By DAN REYNOLDS, senior editor of Risk & Insurance®
An old law has grown some razor-sharp new teeth, and insurers and their insureds are paying keen attention to it.
The Foreign Corrupt Practices Act (FCPA) has been on the books for decades, but these days it is provoking much more virile enforcement from the Securities and Exchange Commission and the U.S. Department of Justice.
According to experts, the DOJ's Deputy Fraud Chief Mark Mendelsohn is enforcing the act much more aggressively than it has been enforced in the past, and the SEC has created a new division dedicated solely to the act's enforcement.
As a result, the act, which was intended to prevent bribes or other inappropriate gifts from being given to officials of foreign governments to win contracts for businessmen with operations in the United States, has provoked some stunning fines in the last couple of years. It has also changed the tone of conversations between insurers and their insureds about their clients' directors' and officers' liability exposures and risk management techniques.
Take the case of the giant German-based manufacturing and engineering concern Siemens AG. In 2008, Siemens agreed to pay U.S. and German authorities a combined penalty of $1.6 billion to settle corruption charges covered by the act. An investigation of Siemens' international business practices covering the period between March 12, 2001, and Sept. 30, 2007, documented a network of corruption and revealed 4,283 bribes totaling $1.4 billion in illegal payments.
Just to put things in perspective, Siemens's net income for fiscal 2008 was approximately $8.9 billion.
The fines were for business arrangements made as far afield as China, Vietnam, Israel, Russia, Mexico and Nigeria. In many places, particularly the west coast of Africa, where Nigeria is located, doing business in an ethical manner can be challenging. Nevertheless, business people need to control their actions, even if the environment they are in has an ethically challenged makeup.
"You have to be very mindful of the Foreign Corrupt Practices Act while doing business there," said Will Fahey, a senior vice president with the specialties group of Zurich North America.
"It is something of a competitive disadvantage for American firms engaging abroad because other countries are not as robust as the SEC and DOJ in investigating them," he said.
The $800 million in penalties that Siemens paid to the United States is an all-time record for a FCPA fine.
ANOTHER POSTER BOY: KBR
But other big names have been hit pretty hard, and still others look like they are on their way to the whipping shed.
On Feb. 11, 2009, the DOJ announced that Halliburton spinoff Kellog, Brown & Root LLC, a global engineering and construction firm based in Houston, was being hit with a combined $579 million in penalties and disgorgement payments. The total comprised $402 million in penalties and $177 million in "disgorgement" payments for FCPA violations. Disgorgement payments are made in response to demands to return ill-gotten gains.
According to court documents, KBR was part of a four-company joint venture that was awarded four engineering and construction contracts as a result of about $182 million in bribes paid to Nigerian government officials in the effort to win about $6 billion in government contracts.
According to Zurich's Fahey, prosecutions under the Foreign Corrupt Practices Act typically begin as voluntary internal investigations on the part of the company. He said companies that are most at risk for FCPA violations are typically those in the energy exploration and production sector and defense contracting.
Waltham, Mass.-based Raytheon, the missile manufacturer that does much of its work for the U.S. government, revealed in its most recent quarterly SEC filing that it has begun an internal investigation of several possible FCPA violations by its employees in one of the jurisdictions in which it does business.
An SEC investigation into such a case could follow--and could follow quite quickly--according to Brad Ockene, a Chicago-based attorney with Lovells, the international law firm.
"Bringing civil cases is easier than conducting a criminal investigation and having to do grand jury subpoenas and that sort of thing because (in) a civil case they can take depositions and they can take their SEC hearings very quickly," said Ockene.
FCPA violations can involve not only proof or allegations of outright bribes to officials but they can also involve failure to keep good records, which is one of the things that Siemens was slapped for.
"Books and records violations are easy to get into and easy to find and don't require proof of criminal intent, so it allows the SEC, the government in essence, to get into the books and records of a company quickly," Ockene said.
INSURANCE AND OUTLOOK
According to Zurich's Fahey, exclusions for disgorgement payments and other penalties for violations of the FCPA have been business as usual for insurers for a long time. But because of the softness of the current insurance market and the competition that breeds, Fahey said specific exclusions for FCPA violations are no longer commonplace, and where the policy is silent, industry practice has generally been to advance defense costs.
The policy may be silent on the issue, but the advance for legal costs is proffered just the same, Fahey said.
Suffice to say, more DOJ and SEC fines are coming. Lovells's Ockene estimates that there are as many as 200 DOJ investigations of FCPA violations in the works.
"There is a tremendous focus on this area, and there should be a tremendous amount of activity in this area in the next couple of years given all that is going on," Ockene said.
Reputational risk is another exposure that the scent of an FCPA violation can play havoc with, according to Fahey.
Mergers and acquisitions can fall through if it becomes public that the company being acquired has admitted to a FCPA violation or is being investigated for one, according to Fahey.
Yet another concern are follow-up or spinoff lawsuits, according to Ockene's colleague Kay Wilde, a Chicago-based consultant in Lovells's insurance and reinsurance practice.
A D&O policy may well include an exclusion for FCPA violation fines and penalties, but once a company has admitted to or been fined for a violation, that same D&O policy could be exposed to a follow-up lawsuit from investors, who use the fact of an SEC or DOJ levy as proof of a board of directors' or executive's malfeasance.
"So I think most of my clients are more concerned with those than worrying about the coverage or the exclusions for the direct enforcement action," Wilde said.
But thankfully for insurers, risk management of the issue could be progressing more quickly in the United States.
"I think American companies have become very attuned to the need to have robust controls in place, and with most companies that you ask those questions of them in an insured meeting, they will come back to you with answers that they really have implemented much more robust practices than they had in place, say, 10 years ago," Zurich's Fahey said.
March 1, 2010
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