Monetary penalties tied to anti-corruption enforcement in the United States reached record levels in 2016 to nearly $2.5 billion, an order of magnitude greater than the prior year, ensnaring sectors across the spectrum, from banks and energy firms to drugs and telecommunications.
That whopping figure – easily hurdling the $133 million firms paid last year tied to violations of the U.S. Foreign Corrupt Practices Act (FCPA) and the $1.6 billion and $1.8 billion paid in 2014 and 2010 respectively – was comprised mostly of four enforcement actions averaging some $500 million. Three of the four were foreign companies, replete with the complexities of international evidence gathering. Those tallies are courtesy of the FCPA Blog.
Overall, 2016 was a “slam bam year,” for corruption enforcement, said Michael Volkov, a former federal prosecutor and now head of a Washington, D.C.-based boutique law firm specializing in compliance and civil and criminal investigations. And despite a swirl of questions regarding the approach and intentions of the incoming US administration, many expect rigorous anti-corruption enforcement to roll unabated into 2017.
“There is too much momentum behind all of this,” Volkov said, adding that more countries realize that corruption, or even the perception, can erode foreign investments and blunt the rule of law in other areas, such as combating organized criminal groups and terror networks. “It’s not going to slow down.”
As well, many FCPA investigations originate from companies self-reporting the possible violations and those tips won’t stop with a new U.S. president. As a result, federal investigators can spend less time investigating as they are presented much of the evidence by the company, a move done by firms in hopes of garnering deep discounts during the penalty phase of negotiations.
A key difference in 2016, however, is that the hefty enforcement totals were not solely the result of the U.S. Department of Justice aggressively expanding the country’s counter-graft agenda independently. Instead, this year’s FCPA cases involved investigations, coordination and cooperation with countries such as Brazil, Russia, China, Switzerland, and others, a framework of reciprocity now forged to bolster future cases, say analysts.
Last year saw U.S. and global settlements including a historic $3.5 billion resolution with Odebrecht, Brazil’s largest building firm, and Braskem, a petrochemical joint venture between that operation and the beleaguered Petrobras; a $520 million settlement with Israeli drug giant Teva Pharmaceutical Industries Ltd.; a nearly $400 million action with Holland’s VimpelCom and a $264 million order involving JPMorgan Chase, just to name a few.
As part of the settlements, penalties were divided among the countries actively involved in the investigation. In some cases, the United States only received a small percentage of the pie, an example of the tectonic shift in international corruption enforcement paradigms as other countries are stepping forward to shoulder the investigative load.
These enforcement actions also have their share of corruption compliance lessons. They include common themes ranging from the importance of oversight of third parties operating on a company’s behalf, to the need for stringent know-your-consultant and know-your-company provisions, a critical first step to sniff out when firms and politically-exposed persons (PEPS) are working through anonymous shell companies.
These actions, particularly the JPMorgan case, also drove home the need for a broad understanding of corruption risk, one that includes threats lurking in hiring and human resources. In response, some institutions are adopting novel compliance approaches, such as meshing together PEP and sanctions screening systems with their human resources and hiring systems to look for threats outside and inside the institution.
Justice Department officials also came up with new ways to force compliance by large companies, without always exacting punitive penalties. A new FCPA “pilot program” allowed “declinations with disgorgements,” a dynamic where prosecutors would not sanction a firm if it self-identities issues, responsively remediates and gives up ill-gotten gains.
In carving out these FCPA settlements, the U.S. and other countries have “created a very sophisticated, global interdependent enforcement regime which resulted in Odebrecht and other global prosecutions and coordination,” Volkov said.
“That is interesting because dismantling that system would be very difficult,” he said, adding that part and parcel of the enforcement approach is teaching and training investigators and prosecutors in other countries, so they can launch investigations of their own and be more of an asset in current and future international cases.
Retraction leads to expansion
One of the major reasons FCPA enforcement broke records in 2016 was that “2015 was such a small year” for actions, with less than a dozen firms paying just more than $130 million, said Richard Cassin, founder and editor-in-chief of the FCPA Blog. “But there was a lot in the pipeline.”
As well, many of the largest cases – three out of the four, excluding Och-Ziff Capital Management – were foreign companies, which can complicate and extend investigations, he said.
“These big cases didn’t start overnight,” Cassin said, adding that such investigations can routinely take 18-24 months.
“It did take a little longer to investigate these cases because the U.S. had to rely on international cooperation,” he said. “As a result, there can be a lot of difficulty in evidence gathering, such as interviewing witnesses, translating documents” and getting access to other data in a foreign jurisdiction due to logistical or privacy hurdles.
Moreover, some countries are not as familiar with U.S. bribery laws, or even the concept of why graft can be so damaging to both countries, and must be “socialized to the idea of enforcement,” he said, noting that the effort globally has gathered momentum as more countries have made crimping corruption a national priority since 2008.
Some of the common themes from FCPA enforcement actions in 2016 include China and Russia being both a source of corporate investment and peril, as economic growth and opportunity in those regions drew more risk takers willing to use graft to grab new business.
“China continues to dominate,” Cassin said. “There has been such a dramatic expansion of business and investment in China in the last five to seven years, and some of that has resulted in a blossoming of FCPA issues. And while there may have been less investment in Russia, it has had some of the most egregious cases of bribery.”
While banks have historically had stronger overall compliance frameworks due to their being a regulated class of institutions, they were not immune to getting caught up in the historic corruption enforcement winds blowing through 2016.
Graft grips largest U.S. bank
In November, JPMorgan Chase, the largest US bank, agreed to pay more than $260 million to settle federal charges it sought to corruptly influence Chinese officials into giving it preferential treatment in regional business and finance deals by awarding jobs and internships to their relatives and friends.
In the non-prosecution agreement, the bank stated it will pay $264 million to an array of government agencies, including the Securities Exchange Commission (SEC), U.S. Department of Justice and Federal Reserve, for violating the FCPA tied to referral hiring practices that granted jobs to unqualified individuals due to their connections to government officials.
The non-prosecution agreement is rarer than the more oft-used deferred-prosecution agreement, which in some recent enforcement cases has come with requirements the institution plead guilty.
As in many other cases, the JPMorgan action came with no individual penalties or top executives being hauled away in handcuffs to face jail time, a criticism of recent government enforcement philosophies for financial crime compliance failures, even as some penalties against banks have in the last few years hit record levels as high as $9 billion.
The investigation of JPMorgan Chase was part of a broader initiative by the U.S. government to sanction companies for engaging in these “quid pro quo” hiring practices in regions where corruption is endemic and such practices are considered customary. This includes many Asian nations where government officials and state-owned enterprises are deeply entwined with the private sector, and hiring the relative of a powerful government or political figure can mean choice access to new markets and opportunities.
In the scheme, investment bankers at JPMorgan’s subsidiary in the Asian Pacific Region (APAC), JPMorgan Securities Limited, “created a client referral hiring program that bypassed the firm’s normal hiring process and rewarded job candidates referred by client executives and influential government officials with well-paying, career-building JPMorgan employment,” according to the Securities Exchange Commission.
Investigators revealed that over a seven-year period, JPMorgan hired some 100 interns and full-time employees at the request of foreign government officials across 10 different government agencies, enabling the operation to “win or retain business resulting in more than $100 million in revenues to JPMorgan,” according to the SEC.
Federal officials at the time stated they believed there could be more banks beyond JPMorgan that could have engaged in similar actions, and the issue may even be a problem “industry wide,” according to news outlets, citing a call with reporters, noting that more cases could result “from this sweep.”
The settlement occurs in a time of transition. The SEC is seeing its leader, Mary Jo White resigning this month, and president-elect Donald Trump, who has criticized the FCPA in the past, will be taking over as president in just a few weeks.
‘New category of corruption enforcement’
That JPMorgan action has “really opened a new category of corruption enforcement,” Cassin said. “It has also opened the door to a lot more scrutiny in the banking sector” to see if other institutions were engaging in similar egregious, overt acts as JPMorgan, an issue already on the minds of federal prosecutors.
Another major theme coursing through 2016 was a shift in more mutual assistance in FCPA actions, rather than just the U.S. spearheading the issue, Cassin said.
“International cooperation is the big story,” he said, adding that the Odebrecht and Braskem enforcement actions involved three countries, Brazil, Switzerland and the U.S., working in concert. “That really showed the breadth and depth of international enforcement.”
When viewed in their totality, including Teva Pharmaceuticals and Vimpelcom, these “big cases are now being approached from several jurisdictions at the same time,” Cassin said. “It’s not just the U.S. out there alone doing the enforcement. It’s an international cooperative effort.”
In the context of FCPA enforcement, 2016 saw several key trends emerge, Volkov said, including stronger reliance on corporate monitors to oversee remediation efforts, greater global cooperation and higher expectations for anti-corruption compliance programs.
While many corporations are not regulated entities covered by specific AML rules, federal prosecutors are “more aware of what is out there and the capabilities of a corruption compliance program,” he said, noting that firms have easy access to best practices, past enforcement actions and transaction monitoring and payment accounting systems.
Moreover, many domestic and foreign companies operating in graft-prone regions can potentially learn from their banking counterparts to better understand the corruption risks of certain entities and transactions. This includes more due diligence and understanding around third parties receiving funds, and increased disclosure by third parties on where payments are going and how they are being spent, Volkov said.
Historic penalties did not bring to fruition Justice Department assertions for a greater focus on individual liability, however. In 2015, the DOJ issued a document titled “Individual Accountability for Corporate Wrongdoing” which became known as the Yates Memo. In it, the agency stated that it would push for top executives to be named, shamed and prosecuted in large cases against companies.
The U.S. levied 15 penalties against individuals for “causing” FCPA violations, but only two of them, tied to Och-Ziff, were related to a major penalty. The Department also won 10 guilty pleas from individuals.
As for 2017, one of the few areas FCPA enforcement could be pared back would be in the leeway given to companies that under the pilot program. As currently structured, the program grants up to a 50 percent reduction in potential penalty amounts if firms self-report issues, disgorge ill-gotten profits and extensively remediate, Volkov said.
This year may see the Justice Department create a formal program that allows a full declination of a penalty, something discussed internally last year, but nixed by top officials, he said. The Justice Department negotiated a dozen declinations last year.
For a wealth of reasons, there likely will not be a retrenchment of corruption enforcement, in the U.S. or globally, said Cassin, due to how inextricably intertwined graft is with a kaleidoscope of other crimes.
“There is the national and global security aspect of corruption,” he said. “We know that corrupt regimes are dangerous to us and the rest of the world. Those regions are where terrorists are trained and travel from.”
There is a growing sentiment and acknowledgment from a wider array of countries that “going backward on anti-corruption is going backward on anti-terror enforcement,” Cassin said. “That’s why AML enforcement has spread. You don’t want unstable regimes. And we know corruption creates instability around the world.”