Article by *F. Joseph Warin, Michael S. Diamant, Veronica S. Root

U. OF PENNSYLVANIA JOURNAL OF BUSINESS LAW [Vol. 13:2 2011] FCPA MONITORSHIPS AND HOW THEY CAN WORK BETTER (PAGE 322)

Few penalties imposed on a corporate criminal offender cause as much consternation as do compliance monitors. After the late-night crisis management meetings, after the invasive and expensive internal investigation, after the shakeup of senior managers, and after the protracted negotiations with federal authorities, companies just want to get back to business. They want to sell their goods and services, be profitable, invest, and grow. In short, they want to move on. Fundamentally, the corporate compliance monitor stands in the way of forgetting the past and going back to "business as usual"—at least when it comes to obeying the law. The monitor's purpose is to see that the company follows applicable laws and regulations going forward and institutes the proper policies and procedures to help ensure compliance. Corporations will never welcome this "tail" to their criminal prosecutions. Monitorships inevitably involve significant expenditures of funds and time. Indeed, the Government Accountability Office reported to Congress in November 2009 that corporations have expressed concern about "how monitors were carrying out their responsibilities" and "the overall cost of the monitorship."1 By taking the right steps, however, companies can often help tailor and guide the monitorships they receive to help ensure that the organization realizes value.

This article explores the rise of the corporate compliance monitor as a condition for settling violations of the U.S. Foreign Corrupt Practices Act ("FCPA")—a setting in which federal prosecutors routinely impose monitors. From 2004 to 2010, more than 40 percent of all companies that resolved an FCPA investigation with the U.S. Department of Justice ("DOJ") or Securities and Exchange Commission ("SEC") through a settlement or plea agreement retained an independent compliance monitor as a condition of that agreement.2 And although the trend line is somewhat unclear, this practice seems unlikely to abate. In 2007, almost 38% of corporate FCPA settlements entailed monitors; 60% in 2008; 18% in 2009; and 32% in 2010.3

If U.S. enforcement authorities maintain their current approach, the reality is that companies facing liability for violating the FCPA are likely to have a monitor imposed on them as part of a settlement agreement. From the U.S. government's perspective, monitorships make sense for companies that violate anti-bribery laws, making it important for offending corporations to learn how to deal with monitors. Pulling from the authors' extensive experience with three major FCPA compliance monitorships, as well as their work assisting clients operating under an FCPA monitorship, this article aids in that process. It also hopes to help monitors themselves, as well as the prosecutors who appoint them, in making the monitorship a more constructive feature of an FCPA settlement. Part I provides some basic background on the FCPA and discusses the use of compliance monitors as a term in settlement agreements with federal regulators. Part II examines why some companies receive a monitor as a term of an FCPA settlement, while others do not. Part III discusses what FCPA monitorships most commonly entail. Part IV identifies best practices for FCPA compliance monitors: what they should and should not do in their quest to help mold an ethical organization. Finally, Part V advises how companies can utilize their role in the selection, retention, and management of the monitor to help make the process anodyne and the results valuable for the organization.

I. FCPA ENFORCEMENT AND THE COMPLIANCE MONITOR AS A CONDITION OF SETTLEMENT

Before delving into the details of FCPA compliance monitorships, it is helpful to consider briefly the FCPA and its enforcement, more generally, as well as recent FCPA enforcement actions that have featured a monitor.

A. The FCPA and its Enforcement

In 1977, following revelations about the corrupt activities of major U.S. corporations overseas, Congress passed the FCPA, 15 U.S.C. §§ 78m and 78dd-1 et seq.4 At the heart of the statute are its anti-bribery provisions, which prohibit giving or offering anything of value5 to a foreign official,6 political party, or party official with the corrupt intent to influence the recipient in his or her official capacity or to secure an improper advantage in order to obtain or retain business.7 The anti-bribery provisions apply to three categories of persons: (1) "issuers"8—any company whose securities are registered in the United States or that is required to file periodic reports with the SEC; (2) "domestic concerns"— any individual who is a U.S. citizen, national, or resident of the United States, or any business organization that has its principal place of business in the United States or which is organized in the United States; and (3) other persons who take any act in furtherance of a corrupt payment while within the territory of the United States.9

The FCPA also contains two accounting provisions, which require publicly traded companies to maintain (1) accurate "books and records" and (2) reasonably effective internal controls.10 Under the books-andrecords provision, issuers must "make and keep books, records, and accounts, which, in reasonable detail, accurately and fairly reflect transactions and dispositions of the assets" consistent with Generally Accepted Accounting Principles.11 The books-and-records provision applies to all transactions, not just corrupt activities. Under the internal controls provision, issuers must implement and maintain a system of internal accounting controls that "provide reasonable assurances" that no off-book accounts or disbursements or other unauthorized payments are made.12

The FCPA does permit some payments that otherwise satisfy its elements. It provides an exception for payments that facilitate or expedite some routine governmental actions.13 And it allows for two affirmative defenses: (1) payments expressly permitted by the written laws of the host country, and (2) "[r]easonable and bona fide expenditure[s], such as travel and lodging expenses . . . directly related to (A) the promotion, demonstration, or explanation of products or services; or (B) the execution of performance of a contract with a foreign government or agency thereof."14 Much of the time and energy expended on FCPA compliance by corporate lawyers today involves ensuring that benefits provided to foreign officials safely fall under one of these affirmative defenses.15

That corporate counsel expends much time at all worrying about the FCPA is a relatively recent phenomenon. Until the past decade, FCPA enforcement was fairly dormant. Years would pass without any prosecutions. In fact, federal authorities brought only five enforcement actions in 2004.16 But enforcement exploded in 2007, the statute's thirtieth year, with thirty-eight enforcement actions.17 In 2009, this number grew to forty, with the DOJ bringing twenty-six alone.18 The SEC and DOJ combined for 137 enforcement actions over the past three years.19 Last year, the SEC and DOJ broke all FCPA enforcement records, with the two agencies combining for seventy-four enforcement actions.20

FCPA enforcement can result in criminal and/or civil liability. The DOJ may bring criminal and civil enforcement actions against violators; the SEC has civil authority only. If a corporation violates the anti-bribery provisions, the criminal penalties include a $2 million fine or twice the pecuniary gain or loss, and possible suspension and debarment by the U.S. government.21 If a corporation violates the accounting provisions, it may suffer a criminal penalty of up to $25 million, per violation.22 Civil penalties may include fines and disgorgement of profits.23

Ultimately, however, these monetary penalties can pale in comparison to the other difficulties (formal and collateral) that attend corporate FCPA enforcement actions. Following the discovery of a potential FCPA problem, the responsible company will conduct an internal investigation and take appropriate remedial steps. This usually entails a significant expenditure of money on attorneys' fees, the appropriation of employee time, and even the permanent loss of employees who must be terminated for improper behavior. Once the scandal becomes public, other collateral consequences may include a decline in reputation or goodwill, a drop in stock price, lawsuits by investors or others, suspension or debarment from government contracting, and various tax law problems.

The consequence on which this article focuses, the corporate compliance monitor, is one of the greatest challenges that may accompany an FCPA enforcement action. Imposed as a condition of the settlement, the monitor siphons both financial and human resources, while increasing the probability that another corruption problem could be uncovered and the parade of collateral consequences could resume. It is, therefore, little wonder that corporations wish to avoid monitors.

B. Monitorships as Part of FCPA Settlements

It is unsurprising that the government frequently imposes independent compliance monitors as a term of an FCPA settlement. As some observers have noted, foreign bribery cases tend to involve a culture of corruption, trigger individual rationalizations or deflection of responsibility, and implicate an entire organization's "social architecture" and incentive system.24 In other words, FCPA transgressions may reveal systemic problems at an organization. This is why compliance professionals typically point to a "culture of compliance" as the most effective tool for combating corporate corruption.25

A federal prosecutor turning to the DOJ's McNulty Memorandum for guidance on how to handle a corporate offender is advised that "the government [should] address and be a force for positive change of corporate culture [and] alter corporate behavior,"26 while the SEC's Seaboard Report advises securities enforcement officials to consider whether "a tone of lawlessness [was] set by those in control of the company."27 Concepts like "tone" and "culture," as important as they may be, are often hard to quantify and harder still to ensure through even very good policies and procedures. Corporate culture is inherently organic, and altering it requires time before reforms take root and permeate the organization. Therefore, in addition to demanding appropriate remedial actions, prosecutors trying to ensure that a corporate defendant sets a compliant tone within the organization and changes its culture will undoubtedly see a "tail" to a settlement in the form of a monitor as a useful tool. During the years that follow the settlement, the monitor can help ensure that the corporation's leaders continue to sound the right "tone from the top" and take the steps necessary to infuse the corporation with high standards of ethical behavior. Occasionally, corporations use the presence of an FCPA monitor as an opportunity for effecting significant change. As the DOJ's Morford Memorandum notes, effective monitorships help to "reduce[] recidivism of corporate crime and . . . protect[] the integrity of the marketplace."28

A second reason why monitorships may be particularly attractive in the FCPA context is that overseas bribery often results from the environments in which companies operate, rather than representing a conscious decision by employees to gain a leg up on competitors.29 Frequently, businesspeople complain that it is "impossible" to do business in certain countries without paying bribes.30 Because overseas bribery is so often a response to a "shakedown" rather than an aggressive business maneuver, one would expect backsliding to be more common following an FCPA problem than other white collar crimes. Again, the "tail" that is the compliance monitorship makes this less likely.

FCPA monitorships may attend different types of settlements with the U.S. authorities. For SEC enforcement, the monitorship is usually a term of an administrative settlement or a final judgment entered by a court.31 The DOJ usually includes the monitorship as a term in a deferred prosecution agreement ("DPA") or a non-prosecution agreement ("NPA"), but monitorships have also been part of plea agreements.32 From 2004 through 2010, seventy-one companies resolved FCPA allegations by entering into one or more of these resolutions with the DOJ or SEC. Of these seventy-one companies thirty, or 42.25%, were required to retain a monitor as part of the resolution. This is a significant percentage, especially when one considers, as a point of comparison, that from 1993 through September 2009, DOJ prosecutors negotiated a total of 152 DPAs and NPAs—FCPA-related and otherwise—and forty-eight, or slightly more than 30%, required the imposition of a monitor.33

In 2010, twenty-two corporations settled FCPA-related enforcement actions with the SEC and/or DOJ. Of these, seven retained independent corporate monitors as a condition of settlement:

BAE SYSTEMS PLC ("BAES") – From 2000 to 2002, BAES represented to various U.S. government agencies that it would create and implement procedures designed to ensure the company's compliance with the FCPA.34 Allegedly, BAES knowingly and willfully failed to create such procedures, made a series of substantial payments to shell companies and third-party intermediaries, and regularly retained "marketing advisors" to assist in securing sales of defense products.35 This was all allegedly done without BAES properly scrutinizing the relationships to ensure that wrongdoing did not occur.36 Various U.K. reporters discovered the alleged wrongdoing, prompting an investigation by the United Kingdom's Serious Fraud Office ("SFO") and eventually the DOJ.37 On March 1, 2010, BAES pleaded guilty to conspiring to defraud the United States by impairing and impeding its lawful functions and making false statements about the company's FCPA compliance program, as well as other items.38 BAES agreed to pay a criminal fine of $400 million and to retain an independent compliance monitor for three years.39

Footnotes

* Mr. Warin is a partner, and Mr. Diamant and Ms. Root are associates at Gibson, Dunn & Crutcher LLP in Washington, D.C. Mr. Warin and Mr. Diamant advise major corporations regarding their FCPA compliance monitorships. Mr. Warin served as the FCPA compliance monitor for Statoil ASA and currently serves as the FCPA compliance monitor for Alliance One International, Inc., and as U.S. counsel to the monitor for Siemens AG.

1. Prosecutors Adhered to Guidance but DOJ Could Better Communicate: Hearing Before the Subcomm. on Commercial and Admin. Law of the H. Comm. on the Judiciary, 111th Cong. 11 (2009) [hereinafter Larence Testimony] (statement of Eileen R. Larence, Director, Homeland Security and Justice, Government Accountability Office), available at http://judiciary.house.gov/hearings/pdf/Larence091119.pdf .

2. Monitors are referred to by various names, including independent consultant, independent compliance consultant, compliance consultant, compliance counsel, outside compliance consultant, etc. Despite the various names, these individuals all, at a minimum, act to independently monitor a corporation and its adherence to the FCPA.

3. Gibson, Dunn & Crutcher LLP, Internal Statistical Analysis (2010) (on file with authors).

4. 15 U.S.C. §§ 78m, 78dd-1, et seq. (2006).

5. The phrase "anything of value" encompasses a broad range of items and can include anything a recipient would find interesting or useful, including theater tickets, gifts, stock, travel, education, employment, donations, and illicit items. See, e.g., United States v. Kozeny, 582 F. Supp. 2d 535, 538 (S.D.N.Y. 2008) (discussing that bribes "in any form whatsoever" are within the scope of the prohibition); United States v. ABB Vetco Gray, Inc., No. 04-cr-00279, slip op. at 6-17 (S.D. Tex. June 22, 2004) (detailing the extensive bribery scheme that the defendant engaged in with Nigerian governmental oil officials); Deferred Prosecution Agreement at Attachment A § IV(B), United States v. Daimler AG, No. 1:10-cr-00063 (D.D.C. Mar. 22, 2010), available at http://www.law.virginia.edu/pdf/faculty/garrett/daimler.pdf [hereinafter Daimler Deferred Prosecution Agreement] (detailing the broad range of bribes employed by Daimler in China); Letter from Mark F. Mendelsohn, Deputy Chief, U.S. Dep't of Justice, to Martin J. Weinstein, Willkie Farr & Gallagher LLP, at app. A, Statement of Facts 8 (Nov. 14, 2007), available at http://www.justice.gov/criminal/fraud/fcpa/cases/docs/11-14-07lucent-agree.pdf [hereinafter Lucent Technologies Inc. Non-Prosecution Agreement] (detailing the broad range of Lucent's bribes to Chinese government officials, including payments covering tuition and living expenses of an employee of a Chinese government ministry, who was obtaining a master's degree).

6. The U.S. government defines "foreign official" broadly and includes any officer or employee, including low-level employees and officials, of a foreign government or any department, agency, or instrumentality of the government. See U.S. Dep't of Justice, Lay-Person's Guide to FCPA, available at http://www.justice.gov/criminal/fraud/fcpa/docs/laypersons-guide.pdf (detailing anti-bribery provisions of the FCPA). The statute also includes as "foreign officials" officers and employees of public international organizations, such as the United Nations, the International Monetary Fund, and the Red Cross. See Ex. Ord. No. 12643, June 23, 1988, 53 F.R. 24247 (conferring public international organization status upon the International Committee of the Red Cross); Ex. Ord. No. 9751, July 11, 1946, 11 F.R. 7713 (conferring public international organization status upon the International Monetary Fund); Ex. Ord. No. 9698, Feb. 19, 1946, 11 F.R. 1809 (conferring public international organization status upon the United Nations).

7. § 78dd-1(a).

8. If an issuer or domestic concern authorizes a third party (e.g., local agents, consultants, attorneys, or subsidiaries) to make payments that the issuer or domestic concern "knows" are corrupt, the issuer or domestic concern can be held liable under the FCPA. Knowledge means either (1) being aware of such conduct or substantially certain that such conduct will occur; or (2) consciously disregarding a "high probability" that a corrupt payment or offer will be made. See U.S. Dep't of Justice, supra note 6 (defining the five elements that must be met to constitute a violation of the FCPA).

9. §§ 78dd-1, 78dd-2, & 78dd-3.

10. § 78m(b).

11. Id.

12. Id.

13. Id. at § 78dd-1(b).

14. Id. at § 78dd-1(c).

15. F. Joseph Warin, Michael S. Diamant, Jill M. Pfenning, FCPA Compliance in China and the Gifts and Hospitality Challenge, 5 VA. L. & BUS. REV. 33, 61-70 (2010).

16. See Gibson, Dunn & Crutcher LLP, 2010 Year-End FCPA Update (Jan. 3, 2011),

available at http://www.gibsondunn.com/publications/pages/2010Year-EndFCPAUpdate.aspx (tracking the number of FCPA enforcement actions brought by the FCPA's enforcers during the past seven years).

17. Id.

18. Id.

19. Id.

20. See id. (noting that "it is clear that 2010 will go down as yet another landmark year for FCPA enforcement."). The statistics in this paragraph include enforcement actions brought against individuals as well as corporations.

21. 15 U.S.C. § 78dd-2(g)(1) (2006); 18 U.S.C. § 3571(d) (2006).

22. 15 U.S.C. § 78ff(a).

23. §§ 78u(d), 78dd-2(g), 78dd-3(e). Disgorgement can be a significant penalty, with companies like Siemens AG and Daimler AG disgorging $350 million and $91.4 million, respectively, to settle their FCPA actions. Infra note 86; infra note 53.

24. See David Hess and Cristie Ford, Corporate Corruption and Reform Undertakings: A New Approach to an Old Problem, 41 CORNELL INT'L L.J. 307, 322 (2008) (arguing that requiring corporations merely to adopt a compliance program and stronger internal controls may be insufficient).

25. See H. Lowell Brown, Parent-Subsidiary Liability under the Foreign Corrupt Practices Act, 50 BAYLOR L. REV. 1, 39-52 (1998) (arguing that an effective culture of compliance requires formal policies, awareness throughout the corporation, ex-ante vigilance, and ex-post remedies).

26. See Memorandum from Paul J. McNulty, Deputy Attorney General, U.S. Dep't of

Justice, to Heads of Department Components and U.S. Attorneys (Dec. 12, 2006), available at http://www.usdoj.gov/dag/speeches/2006/mcnulty_memo.pdf .

27. Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934 and Commission Statement on the Relationship of Cooperation to Agency

Enforcement Decisions, Exchange Act Release No. 1470, Accounting and Auditing

Enforcement Release No. 1470 (Oct. 23, 2001), available at http://www.sec.gov/litigation/investreport/34-44969.htm .

28. Memorandum from Craig S. Morford, Acting Deputy Att'y Gen., to Heads of Department Components and United States Attorneys (Mar. 7, 2008), available at http://www.justice.gov/dag/morford-useofmonitorsmemo-03072008.pdf [hereinafter Morford Memo]. See also Transparency and Integrity in Corporate Monitoring: Hearing Before the Subcomm. on Commercial and Admin. Law of the H. Committee on the Judiciary, 111th Cong. (2009) (statement of Rep. Trent Franks), available at http://judiciary.house.gov/hearings/printers/111th/111-64_53640.pdf (stating that deferred prosecution agreements serve to rehabilitate the company, root out illegal and unethical conduct, discipline culpable employees, help promote good corporate citizenship going forward, and allow prosecutors to achieve more than they could through court-imposed fines and restrictions alone).

29. See, e.g., Jose Armando Fanjul, Corporate Corruption in Latin America: Acceptance, Bribery, Compliance, Denial, Economics, and the Foreign Corrupt Practices Act, 26 PENN. ST. INT'L L. REV. 735-36, n.5 (2007-2008) ("Corruption is far from being a novelty. Its practice is as ancient as other social phenomena like prostitution and contraband." (quoting INSTITUTE OF LATIN AMERICAN STUDIES, POLITICAL CORRUPTION IN EUROPE AND LATIN AMERICA 2 (1996)) (internal quotation marks omitted)); Patricia A. Butenis, Ambassador, Bangl., Remarks at the Conference on Good Governance (June 25, 2006), available at http://dhaka.usembassy.gov/06.25.06_good_governance.html ("The private sector needs to play a more active role in stemming the supply side of corruption. I understand that most businesses look at corruption as a necessary evil. Some have told us that they just account for it on their books—as much as 10%—as a cost of doing business.").

30. Indeed, corporate actions in some highly corrupt countries support this contention.

For instance, Panalpina withdrew from Nigeria following U.S. government inquiries there.

Panalpina, Smooth Withdrawal from Nigeria, (Oct. 10, 2008), available at

http://www.panalpina.com/www/global/en/media_news/news/news_archiv_ordner/08_10_09.html . And Ikea very publicly froze any additional development in Russia due to public corruption in that country. Andrew E. Kramer, Ikea Plans to Halt Investment in Russia, N.Y. TIMES, June 23, 2009, available at http://www.nytimes.com/2009/06/24/business/global/24ruble.html .

31. See, e.g., SEC v. Con-Way Int'l, Inc., No. 08-cv-01478 (D.D.C. Aug. 27, 2008),

available at http://www.sec.gov/litigation/complaints/2008/comp20690.pdf ; Cease-and-Desist Order, In re Con-Way Inc., Exchange Act Release No. 58433, Accounting and Auditing Enforcement Release No. 2867 (Aug. 27, 2008), available at http://www.sec.gov/litigation/admin/2008/34-58433.pdf .

32. See, e.g., Criminal Plea Agreement, United States v. Latin Node, Inc., No. 09-cr-20239 (S.D. Fla. 2009), available at http://www.justice.gov/criminal/fraud/fcpa/cases/docs/latinnode-plea-agree.pdf (providing that the Department of Justice will be given access to all of the corporation's officers, employees, and records relating to the illegal activities charged); Letter from Steven A. Tyrrell, Chief, Dep't of Justice, to Nathan J. Muyskens, Shook Hardy & Bacon L.L.P. (Sept. 29, 2009), available at http://www.law.virginia.edu/pdf/faculty/garrett/agco.pdf (implementing a compliance and ethics program designed to detect and prevent FCPA violations, as part of defendant corporation's plea agreement); Letter from Steven A. Tyrrell, Chief, Dep't of Justice, to Leo Cunningham, Wilson Sonsini Goodrich & Rosati (Dec. 31, 2009).

33. Larence Testimony, supra note 1, at 3.

34. See Press Release, Dep't of Justice, BAE Systems PLC Pleads Guilty and Ordered to Pay $400 Million Criminal Fine (Mar. 1, 2010), available at http://www.justice.gov/opa/pr/2010/March/10-crm-209.html .

35. Id.

36. Id.

37. Id.

38. Id.

39. Id.

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