Foreign Corrupt Practices Act:

A '70s Revival and Growing D&O Risk

By Kevin LaCroix

A venerable statute from the 1970s is going through a 21st century revival, and that is not good news either for companies involved in the global economy or for their directors and officers.

The Foreign Corrupt Practices Act of 1977 is a federal law containing antibribery and accounting requirements. The antibribery provisions make it unlawful to make a payment to a foreign official for the purpose of obtaining or retaining business.

The accounting provisions require publicly traded companies to maintain records that accurately and fairly represent their transactions, and to have an adequate system of internal controls.

The FCPA emerged from Securities and Exchange Commission investigations in the mid-1970s that led to over 400 companies admitting to having made questionable payments to foreign governments or officials. The FCPA was enacted to halt bribery of foreign officials and to restore public confidence.

According to a year-end update from a leading law firm, Gibson, Dunn & Crutcher, “2006 marked one of the busiest years of FCPA enforcement, and further evidenced the recent proliferation of FCPA enforcement activity.”

The primary reason for the dramatic increase in the number of FCPA enforcement actions is the self-examination required under the Sarbanes-Oxley Act, interacting with the self-reporting compelled under the federal prosecutorial guidelines for corporate criminality.

Sarbanes-Oxley requires senior management to scrutinize their company's internal controls and processes. Increased scrutiny has lead to increased self-identification of FCPA concerns.

Under Department of Justice guidelines, a corporation may avoid criminal prosecution if it has self-reported and is cooperating fully with the authorities.

In other words, companies are finding the FCPA problems themselves, and turning themselves in. More than three-quarters of all formal FCPA enforcement actions in 2005 and 2006 resulted from voluntary disclosures following internal investigations, the Gibson, Dunn & Crutcher report notes.

Another important factor in the escalating number of FCPA problems is the challenge of doing business in China. According to an Aug. 22, 2005 article in the Washington Post, “The lure of China profits combined with local corruption is tempting foreign companies and managers and bringing them into conflict with U.S. antibribery laws.”

U.S. companies find themselves “adopting Chinese-style tactics to secure sales as they compete in a market in which Communist Party officials routinely control businesses and purchasing agents consider kickbacks part of their salary,” the Post reported.

These conditions have brought an increasing number of U.S. companies into conflict with the FCPA. Among those having problems from their Chinese operations are Lucent Techologies (now Alcatel-Lucent), InVision Technologies and Schnitzer Steel Industries.

An additional factor behind the growing number of FCPA enforcement actions is the increased willingness of U.S. enforcement authorities to reach far outside traditional jurisdictional boundaries.

For example, in October 2006, the SEC and Justice Department announced that Statoil ASA–a Norwegian firm whose American Depositary Receipts are traded on the New York Stock Exchange–agreed to pay $21 million to settle FCPA charges. Other foreign-domiciled firms that have been the subject of U.S. FCPA probes include DaimlerChrylser and Siemens.

As the number of FCPA enforcement actions has increased, so, too, has the size of the fines and penalties imposed. In February 2007, three subsidiaries of Vetco International, Ltd. agreed to pay criminal fines of $26 million, the largest criminal fines ever under the FCPA.

From the perspective of directors and officers liability insurance risk, the threat is not so much from the underlying FCPA enforcement action, since any fines and penalties likely would not be covered under most D&O policies. Rather, the threat is from the potential liability that could arise in any follow-on civil action. Defense expense and settlements or judgments incurred in a follow-on action would usually be covered under the typical D&O policy.

The FCPA itself does not grant a private right of action. However, plaintiffs have become increasingly successful in alleging securities violations for disclosures relating to, or resulting from, FCPA violations.

For example, Willbros Group–a Houston-based international contractor for the oil and gas industries–was named in a securities class-action lawsuit alleging that the company had been the subject of numerous investigations “because the company engaged in a campaign of illegal and illicit bribery of foreign government officials in Bolivia, Nigeria and Ecuador to successfully obtain construction projects.”

The complaint alleged that the company was forced to restate several years of financial statements and to accrue a reserve for possible FCPA fines and penalties. The case settled in August 2006 for $10.5 million, and the company said the settlement would be funded by its D&O insurer.

Similarly, shareholders filed a securities fraud lawsuit against Immucor–a Norcross, Ga.-based medical diagnostics company–and certain of its directors and officers relating to corruption problems at the company's Italian subsidiary. The complaint alleged that the company gave an overly optimistic assessment of its foreign business practices and internal controls. In October 2006, a federal court in Atlanta denied the defendant's motion to dismiss and the case has gone forward.

Another litigation threat may come from the United Nations Convention Against Corruption, which requires member states to provide a private right of action for those who suffer damages as a result of “an act of corruption.” The Convention has been ratified in over 80 countries. The existence of the private right of action in other countries could subject U.S. companies to litigation in these foreign jurisdictions.

The resolution of FCPA violations may now stretch far beyond achieving peace with the enforcement authorities. The possibility of follow-on civil litigation is now also part of the equation. As FCPA enforcement actions grow in number and magnitude, the follow-on litigation exposure could pose an increasingly greater D&O risk.

Kevin LaCroix is an attorney and a director of OakBridge Insurance Services, a specialized insurance intermediary focused exclusively on executive liability coverages in Beachwood, Ohio. Mr. LaCroix also maintains the D&O Diary blog at http://dandodiary.blogspot.com.

Quotebox, with mug:

“While fines and penalties arising from FCPA enforcement actions would not be covered under most D&O policies, follow-on civil actions represent a growing area of D&O insurance risk.”

Kevin LaCroix

Art caption:

Disclosures of violations of the Foreign Corrupt Practices Act–enacted to halt bribery of foreign officials–could lead to suits against directors and officers.

Flag: Key Factors

Head: Revival Seen In FCPA Concerns

Factors driving a surge in the number of Foreign Corrupt Practices Act enforcement actions include:

o Self-examination required under the Sarbanes-Oxley Act

o Self-reporting compelled under the federal prosecutorial guidelines for corporate criminality

o The challenge of doing business in China

o The increased willingness of U.S. enforcement authorities to reach far outside traditional jurisdictional boundaries

Special Reports /

Foreign Corrupt Practices Act: A '70s Revival and GrowingD&O Risk

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