Lengthy and costly FCPA investigations disserve both business and justice

May 22, 2015

Westlaw Journals Commentary thumbAs each day seems to bring new headlines showing the depth and magnitude of overseas economic corruption, the importance and intrinsic value of a proactive and dynamic U.S. Foreign Corrupt Practices Act enforcement effort comes into sharper focus.  In its 2014 report on foreign bribery, the Organization for Economic Cooperation and Development published some disturbing statistics that confirm the previously unquantified but widely held belief that anti-bribery investigations worldwide have become an excruciatingly arduous and costly process for all involved.

This pattern, if sustained, is anathema to the concepts of responsible stewardship and restorative justice, and must be rectified before vital global anti-corruption initiatives are significantly weakened.

To remain effective, U.S. prosecutors and regulators, as well as in-house and outside counsel, must responsibly and strategically use all appropriate investigatory and training tools at their disposal.  They must also set and meet rational goals to achieve prompt and reasonable dispositions.

In its comprehensive 2014 report, the OECD noted that “the average time taken (in years) to conclude foreign bribery cases has steadily increased over time, [from approximately 2 years between 1999 and 2005] peaking at an average of 7.3 years taken to conclude the 42 [worldwide] cases in 2013.”

To be clear, the OECD report covered more than U.S. enforcement of the FCPA and sought to aggregate the “number of years between the last criminal act and sanction” — time periods that do not necessarily reflect the actual duration of the government investigation prior to achieving a resolution.  Nevertheless, an analysis of some of the most recent FCPA resolutions appears to lend continued credence to its findings.

Since late November 2013, the Department of Justice has concluded seven corporate FCPA resolutions with criminal penalties each exceeding $25 million against these companies: Weatherford, Bilfinger, Maurebeni, Alcoa, Hewlett-Packard, Avon and Alstom.  These investigations, most of which involved bribery schemes that began in the early part of this century, averaged 7 1/4 years.

Thus, the pattern of costly delay in FCPA investigations continues unabated.  While every government investigation and resolution poses unique facts and circumstances that may serve to delay the investigatory process, these recent long-developing FCPA resolutions, together with the findings of the OECD report, are convincingly problematic.  The staggering investigative costs, ultimately borne by employees and shareholders alike, however, also can reach unconscionable levels.

This chart from the OECD Foreign Bribery Report shows that bribery cases are taking longer to conclude.

This chart from the OECD Foreign Bribery Report shows that bribery cases are taking longer to conclude.

Avon, for example, reported that since 2009 it has spent an astounding $344 million on “professional and related fees” associated with the FCPA investigation and compliance reviews.  Those fees were in addition to the criminal fines and regulatory penalties of $135 million that Avon and Avon China paid along with costs associated with the imposition of an independent monitor.

Similarly, Weatherford has disclosed that it had incurred $125 million in legal fees, as a result of the FCPA investigation.  Again, those fees were in addition to the $252 million in criminal and regulatory penalties, fines and independent monitor costs.

Perhaps the most stunning example of the punishing consequences of a lengthy FCPA investigation is the more than $500 million in professional fees and expenses that Wal-Mart publicly disclosed it has incurred since its investigation began in 2011.

The Department of Justice has recently articulated that at least part of the rationale or justification for these interminable investigations is that “[c]ompared to other white collar crime, the challenges associated with FCPA investigations can be much greater.”  The DOJ offered “overseas evidence” as one basis for this greater challenge.2

But this statement fails to explain the  more than twofold increase in investigatory durations from historical norms.  A dispassionate, experience-based analysis of this overly broad assertion exposes a faulty premise.  Simply put, the DOJ can and must do better.

First, the international nature of FCPA crimes is unremarkable when compared with the investigation and prosecution of today’s transnational white collar crime schemes.  Prosecutors investigating international financial crimes, with evidence, witnesses and victims spread across the globe, often confront critical dual needs:

  • To quickly secure evidence of a crime sufficient to support charges against the responsible individuals or entities, and
  • To preserve the ability of any victims of the crime to be made whole — all of which typically must be accomplished within the five-year limitations period from the last criminal act.

While these challenges are usually daunting, they are not unique to FCPA investigations.  Experienced, well-trained white collar prosecutors and investigators routinely bring complex charges and corral the criminal proceeds in short order.

When issues involving the collection of foreign evidence are involved, prosecutors typically use legal assistance treaties or letters rogatory to secure evidence and testimony abroad.  This can be a time-consuming process.  While collecting foreign evidence is an issue of consequence in a multitude of white collar cases, FCPA investigations of public companies have at least one unique advantage: the capacity of corporate cooperation, which can shortcut and streamline the foreign evidence gathering process.

With a cooperating corporation, FCPA investigators routinely find themselves in the unique position of having prompt access to overseas evidence and witnesses without a need to resort to cumbersome international treaty requests.  Such cooperation is much like the prosecution having secured a cooperator with unfettered access to the critical evidence.

Moreover, many entities will have at least scoped out the problem and conducted a preliminary examination and remediation by the time of the self-report.  While internal investigations can be tedious and time consuming, a high level of corporate cooperation is the sine qua non of a corporate FCPA investigation.  The critical advantages it lends to the government’s investigation should neither be underestimated nor underutilized.

Second, the DOJ FCPA unit’s tilt toward the prosecution of culpable executives, initiated in 2007, may have caused a strain on then-available resources. Since that time, significant resource infusions to the FCPA unit, and the recruitment of multiple U.S. attorneys’ offices into the global anti-corruption enforcement effort, have served as force multipliers sufficient to ameliorate any resource drag.  Regardless of the reason or reasons for these protracted investigations, both the continued vitality of the DOJ’s FCPA enforcement efforts and the prominence of the United States as the global leader of anti-corruption enforcement would seem to demand a renewed effort to dramatically reduce the time frame necessary to achieve resolution.

Executive mandate

The president’s Corporate Fraud Task Force, formed in July 2002 in the wake of the corporate financial malfeasance epitomized by Enron, tasked the DOJ with ensuring that corporate fraud investigations progress with “requisite promptness and thoroughness.”

As such, the DOJ continuously reinforced the notion that “real time” enforcement is essential to properly effectuate both deterrence and restorative justice.  In 2004, then-Deputy Attorney General James Comey confirmed that real-time enforcement is indeed critical so that the public and potential white collar criminals could see that misdeeds are “swiftly punished.”   To drive home this message, Comey repeatedly reminded prosecutors that in conducting investigations of corporate malfeasance, justice does not demand perfection.

Encouragingly, laws were enacted, DOJ policies were enhanced, and prosecutors were trained to swiftly bring charges against criminally culpable organizations and executives.  Prosecutors working under the aegis of the Corporate Fraud Task Force established that, when empowered to do so, they could bring comprehensive charges quickly and in real time against corporate and executive malfeasors, regardless of the complexity of the facts or the evidence-gathering process.  The impact of this effort has been viewed as a game changer for criminal white collar enforcement.

Convincingly, in September 2002, less than six months after the last criminal act, prosecutors charged five executives of Adelphia Communications Corp. with “one of the most elaborate and extensive corporate frauds in United States history.”  Also, in June 2003, less than 18 months after the last criminal act, a subsidiary of PNC Bank, PNC ICLC, through entry of a deferred prosecution agreement, resolved charges that they conspired to violate the securities laws by using highly complex and fraudulent special purpose vehicles to conceal hundreds of millions of dollars in non-performing assets on its balance sheets.

Similarly, by February 2006, within two years of the last criminal act, six executives of General Reinsurance and AIG were charged with engineering a complicated sham reinsurance scheme to fraudulently inflate AIG’s insurance reserves by $500 million.  Finally, in June 2009, about four months from the last criminal act, Allen Stanford and four accomplices were charged for their participation in an international $8 billion Ponzi scheme effectuated through concealment offered by offshore financial institutions.

Some of these referenced investigations involved little, if any, significant corporate “cooperation.”  Not all of the cases were perfect.  Nevertheless, in these cases and a multitude of others, prosecutors and agents were able to gather, distill and present evidence sufficient to promptly bring appropriate criminal charges involving complex financial schemes.  Experience dictates that FCPA cases, while not presenting radically different evidentiary hurdles than other complex international corporate prosecutions, can be resolved in real time.

There is an important ameliorative effect to the “real time” investigation and prosecution process encouraged by the Corporate Fraud Task Force: When resolutions are reached in real time, the deterrent effect heightens as businesses take note of ongoing fraud bribery schemes operating within their industry or region and ensure that their compliance programs adequately address those problematic practices.

Legitimate enterprises benefit from those kinds of real-time revelations, and criminal political regimes can be immediately identified and deterred.  Moreover, when a criminal resolution discloses and punishes criminal conduct that occurred five or more years earlier, any deterrent effect of the resolution is significantly diminished.  This is particularly true in industries where the overseas corrupt conduct flourishes with abandon.

At that late stage, the principal deterrent effect is relegated to the size of the monetary penalty — something the DOJ continues to emphasize with all too much frequency and relish.  As recent cases have demonstrated, lengthy FCPA investigations also place untenably wasteful financial burdens on corporations, their employees and their shareholders.

Given that the DOJ’s FCPA unit within the Fraud Section has more than doubled in size from 2009 to today and has been fortified by a dedicated squad of FBI agents, it is puzzling that many of these investigations seem to drag on interminably.  The DOJ must strive to be more than just “FCPA Inc.,” churning out stale resolutions notable only for their record-breaking penalties.

The prosecutorial principles embodied in the Corporate Fraud Task Force and its successful “real time” strategies can easily be implemented in the FCPA arena to empower prosecutors and agents alike.

Training

One hallmark of the Corporate Fraud Task Force was the effort undertaken to support the training of prosecutors and agents in the methods designed to swiftly identify, investigate and prosecute meritorious complex financial fraud cases.  Recognizing that the ability to efficiently investigate and prosecute complex white collar schemes was not second nature to even the most senior agents and prosecutors, specific courses were designed and offered at the National Advocacy Center to continuously and proactively train them in the appropriate methods to effectuate real-time prosecutions.  Complementing the NAC courses, the FBI offered regional training taught by prosecutors and agents.

Today, sponsored private-sector courses on FCPA practice seem to be ubiquitous.  However, there remains a dearth of government-sponsored courses that are designed specifically to train prosecutors and agents in the methods of real-time prosecutions.   With the inevitable turnover of prosecutors in the DOJ’s Criminal Division, there is a strong need for routine real-time enforcement training.  The DOJ should undertake a concerted and sustained effort to meet this need.

Communicate expectations, set realistic deadlines

When an FCPA investigation of a public company is initiated, whether through a self-report or otherwise, the company invariably hires outside counsel to coordinate the internal investigation and meet with prosecutors and investigators.  Because the U.S. attorneys’ manual and the U.S. sentencing guidelines provide significant benefits for corporate cooperation and public companies typically cannot risk indictment, significant synergies exist at this critical juncture to jointly chart a course for expeditious review.

The DOJ and outside counsel have a unified interest in efficiently determining the bona fides of the allegations, their potential breadth and steps needed to remediate any issue.  This can best be accomplished through prompt joint review of critical expectations and the setting of aggressive timetables for the course of the internal/government investigation.

While the international operations of every business and the specific requirements of every internal investigation differ, most internal investigations follow a similar pattern: Investigate the issue; if extant, determine its scope; and, finally, undertake sufficient measures to remediate the problem.  Although the complexities of these undertakings vary depending upon the scope of any discovered problem and the geographic reach of the company’s affected business operations, investigative limits can be established for each stage of the process.

With firm deadlines and open lines of communication, there are no structural barriers to achieving resolution of most FCPA cases within two years.  Indeed, the investigation of Siemens AG, one of the largest of all time, began with a search by the Munich Public Prosecutors Office in late 2006 and concluded with a resolution only two years later.

Limit ‘look backs’

One issue that has vexed public companies in recent years — and routinely prolonged investigations — is the degree to which self-reporting companies must investigate their global business arrangements for the purpose of assuring the DOJ that even potentially corrupt activities have been identified and terminated.  This is an endeavor that at times would unnecessarily stall a viable resolution.

At an FCPA conference in November 2014, and, more recently, at a New York University Law School corporate compliance program, Assistant Attorney General Leslie Caldwell assured the audience that prosecutors would be reasonable in their assessment of the breadth of the required  “look back” and would not routinely require companies to “boil the ocean” prior to resolving the investigation.

While companies should certainly expect, prior to resolution, to convincingly establish that the core criminal conduct had been identified and remediated, Caldwell’s remarks firmly evidence a recognition that the DOJ will assist in shaping a company’s internal inquiry and favorably consider a company’s sensible “look-back” policy.

Certainly, early discussions with prosecutors as to the proper scope of a required look-back would be prudent and could substantially reduce both the costs and duration of an investigation.

Eliminate unnecessary or redundant review

Any outside counsel who recently has reached a corporate FCPA resolution with the DOJ has most likely endured seemingly endless layers of review.  While no one would seriously argue that sensible supervisory review of FCPA resolutions is unwarranted, an examination of the Fraud Section’s organizational structure reveals no fewer than five supervisory layers between the FCPA unit’s trial attorney and the section chief.

Although each supervisor may not directly participate in the chain of review of such resolutions, the DOJ should take steps to ensure that each layer of review adds material value and is necessary to achieve programmatic goals and consistency.

Conclusion

The interests of justice are neither served nor advanced when FCPA investigations routinely drag on for five or more years.  Rigorous and prompt FCPA enforcement with respect to current bribery schemes can have a dramatic impact on the insidious and corrosive effect of corruption overseas.  Real-time enforcement is just one component of what must be a larger proactive strategy to root out overseas corruption, which includes punishing the bribe takers as well as the bribe payers and dispossessing the government officials of access to ill-gotten gains.

Curing the deficiencies that lead to costly and wasteful delays will require a systemic and sustained effort, primarily by the DOJ.  It will also require a more focused approach by outside counsel.  Although the ameliorative benefits resulting from such change will not be achieved overnight, the long-term vitality and efficacy of the DOJ’s anti-corruption enforcement efforts ultimately rests on the government’s ability to sustainably alter the status quo.

Pellitier Case List

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