Understanding and preparing for an 'industry sweep' under the fcpa


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Understanding and preparing for an 'industry sweep' under the fcpa

  1. 1. 1 Understanding and Preparing for an “Industry Sweep” under the Foreign Corrupt Practices Act By Zack Harmon and Amelia R. Medina, King & Spalding LLP1 I. Introduction In recent years, the Department of Justice (DOJ) and Securities & Exchange Commission (SEC) have embraced the use of so-called “industry sweeps” as an enforcement tool against suspected violations of the Foreign Corrupt Practices Act (FCPA).2 Industry sweeps are wide- ranging FCPA investigations into multiple companies within a particular industry based on the government’s belief that corrupt conduct is or may be manifest across the industry. Thus far, sweeps have been used to target a diverse array of businesses, from energy companies3 to Hollywood movie studios.4 Industry sweeps are attractive to government authorities because, among other things, they offer a uniquely efficient way of ferreting out FCPA offenses. As a threshold matter, sweeps encourage companies to evaluate their own operations and disclose anti-corruption issues, largely shifting the expense of a factfinding investigation from the government to the private sector. Typically, the FCPA enforcement authorities initiate sweeps by sending out letters of inquiry from the SEC – sometimes called “Hello There” letters – encouraging the recipient companies to provide information about particular business practices and/or geographic areas of their operations. These simple and oft vaguely-worded letters, backed as they are by the implicit threat of an impending DOJ/SEC investigation, can yield disclosures from companies that ultimately result in the payment of many millions of dollars in penalties, as well as new compliance commitments and other remedial measures. Of course, many of the FCPA issues disclosed pursuant to letters of inquiry might have been discovered by the government in due course (or already were, thereby prompting the industry sweep). On other occasions, though, this enforcement tool provides a mechanism by which the government may leverage the expert skills and knowledge of private industry with respect to complex financial transactions, technological innovation, and other modern developments to uncover wrongful conduct. In those instances, DOJ and SEC are able to root out unlawful conduct that might otherwise go undetected.
  2. 2. 2 Unfortunately, industry sweeps also risk ensnaring compliant companies, or those with relatively minor and easily remedied FCPA issues, in expensive and time-consuming investigations. The government is sensitive to that concern: indeed, SEC FCPA Unit Chief Kara Brockmeyer remarked at a September 2013 conference that, for precisely this reason, the government does not send out letters of inquiry “willy-nilly.”5 Nevertheless, sweeps are inherently more likely to be overinclusive than other enforcement tools and practices. In short, they are more of an axe than a scalpel. Accordingly, even companies whose business models are not considered at high risk of corruption should take reasonable precautionary steps to mitigate the disruptive impact of a possible industry sweep. Those steps include: (1) establishing a corporate FCPA “early alert system”; (2) selecting a possible response team and arming them with the information necessary to deploy quickly; and (3) as always, maintaining good corporate hygiene through risk assessments and an effective compliance program. Through these measures, companies can better position themselves to meet the challenge of this potent new enforcement tool, which is contributing to what DOJ FCPA Unit Chief Charles Duross recently described as a “tremendous pipeline of [FCPA] cases.”6 II. A Brief History of Industry Sweeps: From Panalpina to the Present Over the past decade, DOJ and SEC have dedicated significant resources to the pursuit of FCPA industry sweeps. What is widely regarded as the first such sweep became publicized in November 2010, when Panalpina World Transport (Holding), Ltd. and its U.S. subsidiaries (collectively, “Panalpina”) settled with DOJ and SEC for alleged bribery of foreign officials on behalf of customers in the oil and gas industry.7 The resulting industry sweep subjected several Panalpina customers, as well as some of its competitors in the freight-forwarding industry, to investigations yielding penalties and civil disgorgement of over $200 million.8 Since then, regulators have launched investigations into the medical device industry (e.g., alleged bribes for government-employed doctors to purchase medical device products), the pharmaceutical industry (e.g., alleged bribes for government-employed doctors to purchase drugs), and the financial services industry (e.g., alleged bribes paid to employees of sovereign wealth funds), among others.
  3. 3. 3 This trend of industry sweeps shows no sign of abating. Recent enforcement activities that have the earmarks of sweeps include probes of the retail industry, the Hollywood movie industry, and a probe of banks and hedge funds. The first of those three investigations is thought to have been prompted by Wal-Mart Stores, Inc.’s high-profile disclosure in 2011 of alleged bribes paid to Mexican officials for purposes of obtaining licenses and expediting the opening of stores.9 The second involves alleged payments by multiple Hollywood movie studios to the state-owned China Film Group,10 and the third appears to mark the spread of a government inquiry initially focused on J.P. Morgan Chase for hiring practices regarding interns and other employees in China.11 Unfortunately, it is difficult to generalize about preparing for an industry sweep, because their triggers and growth patterns can be so different. One sweep might be triggered by a company cooperating against a competitor; another by an investigative report in a newspaper; and yet another by a tip received pursuant to the recent Dodd-Frank Act’s whistleblower provision (which yielded 115 FCPA-related tips in Fiscal Year 2012 alone).12 Similarly, the perceived common threads that prompt FCPA enforcement authorities to expand investigations from a single company to an industry also vary considerably. The common denominator in the Panalpina investigation, for instance, was the customs broker Panalpina. By contrast, in the medical device sweep, the authorities were drawn to what they perceived as similar or identical business practices in particular geographies by the medical device companies operating in those geographies. It is difficult to predict when an isolated investigation may expand into a sweep, and lessons learned from one investigation may be of limited utility with respect to the next. But whatever the government’s impetus for initiating a sweep, there are certain steps that can improve a company’s ability to respond.13 III. Ensuring Your Company is Well-Positioned for the Possibility of an Industry Sweep a. Establishing a Corporate “Early Alert System” A company is more vulnerable to negative repercussions from an industry sweep if the government is able to catch it off-guard. Unanticipated, a blitz of letters of inquiry or other simultaneous investigatory contacts can wreak psychological havoc on corporations, triggering premature disclosures or turning companies within an industry against one another in an echo
  4. 4. 4 chamber of finger pointing. Although not all industry sweeps can be predicted, companies can mitigate their risks by implementing an FCPA “early alert system.” Logistically, an early alert system involves a company’s designation of internal and external personnel responsible for scanning the horizon and keeping the company informed of FCPA and other corruption investigations or risky practices that might attract attention from either U.S. or non-U.S. authorities. Of course, many companies have already developed a warning system within the United States; fewer, though, have afforded adequate attention to creating those avenues of communication abroad. Coordination between foreign and U.S. anti- bribery authorities is on the rise, and a warning system without a robust foreign presence is soon to be obsolete. A U.K. probe of a company in China, for example, may quickly expand into a multi-firm probe by DOJ and SEC.14 As part of the effort to construct an early alert system, companies should ensure that senior leaders resident in countries with high degrees of real or perceived corruption (or whose business functions are otherwise susceptible to corrupt payments) are trained to be on alert for media reports or other indicators of corruption. Companies should also inform their law firms, crisis management firms, and other third-party advisers that they are interested in hearing about FCPA- and other corruption-related developments in their industry. Finally, companies should take advantage of the opportunity to share information through trade organizations whose members might be confronting identical compliance risks or government inquiries. Deceptively simple, these measures may result in a company receiving advance notice of an industry sweep, affording it the chance to accelerate preparations and to implement remedial adjustments. It is equally important that a company’s FCPA and other corruption-related alarm system continuously adapt to the changing landscape of government enforcement priorities. In some ways, more informal systems may succeed here where formal ones fail, because boilerplate definitions of the concerns that should be brought to a company’s attention often fail to keep pace with the permutations of improper business practices. Instead, company leadership should set an encouraging tone, in which the individuals who comprise the early alert system are told to err on the side of coming forward with concerns or information about FCPA and other corruption issues. Relatedly, the company’s outside advisers should be instructed to err on the side of over- inclusion when bringing developments of note to the company’s attention.
  5. 5. 5 This approach will help counteract the diagnostic problem that industry sweeps come in a wide variety of shapes and sizes. As previously noted, some are relatively predictable, such as the pharmaceutical industry sweep that emerged shortly after DOJ and SEC began a probe of medical device companies engaged in similar practices. But, as a general matter, industry sweeps are as diverse as the individual FCPA investigations that underlie them. They can cover vertical relationships (e.g., supply chains, customers) as well as horizontal ones (e.g., partners, competitors). To the same point, their scope may expand as the government’s investigation continues, meaning that a company that did not receive an initial letter of inquiry cannot assume that it has escaped scrutiny. In sum, a company’s early alert system must be adaptable, or it may fail to detect activities by aggressive government authorities attempting new strategies of enforcement. b. Selecting and Preparing a Response Team A second precaution in preparing for the possibility of an industry sweep is to identify local law firms and crisis management firms in high risk geographies that are competent in anti- bribery matters. An industry sweep focused on business practices in a particular country can elicit a competition among companies for the best local advisers and resources, but not all jurisdictions have more than a handful (or even fewer) professionals with meaningful and practical experience concerning corruption issues and other aspects of government investigations and enforcement activities. While having a firm on retainer is ideal, preemptively hiring and paying advisers is not necessary. A company benefits merely from considering, in advance, which local professionals might best serve its interests. That way, valuable time that could be directed towards developing a company’s response to a government inquiry is not wasted on evaluating firms and soliciting proposals. Time is of the essence during an industry sweep: for instance, a company must move quickly to implement whatever document and data preservation measures are appropriate under the circumstances. Perhaps even more importantly, a company that ultimately elects to make a disclosure may be better situated to argue for cooperation credit from the government if the disclosure is made early in the course of the sweep.15 Companies also should ensure that, with respect to high risk geographies, their anticipated response team includes personnel or third party advisers who are well-versed in the local attorney-client privilege rules and data privacy rules. Again, these issues can create
  6. 6. 6 tremendous headaches and delay at the outset of an investigation. Moreover, those missed opportunities at the outset can easily result in privilege litigation and other problems that persist well into the investigation. Simple workarounds to these legal obstacles are often available if planned in advance. Among other possibilities, retaining confidential materials in a particular location can help protect the attorney-client privilege in certain jurisdictions, and executing intercompany agreements or providing certain notice to employees can ameliorate data privacy issues. Finally, while companies typically encounter fewer problems and delays engaging U.S.- based professional firms to assist with a sweep and interact with DOJ and SEC authorities, companies obviously should not overlook the risk of wasting precious time in this facet of their response, too. Among other things, it behooves a company to consider in advance whether it would draw solely on internal resources in triaging corruption issues and responding to the government’s outreach. If the company anticipates that it would want to turn to outside professionals (outside counsel, forensic accountants, media relations professionals, etc.), then there is value in at least identifying a list of potential candidates in advance. c. Maintaining an Effective Compliance Program Finally, and unsurprisingly, having an effective FCPA compliance program in place – and working hand-in-hand with the “early alert system” described above – before an FCPA probe begins is crucial to minimizing a company’s exposure to an industry sweep. A fulsome discussion of the components of an effective compliance program exceeds the scope of this article; for our purposes here, it suffices to point out that a compliance program that includes risk assessments of internal vulnerabilities may better position a company to determine whether the issues raised and questions posed in an SEC “Hello There” letter are applicable to the company’s business. This evaluative capability has become especially salient in light of recent public remarks made by Kara Brockmeyer, SEC FCPA Unit Chief.16 Brockmeyer has explicitly acknowledged a phenomenon about which FCPA practitioners had hypothesized for some time – namely, that industry sweeps are usually but not always predicated on a specific tip as to the industry in question.17 Thus, while a company should never assume that the government lacks evidence about a problem merely because the company’s own compliance program did not uncover the
  7. 7. 7 issue, it is equally important for companies to arm themselves with the information needed to tailor their internal investigations and avoid needless expenditure of resources. An unfortunate but significant reality for companies caught up in industry sweeps is that it is difficult to emerge from these investigations quickly. The enforcement authorities (U.S. and non-U.S.) typically want to hear at least the preliminary responses from all of the companies to the questions posed and issues raised before deciding how they will proceed with respect to any one company. From the authorities’ perspective, this approach makes sense. If one company describes improper payments in connection with a business practice, then the authorities naturally want to know whether the other companies have engaged in the same practice. This creates a snowball effect that can prolong and expand these investigations significantly, but there is little reason for the authorities to excuse any company from the exercise until it has sufficiently run its course. Nonetheless, companies can save resources and minimize internal disruption if – based on reliable information arising from a well-vetted compliance program – they can quickly diagnose potential issues relevant to the authorities’ concerns and questions. For example, if the authorities have inquired about a business practice related to which the company has strong compliance procedures, positive findings from a recent and thorough internal audit, few or no complaints from a hotline system that is clearly effective in eliciting concerns, etc., then the investigation should not be as daunting. Moreover, while an initial response to the authorities describing such a strong compliance environment is unlikely to result in a quick exit from the investigation, it may make a well-deserved, positive first impression on the authorities. Finally, an effective compliance program will enable a company to hone in quickly on areas of potential concern, including issues that the authorities have not already raised but that the company may nonetheless elect to bring to the authorities’ attention (e.g., in a situation where the company anticipates that the government will eventually ask about or otherwise discover the problem). This early diagnosis of peripheral issues is important because FCPA enforcement authorities have repeatedly made public statements to the effect that companies that “discover problems before [the government] do[es], and then work to fix them, [ ] will receive a benefit for having done so.”18
  8. 8. 8 IV. Conclusion Some aspects of a company’s preparation for an industry sweep require consideration beyond that associated with a one-off investigation. Certainly, a unique aspect of industry sweeps is the government’s ability to pit industry members against one another, despite the fact that these companies may have shared interests as an industry over the long term. Those macro strategic problems, in combination with the other issues discussed in this article, are precisely the sorts of matters that should not be considered for the first time in the heat of an ongoing government probe. The steps recommended in this article are intended to better position companies for their turn under an industry-wide microscope. In the meantime, practitioners and their clients will continue to venture educated guesses about where the government will focus its attention next. While these guesses are just that – guesses – a consensus has emerged that industry sweeps are likely here to stay. Indeed, referring to the Panalpina investigation, Cheryl J. Scarboro, then-Chief of the SEC’s FCPA Unit, once said: “The FCPA Unit will continue to focus on industry-wide sweeps, and no industry is immune from investigation.”19 Thus far, her words have proved prescient. 1 Zack Harmon is a partner in King & Spalding LLP’s Washington, D.C. office and is Deputy Leader of the firm’s 60+ attorney Government Investigations Practice Group. His practice focuses on FCPA-related litigation, government investigations, internal investigations, due diligence and compliance programs. Prior to rejoining King & Spalding in 2003, Mr. Harmon served as Special Assistant U.S. Attorney in the District of Columbia, as a prosecutor in the Tax Division of the Department of Justice, as a team lead on the Presidential commission (“Webster Commission”) that investigated FBI Special Agent Robert Hanssen’s espionage, as a trial attorney on the Enron Task Force, and finally as Counsel to U.S. Deputy Attorney General Larry D. Thompson. Mr. Harmon is a regular speaker and author on the FCPA and other enforcement issues. Amelia R. Medina is an associate in King & Spalding LLP’s Government Investigations Practice Group. Her practice focuses on white-collar criminal defense, government investigations, internal investigations, and complex civil litigation. 2 Foreign Corrupt Practices Act of 1977, 15 U.S.C. §§ 78dd-1, et seq. (as amended in 1988 and 1998). 3 See Palmina M. Fava et al., Energy Sector Faces Greater FCPA Scrutiny, Oil & Gas Fin. J. (September 1, 2008), available at http://www.ogfj.com/articles/print/volume-5/issue-9/features/energy-sector-faces-greater-fcpa- scrutiny.html. 4 See Michael Cieply, Inquiry into China Film Trade Unnerves Hollywood, N.Y. Times (February 17, 2013), available at http://www.nytimes.com/2013/02/18/business/sec-inquiry-into-china-film-trade-unnerves- hollywood.html?_r=0. 5 Remarks of Kara Brockmeyer, SEC FCPA Unit Chief, at the American Bar Association’s National Institute on the Foreign Corrupt Practices Act, Washington, D.C. (September 19, 2013). 6 Remarks of Charles Duross, DOJ FCPA Unit Chief, at the American Bar Association’s National Institute on the Foreign Corrupt Practices Act, Washington, D.C. (September 19, 2013).
  9. 9. 9 7 DOJ Press Release, Oil Services Companies and a Freight Forwarding Company Agree to Resolve Foreign Bribery Investigations and to Pay More than $156 Million in Criminal Penalties; SEC and Companies Agree to Civil Disgorgement and Penalties of Approximately $80 Million (November 4, 2010), available at http://www.justice.gov/opa/pr/2010/November/10-crm-1251.html. 8 Id. 9 Aruna Viswanatha, U.S. Weighs Retail Sweep after Wal-Mart Bribery Scandal, Reuters News (July 26, 2012), available at http://www.reuters.com/article/2012/07/27/us-usa-retail-bribery-idUSBRE86P1TZ20120727. 10 Studios’ Dealings in China Said to Be Subject of SEC Questions, L.A. Times (April 24, 2012), available at http://latimesblogs.latimes.com/entertainmentnewsbuzz/2012/04/studio-dealings-in-china-subject-of-sec- questions.html. 11 Robin Sidel & Cynthia Koons, U.S. Overseas Hiring Probe Has Wide Net: Scrutiny Goes Beyond Probe Disclosed by J.P. Morgan, Wall St. J. (August 29, 2013), available at http://online.wsj.com/news/articles/ SB10001424127887324324404579043382418965094. 12 U.S. Securities & Exchange Commission, Annual Report on the Dodd-Frank Whistleblower Program: Fiscal Year 2012, Appendix A (November 2012), available at http://www.sec.gov/about/offices/owb/annual-report-2012.pdf. 13 See, e.g., Remarks of Assistant Attorney General Lanny A. Breuer at the 24th National Conference on the Foreign Corrupt Practices Act, National Harbor, MD (November 16, 2010), available at http://www.justice.gov/ criminal/pr/speeches/2010/crm-speech-101116.html (“There are many steps that you can be taking that would put your organization in a better position for the day we do come knocking, or that could prevent us from coming at all.”). 14 See Brockmeyer, supra note 5 (stating that an “increasing number of referrals” come from foreign law enforcement authorities). 15 See Breuer, supra note 13 (“[W]e are increasingly able to take an industry-wide approach to our FCPA investigations. That’s because one way in which corporations obtain credit for their cooperation is by providing us with information about their competitors and their clients. . . . As a former defense lawyer, I understand that the question of whether to self-report is a difficult one. But I can assure you that if you do not voluntarily disclose your organization’s conduct, and we discover it on our own, or through a competitor or a customer of yours, the result will not be the same.”). 16 See Brockmeyer, supra note 5. 17 Id. 18 See Breuer, supra note 13. 19 SEC Press Release, SEC Charges Seven Oil Services and Freight Forwarding Companies for Widespread Bribery of Customs Officials (November 4, 2010), available at http://www.sec.gov/news/press/2010/2010-214.htm.