The Foreign Corrupt Practices Act and the Automotive Industry: Why It Should Be a High Priority and How to Manage the Risk

Friday, November 21, 2014 - November 2014 Newsletter: Executive-in-Residence News: Butzel Long: "The Foreign Corrupt Practices Act and the Automotive Industry: Why It Should Be a High Priority and How to Manage the Risk"

The automotive industry is no stranger to Foreign Corrupt Practices Act ("FCPA") enforcement activity. Indeed, the most significant prosecution in the automotive industry generated a great deal of attention and massive fines. Overall, though, the government's pursuit of automotive-related companies for FCPA violations has been occasional and moderately disorganized, unlike the large-scale antitrust investigation of automotive supply chain companies over the past several years. We believe this will soon change. Companies in this industry would be well-advised to examine their internal ethics and compliance functions, implement recommended changes now, and immediately address potential issues that come to light from compliance efforts.

The Provisions and Purposes of the FCPA

The FCPA prohibits two kinds of conduct: bribery and certain kinds of inadequate internal controls. 15 U.S.C. §§ 78dd-1 et seq. The anti-bribery law is relatively straightforward and very broad. The law covers any company that registers securities in the U.S. or must file reports with the U.S. Securities and Exchange Commission ("SEC"), is organized under U.S. or state law, or otherwise maintains a presence in the U.S., as well as individuals who are U.S. citizens or residents.1 If covered by the law, a company or individual cannot make, promise, or authorize a third-party to make or promise a payment or a transfer of a "thing of value" to a foreign official under specified circumstances. In particular, the law prohibits payments or gifts if they are in any way intended to secure an improper business advantage or induce the official to take official action or forbear in taking official action so any person or company can get or retain business. The law covers any act that might further a corrupt payment or a promise to pay - including any interstate use of wires that took place in the U.S.

The FCPA's internal controls provisions are even more comprehensive. They apply to corporations (and their agents) and focus on (1) books and records and (2) internal accounting controls. Accounting records must show the transactional business of the corporation accurately and with reasonable detail, and internal controls must be designed and maintained in a way that could help detect FCPA violations. Even if no corrupt payments are actually made, deficient record-keeping practices can support a violation of the law.

The FCPA authorizes harsh penalties. Each violation can be punished by a civil penalty of up to $10,000, a criminal fine of up to $250,000, and up to five years in prison. One must keep in mind that an investigation could unearth multiple payments: a kickback arrangement where individual payments are inflated by a small percentage might represent several separate violations. Most FCPA sentences for individuals have ranged from probation to up to two years in prison, but some executives have received much longer sentences; A former telecommunications executive was sentenced to a fifteen-year prison term in 2011 for FCPA violations.

Summary of Significant FCPA Activity in the Automotive Industry

• In 2008, Renault Trucks (a subsidiary of AB Volvo) was charged with a wire fraud conspiracy and violations of the FCPA's books and records provisions for a system of kickbacks to Iraqi government officials. According to the criminal information filed by the Justice Department, Renault inflated numerous invoices by 10% or included fictitious service fees that were intended to pay government officials to obtain business for Renault. Volvo paid a $7 million penalty2 and forged a deferred prosecution agreement with the government that avoided a criminal conviction.
• Voluntary disclosure is crucially important in securing more favorable results in FCPA matters. A company or individual that waits until the government reaches out or arrives at the door with a subpoena and FBI agents is far less likely to get favorable treatment. Deferred prosecution agreements can be used to avoid criminal convictions and the collateral consequences that often follow a conviction, such as civil debarment proceedings related to government contracts, yet such agreements generally incorporate significant financial penalties, forfeitures, or other related payments. Generally, the Justice Department is more likely to authorize deferred prosecution if the targeted company cooperated with investigations or conducted thorough internal investigations, quickly reported the results of any internal investigations to the government, and voluntarily undertook remedial measures. (The criminal charge against Volvo was dismissed in 2011 after Volvo satisfied the terms of its deferred prosecution agreement).
• Daimler resolved FCPA issues in 2010 that emerged from activities of certain subsidiaries in what represents the largest FCPA enforcement action in the history of the automotive industry. Two Daimler subsidiaries pleaded guilty, and Daimler paid combined monetary penalties and civil fines of $180 million as part of a deferred prosecution agreement and a civil settlement with the SEC. Daimler made payments to government officials through a variety of accounts, pricing practices, and intermediaries. Unlike the deferred prosecution agreement entered into by Renault, Daimler's deal included an independent corporate monitor - an outside firm tasked with overseeing the company's implementation and operation of a more robust compliance program. Corporate monitors create significant additional financial and compliance burdens - but in more serious cases, a monitor is still preferable to the severe collateral consequences that often accompany a criminal conviction. Daimler's deferred prosecution agreement and monitorship were extended once and successfully concluded in 2013.
• In 2011, Bridgestone paid $28 million and pleaded guilty to making corrupt payments and rigging bids to obtain sales of marine hose and other industrial products (not directly related to Bridgestone's automotive business). Bridgestone's dual violations of antitrust laws (the Sherman Act) and the FCPA arose from business in Latin America. It is particularly interesting that Bridgestone's FCPA issues grew out of a widespread investigation of price-fixing and bid-rigging. The Justice Department has pursued a similar investigatory and prosecution strategy in other industries.
• In 2014, an auto parts supplier advised in public filings that it had identified payments that potentially violated the FCPA, initiated an internal investigation, and self-reported the matter to the Justice Department and the SEC. The matter was announced relatively recently, so it is likely at an early stage and not yet resolved. Investigations can be resolved without criminal charges.

Risk Factors in the Automotive Industry

The automotive industry is ripe for increased FCPA enforcement activity. The international nature of the business means that companies and their agents routinely come into contact with foreign officials, and foreign governments are potentially significant customers. In addition, the very high level of antitrust enforcement activity among suppliers means that federal prosecutors are paying more attention to the industry, demanding more robust business ethics and compliance programs, and gathering enormous amounts of information from significant participants in the industry through subpoenas and searches that support the antitrust investigation. Finally, internal investigations that arise from a different concern, such as the auto parts antitrust information, can yield information about other challenges, and more robust ethics and compliance generally translates into a higher degree of reporting of any activity that raises ethical or compliance concerns, and generally provides easier reporting mechanisms (such as anonymous whistleblower hotlines).

Five Things Companies Should Do to Address the Challenges Presented by the FCPA

Maintaining an effective compliance program can pay big dividends. Corporations that identify challenges early and voluntarily disclose them are much more likely to get favorable treatment from prosecutors. The United States Sentencing Guidelines that guide federal criminal sentencing specifically note that maintaining an effective ethics and compliance program can affect how a corporation is treated at sentencing. USSG §8B2.1 (detailing basic features of an effective ethics and compliance program); USSG §8C2.5(f)(an effective ethics and compliance program can reduce a corporation's culpability for criminal conduct). Companies in the automotive industry should undertake the following steps to help limit the risks associated with acts that might violate the FCPA:

• Assess your risk. It is very difficult to devise and maintain effective internal controls and compliance programs without periodic reviews and audits. This effort cannot end at reviewing and updating the company's Code of Ethics. A functioning compliance program (among other things) evaluates the important parts of a company's business that create the greatest risk of potential violations, establishes audit procedures likely to identify potential issues, includes routine and effective face-to-face training, and provides multiple reporting mechanisms for possible compliance challenges. Internal controls should contain enough information about payments and third-parties to conduct an effective risk assessment. The Justice Department and the SEC assume there are high risks associated with payments to third-party facilitators outside the U.S., particularly if accounting controls and descriptions might be challenged.
• Follow-up is key. Internal audits must be designed to assess the effectiveness of a company's compliance program and must occur at regular and meaningful intervals. Strong working relationships between in-house and outside counsel are essential to ensure the compliance program and audit accomplish what the company wants. Face-to-face training by operational supervisors is one effective way to instill a culture of compliance, provided that the business stake-holders are in turn trained by skilled in-house and outside counsel. Components that need improvement must be addressed in a timely way and flagged for future review.
• Enforce Common Values Throughout. Compliance programs and audits are only effective if the best-practice procedures and values are disseminated throughout the organization. This can be particularly challenging for larger corporations or companies that have operations in a number of different countries. A company's smallest and most far-flung operations sometimes create the greatest risk of a potential violation.
• Consider data-oriented risk audits. Some corrupt practices can be hard to detect without in-depth review of large amounts of data. For example, corrupt payments can be disguised as seemingly legitimate fees or included as small percentage increases for purchases of particular parts or services. Audits that fail to compare such payments to standard pricing lists or contract terms can miss these types of challenges if they fail to master data at a relatively granular level.
• Keep a good lawyer's name on your short list. The larger enforcement actions discussed earlier in this article make it clear that FCPA challenges can be met through effective advocacy. Neither Daimler nor Volvo suffered a criminal conviction because they successfully crafted and satisfied a deferred prosecution agreement and/or a monitor. Counsel with experience in FCPA matters should be involved in designing and ensuring operation of an effective ethics and compliance program. And if potential problems do arise, early involvement by counsel generally translates into a better outcome.

Butzel Long has the industry expertise and white collar criminal defense experience, in both Detroit and Washington, D.C., to advise and defend companies and individuals with any of the challenges described above.

1The FCPA is generally acknowledged to have extensive extraterritorial application, and numerous individuals who are not U.S. citizens or residents have been charged under the act. Any use of wires that comes into contact with the U.S. banking system, for example, may support jurisdiction under the FCPA.

2Deferred prosecution agreements avoid a criminal conviction but may involve payments referred to as a "criminal penalty."