FOCUS ON THE US
Anti-corruption enforcement in the United States has changed dramatically in the past year and its future remains unclear. What direction will Attorney General Jeff Sessions take the US Department of Justice (DOJ) on anti-corruption enforcement is the overarching question, but there are many more worth considering. Will Sessions' unnamed lieutenants continue the aggressive cooperation credit requirements outlined in the Yates Memorandum and administration of self-disclosures under the DOJ Foreign Corrupt Practice Act (FCPA) Pilot Program? Will there continue to be a growing number of books and records actions brought by the US Securities and Exchange Commission (SEC)? Finally, do the enormous settlements at the end of 2016 reflect a clearing of the enforcement pipeline, or are there a number of matters being worked up toward completion in 2017?
A new team takes over at DOJ and the SEC
First, it's worth noting that Senator Sessions' confirmation hearing testimony on January 10 and 11, 2017, may have answered one of the questions regarding whether he would continue current enforcement policies and strategies. Sessions' testimony was generally supportive of ongoing DOJ's efforts to hold individual wrongdoers accountable; however, his testimony did not provide specific support for ongoing FCPA enforcement strategies, and the DOJ policies targeting individual conduct that was laid out in the Yates Memorandum. It also bears mentioning that Senator Sessions is no stranger to the prosecution of bribery conduct. In his United States Senate Judiciary Committee Questionnaire responses, Senator Sessions highlighted a case that focused on bribery as one of the most significant litigated matters that he personally handled. Although United States v. William Broadus et al. did not involve the Foreign Corrupt Practices Act, it was described by Sessions as "the most significant corruption case involving the criminal justice system" in the district where he served first as Assistant United States Attorney and later as the United States Attorney.
Second, the Attorney General and the Trump administration will have to identify and win confirmation for several key FCPA enforcement leadership positions at the DOJ, including the Deputy Attorney General and the Assistant Attorney General responsible for the Criminal Division. The same will be true at the SEC, where the President has nominated Jay Clayton to succeed Mary Jo White as the SEC Chairman, but still needs to name a Head of Enforcement. Until we see which nominees successfully come through the confirmation process, it will be hard to predict which current policies and approaches will be adopted by the new administration. Clayton's past criticism of the enforcement of anti-bribery actions against US business organizations may result in the SEC reducing some of its recent high profile efforts to the DOJ. Given the relative successes of recent enforcement actions, it makes sense to assume those approaches will still be in place over the next year and to consider the legal risk they generate for global business operations until either organization announces a change in their anti-bribery laws.
The DOJ's Yates Memorandum changed the fundamentals for internal investigations
Given the mood and sentiment behind the 2016 national election, it seems unlikely that the incoming leadership team will drop the DOJ's attempt to generate greater individual accountability for violations of federal statutes through fairly new policies. In 2015, the publication of the Yates Memorandum ushered in a new era for how attorneys should successfully handle corporate internal investigations, including those where allegations of Foreign Corrupt Practices Act violations have been made. At the outset, the Yates Memorandum dramatically changed the way in which investigations are conducted by pressuring corporations and their counsel to prospectively assist with the effort to hold individual wrongdoers accountable. The most notable portion of the memorandum for legal counsel representing business organizations was the following: "[I]n order to qualify for any cooperation credit, corporations must provide to the Department all relevant facts relating to the individuals responsible for the misconduct." Now, in order to receive cooperation credit, companies have to disclose any employee wrongdoing regardless of status or title. This credit remains one of the key factors in the DOJ's charging decision and when relevant, the amount of monetary risk the organization faces to resolve its ongoing investigation.
The government's focus on individual prosecutions, and leveraging of corporate self-disclosures to get there, is not likely to dwindle in 2017. At the December 2016 International Conference on the Foreign Corrupt Practices Act, the DOJ Deputy Attorney General Yates and then-SEC Enforcement Director Andrew Ceresny both gave speeches that emphasized prosecuting individual wrongdoing and persuading companies to self-disclose. Yates noted that the DOJ is "pleased with what [they have] accomplished in focusing on individual actors and that "...we cannot forget that behind every bribe and illegal payment is one or more individuals who knew what they were doing was wrong and nonetheless broke the law.... As I've seen over and over again during my career, the best way to deter individual conduct is the threat of going to jail. That's what truly changes behavior."
As evidence of the SEC's commitment to hold individuals accountable, Ceresny highlighted its recent settlement with Och-Ziff Capital Management. The hedge fund agreed to pay close to US$413 million in fines to the SEC and the DOJ, while CEO Daniel Och agreed to pay US$2.2 million to the SEC—reportedly the largest SEC settlement amount by an individual in FCPA history—and CFO Joel M. Frank settled civil charges, with a penalty to be assessed at a future date. "This case sends the message loud and clear that CEOs will be held responsible if they do business with persons with close ties to government officials when due diligence raises significant red flags," Ceresney said. "It is only by holding such senior decision-makers responsible that we will deter such conduct." During his speech, Ceresney also pointed to the fact that the SEC has chosen not to bring an action against the a company that had self-reported as a concrete example of the tangible benefits that self-reporting and cooperation can bring.
What the leadership of both the DOJ and SEC has made clear is that individual prosecutions of FCPA violations are likely only to increase in the coming months and years as cases currently under investigation make their way through the pipeline. Yates commented that "[i]t won't be every case, but the investments we're making now are likely to yield a real increase in the years ahead."
While the Yates Memorandum laid out "six key steps" for how to best pursue individual wrongdoers, it left many practitioners with more questions than answers. Over the past two years, however, the DOJ and SEC continue to reveal insights on how to effectively and successfully conduct a FCPA investigation. Regardless of these insights into what actually constitutes sufficient cooperation in the eyes of the enforcement authorities, the principal challenges that remain for the corporation's lawyers in a post-Yates world are the legal and ethical issues the policy triggers. Foremost among these are "who is my client" and "what are my legal and ethical responsibilities to that client in light of the Yates Memorandum".
The future of the DOJ's FCPA Pilot Program is less clear
In April of last year, the DOJ implemented a new one-year FCPA Pilot Program, aimed at encouraging voluntary self-disclosure, cooperation and remediation. In exchange for self-disclosure, the DOJ offers the possibility of a so-called "declination" of prosecution (which traditionally means that although a crime has been committed, the DOJ will not prosecute it), up to 50 percent reduction in criminal fines and the avoidance of an appointed compliance monitor. In line with the Yates Memorandum, the Pilot Program requires disclosure of all relevant facts regarding individuals involved in the misconduct, including the company's former and current officers, employees and agents.
While the idea of reduced fines or even a declination in return for self-disclosure, cooperation and remediation is not new, the Pilot Program seeks to provide a more detailed framework for describing the potential amount of fine reduction, which is potentially a useful tool for companies to evaluate whether to self-disclose or not. Generally, the Pilot Program aims to provide more transparency in how the DOJ will treat companies that self-disclose but ultimately the success of the program lies in how the DOJ applies it. It remains to be seen how the program will affect corporate disclosures generally, and with respect to individual cases, whether the DOJ will apply the guidelines in a manner that provides more certainty to self-disclosing companies.
In June of 2016, the government announced the first two prosecutorial declinations under the Pilot Program. Both cases involved allegations that the company's Chinese subsidiary had engaged in bribery. Employees at Akamai's Chinese subsidiary allegedly provided US$40,000 in improper gift cards, meals and entertainment to officials at state-owned entities to build business relationships. Nortek's Chinese subsidiary allegedly made improper payments and gifts to Chinese officials totaling US$291,000 to influence regulatory actions and fines, according to the SEC.
International cooperation on anti-corruption appears to be locked in
Another critical component of FCPA enforcement that the DOJ and SEC leadership forecasted for 2017 is the continued increase in international cooperation between US and foreign authorities. At the same December 2016 conference noted earlier, Ceresney reinforced the strides the SEC Enforcement has made over the last few years in international cooperation. He noted that increased collaboration with international regulators and law enforcement has been pivotal to the SEC's success in the FCPA space, remarking that "[a]s global markets become more interconnected and complex, no one country or agency can effectively fight bribery and corruption alone." Ceresney highlighted the global investigations of VimpelCom and Embraer, both of which resulted in charges brought by the SEC and DOJ in the US, and by authorities in the Netherlands and Brazil, respectively, as two recent examples of successful cooperation between international authorities. According to Ceresney, such cooperation and coordinated global resolutions send strong messages of deterrence to companies and individuals.
Our Firm's lawyers representing clients in investigations involving conduct outside of the US repeatedly experience closer levels of governmental cooperation between the countries where the alleged conduct took place and the United States. This increasing trend puts a premium on legal counsel that places due consideration on the requirements of all applicable global laws, legal privileges and local cultures.
Unless a radical shift in enforcement priorities occurs in 2017, the anti-corruption enforcement initiatives currently in play at the DOJ and SEC will remain a significant legal risk for those companies operating on a global basis with a jurisdictional connection to the United States, however slight. Given this risk, coupled with the ever-higher levels of enforcement by countries where the underlying corrupt conduct takes place, organizations' leadership and their counsel need to take the necessary proactive steps to identify and mitigate their exposure.
FOCUS ON THE UK
The Serious Fraud Office (SFO) has shown its commitment to penalize firms engaged in bribery and corruption. This is exemplified by the SFO's decision to enter into a significant Deferred Prosecution Agreement (DPA) with Rolls-Royce PLC, the British car and aero-engineering company. The agreement was approved on January 17, 2017 by the President of the Queen's Bench division, Sir Brian Leveson.
Conduct of Rolls-Royce
The DPA was agreed following a four-year investigation by the SFO, and relates to bribery and corruption involving intermediaries in multiple overseas markets. The DPA covers Rolls-Royce's conduct across seven jurisdictions: China, India, Indonesia, Malaysia, Nigeria, Russia and Thailand, and involves the company's civil aerospace business, defence aerospace businesses and its former energy business. The allegations include:
- Agreements to make corrupt payments to agents in connection with the sale of civil aircraft engines and in connection with supply of gas compression equipment;
- Concealment or obfuscation of the use of intermediaries involved in its defence business in countries where the use of intermediaries is restricted; and
- Failure to prevent inducements or bribery by Rolls-Royce employees or intermediaries.
Sir Leveson described the investigation as revealing "the most serious breaches of the criminal law in the areas of bribery and corruption, some of which implicated senior management and, on the face of it, controlling minds of the company."
A distinctive DPA
This is the third and most significant DPA which the SFO has levied since the statutory power became available in 2014. Previous DPAs, against Standard Bank in late 2015 and an unnamed party in 2016, totalled approximately £26 million and £6.5 million, respectively. This DPA agreed with Rolls-Royce, reaching nearly £500 million, is by far the highest penalty that has ever been imposed by the SFO for bribery.
In addition to the SFO agreement, Rolls-Royce also reached a parallel DPA with the US Department of Justice totalling US$169.9 million and a Leniency Agreement with Brazil's Ministério Público Federal for US$25.5 million.
Notably, this is the first time that the UK's proportion of the total global settlement is larger than that of the US. Further, three agencies across the globe working together, in this case from Europe and the Americas, may suggest a trend towards more aggressive, unified approach to anti-corruption enforcement.
An interesting feature of the DPA is that Rolls-Royce did not self-report. Self-reporting is one of the fundamental objectives of the DPA regime. Once the SFO investigation commenced, however, Rolls-Royce actively cooperated and the level of cooperation led to a final discount of 50 percent. Commentators have questioned whether the decision may encourage boards of directors not to self-report when it may still be possible to obtain a DPA and a discount without doing so.
Decision to impose a DPA rather than prosecute
The allegations against Rolls-Royce relate to systematic and extensive bribery and corruption. In reaching his decision, the Judge took into account several aggravating factors, including that the offences were multi-jurisdictional, spanned across three decades, related to the award of large value contracts and involved senior employees.
Sir Leveson agreed that the total sum of the UK settlement (£497.25 million plus interest and the SFO's costs of £13 million) reflected the seriousness of the conduct displayed. While this high figure may demonstrate that the SFO and UK courts are taking bribery and corruption seriously, the question has been asked: if Rolls-Royce is not prosecuted in these circumstances, in what circumstances will a company be subject to prosecution?
The Judge highlighted that he had to consider what impact a prosecution, rather than a DPA, would have on "employees, others innocent of misconduct or what might otherwise be described as the consequences of a conviction." Subject to the terms being fair, reasonable and proportionate, Sir Leveson concluded that it was in the interest of justice that the conduct of Rolls-Royce be resolved through the mechanism of a DPA.
There are currently a number of ongoing bribery and corruption investigations being conducted by the SFO and we will be monitoring whether the agency decides to prosecute, or prefers to enter into DPAs.
FOCUS ON CHINA
In 2016, China continued to vigorously enforce its anti-corruption laws. In addition, the supreme judicial bodies issued interpretations specifying penalties in corruption-related criminal cases while the Anti-Unfair Competition Law, which includes commercial bribery, continues to be reviewed.
Judicial interpretation on handling criminal cases involving embezzlement and bribery
On April 18, 2016, the Supreme People's Court and the Supreme People's Procuratorate issued the Interpretations on Certain Issues Concerning the Application of Law in Handling Criminal Cases Involving Embezzlement and Bribery (Interpretations), which provide specific sentencing criteria for corruption crimes based on the Amendment (IX) to the Criminal Law of the People's Republic of China (Amendment (IX)) promulgated in 2015.
The Interpretations are significant for businesses operating in China, as Chinese law provides that the death sentence may be imposed where the amount of embezzlement or the accepted bribes is "especially huge" and the crime involves particularly serious circumstances, such as adverse social consequences, or significant harm to the interests of the State and the people. The Interpretations expand upon the meaning of certain expressions used in anti-corruption laws, such as "relatively large amount," "huge amount," and "especially huge amount." Further, the Interpretations provide that, "other serious circumstances," such as the intended use of money and property, as well as the criminal record of the suspect, must be taken into account when determining penalties.
It is noteworthy that, generally speaking, the penalty for receiving bribes is heavier than offering bribes. However, the Interpretations state that the penalty for offering bribes may be greater than receiving bribes under certain circumstances.
In addition, the Interpretations extend the definition of "money and property" to include material interests that can be converted into a monetary amount, such as the decoration of houses, waiving of payments for debts, membership services and travel.
Further, "seeking benefits for others" constitutes a criminal offense even where a person accepts money or property after having performed their duties or functions.
Anti-commercial bribery in revised Anti-Unfair Competition Law
On February 25, 2016, the Legislative Affairs Office of the State Council released the Anti-Unfair Competition Law (the Revised Draft AUCL) to solicit public comments. The Revised Draft AUCL details relevant prohibitions on commercial bribery and elaborates on the meaning of commercial bribery to include the following:
- Seeking organizational, departmental or personal economic benefits relating to public services offered by government agencies, public institutions, or public enterprises, such as power supply companies;
- Paying economic benefits to another undertaking without making a truthful record thereof in the contract and accounting documents; and
- Paying or offering to pay economic benefits to a third party having influence on a transaction while causing harm to the lawful rights and interests of other undertakings or consumers.
In addition, commercial bribery is defined as an economic benefit given—or promised to be given—to the other party in a transaction, or to a third party that can influence the transaction, to encourage them to solicit for undertaking a transaction opportunity or competitive advantage. As well, where any staff member of an undertaking makes use of commercial bribery to seek any transaction opportunity or competitive advantage for the undertaking, such act shall be deemed the act of the undertaking. Since the Revised Draft AUCL has not yet come into effect, there may be further amendments.
Given the promulgation of relevant laws, regulations, judicial interpretations, and policies, it is believed that China will continue to crack down on anti-corruption in 2017. With the expansion of anti-corruption offences, the legal risks—and consequences—associated with doing business in a manner that does not comply with these laws have increased significantly.
FOCUS ON CANADA
In 2016, Canada continued to demonstrate its appetite to enforce the Corruption of Foreign Public Officials Act (CFPOA), although at a steady rather than spectacular pace. In December 2016, charges under the CFPOA were laid against Calgary businessman Larry Kushniruk, President of Canadian General Aircraft, in connection with an alleged conspiracy to bribe military officials in Thailand over a commercial aircraft transaction. This case reflects a growing trend in Canada of favoring the pursuit of charges against individuals in bribery and corruption matters. In addition, the high-profile and large-scale CFPOA proceedings against SNC-Lavalin Group Inc. moved forward in 2016, with a preliminary hearing being set down for September 2018. The RCMP also continues to run other active CFPOA investigations which are yet to result in charges, but prosecutions are expected to flow from at least some of these in due course.
The slow and steady pace of CFPOA enforcement has fueled debate in 2016 over whether Canada should introduce a regime that allows for Deferred Prosecution Agreements (DPA) to be reached in CFPOA and other white collar cases, similar to the DPA regimes widely utilized in the US and, more recently, in the UK. Supporters of the initiative argue a Canadian DPA regime would provide law enforcement with a more efficient alternative in resolving CFPOA cases for less egregious conduct, by providing a mechanism to encourage corporations to self-report and remediate instances of corruption in their organizations. In addition, by promoting the proactive implementation of compliance programs, DPAs free up valuable investigative and prosecutorial resources, which could be better deployed in pursuing the most compelling and serious cases. On the other side, critics argue DPAs would result in an "enforcement-lite" approach that allows wrongdoers to escape without having to face the prospect of a conviction, and would likely soften the deterrent effect of the current enforcement regime. Importantly, the Canadian government has taken note of the debate, and is currently engaged in a review of the issues surrounding DPAs through an initial consultation process. We anticipate further significant developments on this very important issue in 2017.
Domestic corruption enforcement also captured the news in 2016, focusing particularly on the construction and engineering sector in Québec. Former Laval mayor Gilles Vaillancourt pleaded guilty to fraud charges in connection with an alleged corruption scheme, receiving a six-year sentence and a multi-million dollar restitution order as a result. Another former mayor, Robert Poirier, was convicted along with France Michaud, the former vice president of the engineering firm Roche, regarding a corruption scheme in relation to the award of contracts for a water treatment facility in Boisbriand. The same impugned transaction also led to the former Québec Deputy Premier and Minister of Municipal Affairs, Nathalie Normandeau, being charged with corruption-related offences in March 2016. We fully expect to see this trend of domestic corruption enforcement to continue in 2017 and beyond.
On the legislative side, 2016 saw the submission of the first reports under the Extractive Sector Transparency Measures Act (ESTMA), a federal anti-corruption act which requires extractive sector companies operating in Canada to report on payments made to foreign and domestic government entities. From 2017 onwards, the obligation will extend to the reporting of payments made by extractive sector companies to Canadian indigenous government entities.
Another significant development in 2016 was the introduction of the whistleblower regime of the Ontario Securities Commission (OSC). The regime provides for a whistleblower bounty to be paid to informants whose tips result in successful enforcement action, as well as for enhanced whistleblower protection. Early reports suggest that the OSC has already received a large volume of tips from whistleblowers, many of whom are no doubt hoping to take advantage of the potential reward on offer, which may be as high as CA$5 million. We will have to wait and see whether 2017 provides more ammunition to the proponents of the controversial whistleblower scheme than its critics.
FOCUS ON MEXICO
On July 19, 2017, the new General Law of Administrative Liabilities (the General Law or Ley General de Responsabilidades Administrativas), is set to take effect, a key development in Mexico's continued efforts to fight corruption and increase transparency at all government levels.
This new law will repeal and replace the Federal Law of Administrative Liabilities for Public Servants (Ley Federal de Responsabilidad Administrativa de los Servidores Públicos), and the Federal Anti-corruption Law in Government Procurement (Ley Federal Anticorrupción en Contrataciones Públicas), and will greatly expand the scope of liability of private parties (e.g., corporations) for acts of corruption at the administrative level, as private parties may be held liable for improper conduct carried out by individuals acting in their name or on the behalf of others (i.e. officers, directors, liaisons, employees, contractors, advisors, among others). However, when determining the degree of liability of these companies, the existence and enforcement of an integrity policy—which must meet the requirements set forth in the General Law—will be considered as a mitigating factor.
Other notable provisions of the General Law include the following:
- Public officials must prepare and file three sworn statements disclosing: (a) their assets; (b) any potential conflicts of interest; and (c) evidence of compliance with their tax obligations. These statements will be stored at the digital platform of Mexico's National Anti-corruption System (NAS), with access upon request for anti-corruption enforcement authorities. Redacted versions of these statements will be publicly available.
- Public officials involved in public contracting procedures will be subject to closer supervision and will have to abide by, and act in accordance with, a protocol for contracting procedures to be issued by the Coordinating Committee of the NAS.
- Other procedures arising from administrative offenses will be carried out with the involvement of three separate authorities: (a) the Investigative Authority (Autoridad Investigadora); (b) the Rendering Authority (Autoridad Substanciadora); and (c) the Adjudicative Authority (Autoridad Resolutora). In procedures for serious offenses or those carried out by private parties, the Federal Court of Administrative Claims will act as the Adjudicative Authority. Criminal liability may also be pursued by the District Attorney.
Given that the existence and enforcement of an integrity policy that is consistent with and abides by the requirements set forth by the General Law will be considered as a mitigating factor when prosecuting private parties, and that responsible parties may choose to come forward to the authorities under a leniency program pursuant to which applicable fines may be reduced, it is of the utmost importance for private parties to review, update, amend and/or implement (as necessary) their relevant policies and guidelines to ensure compliance (including implementing training sessions). Needless to say, this applies to all private parties doing business in Mexico, but is particularly important for those parties which regularly engage with public servants and government agencies.
The General Law follows a set of Constitutional Amendments on anti-corruption enacted in 2015, and the introduction of the NAS and amendments to existing statutes (such as the Federal Criminal Code) in 2016 as part of Mexico's commitment to maximum transparency.
We thank Anthony Cole for his contributions to this publication.
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