United States: Latin American Insurance And Reinsurance Trends: Anti-Corruption Enforcement

Last Updated: March 12 2010
Article by M. Machua Millett

A recurrent issue for foreign insurance and reinsurance companies active in Latin American in the last few years has been anti-corruption compliance, both as a compliance issue and an underwriting tisk.

Federal Corrupt Practices Act

On July 31, 2009, the SEC filed a civil enforcement action against Nature's Sunshine Products, NSP's CEO Douglas Faggioli, and NSP's former CFO, Craig D. Huff, arising out of alleged bribes that NSP made to Brazilian customs officials in violation of the Foreign Corrupt Practices Act. The SEC brought only one cause of action against Messrs. Faggioli and Huff: for a violation of Sections 13(b)(2)(A) and (B) of the Securities Exchange Act of 1934 for failing to keep accurate books and records. In connection with a settlement of this enforcement action, NSP paid a penalty of $600,000, and Faggioli and Huff each paid $25,000 penalties. A number of industry commentators have noted that the SEC's decision to bring this action against Messrs. Faggioli and Huff, who are not alleged to have been aware of the alleged bribes, imposed a de facto strict liability standard on these corporate executives.

The NSP case represents only one example of the risk posed to insurance companies doing business in Latin America, both as a direct compliance risk and as a potentially covered loss for insureds. Indeed, Latin America has consistently been a hot spot for FCPA compliance issues, with six of the top twelve problem jurisdiction coming from the region in 2008 (Ecuador, Argentina, Venezuela, Bolivia, Brazil and Mexico).

The United States Foreign Corrupt Practices Act was enacted in 1977 as a response to findings that certain companies were making illegal payments to foreign government officials, politicians and political parties to obtain business advantages. The law came to greater prominence between 2001 and 2006, however, as the average number of new Department of Justice prosecutions quadrupled compared to the previous five year period.

The law is designed to prevent companies and individuals with any connection to the United States from obtaining or retaining a competitive advantage by giving gifts or bribes to officials of countries other than the U.S. The Act applies to foreign employees and agents of any company that is a U.S. "issuer" (any corporation that has issued securities that have been registered in the U.S. or who is required to file periodic reports with the SEC) and of any domestic concern (a citizen, national or resident of the United States or any corporation, partnership, association, joint-stock company, business trust, unincorporated organization or sole proprietorship which has its principal place of business in the United States, or which is organized under the laws of the United States or a territory, possession or commonwealth of the United States). This jurisdiction can, under certain circumstances, be extended to foreign subsidiaries of U.S. companies as well as any foreign company or individual with an employee or agent in the United States.

More specifically, the FCPA prohibits: (1) corruptly paying, promising to pay or authorizing to pay; (2) anything of value; (3) to any foreign official; (4) in order to assist in obtaining or retaining business in a foreign country. Of particular note:

  • "Anything of value" includes traditional bribes, gifts, travel expenses and entertainment. There is no de minimus exception to the prohibition.
  • "Obtaining or retaining business" includes directing business to a particular person or company, securing any other improper advantage, any other business nexus (e.g., lower taxes or tariffs) and obtaining licensing or authorization.
  • "Foreign official" can include political candidates, parties, family members, insurance regulators and staff and officers, directors and employees of state-owned businesses.

In addition to its anti-bribery provisions, the FCPA also imposes record-keeping, accounting and internal controls requirements.

The FCPA includes both civil and criminal penalties, which can be levied against both corporations and individuals. Individual penalties for a criminal violation include fines up to $250,000 and imprisonment for up to five years or both, while civil penalties are up to $10,000 per violation (in addition, individual's fines may not be paid by the individual's company). Corporate penalties include fines up to $2,000,000 per criminal violation, $10,000 per civil violation, suspension and disbarment from the securities industry, ineligibility for expert licenses, etc. It should be noted that these penalties are all per violation, meaning that a series of even minor violations could quickly bring individual and corporate penalties of well over $10,000,000.

A proper compliance program to deal with a company's FCPA risk must therefore include, among other things, training for all local employees, due diligence concerning and close management of local agents, reporting systems, disciplinary processes, systems for internal controls and accurate books and records and independent audits. For obvious reasons, the existence or non-existence of such compliance measures are likewise relevant to underwriting decisions regarding potential insureds doing business in Latin America.

European Anti-Corruption Laws, International Treaties and Local Laws

In addition to the FCPA, many companies are subject to anti-corruption requirements imposed by European law, international treaties and local Latin American laws. Many multinational insurance companies' home nations and many Latin American countries have passed their own anti-corruption laws in recent years, as well as joining international conventions and treaties prohibiting bribery:

  • Over 100 countries now have laws similar to the U.S. FCPA.
  • 35 countries have become signatories to the OECD Convention (1997).
  • 29 countries , including the U.S., Canada, Argentina, Brazil and Mexico, have signed onto the OAS Inter-American Convention Against Corruption (1996).
  • 29 countries have ratified the Council of Europe Convention (1999).
  • More than 145 countries have ratified the U.N. Convention Against Corruption (2005).

Mexico serves as a good example of the network of laws imposed just under local Latin American law, as Mexico has ratified a number of anti-corruption treaties as well as passing its own anti-corruption legislation. Bribery is both a civil and penal violation under Mexican law, and Mexican authorities have indicated that anti-corruption enforcement is a priority. Indeed, in 2008, the Secretariat of the Public Function issued a National Program for Accountability, Transparency and the Fight Against Corruption, indicating that the Mexican government intends to enact new legislation, increase cooperation among enforcement agencies and create a more transparent enforcement system regarding anti-corruption.

Data Privacy Issues

While we will not deal with the issue in detail here, it should be noted that the accounting, record-keeping and reporting requirements under the various anti-corruption schemes can pose issues under data privacy laws enacted in many jurisdictions, particularly for insurance companies.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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