[Editor's Note: The definitions of 'indirect' costs and 'direct' costs have been corrected in this story. We apologize for this error.]
Compliance and legal executives interested in learning about the inner workings of Foreign Corrupt Practices Act investigations and resolutions from the perspective of the Securities and Exchange Commission and the Federal Bureau of Investigation, read on.
During a recent panel at Compliance Week 2017 in Washington D.C., Kara Brockmeyer, former chief of the SEC’s FCPA Unit, and George McEachern, supervisory special agent at the FBI, spoke candidly about the future of FCPA enforcement, cooperation credit, third-party risk mitigation, and more.
The most important message that Brockmeyer and McEachern stressed repeatedly is that the U.S. government continues to develop relationships and cross-border collaboration with their foreign counterparts—a factor that drastically has effected the scale of FCPA resolutions and puts a premium on how companies resolve these cases.
Countries that never have offered the U.S. government assistance in FCPA investigations are now providing significant assistance. “They’re not riding coattails,” Brockmeyer said. “They’re actually providing their own investigative work, their own investigative efforts.”
“From the government perspective, it’s game-changing,” Brockmeyer added. “From a company perspective, it’s terrifying, because it means you have threats and potential risks coming at you from more jurisdictions and more areas than ever before.”
Like the SEC and the Department of Justice, the FBI also has increased its collaboration with foreign counterparts in recent years. McEachern cited the International Foreign Bribery Taskforce (IFBT) as an example. The IFBT, much of whose work takes place behind the scenes, was established in 2013 by the FBI, the Royal Canadian Mounted Police, the Australian Federal Police, and the City of London Police Overseas Anti-Corruption Unit.
The IFBT provides a platform for authorities in these countries to share information in real-time on cross-border anti-corruption investigations. Conversations with these enforcement agencies happen “almost daily,” McEachern said. “I’m on the phone with my counterparts talking about huge cases that we never would have imagined five years ago.” Additionally, representatives from these enforcement agencies meet annually to share new investigative techniques and determine which country is best suited to lead which cross-border case.
McEachern noted that the FBI also has agents sitting in corruption bureaus overseas who are looking specifically at FCPA violations. Having these agents on the ground gives the FBI more leverage during settlement negotiations to say to a company, “Look, we have people on the ground. We know what’s going on. We don’t just rely on what you’re telling us,” he said. Compliance and legal executives should heed that as a warning.
“I’m on the phone with my counterparts talking about huge cases that we never would have imagined five years ago.”
George McEachern, Supervisory Special Agent, FBI
Ultimately, all this cross-border collaboration between the U.S. government and enforcement agencies around the world translates into large, global resolutions. The most prominent example is global construction company Odebrecht, which was ordered to pay $2.6 billion in fines for FCPA violations, securing a plea deal reached in 2016 with authorities in the United States, Brazil, and Switzerland.
“The days of large, U.S. resolutions by themselves are over,” McEachern said. “International cases are only going to continue to get bigger.”
FCPA cases to model. A company that self-discloses potential FCPA violations and remediates the problem increase its chances of receiving cooperation credit from U.S. enforcement authorities. Another realized benefit: “The cooperation of a company can make the case go by much faster,” Brockmeyer said.
Compliance officers looking for cases to emulate don’t need to look any further than Akamai Technologies and Nortek. “They did exactly everything the government would want,” Brockmeyer said.
As laid out in the Akamai and Nortek NPAs, the SEC credited the companies with taking the following actions when it uncovered potential FCPA violations:
Self-disclosed in the early stages of internal investigations;
Shared findings of the internal investigations and provided timely updates to enforcement staff when new information was uncovered;
Provided summaries of witness interviews and voluntarily made witnesses available for interviews, including those in China;
Voluntarily translated documents from Chinese into English;
Terminated employees responsible for the misconduct; and
Strengthened their anti-corruption policies and conducted extensive mandatory training with employees around the world with a focus on bolstering internal audit procedures and testing protocols.
Due to their efforts, both companies not only reached non-prosecution agreements with the SEC and received declinations by the Department of Justice, but also resolved their FCPA cases in just over a year—a rarity for an FCPA case, which takes four years on average to resolve.
Below are the bios of George McEachern, Supervisory Special Agent for the Federal Bureau of Investigation, and Kara Brockmeyer, former chief of the SEC’s Foreign Corrupt Practices Act Unit.
George McEachern currently is Supervisory Special Agent at the FBI, where he supervises the FBI’s Washington Field Office International Corruption Squad with a focus on FCPA, international money laundering facilitation, kleptocracy, and antitrust investigations.
McEachern joined the FBI’s International Corruption Unit in 2013, in which he managed the FBI’s FCPA global investigations program and helped create the newly formed FBI International Corruption Squads based in Washington, Los Angeles, and New York.
McEachern first joined the FBI in 2005 as a special agent, conducting complex federal investigations focused on counterterrorism, public corruption, and corporate criminal activity, prior to being promoted to Supervisory Special Agent in 2011.
Kara Novaco Brockmeyer, former Chief of the SEC Enforcement Division’s FCPA Unit, joined law firm Debevoise & Plimpton in May 2017 as a partner and member of the white-collar and regulatory defense and strategic crisis response and solutions groups in the firm’s Washington, D.C. office.
For the past five and a half years, Brockmeyer directed a nationwide team of attorneys and forensic accountants investigating violations of the FCPA, including anti-bribery, books and records, and internal controls provisions of the federal securities laws.
During her tenure as chief of the unit, she oversaw many of the agency’s largest and most complex FCPA investigations, and under her leadership, the SEC increased its coordination with other countries to reach global settlement resolutions. She was also one of the principal authors of the SEC-DOJ Resource Guide to the Foreign Corrupt Practices Act, which is widely considered the definitive government-issued guide on the FCPA.
Brockmeyer’s expertise extends well beyond the FCPA. Over a 17-year career at the SEC, including five years as an assistant director, she has led and personally conducted major investigations in all areas of SEC enforcement, including financial reporting, broker-dealer and investment adviser violations, and insider trading. She was the founder and co-head of the division’s Cross–Border Working Group, an inter-disciplinary group focused on addressing accounting fraud by companies based overseas.
Source: Debevoise & Plimpton
Although the FBI doesn’t give cooperation credit like the SEC and Department of Justice, it does pay attention to how long a company takes to produce documents. Working with multiple companies in many of the same countries on multiple resolutions, “we know, generally, how long it should take for documents to be produced,” McEachern said. When companies decide to “play games and delay tactics,” the FBI will not hesitate to relay that information to the Department of Justice, he said.
Defining disgorgement. Brockmeyer also provided some rare insight into how the SEC weighs disgorgement during settlement negotiations. “The purpose of ill-gotten gain is to put the company back in the place it would have been had the fraud not occurred,” she explained.
Where the rubber meets the road, however, is how profits are calculated. As a general matter, indirect costs may not be deducted; these are expenses the company would be on the hook for whether the company had won the contract at issue or not—employee salaries, for example. In comparison, direct costs—such as labor and materials—incurred for a contract that was awarded illegally can be deducted.
Because the facts of each case differ, the SEC during settlement negotiations often must determine what constitutes a direct cost versus an indirect cost, Brockmeyer said. In some cases, indirect costs may turn out to be direct costs. In one FCPA case, for example, a company had a subsidiary in China in which all the profits from that subsidiary were the result of a bribe, so even the salaries of the employees at that subsidiary could be deducted, she said. If you're giving all the profits to the subsidiary, then every cost associated with those profits become direct costs.
Brockmeyer added that now that the FCPA Unit has three forensic accountants who work on these cases, the SEC is “far more sophisticated” than five years ago in figuring out disgorgement calculations.
Third-party risks. During the panel discussion, both Brockmeyer and McEachern also spoke about the importance of conducting third-party due diligence and ensuring that third parties are providing the services they are supposed to be providing. Look to see what services are in the contract and that they’re being paid for those specific services, Brockmeyer said.
McEachern offered the following as examples of common red flags that companies should watch out for:
Third parties that take on deals they have no business taking on;
Third parties that get paid over market value;
Third parties that want to be paid in an unusual currency; or
Third parties that want payments to go to banks in countries they’re not operating.
At the most basic level, companies should have audit rights, conducting spot checks on the ground and meeting with people to verify that the third party truly exists. In high-risk areas of the world, especially, “you have to kick the tires very carefully,” McEachern said. “Otherwise, you could have a major problem.”
McEachern forewarned that companies should pay special attention to third parties located in countries experiencing changes on a political front, because a third party that may not have been politically exposed before may be exposed now, putting a company at risk of violating the FCPA.
McEachern specifically cited South America and Central America as regions where compliance officers should keep their ears to the ground. “The politics of those regions are in great flux right now,” he said. Companies should maybe think about revising their risk assessments, he said, and “keep checking those places carefully.”