. Smith & Nephew, Inc., No. 12-CR-30 (D.D.C. Feb. 6, 2012) [hereinafter Smith & Nephew DPA]. 74 Smith & Nephew Complaint, supra note 733, ¶ 2. 75 Id. ¶¶ 13-19. 76 Id. ¶ 3. 77 Smith & Nephew DPA, supra note 73, at Attach. A. 78 Smith & Nephew Complaint, supra note 73; Smith & Nephew DPA, supra note 73, ¶ 13 and Attach. C.


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Develop and implement a clearly articulated and visible corporate policy against violations of the FCPA, including strong, explicit, and visible support and commitment from senior management;

Develop and implement compliance standards and procedures designed to reduce the prospect of violations of anti-corruption laws, including policies governing gifts, hospitality, entertainment, customer travel, political contributions, charitable donations and sponsorships, facilitation payments, and solicitation and extortion;

Develop and implement compliance standards and procedures on the basis of a risk assessment addressing individual circumstances within the company;

Annually review compliance standards and procedures, and update such standards and procedures as necessary;

Designate a senior corporate executive to implement and oversee compliance;

Implement appropriate financial and accounting internal controls;

Periodically train all officers, directors, employees, and, where necessary, third parties, including certifications from all individuals who received training;

Implement effective internal guidance and reporting mechanisms and response to such mechanisms;

Institute appropriate disciplinary procedures;

Execute appropriate due diligence and compliance requirements pertaining to all agents and partners;

Include standard anti-corruption provisions in agreements with agents and partners; and

Execute periodic review and testing of the compliance code, standards, and procedures.79

These enhancements reflect provisions of the Organization for Economic Cooperation and Development’s Good Practice Guidance on Internal Controls, Ethics, and Compliance (“OECD Guidance”).

79 Smith & Nephew DPA, supra note 73, at Attach. C; see also Organization for Economic Cooperation and Development, Good Practice Guidance on Internal Controls, Ethics, and Compliance (Mar. 2010), available at www.oecd.org/dataoecd/5/52/44884389.pdf.

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B. Biomet

On March 26, 2012, Biomet Inc. (“Biomet”) reached a US$22.8 million settlement with the DOJ and SEC related to charges of using cash, travel, gifts, and entertainment to bribe government-affiliated surgeons in Argentina, China, and Brazil.80 According to the SEC complaint, from 2000 to 2008, Biomet, four of its subsidiaries, and a number of the company’s employees and agents at all levels, widely engaged in this misconduct. Further Biomet’s internal auditors and compliance department failed to report the conduct upon discovery.81 The bribes were recorded in company books and records as “consulting fees” or “commissions.”82

Biomet was charged with violations of the FCPA’s anti-bribery provisions, books and records provisions, and internal controls provisions.83 Although it cooperated with the SEC’s and DOJ’s investigations, Biomet had to submit to an outside compliance monitor for 18 months.84 Additionally, as with Smith & Nephew, Biomet agreed to implement an enhanced anti-corruption compliance program in line with the OECD Guidance framework.85

C. Orthofix

On July 10, 2012, Orthofix International N.V. (“Orthofix”) reached a US$7.44 settlement with the DOJ and SEC in connection with a bribery scheme in Mexico. Orthofix allegedly provided cash and gifts—often called “chocolates”—to officials at the Instituto Mexicano del Seguro Social (“IMSS”), the Mexican social security agency, to induce the purchase of Orthofix products.86

According to the SEC complaint, from 2003 to 2010, Orthofix’s Mexican subsidiary paid roughly US$317,000 in bribes to IMSS officials to secure lucrative sales contracts from IMSS hospitals.87 The bribes consisted largely of cash, travel packages, and gifts, including televisions,

80 Complaint, Sec. & Exch. Comm’n v. Biomet, No. 12-CV-454 (D.D.C. Mar. 26, 2012) [hereinafter Biomet Complaint]; Deferred Prosecution Agreement at Attachs. A and B, United States v. Biomet, Inc., 12-CR-80 (D.D.C. Mar. 26, 2012) [hereinafter Biomet DPA]. 81 Biomet Complaint, supra note 80, ¶¶ 23-55. 82 Id. 83Id. ¶¶ 62, 65, and 68. 84 Biomet Complaint; Biomet DPA, supra note 80, ¶ 5. 85 Biomet DPA, supra note 80, at Attach. C. 86 Complaint, Sec. & Exch. Comm’n v. Orthofix, No. 12-CV-419 (E.D. Tex. July 10, 2012) [hereinafter Orthofix Complaint]; Deferred Prosecution Agreement at Attachs. A and B, United States v. Orthofix, No. 12-CR-150 (E.D. Tex. July 10, 2012) [hereinafter Orthofix DPA]. 87 Orthofix Complaint, supra note 86, ¶¶ 8-18.


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laptops, appliances, and a car lease.88 The bribes were recorded in the subsidiary’s books as promotional expenses, training courses, meetings, and congresses.89 The complaint emphasized that although FCPA policies, materials, and training were offered to the employees at the Mexican subsidiary, none of the training or materials were translated into Spanish, the primary language spoken by the subsidiary employees.90

Upon discovering the conduct, Orthofix immediately made a voluntary self-disclosure to the DOJ, and conducted a thorough internal investigation.91 It terminated employees involved in the conduct and wound up operations at the Mexican subsidiary.92 Unlike Smith & Nephew and Biomet, Orthofix was not required to submit to a compliance monitor, but instead was required to make periodic self-reports to the government.93 Orthofix expanded its internal audit function and enhanced its anti-corruption compliance program by:

Appointing: (1) a senior executive with anti-corruption and FCPA experience as the chief compliance and risk officer; (2) business unit compliance leads; and (3) an executive compliance committee to oversee the corporate compliance program;

Continuing to conduct proactive anti-corruption reviews in at least five high-risk markets each year; and

Providing biennial anti-corruption training to officers, directors, and employees, and providing anti-corruption training for agents and business partners at least once every three years as appropriate.94

D. Pfizer/Wyeth

On August 7, 2012, several Pfizer entities including Pfizer Inc. (“Pfizer”), recently-acquired subsidiary Wyeth L.L.C. (“Wyeth”), and subsidiary Pfizer H.C.P. Corporation (“Pfizer H.C.P.”) agreed to pay approximately US$60.1 million in fines, penalties, disgorgement, and pre-judgment interest to settle DOJ and SEC charges that Pfizer’s subsidiaries in several Asian,

88 Id. 89 Id. 90 Id. ¶ 20. 91 Id. ¶¶ 22-23. 92 Orthofix Complaint, supra note 86, ¶¶ 28 and 31; Orthofix DPA, supra note 86, ¶ 1. 93 Id. 94 Orthofix DPA, supra note 86, at Attach. C-2.


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European, and Middle Eastern countries made improper payments to foreign officials to obtain regulatory and formulary approvals for their products and to increase sales and prescriptions.95

According to government documents, beginning in 2001, Pfizer and its subsidiaries began providing incentives such as recreational or entertainment activities, cash, travel, or free products to “high-prescribing doctors.”96 When Pfizer acquired Wyeth in 2009, Wyeth allegedly had been engaging in similar incentive programs for at least four years, including providing Blackberries and cell phones or travel incentives to government-affiliated doctors, and concealing the bribes with fictitious invoices.97 Pfizer H.C.P. authorized payments of cash to foreign officials through third parties and vendors, to influence the officials in connection with regulatory and formulary approvals, customs clearance, and purchase decisions, including:98

Bulgaria: From 1999 until 2005, Pfizer H.C.P.’s Bulgarian operation allegedly paid for domestic and international travel, and provided equipment to government-employed doctors to influence them to prescribe Pfizer products. Travel included “incentive trips” for Bulgarian healthcare providers to Greece.

China: From 2003 to 2007, Pfizer H.C.P.’s Beijing subsidiary allegedly provided cash payments, hospitality, gifts, and international travel to doctors employed by Chinese government institutions. These gifts were intended to incentivize the prescription of Pfizer products. The program was eventually organized into a “club” or “high-prescribing doctors” rewards program, as well as various “point programs” under which doctors in government institutions could earn gifts after accumulating points for prescribing Pfizer products.

Croatia: From 1997 to 2004, Pfizer H.C.P.’s Croatian representative office allegedly provided cash and gifts to government officials to provide regulatory approval for products, and to prescribe Pfizer products. For example, from 1997 to 2003, Pfizer’s representative office allegedly made monthly payments to the Austrian bank account of a doctor who served on several government committees that oversaw the registration and reimbursement of pharmaceutical products. The office also apparently created a “Bonus Program” for doctors in senior positions in Croatian government institutions, in which doctors could redeem points earned by using Pfizer products for gifts and travel support.

95 Complaint, Sec. & Exch. Comm’n v. Pfizer, No. 12-CV-1303 (D.D.C. Aug. 7, 2012) [hereinafter Pfizer Complaint]; Complaint, Sec. & Exch. Comm’n v. Wyeth, No. 12-CV-1304 (D.D.C. Aug. 7, 2012) [hereinafter Wyeth Complaint]; Deferred Prosecution Agreement, United States v. Pfizer H.C.P. Corp., No. 12-CR-169 (D.D.C. Aug. 7, 2012) [hereinafter Pfizer DPA]. 96 Pfizer Complaint, supra note 95, ¶¶ 14-83; Wyeth Complaint, supra note 95, ¶¶ 13-33; Pfizer DPA, supra note 95, at Attach. A. 97 Wyeth Complaint, supra note 95, ¶¶ 13-33. 98 Pfizer Complaint, supra note 95, ¶¶ 14-83.


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Czech Republic: From 2003 to 2004, Pfizer H.C.P.’s Czech subsidiary, through employees and agents, allegedly provided international travel and recreational opportunities to doctors employed by the Czech government to influence them to prescribe Pfizer products. Visits allegedly included sightseeing in Australia, ski resort events in Austria and Slovakia that consisted almost entirely of skiing with little educational value, and trips to Australia with lengthy sightseeing layovers in Hong Kong.

Italy: From 2001 to 2004, Pfizer H.C.P.’s Italian subsidiary allegedly provided cash and gifts both directly and through vendors, to doctors employed by Italian government healthcare institutions to influence the doctors to prescribe Pfizer products. Gifts apparently included televisions, monitors, and weekends in various European cities “with companion.”

Kazakhstan: From 2000 to 2005, Pfizer H.C.P.’s Kazakh representative office allegedly maintained exclusive distributor relationships with a company, believing that some of the profits of the company would be provided to senior Kazakh government officials for their assistance in obtaining registration for Pfizer’s pharmaceutical products.

Russia: From 2000 to 2005, Pfizer H.C.P.’s Russian representative office allegedly provided cash payments, gifts, and travel to doctors employed by the Russian government to obtain regulatory approvals and avoid delays and penalties associated with importing certain products. From the mid-1990s to 2005, the Russian representative office also ran a “Hospital Program” under which employees apparently provided 5 percent of the value of certain products purchased by the hospitals as either discounts or in-kind benefits. The hospital allegedly received the cash, issued through false invoices, through vendors.

Serbia: Pfizer H.C.P.’s Serbian subsidiary allegedly paid for a government doctor to attend a conference in Chile in exchange for his agreement to increase his department’s purchase of Pfizer products.

Also, according to government documents, Wyeth and several of its subsidiaries engaged in improper marketing practices which ultimately constituted bribes to government officials in various countries:99

Indonesia: From 2005 to 2010, Wyeth’s Indonesian subsidiary allegedly provided cash payments and nutritional products to employees of Indonesian government-owned hospitals to ensure that Wyeth products were made available at hospitals, and to obtain patient information that could be used for marketing purposes. They also provided gifts of cell phones and phone cards to doctors and midwives from funds allocated for medical educational events to influence the providers to use Wyeth products.

99 Wyeth Complaint, supra note 95, ¶¶ 13-33.


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Pakistan: From 2005 to 2009, Wyeth’s Pakistani subsidiary allegedly provided cash payments, travel, office equipment, and renovations to doctors to influence them to recommend Wyeth products to new mothers. These payments were described as advertising, promotion, entertainment, and product meeting expenses.

China: From 2005 to 2010, Wyeth’s Shanghai subsidiary allegedly provided cash to government-employed doctors to influence them to recommend Wyeth nutritional products. These payments apparently were concealed with falsified expense reimbursement requests. Separately, a Wyeth entity allegedly generated funds by paying vendors’ falsified invoices and getting cash kickbacks—including false or inflated invoices from travel agencies related to “large-scale consumer education events.”100

Saudi Arabia: In June 2007, a Wyeth representative office allegedly directed a local distributor to make a cash payment to a Saudi Arabian customs official to secure the release of promotional items, and improperly recorded it as a “facilitation expense.”

Pfizer was charged with violations of the books and records and internal controls provisions.101 Wyeth was charged with violation of the books and records and internal controls provisions.102 Pfizer H.C.P. was charged with conspiracy to violate the anti-bribery provisions of and a violation of the anti-bribery provisions of the FCPA.103

Like Orthofix, Pfizer made a voluntary self-disclosure to the DOJ and SEC in 2004 and cooperated fully with the government.104 And, like Orthofix, Pfizer was not required to employ a compliance monitor; however, it was required to conduct risk-based due diligence, adopt the standard OECD Guidance compliance program recommendations, and implement several targeted compliance program enhancements including:

Appointing: (1) a senior executive with anti-corruption and FCPA experience as the chief compliance and risk officer; (2) business unit compliance leads; and (3) an executive compliance committee to oversee the corporate compliance program; and

Maintaining a mergers and acquisitions compliance program designed to support early identification of compliance risks associated with complex business transactions.

100 Id. ¶¶ 23-27. 101 Pfizer Complaint, supra note 95, ¶ 88. 102 Wyeth Complaint, supra note 95, ¶ 33. 103 Pfizer DPA, supra note 95, at Attach. B. 104 Pfizer Complaint, supra note 95, ¶ 84.


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E. Eli Lilly

On December 20, 2012, Eli Lilly and Company (“Eli Lilly”) reached a US$29.4 million agreement with the SEC to settle charges that its subsidiaries in Russia, Brazil, China, and Poland violated the FCPA by making improper payments to government officials.105 This settlement was reached after a nine-year government investigation.

According to the SEC complaint:

Between 1994 and 2005, Eli Lilly’s Russian subsidiary paid millions of dollars to offshore entities—one of which was owned by a person closely associated with a member of the Russian Parliament—for “marketing services” that the subsidiary knew were intended to “create sales potential” with government customers;106

Between 2007 and 2009, Eli Lilly’s Brazilian subsidiary provided distributors with high discounts that were passed through as cash to government health officials in exchange for US$1.2 million in sales of Eli Lilly products to government-owned health-care institutions;107

Between 2006 and 2009, Eli Lilly’s Chinese subsidiary falsified expense reports to provide improper gifts such as jewelry, wine, specialty food, visits to karaoke bars, cigarettes, and spa treatments to government healthcare providers, to incentivize the use of Lilly products;108 and

Between 2000 and 2003, Eli Lilly’s Polish subsidiary made payments to a charitable foundation administered by the Director of the Silesian Heath Fund, one of sixteen regional government health authorities, in exchange for the Director’s influence to place Eli Lilly products on the government reimbursement list.109

Eli Lilly was charged with violations of the anti-bribery, books and records, and internal controls provisions of the FCPA.110 The SEC complaint acknowledged that Eli Lilly had improved its anti-corruption compliance program by “enhancing due diligence requirements for relationships with third parties; implementing compliance monitoring and corporate auditing specifically

105 Complaint, Sec. & Exch. Comm’n v. Eli Lilly and Co., No. 12-CV-2045 (D.D.C. Dec. 20, 2012). 106 Id. ¶¶ 25-43. 107 Id. ¶¶ 22-24. 108 Id. ¶¶ 16-21. 109 Id. ¶¶ 7-15. 110 Id. ¶¶ 48-58.


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tailored to anti-corruption; enhancing financial controls and governance; and expanding anti-corruption training throughout the organization.”111 In addition to financial penalties, Eli Lilly agreed to retain an independent consultant who would review and make recommendations regarding its anti-corruption policies and procedures.112

According to Kara Novaco Brockmeyer, Chief of the SEC Enforcement Division’s FCPA Unit, Eli Lilly’s remedial efforts were not better rewarded because:

Eli Lilly and its subsidiaries possessed a “check the box” mentality when it came to third-party due diligence. Companies can’t simply rely on paper-thin assurances by employees, distributors, or customers. They need to look at the surrounding circumstances of any payment to adequately assess whether it could wind up in a government official’s pocket.113

F. Grifols S.A.

In its November 30, 2012 SEC filing, Spanish pharmaceutical company Grifols S.A. (“Grifols”) disclosed that the SEC had declined to pursue an FCPA enforcement action against the company. The investigation began in 2009, and was related to Grifols’ dealings with Talecris, a company that was initially a Grifols agent and was later acquired by Grifols in 2011.114

The SEC filing stated that Grifols had cooperated fully with the SEC and had conducted an internal investigation into Talecris’s operations in Belarus, Russia, Iran, Brazil, Bulgaria, China, Georgia, Libya, Poland, Turkey, and Ukraine. Further, during the investigation, the company had suspended operations in several of these countries while taking remedial measures.115

G. Olympus Disclosure

On August 1, 2012, Olympus Corp. (“Olympus”), a leading manufacturer of endoscopes, publicly disclosed that the DOJ is investigating how the company has handled doctors’ travel,

111 Id. ¶ 47. 112 Sec. & Exch. Comm’n Litig. Rel. No. 22576, SEC Files Settled FCPA Charges against Eli Lilly and Company (Dec. 20, 2012), available at http://www.sec.gov/litigation/litreleases/2012/lr22576.htm. 113 Id. 114 Grifols, S.A., Form 6K (Nov. 30, 2012), available at http://www.sec.gov/Archives/edgar/data/1438569/000110465912081081/a12-28378_16k.htm. 115 Id.

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meal, and entertainment expenses in Brazil.116 Olympus discovered red flags at its Brazilian medical training center and self-reported to the DOJ.117 Olympus indicated that the DOJ is conducting a thorough investigation and that the company might admit to a violation of the FCPA in Brazil.118

H. Lessons Learned

The number of settlements this year indicates that the government may have an increased interest in resolving ongoing FCPA investigations in the medical device and pharmaceutical industries. Generally, these investigations have required that the company enhance its compliance program, but each settlement has been tailored to the company’s unique situation and violations, demonstrating that the government expects companies to implement compliance programs specific to their business, risk factors, structure, and growth plans, rather than one-size-fits-all, “check the box” compliance programs.

For instance, while most companies have had to submit to independent compliance monitors, Orthofix and Pfizer did not, perhaps as a result of their noted cooperation with the government. Several companies were instructed to implement risk assessments or audits in five high risk countries each year, indicating that the government wants to see corporate sensitivity to specific risk factors in their companies on an ongoing basis. Companies were also required to conduct training for their partners, agents, acquired companies, and joint ventures, suggesting that the government continues to consider third-party liability as a concern that companies should address aggressively. Finally, Orthofix and Pfizer were both instructed to appoint a senior executive with FCPA experience to oversee their compliance programs, indicating that the government wants senior level management with focused expertise in analyzing and addressing anti-corruption risks

III. Energy

A. Data Systems & Solutions LLC

In June. Data Systems & Solutions L.L.C. (“DS&S”) settled charges that it had conspired to violate and violated the FCPA’s anti-bribery provisions by agreeing to pay an US$8.8 million

116 Mariko Yaso and Takashi Amano, “Olympus Refers Possible Corrupt Practice Incident to U.S.” Bloomberg, Aug. 1, 2012, available at http://www.bloomberg.com/news/2012-08-01/olympus-sees-violation-of-laws-possible-with-disclosure-to-u-s-.html. 117 Id. 118 Id.

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criminal penalty.119 DS&S provides services to nuclear and fossil fuel power plants including design, installation, and maintenance.120

According to the Information filed with the Eastern District of Virginia, DS&S paid bribes to officials employed by the Ignalina Nuclear Power Plant, a state-owned nuclear power plant in Lithuania, to secure contracts to perform services for the plant. To disguise the scheme, the bribes were funneled through several subcontractors located in the United States and abroad. The subcontractors, in turn, made repeated payments to high-level officials at Ignalina via check or wire transfer.121

Under the terms of the Deferred Prosecution Agreement, the DOJ will defer prosecution of DS&S for two years. In addition to the monetary penalty, DS&S agreed to cooperate with the DOJ, to report periodically concerning its compliance efforts, and to continue to implement an enhanced compliance program and internal controls designed to prevent and detect FCPA violations.122 If DS&S abides by the terms of the deferred prosecution agreement, the DOJ will dismiss the criminal information when the agreement’s term expires.123

IV. Technology and Innovation

A. Oracle

In August 2012, Oracle Corporation (“Oracle”) agreed to pay a US$2 million penalty to settle charges brought by the SEC alleging that the company’s conduct between 2005 and 2007 in India violated the books and records and internal controls provisions of the FCPA.124 According to the complaint, Oracle’s Indian (“Oracle India”) subsidiary allegedly created a secret fund of approximately US$2.2 million dollars that was kept off the company’s books and later used to

119 Press Release, Dep’t of Justice, Data Systems & Solutions LLC Resolves Foreign Corrupt Practices Act Violations and Agrees to Pay $8.82 Million Criminal Penalty (June 18, 2012), available at http://www.justice.gov/opa/pr/2012/June/12-crm-768.html. 120 Id. 121 Information, United States v. Data Sys. & Solutions L.L.C., No. 12-CR-262 (E.D. Va. June 18, 2012), available at http://www.justice.gov/criminal/fraud/fcpa/cases/data-systems/2012-06-18-data-systems-information.pdf. 122 Deferred Prosecution Agreement ¶¶ 5, 8-10, United States v. Data Sys. & Solutions L.L.C., No. 12-CR-262 (June 18, 2012), available at http://www.justice.gov/criminal/fraud/fcpa/cases/data-systems/2012-06-18-data-systems-dpa.pdf. 123 Id. ¶ 12. 124 Sec. & Exch. Comm’n, Litig. Release No. 22450, SEC Charges Oracle Corporation with FCPA Violations Related to Secret Side Funds in India (Aug. 16, 2012), available at http://www.sec.gov/litigation/litreleases/2012/lr22450.htm [hereinafter SEC, Litig. Release No. 22450].

http://www.justice.gov/‌opa/pr/2012/June/12-crm-768.html

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make payments to fictitious vendors.125 The subsidiary generated this slush fund by selling products and services to its distributors at a price well below the price that the subsidiary had helped negotiate with the end user government entity.126 In its complaint, the SEC identified approximately 14 occasions related to eight different government contracts when Oracle India employees created higher than normal margins for distributors and directed the distributors to keep these funds in a side account for later payment to third parties.127 The complaint also identified one instance in which an Oracle India employee allegedly provided a distributor with false invoices for payments to third parties who had provided no services and were not on Oracle’s approved vendor list.128

Oracle agreed to the entry of a final judgment that would permanently enjoin it from violating the FCPA and to pay a US$2 million penalty. The SEC stated that the settlement took into account the company’s voluntary disclosure of the conduct, cooperation with the investigation, and the remedial measures taken in response to the conduct.129 These remedial measures included terminating the employees involved, terminating its relationship with the distributors involved in the transactions giving rise to the alleged misconduct, and enhancing its compliance program to include additional due diligence on third parties in India, requiring additional representations and warranties by distributors, and improved anti-corruption training for third parties and employees.130

V. Infrastructure, Mining and Commodities

A. Tyco International Ltd.

On September 24, 2012, the SEC and DOJ announced that Tyco International Ltd. (“Tyco”) agreed to pay over US$26 million in civil and criminal penalties to settle charges brought by the SEC and DOJ regarding violations of both the anti-bribery and books and records provisions of the FCPA.131 Tyco agreed to pay US$13 million in disgorgement and prejudgment interest to

125 Complaint, Sec. & Exch. Comm’n v. Oracle Corporation, No. CV-12-4310 (N.D. Cal. Aug. 16, 2012), available at http://www.sec.gov/litigation/complaints/2012/comp-pr2012-158.pdf [hereinafter Oracle Complaint]. 126 Id. at 3. 127 Id. 128 Id. at 4. 129 SEC, Litig. Release No. 22450, supra note 124. 130 Id.; Oracle Complaint, supra note 125, at 5. 131 Sec. & Exch. Comm’n, Litig. Release No. 22491, SEC Charges Tyco with Making Illicit Payments to Foreign Officials (Sept. 24, 2012), available at http://www.sec.gov/litigation/litreleases/2012/lr22491.htm [hereinafter SEC, Litig. Release No. 22491]; Press Release, Dep’t of Justice, Subsidiary of Tyco International, Ltd. Pleads Guilty, Is Sentenced for Conspiracy to Violate Foreign Corrupt Practices Act (Sept. 24, 2012), available at http://www.justice.gov/opa/pr/2012/September/12-crm-1149.html [hereinafter Tyco Press Release].

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settle civil charges arising from conduct that has occurred or from which benefit has been derived since Tyco’s 2006 settlement with the SEC.132 It also consented to the entry of a final judgment prohibiting future violations of the anti-bribery, books and records, and internal controls provisions of the statute.133 Tyco together with its subsidiary Tyco Valves & Controls Middle East Inc. (“TVC”) agreed to pay a US$13.7 million criminal penalty to settle the criminal charges based on conduct that occurred from 1999 to 2009.134 TVC also pled guilty to conspiracy to violate the FCPA’s anti-bribery provisions for paying bribes to officials employed by Saudi Aramco, Saudi Arabia’s state-owned and controlled oil company.135 Tyco voluntarily disclosed the conduct giving rise to these charges as part of the review of each of its legal operating entities that had been required under Tyco’s 2006 SEC settlement.136 Both the SEC and DOJ noted that the settlement takes into account the voluntary disclosure, full cooperation, and remediation that had already been implemented, including enhancing Tyco’s compliance program, terminating employees responsible for the misconduct, exiting certain businesses, and terminating relationships with certain third party agents.137

According to the SEC complaint and Tyco’s Non-Prosecution Agreement with the DOJ, Tyco subsidiaries used third party agents to improperly secure lucrative government business in countries including China, India, Thailand, Laos, Indonesia, Bosnia, Croatia, Serbia, Slovenia, Slovakia, Iran, Saudi Arabia, Libya, Syria, the United Arab Emirates, Mauritania, the Congo, Niger, Madagascar, and Turkey.138 The improper conduct across the different subsidiaries took several forms including direct gifts or cash payments to officials, often disguised as “commissions,” “business introduction services,” “promotional expenses,” or “sales development expenses.”139 Tyco’s China subsidiary also provided entertainment and travel for Chinese government health care officials.140

132 SEC, Litig. Release No. 22491, supra note 131. 133 Id. 134 Tyco Press Release, supra note 131. 135 Plea Agreement, United States v. Tyco Valves & Controls Middle East, Inc., No. 12-CR-418 (E.D. Va Sept. 24, 2012), available at http://www.justice.gov/criminal/fraud/fcpa/cases/tyco-valves/2012-09-24-plea-agreement.pdf; Information, United States v. Tyco Valves & Controls Middle East, Inc., No. 12-CR-418 (E.D. Va. Sept. 24, 2012), available at http://www.justice.gov/criminal/fraud/fcpa/cases/tyco-valves/2012-09-24-criminal-information.pdf. 136 Complaint, Sec. & Exch. Comm’n v. Tyco Int’l Ltd., No. 12-CV-1583 (D.D.C. Sept. 24, 2012), available at http://www.sec.gov/litigation/complaints/2012/comp-pr2012-196.pdf [hereinafter Tyco Complaint]. 137 Tyco Press Release, supra note 131.; SEC, Litig. Release No. 22491, supra note 131. 138 Tyco Complaint, supra note 136; Non-Prosecution Agreement Between the Department of Justice and Tyco International Ltd. (Sept. 20, 2012), available at http://www.justice.gov/criminal/fraud/fcpa/cases/tyco-intl/2012-09-20-tyco-intl-npa-sof.pdf [hereinafter Tyco NPA]. 139 Tyco Complaint, supra note 136, ¶¶ 23-46; Tyco NPA, supra note 138, at App. A ¶¶ 17-62. 140 Tyco Complaint, supra note 136, ¶43; NPA, Tyco NPA, supra note 138, at App. A ¶ 50.

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As part of its Non-Prosecution Agreement, Tyco agreed to further enhance its compliance program by:

Ensuring its directors and senior management provide “strong, explicit, and visible support and commitment” to its compliance program;

Developing and promulgating further policies and procedures that address gifts, hospitality, entertainment, customer travel, political and charitable contributions, sponsorships, facilitation payments, and solicitation and extortion;

Ensuring that it has an adequate system of financial and accounting procedures to comply with the books and records and internal controls provisions;

Conducting at least annual risk assessments to determine foreign bribery risk on which it will base the development of compliance policies;

Assigning oversight responsibility to one or more senior corporate executives who report to independent monitoring bodies including internal audit, the board, or any appropriate committee thereof;

Providing training and guidance to all employees, directors, and officers as well as to any necessary third party agents;

Maintaining an effective system for internal, preferably confidential, reporting and a means of investigating allegations of violations;

Appropriately incentivizing compliance and discipline noncompliance;

Conducting risk-based due diligence on business partners and third party agents;

Including standard provisions in all third party agreements designed to prevent violation of anti-corruption laws to include: anti-corruption representations and warranties; audit rights; and rights to terminate an agent or business partner based on any breach of anti-corruption laws and regulations or related representations;

Developing policies of risk-based due diligence in advance of mergers and acquisitions and promptly educating and auditing, if necessary, newly acquired business entities for FCPA compliance purposes; and

Periodically reviewing and testing the anti-corruption compliance program.141

141 Tyco NPA, supra note 138, at App. B.


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B. Total S.A.

In a November 6, 2012 SEC filing, Total S.A. (“Total”) reported that it would reserve €308 million (US$398 million) to settle charges at the completion of a recent investigation into the company’s practices in Iran.142 The SEC and the DOJ began investigating the activities of Total and other oil companies in Iran in 2003.143 The investigation has focused on Total’s possible use of improper payments in pursuit of contracts to develop Iran’s South Pars gas field in the early 2000s.144 Total reported in its filing that it had been in discussions with the DOJ and SEC about a settlement since 2010 and that the DOJ and SEC had proposed draft agreements that Total could accept, necessitating the reservation of funds even though nothing had been finalized.145

VI. Transport

In 2012, the DOJ and SEC brought FCPA matters against a number of aerospace related companies—a highly regulated industry that must often manage relationships with government-owned customers.

A. Bizjet

In March 2012, Bizjet International Sales and Support, Inc. (“Bizjet”), an Oklahoma-based aircraft maintenance, repair and overhaul (“MRO”) company, entered into a deferred prosecution agreement for US$11.8 million related to allegations that, between 2004 and 2010, its employees bribed government officials in Latin America.146 According to the allegations, at least three executives and a sales manager purportedly conspired to make payments to foreign governmental officials, including the Mexican Federal Police, the Mexican President’s fleet, the Sinaloa Governor’s air fleet, the Sonora Governor’s fleet, the Panama Aviation Authority, and other government-owned customers, to obtain and retain government contracts to perform MRO services.147 The payments, labeled as “commissions,” “incentives,” or “referral fees” in the

142 Total S.A., Form 6-K, Exhibit 99.1 at 41, available at http://www.sec.gov/Archives/edgar/data/879764/000110465912074104/a12-25592_1ex99d1.htm. 143 Id. 144 Id.; Christopher M. Matthews, Total Reserves €308 Million for FCPA Settlement, Wall St. J., Nov. 6, 2012, http://blogs.wsj.com/corruption-currents/2012/11/06/total-reserves-e308-million-for-fcpa-settlement/tab/print/. 145 Total S.A., Form 6-K, Exhibit 99.1 at 41, available at http://www.sec.gov/Archives/edgar/data/879764/000110465912074104/a12-25592_1ex99d1.htm. 146 Press Release, Dep’t of Justice, Bizjet International Sales and Support Inc. Resolves Foreign Corrupt Practices Act Investigation and Agrees to Pay US$11.8 Million Criminal Penalty (March 14, 2012), available at http://www.justice.gov/opa/pr/2012/March/12-crm-321.html; Deferred Prosecution Agreement, United States v. Bizjet Int’l Sales and Support, Inc., 12-CR-61, Attach. A, ¶¶ 1-2 (N.D. Okla. March 14, 2012) [hereinafter Bizjet DPA] 147 Bizjet DPA, supra note 146, Attach. A ¶¶ 8-18.

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company’s books and records, were concealed either by using a shell company to funnel the funds or by hand-delivering cash to the officials.148 In some instances, sales managers purchased items for government officials and then requested US$10,000 extensions to their credit card limits as reimbursement from Bizjet.149

The alleged illicit activities were allegedly discussed openly among the employees, in person and in writing. For example, at a November 16, 2005 Board of Directors meeting, two unnamed executives informed the Board that the decision on which company to use for MRO services is made by the potential customer’s director of maintenance or chief pilot, and that these individuals were demanding US$30,000 and US$40,000. The executives advised they would pay the fees.

Bizjet voluntarily disclosed the issue to the DOJ and agreed to a three-year deferred prosecution agreement.150 In addition to the US$11.8 million criminal penalty, Bizjet agreed to implement an enhanced compliance program and internal controls to detect and prevent future FCPA violations.151 In its press release, the DOJ highlighted Bizjet’s and Lufthansa’s extensive remediation thus far, including terminating the individuals involved, enhancing due diligence protocol for third-party agents and consultants, and improving reviews of proposals and other transactional documents for Bizjet contracts.152

B. NORDAM

Another Tulsa-based MRO company, NORDAM Group, Inc. (“NORDAM”), entered into a non-prosecution agreement to pay a US$2 million criminal penalty to settle allegations that it bribed employees of state-owned and state-controlled Chinese airlines to secure MRO contracts.153 The DOJ alleged that, from 1999 to 2008, NORDAM’s wholly owned subsidiary, Nordam Singapore Pte Ltd. (“NSPL”), and its affiliate World Aviation Associates Pte Ltd. (“WAAPL”) made

148 Id. ¶¶ 19, 21-22. 149 See id. ¶¶ 25, 33. 150 Press Release, Dep’t of Justice, Bizjet International Sales and Support Inc. Resolves Foreign Corrupt Practices Act Investigation and Agrees to Pay US$11.8 Million Criminal Penalty (March 14, 2012), available at http://www.justice.gov/opa/pr/2012/March/12-crm-321.html. Bizjet’s indirect parent company, Lufthansa Technik AG, entered into a non-prosecution agreement and agreed to revise its internal controls and cooperate fully with the DOJ. Id. 151 Id. 152 Bizjet DPA, supra note 146, ¶ 4. 153 Press Release, Dep’t of Justice, The Nordam Group Inc. Resolves Foreign Corrupt Practices Act Violations and Agrees to Pay US$2 Million Penalty (July 17, 2012), available at http://www.justice.gov/opa/pr/2012/July/12-crm-881.html.

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“commission” and “facilitator fee” payments directly to its customers’ employees, referred to as “internal ghosts,” “our friends inside,” and “internal guys.”154

The payment methods for these bribes varied and expanded as the years progressed. Some were made directly through wire transfers to the customer employees’ bank accounts or indirectly through WAAPL’s employees.155 Sometimes, NORDAM, NSPL, and WAAPL artificially inflated the customers’ invoices to offset the bribes, so that NORDAM’s customers were actually reimbursing the company for the payments.156 To further disguise the bribes, in 2002, three WAAPL employees created fictitious entities to act as sales representatives.157 The commissions paid to these fictitious entities were used, in part, to pay bribes.158 In total, NORDAM, WAAPL, and NSPL paid US$1.5 million in bribes and secured approximately US$2.5 million in profits.159

Interestingly, the DOJ agreed to a fine substantially below the standard range set by the U.S. Sentencing Guidelines because NORDAM demonstrated that anything exceeding US$2 million would jeopardize its continued viability.160 The DOJ also noted the company’s cooperation and remedial efforts.

C. Embraer

In November 2011, Embraer S.A. (“Embraer”), the third-largest commercial aircraft manufacturer, disclosed that it had received a subpoena from the SEC related to potential FCPA violations. The company immediately began an internal investigation into transactions in three specific countries. On October 23, 2012, the Brazilian-based company confirmed that its investigation was still ongoing and that it had provided both the SEC and the DOJ documents and other information. Embraer also noted that its outside counsel had recently met with the government to brief them on the status of the investigation. Details about the allegations and the status of the investigation are not publicly available.

154 Non-Prosecution Agreement Between the Department of Justice and NORDAM Group, Inc., 1 (July 6, 2012), available at http://www.justice.gov/criminal/fraud/fcpa/cases/nordam-group/2012-07-17-nordam-npa.pdf. 155 Id. at Attach. A, ¶ 4. 156 Id. at Attach. A, ¶ 7. 157 Id. at Attach. A, ¶ 6. 158 Id. 159 Id. at Attach. A, ¶ 11. 160 Id. at 1-2.

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GLOBAL DEVELOPMENTS

I. Europe

A. United Kingdom

1. Introduction

Commentators can point to a lack of enforcement under the U.K. Bribery Act 2010 (the “Bribery Act”), but anti-corruption enforcement in the United Kingdom continued to progress in 2012. The Director of the U.K.’s Serious Fraud Office (“SFO”) has emphasized that the office seeks to fulfill its “primary role as an investigator and prosecutor of serious and/or complex fraud including corruption.” It remains to be seen whether enforcement will pick up in 2013. The proposed introduction of DPAs appears to seek greater flexibility in the prosecutorial measures the enforcement agencies will have at their disposal. However, the SFO’s ability to take effective action is likely to be tested against a back-drop of continued cuts in the regulator’s financial resources. The U.K. government has cut more than a third of the SFO’s budget in the last four years. Transparency International has reported161 its concerns that the number of U.K. bribery enforcement cases will decline due to these cut-backs.

2. SFO Revised Guidance

The SFO issued a press release on October 9, 2012 announcing revisions to its previously published guidance to the Bribery Act following a review of its policies on facilitation payments, business hospitality expenditures, and corporate self-reporting. These revisions supersede any previous practices or policies.

Facilitation payments remain illegal under U.K. law: “A facilitation payment is a type of bribe and should be seen as such. Facilitation payments were illegal before the Bribery Act came into force and they are illegal under the Bribery Act, regardless of their size or frequency.” This supersedes previous guidance indicating that small single payments may weigh against prosecution and may result in a nominal penalty. Nevertheless, the SFO maintained that “[i]t would be wrong to say there is no flexibility” in relation to facilitation payments and the SFO will consider: (1) whether it is a serious or complex case which falls within the SFO’s remit; and, if so, (2) whether the SFO concludes, applying the Full Code Test in the Code for Crown Prosecutors (“CCP”) that “there is an offender that should be prosecuted.” The CCP has two stages: (1) the evidential stage; and (2) the public interest stage. In broad terms, to discharge the evidential stage, prosecutors must be satisfied that there is sufficient evidence to provide a realistic

161 Press Release, Transparency International, SFO Resource Deficit Endangers Anti-Bribery Effort (Sept. 6, 2012), available at http://www.transparency.org.uk/news-room/press-releases/13-press-release/341-sfo-resource-deficit-endangers-anti-bribery-effort

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prospect of conviction against each suspect on each charge. In every case where there is sufficient evidence to justify a prosecution, prosecutors must go on to consider whether a prosecution is required in the public interest. A prosecution will usually take place unless the prosecutor is satisfied that there are public interest factors tending against prosecution which outweigh those tending in favor. In some cases the prosecutor may be satisfied that the public interest can be properly served by offering the offender the opportunity to have the matter dealt with by an out-of-court disposal rather than bringing a prosecution.

The SFO has confirmed that “bona fide hospitality or promotional or other legitimate business expenditure is recognised as an established and important part of doing business. It is also the case, however, that bribes are sometimes disguised as legitimate business expenditure.” The SFO will prosecute offenses involving facilitation payments or hospitality payments if conviction is a realistic prospect and such prosecution is determined to be in the public interest.

In short, the SFO stated that “self-reporting is no guarantee that a prosecution will not follow.” Self-reporting will be a relevant consideration to the extent set out in the Joint Guidance on Corporate Prosecutions162 which explains that, for a self-report to be taken into consideration as a public interest factor tending against prosecution, it must form part of a “genuinely proactive approach adopted by the corporate management team when the offending is brought to their notice”. The SFO stated that if “on the evidence there is a realistic prospect of conviction, the SFO will prosecute if it is in the public interest to do so . . . In appropriate cases the SFO may use its powers under proceeds of crime legislation as an alternative (or in addition) to prosecution”.

While some commentators view these changes as having little, if any, practical effect, the SFO appears to take a tougher stance with respect to self-reporting, emphasizing that self-reporting will not necessarily mean that prosecution will be avoided. Previously, in the case of voluntary reporting, the SFO stated a preference for imposing civil, rather than criminal, penalties. Now, self-reporting will be but just one of the factors to be considered as the current guidance states that “[s]elf-reporting is no guarantee that a prosecution will not follow.” In fact, the SFO also noted that with respect to these latest revisions “there will be no presumption in favor of civil settlements in any circumstances.”

In March 2012, the OECD Working Group on Bribery completed its latest report into the U.K.’s application of the Convention on Combating Bribery of Foreign Public Officials in International Business Transactions and Related Documents. The OECD gave a somewhat mixed review of 162 The Joint Guidance on Corporate Prosecutions sets out the common approach of the Director of Public Prosecutions, the Director of the Serious Fraud Office and the Director of the Revenue and Customs Prosecutions Office to the prosecution in England and Wales of corporate offending other than offences of corporate manslaughter. The guidance should be read in conjunction with, and is subordinate to, the Code for Crown Prosecutors.


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the U.K.’s anti-bribery enforcement efforts. While the Working Group recognized that the SFO had significantly increased foreign bribery enforcement and that the UK government had made substantial efforts to raise awareness of the Bribery Act, resulting in a heightened understanding of foreign bribery-related issues in the United Kingdom, it found that there was still room for improvement. The OECD highlighted a particular need for the U.K. authorities to be more transparent when resolving cases.

3. Enforcement

To date, U.K. authorities have only recorded two successful, yet low-level, prosecutions under the Bribery Act. In 2011, a court official, was found guilty for receiving payments to annul traffic offences from the court’s database and was sentenced to a six year jail term. In December 2012, Mawia Mushtaq was sentenced to two months imprisonment, suspended for twelve months, and subject to a two-month curfew order, in connection with offers to pay a licensing officer bribes of £200 (US$300) or £300 (US$454) in exchange for a “pass” on a private taxi license test.

However, the U.K. authorities have pursued a number of significant anti-bribery enforcement actions and prosecutions in 2012 under U.K. anti-corruption legislation pre-dating the Bribery Act (such as the Prevention of Corruption Act 1906) and the Proceeds of Crime Act 2000 and related legislation. The Bribery Act does not have retrospective effect. Consequently, U.K. prosecutors are required to bring charges under prior legislation in relation to corrupt activities taking place before July 1, 2011 when the Bribery Act came into force.

It can be expected that with the recent guidance discussed above, and the passage of time, facts such as some of those criminal matters discussed below may be prosecuted under the Bribery Act in the future:

In January 2012, Andrew Ryback, Ronald Saunders, Philip Hammond and Barry Smith were prosecuted for conspiracy to corrupt under the Prevention of Corruption Act 1906 in passing confidential information relating to oil and gas sector contracts valued in excess of £60 million (US$90 million) to targeted bidding companies in exchange for payment. Ryback received a five year prison sentence, Saunders was sentenced to three years and six months, Hammonds was sentenced to three years and Smith was sentenced to 12 months imprisonment.

In March 2012, James McGeown, William Marks, John Symington and Carol Kealey, made payments to Ministry of Defence officials in Northern Ireland in exchange for favor in the tendering and continuation of CCTV contracts. McGeown was sentenced to three years imprisonment (suspended for two years) and banned from acting as a company director for seven years. Marks was sentenced to two years imprisonment (suspended for two years). Symington was sentenced to nine months, (suspended for two years) and


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Kealey was given a conditional discharge. This matter followed an investigation by the SFO and the Ministry of Defence Police.

In June 2012, Andrew Behagg, David Baxter, former directors of a major U.K. potato supplier, and John Maylam, a buyer at major U.K. supermarket Sainsbury’s, were prosecuted in connection with the exchange of gifts and hospitality in return for lucrative contracts. In a case which the trial judge described as a very serious case of corruption, the directors paid Maylam £4.9m (US$7.4 million) out of a fund created by the overcharging of Sainsbury’s to the tune of £8.7m (US$13.2 million). Behagg received a three year prison sentence, Baxter was sentenced to 30 months in prison and Maylam was sentenced for four years in prison.

The U.K. authorities have also continued to bring significant civil proceedings against commercial organizations in connection with corrupt activities. For example:

On November 29, 2012, the Crown Office and Procurator Fiscal Service of Scotland announced that Abbot Group Limited (“Abbot”) is to pay £5.6 million (US$8.5 million) following the self-reporting of benefits the company received from corrupt payments made in connection with a contract entered into by one of its overseas subsidiaries and an overseas oil and gas company. Abbot is the first company to enter into a civil settlement under a Scottish self-reporting initiative since the initiative was introduced in 2011. The sum to be paid by Abbot represents the profit made by the company from the contract. The corrupt payments were brought to light in May 2011 following inquiries by an overseas tax authority which resulted in an investigation by a firm of solicitors and a firm of accountants instructed by Abbot itself.

In January 2012, the SFO obtained a civil order under the Proceeds of Crime Act 2000 requiring Mabey Engineering (Holdings) Limited, the sole shareholder of Mabey & Johnson Ltd (“M&J Ltd.”) to pay £131,201 (US$198,727) it had received from M&J Ltd. by way of dividends. M&J Ltd. and its directors had been subject to an earlier enforcement action in connection with corrupt activities and breaches of U.N. sanctions.

While the long-running M&J Ltd. case concerned a family-run, closely held group of private companies, the latest stage of enforcement action indicates that shareholders and investors in U.K. companies now face potential enforcement action in respect of the activities of the companies in which they invest. The message is clear: investors can no longer remain passive to corrupt activities within the companies in which they invest. Investors should consider the extent to which it is necessary to conduct an assessment of corruption risks arising out of factors including the company’s geographic area of operations, the company’s relationships with third parties, and the company’s approach to and culture of compliance.


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The other cases summarized above show the corruption risks now coming to light in the procurement, retail and energy sectors and highlight the U.K. authorities’ continued efforts to prosecute individuals involved in corrupt activity (although the sentences handed down are still relatively light compared to the United States).

4. Anti-Corruption Efforts by the U.K.’s Financial Regulator

In the financial regulatory sphere, the U.K. Financial Services Authority (“FSA”) has continued to reiterate its commitment to combatting corruption in the financial sector through thematic reviews and best practice guides. For example, in March 2012, the FSA published a report on anti-bribery and corruption systems and controls in investment banks following a review of practices at 15 firms. The FSA raised a number of concerns including the adequacy of risk assessments, the lack of monitoring of third parties, the poor dissemination of management information to senior management, and inadequate assessment of the impact of anti-corruption training.

While the FSA has not brought any anti-bribery related enforcement action in 2012, a number of multi-million pound enforcement cases against overseas financial institutions operating in the United Kingdom have focused on systems and controls which have failed to detect and prevent money laundering, emphasizing the FSA’s commitment to combatting dealings arising out of criminal conduct.

5. The Proposed Introduction of DPAs

The Crime and Courts Bill 2012-13 currently before Parliament seeks to introduce a mechanism for DPAs in England and Wales. As drafted, the proposed legislation provides for a written agreement between a prosecutor and a body corporate, a partnership, or an unincorporated association (but not an individual) which allows a prosecution to be deferred and eventually dismissed if the subject abides to the terms of the DPA. Key features of the proposed DPA process include:

A judge will take an early view at an initial hearing in the Crown Court, to be held in private, as to whether the DPA is appropriate “in the interests of justice” and whether, based on the evidence and information provided, the proposed terms of the DPA are “fair, reasonable and proportionate.”

The DPA may impose terms such as: a financial penalty; compensation of victims of the alleged offense; donation of money to a charity or other third party; disgorgement of any profits made from the alleged offence; implementation of or changes to a compliance program; cooperation in any investigation; and an order to pay any reasonable costs of the prosecutor in relation to the alleged offence or the DPA.


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The prosecutor will publish (subject to any necessary protections in respect of ongoing or future related proceedings) the final DPA and court rulings upon approval of the DPA, details of how the terms and conditions of the DPA have been complied with by the organization at the end of the DPA process, and details of the facts and approach taken in the event of any breach, variation or termination of the DPA.

The proposed DPA process differs from the U.S. approach as it requires greater judicial involvement and legal formality. The factors that will determine whether a DPA is appropriate will be set out in a statutory DPA Code of Practice for Prosecutors. DPAs will provide a further tool for the U.K. authorities in their efforts to combat corruption.

B. Italy

On October 31, 2012, Italy passed an anti-corruption bill that introduces new categories of corruption-related offences, mandates the establishment of a national anti-corruption authority that will have investigative powers, and generally aims to strengthen the fight against corruption in both the public and private sectors.163 Bribery and corruption costs the Italian economy an estimated €60 billion (US$80 billion) per year. The new law is set to combat that figure and bring the Italian anti-corruption legislation in line with that of other EU countries. The new legislation criminalizes corruption in the private sector and imposes criminal penalties on any public official who abuses his position to induce others to provide or promise to provide anything of value to him or to a third party. In addition, the new law imposes criminal penalties on any individual who, through personal influence or a pecuniary incentive, induces a public official to abuse his position. Finally, among other measures, the law extends whistleblower protection for government employees who report corrupt conduct.

In light of the newly adopted law, companies doing business in Italy should revisit their anti-corruption and compliance programs to ensure that appropriate controls and monitoring procedures are in place. They should also implement training programs that address the new anti-corruption law and explain any new corporate policies and procedures developed in response to this legislation.

C. The Netherlands

In its 2012 progress report, the OECD raised serious concerns at the low level of foreign bribery investigations and prosecutions in the Netherlands. Since the Netherlands joined the International Convention Against Bribing Foreign Officials in 2000, no individual or company has been sanctioned for foreign bribery, though two foreign bribery cases are due to go on trial in 2013. The OECD report welcomed a number of positive steps taken in the Netherlands against

163 Law Library of Congress Global Legal Monitor, Italy: Anti-Corruption Law Adopted, (Nov. 7, 2012), http://www.loc.gov/lawweb/servlet/lloc_news?disp3_l205403389_text.

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corruption and fraud, such as the development of strong expertise in confiscating the proceeds of crime and the organisation of foreign corruption and bribery awareness-raising activities for Dutch public and private sector entities by the Dutch Ministry of Foreign Affairs. A number of initiatives have also been undertaken by the Dutch Ministry of Security and Justice to improve anti-corruption practices and increase sanctions for bribery and financial crime. These include the signing of a memorandum of understanding with the World Bank in which the parties agreed to work together in support of criminal and administrative investigations and proceedings in the fight against fraud and corruption that threaten the security of development resources.

Further, the new Dutch cabinet announced in its coalition agreement on September 29, 2012 that they would intensify efforts across the board to tackle financial and organised crime. In December 2012, the Dutch Ministry of Security and Justice issued draft legislation to that effect. The draft legislation—which is not public yet—includes higher fines to be imposed for money laundering and corruption, including fines of up to ten percent of the company’s annual turnover. Improvements to the capacity of regulators to confiscate illegally obtained assets from persons or entities that are convicted of corrupt practices are also being made.

D. Germany

Corporations in Germany will in the future face stricter sanctions for compliance offences such as corruption and bribery. Following an OECD report in March 2011 which was critical that German sanctions did not much extend beyond the disgorgement of illegally obtained profits, German legislators put forward, at the beginning of 2012, a proposal to amend the German Administrative Offenses Act (“OWIG”). Proposed changes include elements similar to the FCPA and the U.K. Bribery Act. While German companies would still not be liable under criminal law, the possible maximum administrative offense would be increased tenfold (up to €10 million (US$13 million)). On November 15, 2012, Federal Ministers of Justice discussed the introduction of criminal liability of companies for corruption and alternative methods of sanctioning. There is also a growing demand towards sanctions in the health care sector (pharma-marketing). Following a landmark ruling of the German Federal Court, which denied liability of doctors who took kickbacks from pharmaceutical companies, the Federal Ministry of Health is currently reviewing whether to introduce a law to combat corruption in the health care system.

The German corporate sector has seen a number of fines this year (e.g. Siemens, MAN, Daimler). Self-disclosures following internal investigations, based not only on the violation of German law but also of the FCPA, are also increasing. This shows an increasing commitment by companies and their management to prevent anti-corruption by implementing compliance systems and conducting internal investigations. In discussion on the above mentioned OWIG draft, consideration was given whether to include provision that an adequate compliance system would result in a decreased fine. However, it was decided not to include such provision as this should continue to be assessed on a case by case basis.


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E. Russia

Corruption continues to be a real concern in the Russian Federation. President Vladimir Putin and Prime Minister Dmitry Medvedev have made clear statements of intent in 2012 on continuing anti-corruption efforts, and Russia took a number of positive steps toward combating corruption during the last 12 months. In February 2012, Russia ratified the OECD Convention on Combating Bribery of Foreign Public Officials. On December 3, 2012, the Russian President signed Federal Law No. 230-FZ “On Monitoring Correspondence between Spending and Incomes of State Officials and Other Individuals”. Under this Law certain purchases made by public officials or their relatives are subject to control if the amount of purchase exceeds in aggregate the salary of the official or his/her relative for the preceding three years. There have also been a number of high profile corruption investigations, including investigation in respect of senior officials of the Ministry of Defense (which resulted in the dismissal of the Minister of Defense and his being called as a witness) and an investigation in respect of corruption during construction of the site for the APEC summit in Vladivostok. The prosecution of these cases is seen as a positive trend in Russian anti-corruption. The test for 2013 is whether or not anyone is actually prosecuted.

II. Asia Pacific

A. China

Corruption in the People’s Republic of China affects all industries, levels of government, and types of companies. This corruption directly impacts international companies attempting to grow their business in an environment which is significantly affected by poor corporate practices. The incoming Chinese government led by President Xi Jing has vowed to combat corruption at all levels, in government and private companies. While similar statements have been made before, the fight against corruption has become the crux of the political message of the next generation of Chinese leaders. This has been evidenced by feverish legislative activity in this area, with four significant regulations having been or due to be issued in 2012-2013.

For example, in September 2012, China’s Ministry of Health stepped up its campaign against corruption in the healthcare sector by ordering all public hospitals and their patients to sign anti-bribery agreements.164 Pursuant to such agreements, all incoming public hospital patients must promise that neither they nor their family members will pay bribes to physicians. Similarly, public hospitals must agree that no bribes will be accepted. The government’s stated goal in enacting this measure is to curb a long-standing and prevalent practice of patients providing cash-filled “red envelopes” to their physicians in the hopes of receiving better medical treatment.

164 Chinese Government’s Official Web Portal, China Steps Up Campaign Against Healthcare Bribery (Sept. 28, 2012), http://english.gov.cn/2012-09/28/content_2235710.htm.

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At the same time, an increasingly China-focused DOJ, SEC and SFO will continue to pursue questionable corporate behavior in China. This means that international companies operating in China will need to account for a renewed focus on corruption and may need to overhaul their systems, corporate culture towards corrupt practices and prepare, in the worst case, to face investigation by Chinese or foreign authorities. Finally, the internationalization of Chinese businesses (and their ventures abroad, commonly referred to as “outbound investment”) also create significant risks for these businesses, which sometimes have a limited understanding of, or regard for, their corporate and personal liability when conducting business outside China.

B. India

According to Transparency International, India is currently perceived as being in the top half of the most corrupt country ranking system that assesses 176 nations. Corruption is proving to be a real cost to business. For example, Air India, the country’s national air carrier, has lost millions of dollars due to corruption and mismanagement in the outsourcing of repairs. The effect is not only felt by local companies, but well-known multinationals, such as Nokia and Walmart, have also faced allegations of corruption. The Walmart matter is particularly interesting, showing that an investigation initiated in one country can lead to an investigation elsewhere, demonstrating the need for companies to ensure that all their subsidiaries have in place proper anti-corruption measures.

There are, however some signs that things may be changing in India. KPMG’s latest “India Fraud Survey” found that 56 percent of multinationals believe that business can be done in India without resorting to corruption, even though 71 percent believe that doing business in India inevitably involved the cost of dealing with fraud. There are also signs that the Indian authorities are taking a more robust approach towards corruption. In February 2012, the Supreme Court cancelled 122 telecommunications licenses awarded to 11 telecom firms (the 2G licenses) in what has been referred to as one of the biggest corruption scandals in India. Recent events concerning Finmeccanica, in which India froze payments under a contract for the delivery of 12 helicopters to the Indian air force following the arrest of the head of the Italian aerospace and defense firm on suspicion of corruption, show that there may be an increased awareness of the need to take a more robust approach towards preventing corruption. There have also been moves to legislate against corruption, and, in December 2012, India’s lower house of parliament passed an anti-corruption bill, the Jan Lokpal Bill, which provides for an independent ombudsman who will be able to prosecute corrupt politicians and civil servants.

One reason for a possible change in the way corruption is treated in India may be the internet. Websites, such as http://www.ipaidabribe.com/, are giving Indians the ability to report instances of corruption, and are designed to raise awareness of the issue.

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C. Indonesia

In a setback to anti-corruption efforts in Indonesia, two judges of local corruption courts in that country have been arrested in August 2012 for allegedly accepting bribes in the total amount of approximately US$15,800 from an intermediary who is said to have sought the release of a high-ranking official currently under investigation.165 The arrest of the two judges has prompted a call to shut down Indonesia’s regional corruption courts and establish instead a centralized corruption court based in Jakarta. The judges’ conduct was detected by investigators from Indonesia’s anti-corruption commission.

D. Singapore

Singapore is generally perceived as being one of the least corrupt Asian jurisdictions. A number of public bodies have come under intense scrutiny after internal audits uncovered discrepancies in procurement processes that suggested the possibility of bias. The underlying issues in the public procurement system were outlined in a report produced by the Auditor-General in August 2012 which stated that the largest concern was the way agencies treated the role of approving authorities that have the power to award contracts. Such criticism is evidence of the government’s wish to be seen as taking a zero tolerance approach to such issues, regardless of any embarrassment it may cause in the public sector.

E. Australia

In Australia, there has been a noticeable move towards a greater emphasis upon the need to effectively address bribery and corruption risks. In response to international pressure the Federal Government has invited submissions on a consultation paper which proposes that the facilitation payment defense in Australia’s Foreign Bribery Laws be removed, and it is expected that this will lead to legislation banning facilitation payments. The government is also developing a National Anti-Corruption Plan which has a number of objectives including providing a clear statement of the national approach to combating corruption, clarifying federal agency roles and responsibilities, and addressing challenges or issues raised in the review of Australia’s compliance with the U.N. Convention Against Corruption. The government is concerned about its foreign bribery obligations, which have been criticized by the OECD, and so has established a Foreign Bribery Panel of Experts which will help the Australian Federal Police with this issue by offering greater expertise. As part of this, the Australian Federal Police have joined with the Royal Canadian Mounted Police, the U.S. FBI and the City of London Police on an international foreign bribery task force which is likely to lead to more effective cooperation and communication in relation to international bribery investigations. The result is that regulatory

165 Margareth S. Aritonang, Government Considers Shutting Down Corruption Courts in Regions, The Jakarta Post, Aug. 21, 2012, available at http://www.thejakartapost.com/news/2012/08/21/govt-considers-shutting-down-corruption-courts-regions.html

http://www.thejakartapost.com/news/2012/08/21/govt-considers-shutting-down-corruption-courts-regions.html

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authorities have greatly increased their focus on bribery and corruption related activities and this can only be expected to grow.

In the private sector the need to effectively address bribery and corruption risks and related issues is also increasingly recognized. This is partly because of ongoing high profile cases, such as the criminal prosecutions arising from alleged foreign bribery by Securency International and Note Printing Australia. Also of importance has been the litigation concerning the AWB Regime and the U.N. Oil-for-Food Program, which came to a conclusion this year. The result of this increasing recognition is that Australian corporations will move towards adopting or improving their compliance activities to address bribery and corruption risks.

III. Africa

A. South Africa

Africa continues to offer significant opportunities for global business. Sub-Saharan Africa was the second fastest-growing global economy in 2012. With the news that 40 African countries have discovered or are already exploiting oil and gas reserves, a new resource is helping to power the continent, but raising compliance issues for business. International businesses have found that the more strategic the resource, and if there is a high level of international funding, the less likely there are to be issues around compliance. Companies should adopt a zero-tolerance approach and seek expert advice when considering entering new jurisdictions.

In South Africa, various government actions offered mixed messages. The President appointed a judicial commission of inquiry to investigate further allegations of corruption by government officials (including the President himself) and arms manufacturers, specifically relating to the multi-billion Rand arms acquisition program in 2000. The commission itself has become embroiled in controversy. The key office of the National Director of Public Prosecutions is another area of concern, with the Constitutional Court overturning as “irrational” the President’s appointment to this key position, after key findings that the candidate was wholly unsuitable. At the same time, the President has increased his public utterances calling for clean governance. The ruling parties’ electoral conference voted in a top business leader who is seen as tough on corruption as the President’s political deputy. It is likely the deputy will get a senior government appointment soon.

IV. The Americas

A. Canada

Anti-corruption issues were on the forefront of the news in Canada in 2012. The mayor of Canada`s largest city, Toronto, was stripped of his position by a court which found that he had breached the Municipal Conflict of Interest Act, but was then reinstated by an appellate court in January 2013. In Quebec, a commission of inquiry established to investigate allegations of


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corruption in public construction contracts, heard explosive testimony resulting in the resignation of various officials including the mayor of Montreal. New laws and policies in both of these provinces imposed more stringent requirements on bidders on contracts with government ministries and organizations in the public sectors, including the obligation to self-declare real or apparent conflicts of interest. At the federal level, a revised Values and Ethics Code for the Public Sector tightened up the rules for the post-employment of civil servants.

B. Colombia

In 2012, Colombia saw the first actions to enforce its Anti-Corruption Statute of 2011, with high-profile cases being brought against subcontractors in Bogota’s infrastructure contracting cartel, Senator Merlano and others. These actions and a former Bogota mayor remaining in jail for misuse of public funds may indicate that the age of impunity is ending.

Colombia’s interest in joining the OECD resulted in pressure on the Santos government to enunciate a detailed plan to fight corruption and to show results (see below). As a result, the Transparency Counsellor sent to Congress a proposed Bill calling for the “legal death” (mandatory liquidation) of companies involved in corrupt practices.

C. Argentina

The trial of Argentina’s former president, Fernando de la Rua, has resumed in November 2012 after a brief recess. Mr. de la Rua is accused of bribing Argentinian senators to obtain their approval of a labor reform bill in 2000.166 According to prosecutors, the bribe payments amounted to about US$5 million. The labor reform at issue was sought by the International Monetary Fund (“IMF”) as a condition for approving new loans to Argentina. The IMF ultimately declined to extend the loans, and Mr. de la Rua’s unpopular austerity measures led to his resignation following riots in Buenos Aires.

WHAT TO EXPECT IN 2013

It is impossible to forecast with complete accuracy what FCPA and global anti-corruption developments in 2013 will be. However, the following are some of the developments that we can reasonably expect as the year progresses.

Individual challenges: Over the past few months, individual executives sued by the SEC over alleged FCPA violations have aggressively challenged their lawsuits. Although, to date, the federal courts have generally sided with the DOJ’s interpretation of the law, individual defendants will likely continue to challenge the government’s interpretation of the FCPA in both trial and appellate courts.

166 BBC News, Former Argentine President de la Rua in Corruption Trial, (Aug. 14, 2012), http://www.bbc.co.uk/news/world-latin-america-19263669.

http://www.bbc.co.uk/‌news/world-latin-america-19263669

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Declinations: There have been a number of declinations already in 2013 in long-standing investigations of large public companies. While FCPA enforcement will continue to be robust into the current year, the use of enforcement agency declinations after a thorough investigation and some public pronouncement of their occurrence would appear to continue as a trend.

Enforcement agency transition: This year will also be a time of transition at both the DOJ and SEC, as key leaders from both organizations leave. At the DOJ, Lanny Breuer, who led the Criminal Division as an Assistant Attorney General, announced his resignation in January 2012, effective March 1, 2013. Mr. Breuer served in that position since April 2009 and oversaw some of the largest FCPA cases, including eight of the ten largest settlements. During his tenure, the DOJ significantly increased its FCPA-focused resources and increased its prosecution of individuals for FCPA and FCPA-related violations. Mythili Rahman will lead the Criminal Division on an acting basis. At the SEC, former Chairwoman Mary Schapiro stepped down in late 2012. In early 2013, President Obama nominated Mary Jo White, a former U.S. Attorney for the Southern District of New York known for her tough stance against financial institutions, to take over the lead role at the SEC. Ms. White’s confirmation hearings will likely occur in March 2013.

Vigorous enforcement with settlement tools: Although there are likely to be some changes because of the DOJ and SEC personnel turnover, it is generally expected that both agencies will stay the course and continue to pursue FCPA matters vigorously, but with an eye ultimately toward settlement . For example, based on recent statements from DOJ officials, the use of deferred prosecution agreements and non-prosecution agreements will continue to be a key tool used by the DOJ in settling FCPA matters.

Monitors: While the DOJ has in the past received criticism for its selection and use of monitors as part of FCPA resolution requirements, the past year demonstrates that the agency can nevertheless be expected to selectively require the imposition of a monitor as a condition of resolution when it believes the facts merit that outcome.

Investigations: Companies confronting FCPA issues often find themselves initiating internal investigations. As detailed in Fulbright’s 9th Annual Litigation Trends Survey Report (http://www.fulbright.com/litigationtrends22), in 2012, the percentage of U.S. companies retaining outside counsel for assistance in a regulatory investigation reached a five-year high of 60 percent (after climbing from 43 to 55 percent in the two years prior). Additionally, 72 percent of Fulbright’s U.K. respondents retained counsel for a regulatory investigation in the last year, up from 27 percent in 2011 and 26 percent in 2010. Companies have also seen whistleblower reports increase over the past three years, which has increased the need to conduct internal investigations. This will likely continue in 2013.

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Targeted industries: Similarly, it is probable that FCPA enforcement aimed at targeted industries, including the pharmaceutical and medical device industries, will continue, with some retail industry focus possibly resulting from the Walmart investigation as it develops.

International agency cooperation: As the Bribery Act moves into its third year and other countries continue to enact laws and put teeth into anti-corruption efforts, we can expect to see additional inter-agency enforcement assistance in 2013, especially in countries with growing economies and an international interest in their respective business environments. For example, in January of this year, Colombia became the fifth Latin American country to accede to the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions, along with Chile, Argentina, Brazil, and Mexico. Colombia has recently substantially revised its own anti-corruption statute and will be under pressure from the OECD to apply and effectively enforce that law. Likewise, Brazil’s legislature is considering and will likely pass a strengthened anti-bribery law imposing substantial prohibitions and significant penalties for violations.

Enforcement in developing economies: Companies seeking to grow or continue to grow their operational footprint in the developing economies of Brazil, Russia, India, and China can expect that anti-corruption enforcement resources will continue to be allocated to those areas as well.

Compliance program reviews: The DOJ and SEC Guidance has spurred many multinational companies to put a comprehensive assessment of their current compliance program on the agenda for 2013, with possibly revisions made to more closely conform to the Guidance pronouncements.


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