Internal Investigations By Outside Counsel:
Implications for Anti-Corruption Enforcement
JAMES E. HOUGH
American Bar Association’s
“The Role of Lawyers, the Bar, and the
Bench in Preventing and Combating
Corruption within the Justice System”
February 19, 2007
© 2006 Morrison & Foerster LLP All Rights Reserved
Internal Investigations By Outside Counsel
WH0
?
WHAT
is investigated
WHEN
are investigations performed
WHY
1
?
conducts corruption-related investigations
are investigations conducted
?
?
Internal Investigations: WHO?
• Global companies whose home
jurisdictions prohibit foreign corrupt
payments.
• Thirty-six “supply-side” countries now
prohibit use of corporate funds to pay
bribes to foreign officials.
2
3
Examples of Companies Subject to Prohibitions on Foreign Bribery
USA
Netherlands
South Korea
UK
France
Switzerland
Germany
USA
Japan
USA
4
EXAMPLES OF APPLICABLE SANCTIONS
COUNTRY
PRISON
(maximum penalty)
FINES for natural
persons (NP) and legal
person (LP)
OTHER SANCTIONS
upon criminal conviction
JAPAN
3 years
NPs: JPY 3 million (THB
949,282 )
LPs: JPY 300 million (THB
94,937,554 )
Not directly on foreign
bribery offence convictions
KOREA
5 years
NPs: KRW 20 million
(THB 749,377) or twice the
amount of profit if > KRW
10 million
LPs: KRW 1 billion or
twice the amount of profit if
profit > KRW 500 million
(THB 18,738,378)
Not directly on foreign
bribery offence conviction
to date, but under
consideration (disbarment
from public procurement)
UNITED KINGDOM
6 months (summary)
7 years (indictment)
THB 320,962 (summary)
NO upper limit (indictment)
NPs: disqualification of
directors from certain
functions
LPs: Not directly on foreign
bribery offence conviction
UNITED STATES
15 years
NPs: Up to USD 100,000
(THB 3,729,861)
LPs: Up to USD 2 million
(THB 74,606,384); actual
fine up to 2x the benefit
sought
Civil penalties up to USD
10,000 (THB 341,253;
additional SEC fine;
debarment from U.S.
government procurement
5
Internal Investigations: WHAT
U.S. FOREIGN CORRUPT PRACTICES ACT
•
Anti-Bribery Provisions


•
6
Apply to all U.S. companies (including officers,
directors, employee, agents and shareholders) and all
U.S. nationals
Apply to non-U.S. companies and nationals who act in
U.S.
Accounting/Books and Records Provision


Applies only to U.S. “issuers”
Affect foreign subsidiaries and affiliates of issuers
Internal Investigations: WHAT
• Primarily Fact Investigation
 Collecting, reviewing and preserving evidence
• E-mail and electronic data
• Hard copy documents
 Conducting interviews
• Key executives
• Staff
• Consultants, agents and/or customers
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Internal Investigations: WHEN
• Whistleblower allegations
 SOX provides protections and incentives
• M&A due diligence
• Auditor questions
• Investigations already underway by
authorities
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Internal Investigations: WHY?
“. . . Foreign bribery is a difficult
offense to detect, since it is
committed in secret and involves
two satisfied parties . . . .”
OECD Mid-Term Study of Phase 2 Reports, p. 92
(available at: http://www.oecd.org/dataoecd/19/39/36872226.pdf)
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Internal Investigations: WHY
• Reduces exposure to government
action
• Puts company in better position to
respond to charges/lawsuits
• Prevents future wrongdoing
• Provides information that management
needs to fulfill responsibilities
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Internal Investigations: WHY
Advantages of outside counsel:
•
Increased control over information
discovered
 U.S. law: Attorney-Client Privilege; Work
Product Protection
•
Independence from management
 Ethical obligations
 Avoids conflicting interests
•
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Credibility if company decides to selfreport
Internal Investigations: WHY
• Voluntary disclosure to government over
improper conduct discovered by internal
investigation
 U.S. reporting FCPA violations made both to
DOJ and SEC
• Criminal case against company by DOJ
•
12
less likely
Lowers or eliminates SEC penalty
Self-Reporting Example: Schnitzer Steel
•
Korean subsidiary made over $1.8M in improper
payments to customers, many of whom were Chinese
state-owned entities
•
Self-reported to DOJ and SEC
•
Reported both bribery of foreign government officials,
and books and records violations
•
Korean subsidiary entered guilty plea; Schnitzer Steel
entered deferred prosecution agreement with DOJ
•
Schnitzer Steel and Korean subsidiary paid over $15M
to settle matter
13
Self-Reporting Example: Baker Hughes
• Paid $75,000 through an agent to
Indonesian tax official to reduce
assessed tax
• Self-reported
• Company, CFO, Controller charged by
SEC
• $30 million estimated cost of
remediation required by government
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RECENT FCPA ENFORCEMENT ACTIONS
Year
Company/Individual
2004
ABB, Ltd.
2004
Schering-Plough Corp.
2004
GE InVision Technologies, Inc.
2005
Micrus Corporation
2005
Titan Corp.
How discovered
problem?
Self-reported?
Action by Government Agency
(SEC/DOJ)
M&A due diligence
Yes
$5.9M in civil disgorgement and
prejudgment interest; retain outside
FCPA compliance monitor; $10.5M
criminal fine; subsidiary entered guilty
plea
Internal investigation
Yes
$500,000 civil fine; retain independent
consultant
M&A due diligence
Yes
$589,000 civil disgorgement; $500,000
civil fine; non-prosecution agreement
with DOJ; $800,000 criminal fine;
continued cooperation with DOJ and
adopt FCPA compliance program
Internal investigation
Yes
Non-prosecution agreement with DOJ;
$450,000 fine; retain independent
consultant
M&A due diligence
Yes
$15.5M in civil disgorgement and
prejudgment interest; $13M criminal
fine; company plead guilty; agreed to
retain independent consultant
15
RECENT FCPA ENFORCEMENT ACTIONS
Year
Company/Individual
How discovered
problem?
Self-reported?
Action by Government Agency
(SEC/DOJ)
2005
Monsanto Company
Routine internal audit
Yes
Non-prosecution agreement with DOJ;
$1.5M civil fine; appoint independent
consultant
2005
Diagnostic Products Corp. and
DPC (Tianjin) Co. Ltd. ("DePu")
Internal investigation
Yes
$2.04M in civil disgorgement +
$750,000 in prejudgment interest; $2M
criminal fine; DePu entered guilty plea
2005
Yaw Osei Amaoki (former
regional director for ITXC Corp.)
Internal investigation
Yes
Case by SEC pending
2006
Schnitzer Steel and SSI
International Far East Ltd. ("SSI
Korea)
Internal investigation
Yes
$6.27M in civil disgorgement by
Schnitzer + $1.45M in prejudgment
interest; deferred prosecution
agreement with DOJ by Schnitzer
Steel; retain independent consultant;
SSI Korea plead guilty and $7.5M
criminal fine
2006
Statoil, ASA
Norwegian press report
triggered U.S.
investigation
No
deferred prosecution agreement with
DOJ; $21M total fine in civil and
criminal penalties; retain independent
consultant
16
Internal Investigations: WHY
• U.S. Law: incentives to disclose if find
problems
• Governments increasingly likely to share
information with authorities where corrupt
activity took place
 OECD Convention incorporates “Mutual Legal
Assistance”
 UN Declaration Against Corruption and
Bribery in International Business Transactions
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THANK YOU
James E. Hough
Morrison & Foerster LLP
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