Chadbourne Special Report – A Study of Individual Liability under the FCPA

A Chadbourne Compliance Quarterly Special Report (“the Report”) was issued last week by the law firm of Chadbourne & Parke LLP, authored by Scott Peeler entitled “A Study of Individual Liability under the Foreign Corrupt Practices Act”. It has attracted much attention for one of its findings, that being that a majority of persons charged with violations of the Foreign Corrupt Practices Act (FCPA) were at the top of their respective organizations; such as, the President, Chief Executive Officer (CEO) or the Chief Operating Officer (COO). However, there were several other findings, which I believe were significant and were equally worthy of discussion.

Methodology

The Report examined the results from major government-initiated civil and criminal FCPA cases filed against individuals since 2005.  It reviewed cases involving 61 individuals over that time frame. These persons were working for 26 different companies. The data compiled for the Report included the individuals “(a) name, company and job title/position; (b) the year, location and amount of alleged improper payments (if known); (c) the types of charges that were filed (civil, criminal or both); (d) the current status of those cases; (e) the resulting penalty (if known); and (f) whether the individual had indirect or direct knowledge and/or played any role in the alleged misconduct.”

Findings

As noted above the most reported finding is that the clear majority of those persons charged were at the executive level of their respective company; the President, CEO or COO. However, there were several other findings which a Compliance Department should consider in the context of their compliance program. The first is the Region where the alleged FCPA violation occurred. Perhaps, surprisingly is that the region where the greatest number of alleged violations occurred was not in Asia or Africa but in Mexico, Central and South America. Next was the amount of improper payments. Following that was the amount of improper payments involved in the alleged bribery. The largest number of bribes or improper payments was between $500,000 and $1.0MM and second largest number was between $1.0MM to $2.5MM. The smallest number was less than $100K.

In a very interesting analysis, the Report looked at an individual’s level of knowledge or involvement in the alleged bribery or corruption and such knowledge or involvement impacted whether a civil or criminal action was filed. The Report broke such knowledge or involvement into three levels. They were:

(1)     Indirect Knowledge – The individuals were never told directly of the improper conduct. However, they were aware of circumstances that would lead a reasonable person to suspect impropriety and investigate. Their liability was based primarily on their subsequent failure to ask questions and take prudent steps to discover and stop the bribery from occurring.

(2)     Direct Knowledge – While playing no direct role in the bribery or corruption the individuals involved were informed that it was ongoing but took no action to stop.

(3)     Direct Knowledge and Action – In this category the persons were both aware of the conduct and took some active role in it or allowed such conduct to occur.

In the last chart, the Report showed that no criminal actions were filed against persons with Indirect Knowledge and the vast majority of criminal actions were filed against those persons with Direct Knowledge.

Peeler Recommendations

Author Peeler concludes the Report with “five unavoidable conclusions” which are:

1. Don’t be an Ostrich. At the first sign of bribery or corruption, “commence a meaningful investigation.”
2. Don’t be a Fool. The moment you get a whiff that bribes are being paid, “don’t do any that could later look like acquiescence.”
3. Define Your Culture before it Defines You. As a senior executive, you need to play a demonstrable role that your company “never tolerates bribes and actively works to insure they aren’t part of your direct or indirect business.”
4. Play to win. As President, CEO or COO, “use the same skill, drive and intellect on the anti-corruption front that earned you that leadership role in the first place.”
5. It’s never too late. Even if you company is “literally starting with nothing” in terms of a compliance program…it’s never too late to start” to put one in place.

Conclusions

The data from this Report is very interesting. While I certainly agreement with Peeler’s recommendations, as set out above, I would draw some additional thoughts from his report. First is the region where the greatest amount of alleged violations occurred, Mexico, Central and South America. Many companies may not be focusing on this region as their top compliance risk. With the information presented in the Report, companies may need to reassess their compliance priorities towards these regions. This could occur through an annual Risk Assessment which has greater focus on the regions. Second is the amount of the bribes involved, clearly a bribe or other improper payment between $500,000 to $2.5MM would require either a (a) books and records detection system that has completely broken down or is so systemically inadequate as to useless or (b) direct knowledge and action of senior management to perpetrate such conduct. Leaving aside the bribes or improper payment paid by the direction of senior management with their direct knowledge, this finding would seem to scream out that an adequate books and records system is an absolutely mandatory part of a best practices compliance program.

The final conclusion I would draw is more one of overall fairness. This comes from the final chart listing the number of civil and criminal actions filed. Of the 64 civil and criminal cases filed, only 2 civil cases were filed against senior executives who had indirect knowledge only of bribery or corruption. There is much gnashing of teeth and complaints that a senior manager such as President, CEO or COO will be facing jail time for something that they do not know about and in a large, multi-national company, could not have any way of knowing about. This finding that no criminal charges were filed against any such persons would seem to belie such complaints.

I congratulate Scott Peeler and his firm for producing such a useful report. The analysis is quite helpful for the compliance practitioner and provides solid information which can inform a company’s compliance program.

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Scott Peeler is a Partner at Chadbourne & Parke and can be reached via email at speeler@chadbourne.com or phone at (212) 408-1140.

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