By Ethan D. Lenz and Max Chester
The specter of a Foreign Corrupt Practices Act investigation and potential fines or penalties has become a real source of angst for U.S.-based companies that do business overseas. It's also been a thorn in the side of non-U.S.-based global companies with ties to the United States. Record settlements achieved by the Securities and Exchange Commission and the Department of Justice over the past few years -- and enormous defense costs incurred by companies that have been targeted -- have led risk managers and other company executives to ask many new questions about the Foreign Corrupt Practices Act: Are the costs associated with an investigation (and settlement or penalty) covered by insurance?
What is the FCPA?
Generally, the Foreign Corrupt Practices Act applies to nearly every U.S.-based company, whether publicly traded or privately held. Additionally, the Foreign Corrupt Practices Act anti-bribery provisions apply to foreign persons and companies that violate the law while operating in the United States. The act prohibits companies, as well as their officers, directors, employees and others acting on their behalf, from paying bribes to "foreign officials," a term U.S. enforcement agencies interpret broadly to include employees of state-owned enterprises. The act also requires companies to maintain internal accounting controls and to keep books and records that accurately reflect all transactions.
Why Worry About the FCPA?
Between 2004 and 2010, the Foreign Corrupt Practices Act enforcement actions, initiated by the Department of Justice and Securities and Exchange Commission, increased nearly 15-fold, from five to 74. The pace of enforcement actions slowed somewhat in the first half of 2011. There were eight new DOJ and nine new SEC actions, but this apparent slowdown is attributable to the fact that there were multiple FCPA jury trials in the first half of 2011 as well as multiple ongoing criminal cases in various pretrial stages. One of these jury trials produced the first criminal FCPA conviction of a company -- Lindsay Manufacturing. Indeed, more than 150 ongoing investigations and recent remarks by Assistant U.S. Attorney General Lanny Breuer confirm that FCPA enforcement remains a high priority for the DOJ.
The FCPA enforcement actions often result in breathtaking $100 million settlements. In 2008, Siemens paid more than $800 million to settle worldwide corruption charges; in 2009, Halliburton paid $559 million to settle charges that one of its former units bribed Nigerian officials during the construction of a gas plant; in 2010, in connection with the investigation of a Swiss freight company, Panalpina, seven oil and gas oilfield service companies paid a total of $236 million. FCPA settlements in the tens of millions of dollars are now routine.
Aside from the actual cost of settling charges, the costs of FCPA investigations can be astronomical as well. For example, Avon reported that its FCPA-related investigative costs in 2009-2010 were nearly $130 million. Reportedly, the investigation costs for Siemens were in excess of $850 million. While these cases are not necessarily typical, a routine FCPA investigation can often cost millions of dollars in attorneys and accountant fees.
Does My Insurance Cover the Costs of an FCPA Investigation and Settlement/Fines?
Companies that carry directors' and officers' liability insurance may have at least some limited protection for the costs of an FCPA investigation and related fines/settlements. However, there are likely many gaps in this coverage. For example, many D&O policies now include a specific grant of coverage for civil penalties assessed against an individual director, officer or employee under the FCPA. It states that any officer, director, employee, or agent of a U.S. based company, or stockholder acting on behalf of such company, who violates the anti-bribery provisions of the FCPA, whether in the U.S. or abroad, is subject to a civil penalty of up to $10,000 per violation. Persons, of course, are also subject to criminal penalties for willful violations of the FCPA's anti-bribery provisions as well as books and records provisions. However, there is typically no specific grant of coverage for any penalties assessed against the company itself.
Furthermore, the scope of coverage for the costs of an FCPA investigation will likely vary from one director's and officers' policy to the next. The policies typically contain broad initial grants of coverage for "wrongful acts" allegedly committed by directors, officers and employees, depending on whether the policy's definition of "claim" includes administrative/regulatory investigations and the point at which such investigations trigger the policy. Must the investigating agency file a formal complaint? Does the issuance of a subpoena trigger coverage? Does a self-initiated investigation trigger any coverage? However, the actual coverage for costs associated with an FCPA-related investigation may be fairly limited. Finally, for publicly traded companies, the directors' and officers' coverage for the company itself as opposed to the individual directors and officers will almost certainly be limited to securities claims. Depending on the breadth of the definition of the term "securities claim," the coverage for the company may be limited to actions based on the purchase and sale of its securities, and may not pick up costs of administrative or regulatory investigations brought solely against the entity. The bottom line is that while a directors' and officers' policy might be the most likely source of some coverage for FCPA investigations, it must be closely scrutinized to determine the exact scope of that coverage.
In response to the potential gap in coverage for FCPA investigations, new insurance products are beginning to come to market that may cover at least some of this exposure. These products typically offer specific coverage for the costs of FCPA investigations, but not for settlements or fines and penalties paid as a result of those investigations. The potential advantages of these new products are at least two-fold. They specifically cover the costs of FCPA investigations, largely taking away the questions that arise under the typical directors' and officers' policy as to the exact scope of coverage and when it is triggered; and they take the costs of an FCPA investigation completely out of the directors' and officers' policy, leaving the policy's limits intact for other claims.
A byproduct of a significant FCPA investigation and settlement may be a securities class action or a shareholder derivative suit alleging fraud in connection with the purchase or sale of securities or breach of duty by management/directors in connection with the alleged FCPA violations.
There are a number of questions that a company should ask when evaluating the purchase of specific FCPA investigation cost insurance:
* What is the likely scope of FCPA coverage under my existing directors' and officers'or other insurance policies?
* What is the company's exposure to an FCPA enforcement action? This will be influenced by the breadth of foreign operations, and current corporate policy and compliance measures related to the FCPA.
* Are the limits of FCPA coverage meaningful in light of the company's potential exposure? Given that the products are relatively new to the marketplace, large limits for FCPA-specific coverage may not be available to most insureds. For example,
many may be able to acquire coverage limits only in the $1 million to $5 million range, which may only cover a small portion of the total costs of an FCPA investigation.
* Does the coverage apply worldwide? This should be carefully reviewed, as some of the newer products only cover investigations related to countries specifically agreed to between the insurer and the insured. Thus, if a company's operations expand, or activities take place in nonlisted countries, there may be no coverage.
* Does the coverage apply only to investigations for FCPA violations, or will it also cover the costs of investigations by foreign governments under laws similar to the FCPA? Many countries have laws similar to the FCPA, and U.S. companies operating in those countries must comply with local laws in addition to complying with the FCPA.
* Does the coverage apply to investigations of the company and individual directors, officers and employees, or only to investigations of the company? Some of the newer policies only cover investigations against the company, leaving the individual coverage under an existing directors' an d officers' policy, or uncovered altogether. In addition to a potential lack of coverage, this also creates potential issues of allocating covered costs between the FCPA-specific policy and a separate directors' and officers' policy.
The bottom line is that the insurance industry is making a conscious effort to respond to companies' exposures to FCPA enforcement-related costs and to provide innovative and meaningful products to address those exposures. However, the products must be carefully scrutinized in conjunction with a company's existing coverage and risk profile to determine the benefits that any additional coverage might provide for any particular company's FCPA-related, or similar, exposures. Only after a careful evaluation can a company make a meaningful cost benefit analysis to determine if the additional premium dollars that must be spent for such coverage are commensurate with the advantages of obtaining any FCPA or similar foreign act-specific investigative coverage.
ETHAN D. LENZ is a partner with Foley & Lardner LLP and focuses on providing risk management and insurance coverage-related advice.
MAX CHESTER is a senior counsel with Foley and focuses his practices on litigation of reinsurance disputes and government enforcement matters, with particular emphasis on FCPA compliance.
November 21, 2011
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