On the enforcement front, the Department of Justice, the Securities and Exchange Commission, and other government agencies are sharpening their knives for 2014.
An increase in Foreign Corrupt Practices Act cases, hordes of whistleblower complaints, and a renewed focus by the government on financial and accounting fraud caused big compliance headaches in 2013. Expect those developments to only intensify in 2014.
Bribery Enforcement Goes Global
The big story in enforcement over the last few years has been the intense pursuit by regulators of FCPA cases. The pressure on companies has been so great and the penalties so stiff, that anti-bribery efforts have changed the complexion of compliance at many global companies. Don't expect enforcement agencies to ease up in 2014. In fact, those agencies say they are doubling down on bribery and corruption enforcement. During remarks at the International Conference on the FCPA in November, several enforcement officials from the Justice Department and SEC warned companies that more FCPA enforcement actions are on the horizon.
“We have more resources than ever, and we're busier than ever,” said Charles Duross, deputy chief of the Justice Department's FCPA unit. In 2014, companies should expect more significant investigations and resolutions, including "very significant cases, top 10-quality-type cases,” he said.
“The SEC and Department of Justice have made it quite clear that their interest in the FCPA area has not died down at all,” says Michael Rivera, a partner with law firm Venable and chair of its securities enforcement and compliance practice. “In fact, we're starting to see an uptick in that area.”
Stronger cross-border cooperation from law enforcement agencies all around the world increasingly are driving these investigations and resolutions, as the number of foreign governments that are tipping off U.S. regulators about possible bribery and corruption cases continues to grow. “Over the past five years, we have experienced a transformation in our ability to get meaningful and timely assistance from our international partners,” said Andrew Ceresney, co-director of the SEC's Enforcement Division.
The pace and extent of such cooperation with foreign agencies will only continue to grow over the coming years, Ceresney added. “The more we can foster this sort of international cooperation, the more we can be successful in prosecuting FCPA cases,” he said.
Booking Book-Cookers
Another area of enforcement that will get more attention in 2014 is financial statement and other accounting fraud under the leadership of SEC Chairman Mary Jo White. “They're going to make that a new priority,” says Thomas Gorman, a partner in the law firm Dorsey & Whitney.
In the wake of the financial crisis, the SEC focused heavily on financial crisis cases—those involving collateralized debt obligations, sub-prime mortgages, Ponzi schemes, and other activity that resulted in massive losses to investors. As a result, the SEC devoted fewer resources to accounting fraud, causing investigative activity in this area to steadily decline.
In fiscal year 2013, for example, the SEC filed just 68 financial fraud and issuer disclosure investigations, down from 79 filed in 2012, and an even sharper decline from the 228 filed in 2007, prior to the financial crisis. According to the SEC, this is the seventh consecutive year financial fraud cases have declined. According to Ceresney, the SEC also filed fewer financial fraud investigations in the wake of the financial crisis. In 2012, the SEC opened 124 financial fraud investigations compared to 304 in 2006 and 228 filed in 2007, he said.
Companies can expect a dramatic shift, however, in the SEC's 2014 regulatory agenda. The SEC's renewed focus on financial statement and accounting fraud “gets back to the more traditional type of SEC cases, which I think you'll see more of given that these financial crisis cases are winding down,” says Rivera. “That's going to be an area where there is going to be a lot of activity.”
“The SEC and Department of Justice have made it quite clear that their interest in the FCPA area has not died down at all.”
—Michael Rivera,
Partner,
Venable
To help in this effort, the SEC has created the Financial Reporting and Audit Task Force to improve the agency's ability to detect and prevent accounting and financial statement fraud. Through this task force, the agency continues to develop new data analytics tools and other technologies to assist the agency in spotting anomalies and streamlining investigative efforts. “They're using those as an enforcement tool,” says Gorman.
The SEC's Advanced Bluesheet Analysis Program, for example, analyzes data provided by market participants on specific securities transactions to identify suspicious trading. In a speech given in November at the Securities Enforcement Forum, White said the agency will “step up our use of this program.”
The SEC is likely to rely more on these kinds of tools to launch investigations, says Kelly Currie, a partner with law firm Crowell & Moring. Another tool the SEC is utilizing is the Accounting Quality Model, which uses data analytics to assess if values in a company's financial statement fall outside certain ranges or don't line up with other values. The tool enables the SEC to compare performance across industries and detect outliers that suggest possible fraud.
Whistleblowers Multiply
The SEC's Whistleblower Program, established under the Dodd-Frank Act, is also making it easier for the SEC to bring cases against companies that are accused of wrongdoing. “It's another arrow in the quiver of the Justice Department and the SEC to collect information and get some speedy results from investigations,” says Randy Stephens, vice president of advisory services at Navex Global.
JUSTICE DEPT. WAR ON BRIBERY
Below is an excerpt from Deputy Attorney General James Cole's speech on FCPA enforcement.
In the nearly 36 years since the passage of the FCPA, the modern world has begun to embrace our fight against foreign bribery and to follow our lead. From the 1999 OECD Anti-Bribery Convention to the 2005 UN Convention Against Corruption, from the Council of Europe's Group of States Against Corruption to the Organization of American States' Inter-American Convention Against Corruption, a common legal standard has emerged over the last 36 years that rejects the notion that bribery in international business transactions is lawful, much less inevitable. It is true that this common standard has emerged slowly, and that at times it has faced challenges, but the tide of history has turned and is now on our side.
The emergence of the global anti-bribery trend is often reflected in striking ways. For example, in France and Germany, as late as the 1990s, bribes were not only legal, but they were also tax deductible. Yet, in the past 10 years, both of those nations have changed their laws and joined us in the fight against transnational corruption. Most of you are familiar with the Siemens resolution in 2008, which was the product of our cooperation with German authorities. And in just the past 6 months, we announced the first coordinated action by French and U.S. law enforcement in a major foreign bribery case, the Total investigation.
Germany and France are just two of the countries that have joined us in our fight against transnational bribery. Earlier this year, Indonesia's Corruption Eradication Commission, the KPK, assisted us in securing guilty pleas from several employees of a global power and transportation company for their role in bribing Indonesian officials in order to win a lucrative contract to build a power plant in that country. These examples and many more should send a clear message to the market: with increasing frequency, countries around the world are saying “no” to transnational bribery. And if the United States doesn't catch you, there is a good chance that one of our allies in the fight against global corruption will and will hold you accountable.
I am proud to say that the United States, and DoJ in particular, has played a leadership role in this global effort to combat transnational bribery. I have seen this firsthand in my nearly three years as deputy attorney general. Since I took office in January 2011, the Department has reached 27 corporate resolutions and publicly announced that 28 individuals have been charged with FCPA and FCPA-related violations. This is a remarkable record. Those corporate cases resulted in penalties of $785 million and there is more to come.
These results are the product of the skill, hard work, and determination of our talented prosecutors in the Criminal Division's FCPA Unit, working in tandem with federal prosecutors across the country at many of the 94 U.S. attorney's offices. Working with our partners like the FBI, the Department of Homeland Security, the Department of Commerce, the SEC, and IRS-Criminal Investigations, we have made enforcement of the FCPA a priority. Together, we are pursuing more cases than ever before, and we are using all of the investigative tools available to us from subpoenas to search warrants, from body wires to wiretaps.
We are also sharing our experience and knowledge with our foreign counterparts. This past February, I was privileged to address an audience of 130 judges, prosecutors, investigators, and regulators from more than 30 countries, multi-development banks, and international organizations. This group, who came here from around the world, was attending a training course co-hosted by the SEC, FBI, and the Department to exchange ideas and best practices on combating foreign corruption. Even a decade ago, no one would have imagined that such a broad coalition of law enforcement would be gathered in Washington, D.C., to exchange best practices in conducting foreign bribery investigations. And we are continuing these types of exchanges. Just last month, the head of our FCPA Unit helped lead a training session of prosecutors in Mexico City, and this week we are participating in another training session in Brazil. In the words of the Attorney General, when it comes to foreign bribery investigations and prosecutions “partnership is not a luxury; it is a necessity.”
Source: Justice Dept.
The whistleblower program could help the SEC more easily uncover financial statement and accounting fraud, in particular, “because those cases are often hard to detect and investigate,” says Rivera. “It makes it a lot easier when you have a whistleblower.”
The number of whistleblower complaints the SEC received through its Whistleblower Office continues to increase. According to the SEC's annual report on the Dodd-Frank Whistleblower Program, the Whistleblower Office received 3,238 whistleblower tips, complaints, and referrals during fiscal year 2013 compared to the 3,001 it received in 2012, and 334 it received in 2011, when it first opened.
More whistleblower complaints, however, doesn't necessarily translate into more cases. “The jury is still out on how effective the whistleblower program has been,” says Stephens. “While there has been an increase in the number of calls that have come in, there hasn't been a lot of settlements, or the kind of big bounties people were expecting.”
So far, the agency's highest-profile case resulted in a record $14 million award in October to a whistleblower, whose information led to an enforcement action that recovered substantial investor funds, although details on the case were not disclosed to protect the identity of the whistleblower. Companies may see the number of whistleblower cases increase, however, as these complaints work their way through the pipeline. “Those generally take a long time to develop,” says Gorman.
“A lot of these whistleblower tips will start to come to fruition over the next few years,” says Rivera. “The fact you had a $14 million award this year is going to encourage more people to come forward.”
SEC officials also have warned that they will be coordinating more closely with the agency's enforcement division to identify situations where companies may have taken retaliatory measures against whistleblowers protected under the Dodd-Frank whistleblower statute. “That is something to watch for in 2014,” says Lisa Noller, a litigation partner with Foley & Lardner.
The SEC's bounty program will continue to keep compliance officers on their toes. Having in place a robust compliance program and fostering a speak-up culture, Stephens says, are “going to be a company's best offense, as well as their best defense.”
One last enforcement trend to watch in 2014 is how the SEC will do at getting defendants to admit to guilt when settling claims. In 2013, the SEC changed its long-standing policy of allowing defendants to settle cases without admitting or denying guilt.
“The SEC seems to be seeking to establish is tougher conditions in resolutions,” says Currie. More cases will arise in which the SEC will insist on admissions of wrongdoing from corporate defendants, as opposed to allowing for a “no admit, nor deny” settlement. “It will be interesting to see how that plays out in resolutions in the coming year.”
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