Not since November, 2010, when the Justice Department announced its many settlements with Panalpina on Foreign Corrupt Practices Act charges, have we seen such a stunning back-to-back announcement of resolution of long-running and highly public FCPA enforcement actions.
I am, of course, referring to the Avon and Alstom FCPA enforcement actions announced in December. Alstom engaged in multi-country bribery schemes over several years, sometimes in the open and sometimes (seemingly) trying to hide the details of the bribery to the corporate headquarters in France. Avon engaged in a systematic bribery scheme in one country (China) followed by a cover-up at the highest levels of the company when the scheme was uncovered by the company’s internal audit function. Both enforcement actions have several key points worth noting.
Foremost were the fine amounts. At $772 million, Alstom now has the highest criminal fine for FCPA violations in history. (Siemens’ prior settlement of $800 million was a combination of Department of Justice and Securities and Exchange Commission fines and penalties. Alstom was not subject to SEC enforcement.) The fines and penalties levied on Avon totaled only $135 million, but included $58.2 million in profit disgorgement, which rank among the top 10 profit disgorgements of all time.
Those settlements bring the 2014 fine totals up to around $1.5 billion, a close second to the record-setting year of 2010, where the total amount of fines was $1.8 billion.
Alstom has not disclosed the amount of money it spent investigating and resolving its FCPA probe. The internal costs to Avon, meanwhile, can only be described as stunning. The FPCA Professor reported “whispers” of pre-resolution costs up to $500 million. Given Avon’s continued obligations in its deferred-prosecution agreement, the pre-resolution costs, fine and penalty, and post-resolution cost could rival the criminal fine sustained by Alstom.
Disclosure, Cooperation, and Conduct
Alstom clearly engaged in foot-dragging in dealing with the Justice Department while the investigation was pending, and then compounded this conduct by refusing to engage in timely remediation. Alstom’s conduct included its absolute refusal to cooperate with the department’s investigation for several years, apparently even while the conduct was continuing to occur. Moreover, Alstom had no effective compliance and ethics program at the time of the conduct and its corrupt conduct spanned many years, occurred in countries around the globe and in several business lines, and involved sophisticated schemes to bribe high-level government officials. Finally, Alstom’s conduct led to resolutions with various other governments and the World Bank.
Alstom’s conduct was so bad during the investigation that the Justice Department obtained indictments against four company executives during the pendency of the investigation. Three of these executives pled guilty and await sentencing. Britain’s Serious Fraud Office has also brought charges against individuals.
Alstom will stand for the proposition that cooperating with the Justice Department is always better than fighting, or even worse, obstructing—even for a foreign-based company such as Alstom. It also portends the truly international fight against corruption and bribery.
Avon, on the other hand, did self-disclose to the Justice Department back in 2008. That being said, its cooperation may have also been somewhat less than sterling; the company reportedly did not get serious about resolving the matter until senior executives were called in front of a grand jury in 2012. Even with that, ahem, incentive, Avon needed three years to reach resolution.
During that time Avon made one the most bonehead Justice Department negotiating moves of all-time, when it low-balled the SEC with an opening settlement offer of $12 million. The company later disclosed in a regulatory filing that the SEC “offered an FCPA settlement last month with monetary penalties that were ‘significantly greater’ than the $12 million the company had offered.” Avon’s filing continued by saying, “Monetary penalties at the level proposed by the SEC staff are not warranted.” That approach did not turn out well for Avon.
Alstom will stand for the proposition that cooperating with the Justice Department is always better than fighting, or even worse, obstructing—even for a foreign-based company such as Alstom. It also portends the truly international fight against corruption and bribery. As the regulators said in their press statement on the case, “Further, the DoJ acknowledged significant cooperation from the law enforcement colleagues in Indonesia at the Komisi Pemberantasan Korupsi (Corruption Eradication Commission), the Office of the Attorney General in Switzerland, the Serious Fraud Office in the United Kingdom, as well as authorities in Germany, Italy, Singapore, Saudi Arabia, Cyprus, and Taiwan.” The Alstom investigation truly was worldwide in scope.
The Alstom enforcement action did have some good news for companies that might be in acquisition mode: it makes clear that the company acquiring it, General Electric, is not responsible for the fine going forward. This enforcement action reinforces the message the Justice Department presented in Opinion Release 14-02, that a company which engages in pre-acquisition due diligence, discloses and then remediates the issues after it acquires an entity, can rest easier about purchasing an FCPA violation. That is, if GE can be confident it can acquire a business like Alstom and remain in compliance with anti-corruption laws, any other company can do so as well.
The Avon enforcement action gives us several other lessons. First, if a new business opportunity results in an explosion of sales, that’s probably because some high risk is involved. It may be financial risk, political instability risk, weather-related risk, currency fluctuations risk, or lord knows what other type of risk. Regardless, when a business is regulated down from the national to the provincial to the municipality level, it means multiple government interaction for permits and licenses to do business. The compliance function must be integrated into the business operations of a company well enough to be alerted when such an opportunity presents itself, perform some type of risk assessment, and then plan and implement a strategy to manage those risks going forward.
The second lesson is that a corporate compliance committee is not simply a vehicle to show off when someone might be around to take pictures. A corporate compliance committee has to function and be involved, actively, in an appropriate level of oversight. If a compliance committee is informed of credible allegations of an FCPA violation, it simply cannot accept information that is “unsubstantiated” at a later date. A compliance committee must be involved in the investigation, review the investigation protocol, review information and findings as they become known, direct outside counsel in the investigation and, finally, take charge to remediate the issues involved. It has to have real authority, have real power, and be taken seriously, not simply have a toothless title of “compliance committee.”
Finally is the cost to Avon. For bribe payments totaling a bit more than $8 million, Avon has or will pay upwards of $750 million to get through all the FCPA investigation and enforcement expenses. This staggering cost should be a clear lesson that now is the time to implement or enhance a compliance program.