Not only must U.S. corporations be cognizant of the FCPA, the significant scope of U.K.’s Bribery Act of 2010 is yet another concern for U.S. corporations.   In April 2011 the Bribery Act will replace U.K.’s current anti-bribery laws.  The Act is quite broad and can be enforced against a U.S. corporation that has a British office even if that office was not involved in the alleged transgression.  For example, if HP takes part in bribery in Africa, then, because of HP’s presence in the U.K., it is subject to the Bribery Act.  Furthermore, the Act encompasses employees, sub-contractors, agents, and third party business partners in a joint venture.

The Bribery Act creates four new criminal offenses.  Three of these offenses relate to giving or receiving bribes with penalties running to ten years in prison.  The fourth offense concerns the failure of the entity to prevent bribery.  Here the penalty can result in an unlimited fine.  The only defense open to a corporation charged with a violation of this fourth offense will be to show that it had “adequate procedures” in place to prevent the bribery.  Clearly, the definition of “adequate” will be heavily debated and litigated.  But ultimately, the question posed to corporations with a presence in U.K. is - in the words of Clint Eastwood - do you feel lucky?  If not, take the time now to implement the controls necessary before it is too late.

Returning to the above example involving HP, not only is HP subject to the FCPA, it would also be subject to the Bribery Act with its potentially unlimited fine.  If your company does business in the U.K. and it hasn’t been scared straight by the FCPA, it will be by the Bribery Act.  Talk about double whammies.

While there have recently been cases involving the FCPA that have been surprising in the magnitude of the fines assessed, a case in June was surprising for the opposite reason.  Late last month the SEC announced the settlement of its action against Veraz Networks Inc. (Veraz) out of California.  The Complaint is here. The SEC asserted that Veraz resellers, consultants, and employees made payments to government-controlled telecommunications companies in China and Vietnam to influence them to continue doing business with Veraz.  Specifically, a Veraz consultant allegedly gave approximately $4,500 worth of gifts to a Chinese-owned company.  Further, a Veraz reseller made or offered gifts to Vietnamese officials of a state-owned company.  The one gift identified by the SEC was flowers purchased for the wife of an official.  This payment was done to secure a contract worth less than $250,000.  As a result of these actions, Veraz was fined $300,000.  More significantly, Veraz incurred approximately $2.5 million in investigating and defending this matter.

There are three matters of import to be learned from this case.  First, and most significantly, there is no de minimus exception to the FCPA.  Flowers and gifts worth about $4,500 resulted in a fine of $300,000.  Second, the fine of only $300,000 is a fraction of the size of the fine assessed in other actions.  Clearly, the SEC is not after just the big boys but is open to all comers.  Third, the value of the “bad actions” pales in comparison to the costs of the investigation. 

With the growth in the size of the SEC staff assigned to FCPA matters, companies need to be ever vigilant in assuring compliance with the FCPA.  Since size really doesn’t matter, as evidenced by the Veraz case, all companies should take a second look at their international actions.

While fiscal constraint maybe the tune that the majority of the Federal Government is striving to sing, the Dept. of Justice is clearly marching to a different drummer.  Under President Obama’s 2011 proposed budget, the DOJ would receive a 5.4% increase over the prior year’s budget to over $29 billion.  Furthermore, there would be an increase of almost 3,000 new positions within the DOJ.  Most significantly for readers of this blog, over 700 of these new positions will be used to pursue financial fraud and other economic crimes.

The increase in the budget which is dedicated to the prosecution and investigation of financial fraud is $96.8 million, a 23% increase from 2010.  In this economic climate, an increase of this size is truly noteworthy.  Clearly, the Obama administration is making this area one of its priorities.

In addition to the items noted above, the DOJ is also going after health care fraud.  However, here DOJ’s efforts are funded out of the Dept. of Health and Human Services’ budget.   All in all, the funding being allocated towards the prosecution of economic crime is quite impressive.

According to Peter Orszag, director of the White House Office of Management and Budget, the government paid just under $100 billion in improper payments during fiscal year 2009. This represents a 37.5% increase over the $72 billion in improper payments made in 2008. Orszag attributed the increase to improved detection methods and the increase in federal spending associated with the economic downturn.

“Improper payments” include an assortment of various charges including overpayments to contractors, benefit payments to ineligible participants, and outright fraudulent payments. Orszag was unable to provide detail on the breakdown of the total improper payments. Consequently, the amount associated with pure fraud was not divulged. Additionally, Orszag was did not reveal what portion of the $98 billion was due to “improved detection.”

As a result of the significant year-over-year increase, President Obama is planning on issuing an executive order this week to deal with this problem. According to Orszag, the Executive Order will: (1) boost transparency; (2) hold agencies accountable for waste; and (3) create incentives for compliance. Orszag’s release can be found here.

To put things in perspective, the amount attributed to “improper payments” is approximately 7% of the deficit for 2009. No matter how you look at it, that represents a lot of fraud. Here’s to hoping 2010 is a better year.

The House Financial Services Committee passed the Investor Protection Act, (H.R. 3817) today with a 41 - 28 vote straight down party lines.  The Senate is scheduled to mark up its version of the Investor Protection Act in mid-November.  Although it is quite early in the legislative process, there are several provisions in the Act that, if enacted, will significantly impact the activities of the SEC. 

First, the Act more than doubles the funding for the SEC over five years.  The requested budget for 2009 was $906 million.  By 2014, the Act provides that the SEC’s budget will be $2 billion.  Doubling the size of the SEC’s budget in just five years should have a huge impact on the number of enforcement actions undertaken.

Second, the Act, if passed as written, will clearly incentivize whistleblowers to inform to the SEC.  Under the Act, in any action brought by the SEC where monetary sanctions exceed $1,000,000, the SEC may award a whistleblower an amount not to exceed 30% of the monetary sanction.  In the past couple of months, the SEC fined GE $50 million for accounting misdeeds and then fined Bank of America $33 million.  If the whistleblower provisions were already in place, these awards could be as high as $10 - $15 million.  Obviously, this provision has the potential to result in many new actions, clearly a highly desired result.

The rules of the game may be changing.

An important decision by the Ninth Circuit should serve as a warning to all corporate officers and to the outside counsel that represent corporations in internal investigations.  In anticipation of an inquiry by the SEC, Broadcom’s Audit Committee engaged outside counsel to conduct an investigation into Broadcom’s stock option granting practices.  William Ruehle, Broadcom’s CFO, was present at the initial meetings with outside counsel, Irell & Manella, and assisted in the planning of the investigation.  At that time, civil litigation was clearly anticipated but criminal litigation was not since there had never been any involving the stock option issue.  Not surprisingly, within days of the kick-off meeting a civil suit was subsequently filed naming Broadcom and Ruehle, among others, as co-defendants.   

Approximately five days after the initial meetings, Irell met with various Broadcom employees including Ruehle.  It is unclear whether an Upjohn warning was made at the meeting between Ruehle and outside counsel.  Within a month, Irell advised Ruehle to secure independent counsel with respect to the underlying investigation and the pending civil suits.  The statements made at the initial meeting between Irell and Ruehle are at the heart of the criminal proceeding that was ultimately brought against Ruehle. 

Approximately one year after the Audit Committee’s initial investigation, the SEC and the US Attorney’s Office began formal investigations of the stock option related activities of Broadcom’s executives.  As part of those investigations, government investigators interviewed the Irell attorneys that had undertaken the original investigation.  The statements allegedly made by Ruehle were subsequently incorporated into the criminal case against Ruehle.  The question is whether those statements were subject to the attorney-client privilege.

The lower court suppressed the statements made by Ruehle to Broadcom’s outside counsel finding that Ruehle had a reasonable belief that Irell & Manella were his counsel at the time of the initial meeting.  It wasn’t until Irell advised Ruehle to obtain independent counsel did the situation change.  Applying a stricter view of the attorney-client privilege as found under federal common law, the Ninth Circuit rejected the lower court’s finding that the statements made were subject to the attorney-client privilege. 

Two important points arise from this decision.  First, every corporate officer needs to understand that any statements they make during an internal investigation can be used against them in subsequent litigation.  Even if they believe that the outside counsel represents their individual interests, this is probably not the case.  Second, outside counsel should use a written Upjohn warning every time they meet with employees when undertaking any internal investigation.  Although obtaining written acknowledgement of the Upjohn warning will obviously damper and disrupt the investigative process, it will also provide cover to counsel.  Otherwise, as was the case in the Ruehle matter, their actions may be subject to disciplinary proceedings by the state bar. 

At a legal conference in D.C., representatives from both the SEC and the DOJ again stressed the importance of the FCPA in their ongoing investigations.  Mark Mendlesohn, Deputy Chief of the Fraud Section of the Criminal Division of the DOJ, noted that there have been more criminal prosecutions concerning violations of the FCPA in the last 3.5 years than in the previous 28 years since the act was passed in 1977.  There were previously about 2 or 3 prosecutions annually – in 2007 there were 16 prosecutions, in 2008 there were 17 prosecutions, and there have been 10 prosecutions already in 2009 with 120 currently open cases.  Mr. Mendlesohn also noted that there have been over $1 billion in fines since 2005. 

The pattern of these statistics also holds true at the SEC.  According to Kara Brockmeyer, Assistant Director in the Division of Enforcement at the SEC, there have been more cases involving the FCPA in the last four years than in the prior thirty years.  In fact, as part of the restructuring at the SEC, a new section devoted exclusively to matters relating to FCPA violations has been established.  Ms. Brockmeyer stated that the SEC is focusing on joint ventures and the use of third parties in foreign lands.  This focus and its effect will have a significant impact going forward.

The reason for the ever increasing importance of the FCPA is directly attributable to the overall change in the global economy.  Because U.S. corporations are reaching out in areas where they have never before tread, they are forced to rely on third parties to do the legwork.  This can be dangerous since the U.S. corporations cannot blindly rely on third parties – they must take affirmative steps to verify that these parties are not violating the FCPA.  Another peril facing these U.S. corporations is their overall lack of familiarity with the business practices in these countries.  For example, in China almost everyone is a government official since many of the companies with which the U.S. corporations are doing business are state-owned.  The implications to the enforcement of the FCPA are clear.  What would have been considered a straight commercial bribery matter is turned into an FCPA case.

Perhaps most frightening to those venturing out globally, is the trend by DOJ to go after individuals rather than settling just for corporate defendants.  Just this year there have been three FCPA cases tried against individuals, namely Frederic Bourke, Congressman William Jefferson, and Gerald and Patricia Green.  The DOJ won them all.  Business may be going global but the SEC and the DOJ are still enforcing laws locally. 

For those US taxpayers with undisclosed accounts at UBS, their day of reckoning has been postponed.  As a result of a civil action between the IRS and UBS, 52,000 UBS customers faced significant criminal and civil penalties.  The case between UBS and the IRS settled with UBS agreeing to turn over 4,450 client names.  Thus, anyone of the 52,000 UBS customers had about a one in ten chance that their account information would be included in the submittal.  When faced with jail time, this risk was still quite considerable.

This risk was not mitigated by UBS’s actions following the settlement of the case.  Apparently, as part of the settlement agreement with the IRS, UBS was not letting its customers know which accounts it intended to turn over to the IRS.  If UBS made public the accounts that it was going to release to the IRS, then only those customers would be at risk of criminal prosecution.  The others could remain silent and most likely avoid all prosecution.  Thus, this inaction on the part of UBS worked to the IRS’s benefit as it kept the pressure on all of UBS’s customers to voluntarily come in and pay the piper. 

To alleviate UBS’s customers’ fears of criminal prosecution while still imposing hefty civil fines, the IRS implemented a tax amnesty program that was due to expire on September 23, 2009.  Under this program, the UBS customers could eliminate the potential of criminal prosecution provided they pay a significant financial penalty.  Thus, UBS customers could do nothing and hope that their information was not included in the 4,450 accounts given to the IRS.  If they got lucky and guessed correctly, they could escape all penalties.  If they were not so lucky, they would face criminal prosecution.  The third option was to turn their selves into the IRS under the amnesty program and only pay significant fines. 

With time running out, the IRS either blinked or was compassionate, depending on your point of view.  On September 21, 2009, just two days before the amnesty program was set to expire, the IRS extended the program to October 15.  The IRS stated that the extension was due to “repeated requests by tax practitioners and attorneys following an influx of taxpayer requests.”  See here.  Thus, the 52,000 UBS customers (less the 3,000 that have already chosen to take advantage of the program) were given an additional three weeks to decide their fate.

As a result of UBS’s decision to remain silent, two of UBS’s clients had sought relief through the Swiss courts seeking information concerning whether their accounts were among the 4,450 that UBS had agreed to supply to the IRS.  Obviously, if they knew that they were to be included on the UBS list, then they could avail themselves of the amnesty program and only pay the financial penalties.  If they were not on the list, they would be free and clear. 

On September 22, 2009 UBS stated that it would honor the temporary injunction set forth by the Swiss court and release the listing of accounts to be turned over to the IRS “once a decision has been reached.” Although UBS acknowledged that this process could take several months, it has already informed approximately 500 clients that their information was being supplied to the IRS.  In essence, this result will not change anything for the other account holders.  While the 500 customers now know that it is to their advantage to apply to the amnesty program, the options and risks facing the other customers doesn’t change.  Now there are 3,950 unknown names rather than 4,450 unknown names.  The risk that they will be included is less than one in ten, but the potential penalty of jail time still looms large.  If it were me, I’d pay the tax fine and live free another day.

If you are in the gun sights of an FCPA investigation it is time to pray.  The DOJ is batting 1000% this year on its FCPA prosecutions.  The summer began with the trial of Frederic Bourke on charges that he participated in a scheme to bribe government officials in Azerbaijan to sell off the State Oil Company of Azerbaijan Republic.  Bourke was found guilty of conspiracy to violate the FCPA among other charges.  Next, former Louisiana Congressman William Jefferson was charged with 16 corruption charges including a FCPA violation.  He was found guilty of 11 of the charges but was not found guilty on the FCPA violation – not that it matters much to him.  He faces hundreds of years in prison.  Jefferson’s trial was followed by the trial of Gerald and Patricia Green.  They were charged with 21 counts and found guilty of 19, including the ones related to the FCPA.  The Greens were found to have paid $1.8 million in bribes to the former governor of the Tourism Authority of Thailand.  Three prosecutions and three convictions – not a bad record for the DOJ. 

Currently, there are over 120 open FCPA investigations.  While DOJ had previously gone after the companies involved in the allegations, it appears as though there has been a change in tactics with the focus being on the individuals themselves.  To add more fuel to the fire, DOJ has increased the staff assigned to FCPA investigations.  This is clearly very bad news for anyone that is the target of one of these open investigations.  If you are in the sights, get good counsel quickly.  As the saying goes, a lifetime in prison is a terrible thing to waste.

The best lessons in life are the ones learned when someone else has to go through the crisis.  It is much better to learn from another’s mistakes than your own.  A perfect example of this axiom lies in the circumstances surrounding LeNature’s Inc.’s demise and the internal investigation that was done three years prior to LeNature’s downfall.  

In 2006 LeNature’s was forced into bankruptcy as a result of fraudulent accounting practices engaged in by its CEO Gregory Podlucky.  Soon after the federal investigation of LeNature’s began, it was discovered that two sets of books were being kept to distort the true financial condition of the company.  Furthermore, the federal investigation revealed that Podlucky was excessively involved in the accounting records of LeNature’s.  These factors should have raised red flags – and they did.  However, the subsequent actions taken by LeNature’s board show the often known but as often ignored problem associated with a CEO that exercises almost total control over a corporation and its board. 

In 2003, at the behest of LeNature’s CFO, an internal investigation was initiated of LeNature’s executives and its finances.  K&L Gates was brought in to lead the investigation.  K&L Gates subsequently retained Pascarella & Wiker, a regional certified public accounting firm.  Irrespective of what was ultimately revealed in 2007, in 2003 this investigation failed to uncover the fraudulent activities.  How was this possible given the eventual fraudulent findings?

Without question, the most important factor that resulted in the ultimate failure of the investigation was Podlucky’s personnel involvement.  Podlucky thwarted the investigation by preventing interviews and withholding access to certain records.  While these actions clearly impacted the ability of K&L Gates and Pascarella & Wiker to perform the investigation, this should have not been the end of the story.  These two firms should have immediately informed the Board of Directors of the limitations Podlucky was imposing on the investigation.  If the Board did not subsequently undertake appropriate remedial actions, these firms should have walked away.  Otherwise, the results of their findings would be as tainted and misleading as the underlying actions that they were brought in to investigate.  Apparently, these firms were as swayed by Podlucky as was LeNature’s board. 

The moral of the story?  Since K&L Gates and Pascarella & Wiker have been sued by LeNature’s bankruptcy trustee for performing an inadequate investigation, the lesson these firms should have learned is to maintain independence when performing an internal investigation.  Otherwise, you’ll end up getting investigated yourself.