- Foreign Corrupt Practices Act (FCPA): Israel Beware - Trends in Enforcement
- August 26, 2015 | Author: Daniel S. Harary
- Law Firm: Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. - New York Office
- Intuitively, Israeli companies and their directors would likely assume that their businesses are immune to investigation and the assessment of penalties by US regulators that are separated by a vast ocean and located more than 9,500 kilometers away. The reality, however, stands in contrast with intuition, as Israeli companies and individuals have recently come under the scrutiny of US regulators investigating possible violations of the Foreign Corrupt Practices Act (“FCPA”). The investigations have touched upon several key sectors of the Israeli economy, including technology, energy, defense, health care and life sciences, and mining, and, in at least one instance, significant penalties have been assessed. Therefore, Israeli companies and their boards of directors should be asking (i) What is the FCPA and (ii) what steps can be taken to avoid an unwelcome investigation and/or liability?
The FCPA is a United States anti-bribery law with worldwide reach. Generally speaking, the law makes it unlawful for companies or persons within its scope of coverage to provide money or other benefits to any foreign official in order to obtain or retain business. More specifically, the law covers a variety of circumstances not immediately obvious that are critically important for international companies to recognize. The statute is comprised of two sections: (i) an anti-bribery prohibition and (ii) a books-and-records provision. The Securities and Exchange Commission (“SEC”) of the United States enforces the statute civilly, while the Department of Justice (“DOJ”) oversees criminal prosecutions.
As Israeli individuals and companies continue to have a significant impact on the international marketplace, their exposure to FCPA investigations and liability is likewise enhanced. Awareness of the scope and reach of the FCPA and the following of some basic preemptive rules can assist Israeli companies with avoiding the unwanted and severe consequences of FCPA investigations and enforcement actions by U.S. regulators. Criminal and civil fines and penalties imposed under the FCPA can be enormous, and can also attract unwelcome publicity to a company alleged to have violated the statute.
This article explains the basic provisions of the FCPA, provides recent trends in FPCA enforcement generally and specifically with regard to Israeli companies and individuals. Finally, the article provides critical advice for limiting exposure to FCPA liability.
The FCPA Explained
The Anti-bribery Prohibition
The anti-bribery prohibition makes it illegal to corruptly offer, promise to pay, authorize the payment of any money or authorize the giving of “anything of value” to any “foreign official” for the purposes of obtaining or retaining business. Courts have noted that the “[t]he term ‘anything of value’ is construed broadly to include such benefits as employment offers, travel expenses, and charitable contributions.” This term also includes entertainment, meals, use of facilities or equipment or anything else the recipient views as having value. Likewise, “foreign officials” is broadly defined under the statute to include all levels of officials, candidates for foreign office and employees of a foreign government at any level. The term “foreign officials” can also include employees of state-owned or state-controlled entities. Government control or ownership is especially prevalent in such areas as aerospace and defense manufacturing, banking and finance, health care and life sciences, energy and extractive industries, telecommunications, and transportation, and therefore, FCPA exposure in these sectors is increased.
In other words, companies can be found liable for violating the FCPA in situations where it is not obvious that the person to whom they are providing something is actually a foreign official. The fact that employees of state-owned businesses fall within its scope is one example of how FCPA violations may arise in areas far removed from a traditional notion of a “foreign official.”
Similarly, the FCPA casts a wide net with respect to both individuals and companies who may incur liability. Critically, liability may be imposed upon a company or an individual, both domestic and foreign. Indeed, the anti-bribery section of the FCPA applies to: (i) issuers and their agents; (ii) domestic concerns and their agents; and (iii) any person who violates the FCPA while in the territory of the United States. Issuers are companies with securities listed on a national exchange in the United States, or companies with securities quoted in the over-the-counter market in the United States and required to file a report with the SEC. Issuers also include foreign companies whose securities are traded on domestic stock exchanges through the use of ADRs, and subsidiaries of any issuer. Domestic concerns include individuals, such as citizens, nationals, residents, and businesses, such as corporations, partnerships, associations, joint-stock companies, business trusts, unincorporated organizations or sole proprietorships that have a principal place of business in the United States.
This means that Israeli companies and U.S. and other foreign companies doing business in Israel may be subject to the FCPA’s jurisdiction on several grounds that are easily met, including listing their companies on a U.S. exchange, being required to file periodic reports with the SEC, or maintaining a principal place of business in the United States. At the individual level, a person can be subject to FCPA jurisdiction, and hence, liability, for a violation taking place in a U.S. territory, or for acts committed anywhere in the world, if the individual has a principal place of business in the United States.
Penalties for violation of the anti-bribery provision include (i) criminal fines for entities up to $2,000,000 and for individuals up to $25,000 and five years imprisonments and (ii) civil penalties up to $16,000 per violation and potential debarment from contracting with the federal government.
The Books-and-Records Provision
The FCPA’s books and records provision requires issuers to (i) make and keep accurate books, records, and accounts, which, in reasonable detail, accurately and fairly reflect transactions and disposition of assets and (ii) devise and maintain reasonable internal accounting controls aimed at preventing and detecting FCPA violations. The term “reasonable detail” in the accounting provision is defined as the degree of assurance that would “satisfy prudent officials in the conduct of their own affairs.” Congress included the prudence standard to emphasize that “the issuer’s records should reflect transactions in conformity with accepted methods of recording economic events and effectively prevent off-the-books slush funds and payments of bribes.”
The internal controls established by a company must give “reasonable assurance” that company procedure is followed, transactions are recorded, and access to and accountability of assets is controlled and regularly monitored. Like the books and records provision, the “reasonable assurances” demanded by the internal controls provision must be maintained at “such level of detail and degree of assurance as would satisfy prudent officials in the conduct of their own affairs.”
Violations of the books-and-records provision may result in (i) criminal fines for entities up to $25,000,000 and for individuals up to $5 million and 20 years imprisonment and (ii) civil penalties of the greater of (a) the gross amount of pecuniary gain to the defendant and (b) a specified dollar limitation, depending on the egregiousness of the violation, ranging from $7,500 to $150,000 for individuals and from $75,000 to $750,000 for companies. Violation of this provision may also result in debarment from serving as an officer or director of a public company.
Israel: Recent Trends and Focus
Increased FCPA Focus on Israeli Companies, Individuals, and Transactions
As a result of Israel’s emerging role as a major force in the global marketplace, particularly in the technology, health and life sciences, and defense sectors, an analogous increase in DOJ and SEC scrutiny of Israeli transactions for FCPA compliance is anticipated. Whereas prior to September 2007, there was only a single FCPA claim involving an Israeli defendant prosecuted under the FCPA, since then, several FCPA claims have involved Israeli companies and/or individuals.
In 2008, the SEC charged Siemens, A.G. (“Siemens”) with sweeping violations of the FCPA, spanning numerous countries and continents. Among the allegations, the complaint charged Siemens with offering a $20 million bribe to a former director of Israel Electric Corp. (“IEC”), in connection with four contracts to build and service power plants in Israel. Ultimately, Siemens settled the allegations for $800 million, representing the highest FCPA penalty to date. The former director from of the IEC has since been extradited by the Israeli government from Peru to face a $200 million lawsuit commenced by the IEC in connection with the bribery allegations.
In January 2010, the DOJ announced a sting operation in which 20 executives and employees of companies in the military and law enforcement sectors were indicted for engaging in a scheme to bribe government officials to obtain business. One such executive, Ofer Paz, an Israeli citizen residing in Israel, was charged as a “person” other than an issuer or a domestic concern under the FCPA. The SEC alleged that Paz made corrupt payments to an undercover FBI agent posing as a sales agent on behalf of a Minister of Defense of an unidentified African country. Specifically, in connection with two contracts to sell explosives, Paz allegedly paid a 20% commission to the sales agent, half of which the agent kept as a fee for his services, and the other half consisting of the bribe to be given to the Minister of Defense in exchange for the contracts. Although the sting operation resulted in four pleas, the case against Paz was ultimately dismissed with little additional information made public about the disposition.
One of the strongest examples of the SEC’s focus on Israeli compliance with the FCPA is demonstrated by its filing of a complaint in April 2011 against Comverse Technology, Inc., in connection with alleged FCPA violations by its Israeli operating subsidiary, Comverse Limited. The complaint alleged that Comverse Limited made improper payments to individuals connected to a Greek telecommunications company, part of which was owned by the Greek government, resulting in contracts worth $10million in revenue. To carry out the scheme, it is alleged that Comverse Limited employed a third-party agent to facilitate and conceal the payments. These payments were allegedly recorded on Comverse’s books and records as “agent commissions.” To settle the allegations in the complaint, Comverse consented to pay $1,249,614 in disgorgement and $358,887 in prejudgment interest.
More recently, several of Israel’s wealthiest companies and individuals have become entangled in FCPA investigations. Notably, Benny Steinmetz Group Resources (“BSGR”), a mining company owned by Benny Steinmetz, Israel’s wealthiest citizen, is reportedly being investigated by the DOJ for allegedly agreeing to pay the wife of an African official in order to secure the mining rights to Guinea’s Simandoan iron-ore deposit. On March 10, 2014, Frederic Cilins, an agent employed by BSGR, pled guilty to one count of obstruction of the DOJ’s criminal investigation. A Guinean government report released in early April recommended that BSGR be stripped of the two iron-ore concessions worth billions of dollars, concluding that they were obtained through bribery.
Israeli companies should also be aware of general FCPA trends, as they suggest a continued focus on FCPA prosecution and enforcement by the regulators. The average financial payment to resolve an FCPA matter with the DOJ or SEC in 2014 exceeded $156 million, almost seven times more than the average resolution price in 2012 and a 96% increase from 2013. In addition, the enforcement trend is increasing: as of February 25, 2014, the SEC had already brought the same number of FCPA enforcement actions as it had in all of 2013. Further, in 2014, the DOJ and SEC imposed approximately $1.565 billion in penalties on their defendants. Such penalties yielded the second highest amount of fines and penalties in the FCPA’s history. Notably, no FCPA enforcement action brought by the SEC or DOJ has been resolved for less than $1,000,000 since March 2011. In 2014, four separate cases - against Alston, Alcoa, Avon, and Hewlett-Packard - each exceeded resolution amounts of $100 million. In addition, Alstom S.A., a French engineering company and powerhouse, paid a record-breaking $772 million in December 2014 in response to criminal charges brought by the DOJ, closing an investigation involving law enforcement in 10 different countries that lasted over six years.
Confirming regulators’ staunch commitment to increased enforcement, Kara Brockmeyer, Chief of the Foreign Corrupt Practices Act Unit, stated at a workshop in 2014 that the biggest issues in FCPA enforcement are third-party intermediaries and travel and entertainment expenses. On this point, Brockmeyer noted that she is “amazed” to see companies enter into arrangements with third parties to get business without knowing anything else about the third party. Brockmeyer’s views aligned with what we saw in 2014, where the exploitation of third parties was a common theme among every single FCPA investigation, except for one.  Another trend we expect to continue through 2015 includes the SEC’s heavy reliance on administrative resolutions. At a conference in 2014, Brockmeyer stated, “it’s fair to say [the use of administrative proceedings] is the new normal.” Moreover, more aggressive investigations, which include wiretaps, body wires, border searches, and physical surveillance, are also anticipated. In 2014, Marshall Miller, the DOJ’s Criminal Division’s Acting Principal Deputy Assistant Attorney General, declared, “Such proactive investigation tools - previously used primarily in organized crime and drug cases - have become a staple in our white-collar investigations ... I can promise you we will continue to use them.” In January 2015, the Federal Bureau of Investigation (FBI) announced a tripling of the number of agents assigned to overseas bribery, now totaling over thirty agents. Joseph Campbell, assistant director of the FBI’s criminal division, stated in an interview, “With the growing global economy and the growing nature of international commerce with globalization of more companies and economies, it’s creating more opportunities for the potential of FCPA and corruption.”
Further, we expect increased attention on small and medium-sized companies through 2015. Brockmeyer stated at a conference in February 2015, “We won’t focus only on the multinationals, but also on the small and medium-sized companies” as the SEC wants to ensure that such businesses going overseas for the first time or moving into an emerging market are paying enough attention to their internal controls and FCPA risks. 
Certainly, an important trend in terms of FCPA enforcement has also been the increased prosecution of individuals. Of the 26 FCPA criminal enforcement actions announced by the DOJ in 2014, 12 were brought against individuals. The SEC also expects to actively pursue enforcement action against individuals. Leslie R. Caldwell, Assistant Attorney General for the Criminal Division, expressly stated in a conference on October 1, 2014, that “Corporations do not act, but for the actions of individuals. In all but a few cases, an individual or group of individuals is responsible for the corporation’s criminal conduct. The prosecution of culpable individuals - including corporate executives - for their criminal wrongdoing continues to be a high priority for the department.”
Best Practices For Compliance Programs
Given the broad scope and severe penalties associated with the statute, what should companies in Israel be doing to minimize their risk of running afoul of the FCPA? Critical to any company with potential FCPA exposure is the development, maintenance, and enforcement of a comprehensive compliance program at every corporate level. Fortunately, in 2012, the SEC and DOJ jointly released a “Resource Guide to the U.S. Foreign Corrupt Practices Act” (the “Guide”), which offers useful instruction and guidance in this area.
Initially, U.S. regulators will ask three basic questions about a company’s compliance program:
- Is it well-designed?
- Is it being applied in good faith?
- Does it work?
- Establish standards and procedures to prevent and detect even minimal unlawful conduct.
- Have the company leadership know the content of the compliance program and exercise reasonable oversight of it.
- Exclude from the company leadership any person who has previously engaged in conduct inconsistent with an effective compliance program.
- Communicate the standards and procedures of their programs regularly to their employees.
- Monitor and audit their compliance program to regularly determine its effectiveness.
- Promote and enforce the compliance program consistently through incentives for compliance and appropriate disciplinary measures for non-compliance.
- Take reasonable steps to respond appropriately to any criminal conduct that is found and to prevent further similar criminal conduct, including making any necessary modifications to the compliance program.
1 Chevron Corp. v. Donziger, 2014 U.S. Dist. LEXIS 28253, at *616, 617 (S.D.N.Y. 2014).
2 See http://www.justice.gov/criminal/fraud/fcpa/guide.pdf.
3 See 15 U.S.C. § 78dd-1(a); 15 U.S.C. § 78dd-1(f)(1)
4 See http://www.justice.gov/criminal/fraud/fcpa/guide.pdf at page 20.
5 See http://www.justice.gov/criminal/fraud/fcpa/guide.pdf at page 11.
6 15 U.S.C. §§ 78l and 78o(d).
7 15 U.S.C. § 78dd-2(h)(1).
8 15 U.S.C. § 78m(b)(2).
9 15 U.S.C. § 78m(b)(7).
11 15 U.S.C. §78m(b)(2).
12 15 U.S.C. § 78m(b)(7).
13 See U.S. v. Steindler, No. CR 1 94-29 (S.D. Ohio 1994). In Steindler, the DOJ brought charges against Herbert Steindler, a sales manager for General Electric Company (“GE”), Harold Katz, an attorney practicing in Israel, and Rami Dotan, a General in the Israeli Air Force. The DOJ alleged that the defendants engaged in a conspiracy to divert $11,000,000 from contracts between GE and Israeli government for fighter jet engines. Steindler was charged with violations of the FCPA’s anti-bribery provisions and both he and Dotan were additionally charged with, inter alia, violation of the books and records provision.
14 See SEC v. Siemens, A.G, No. 08-cv-02167, https://www.sec.gov/litigation/complaints/2008/comp20829.pdf.
15 See http://www.timesofisrael.com/israeli-electric-corporation-sues-ex-judge/.
16 See U.S. v. Paz, No. CR-09-339 (D.D.C. 2009), http://www.justice.gov/criminal/pr/documents/11-16-09-paz-indictment.pdf.
17 See SEC v. Comverse Technologies, Inc., No.11-cv-1704 (E.D.N.Y. 2011), http://www.sec.gov/litigation/complaints/2011/comp21920.pdf.
18 See https://www.sec.gov/litigation/litreleases/2011/lr21920.htm.
19 See http://www.theguardian.com/world/2013/apr/16/fbi-arrest-bribery-10bn-mountain.
20 See http://www.justice.gov/usao/nys/pressreleases/March14/CilinspleaPR.php.
21 See http://news.yahoo.com/guinea-report-recommends-stripping-bsgr-two-iron-ore-110735794.html.
22 See http://www.acc.com/legalresources/publications/topten/due-diligence-for-corporate-counsel.cfm?makepdf=1.
23 See http://www.mondaq.com/unitedstates/x/295596/Corporate+Governance/The+SEC+Speaks+About+FCPA.
24 See http://www.bna.com/sec-internal-controls-n17179923705/.
25 See http://www.sec.gov/spotlight/fcpa/fcpa-cases.shtml.
26 See http://www.wsj.com/articles/alstom-to-pay-772-million-to-settle-bribery-charges-1419264599.
27 See http://www.sec.gov/spotlight/fcpa/fcpa-cases.shtml.
28 See http://www.justice.gov/criminal-fraud/case/related-enforcement-actions/2014.
29 See http://www.wsj.com/articles/sec-is-steering-more-trials-to-judges-it-appoints-1413849590.
30 See http://fcpamericas.com/english/enforcement/top-fcpa-enforcement-trends-expect-2015/.
31 See http://www.wsj.com/articles/sec-is-steering-more-trials-to-judges-it-appoints-1413849590.
32 See http://blogs.wsj.com/riskandcompliance/2015/01/14/fbi-to-bulk-up-foreign-bribery-efforts/.
33 See http://www.law360.com/articles/644938/2015-begins-with-a-drop-in-fcpa-enforcement-activity.
34 See http://www.bna.com/sec-enforcement-officer-n17179892900/.
35 See http://www.justice.gov/criminal-fraud/case/related-enforcement-actions/2014; http://www.sec.gov/News/PressRelease/Detail/PressRelease/1370543472839#.VJDQePldUWd.
36 See http://www.justice.gov/opa/speech/remarks-assistant-attorney-general-criminal-division-leslie-r-caldwell-22nd-annual-ethics.