FCPA Violations are NOT Like a Box of Chocolates
- Catalina Osorio
- Aug 14, 2014
- 4 min read
When Forrest Gump uttered the famous phrase: “Mama always said life was like a box of chocolates. You never know what you're gonna get,” he was certainly not referring to the risks inherent in violating the Foreign Corrupt Practices Act (FCPA) at least not in recent years. Just ask Orthofix, the Texas-based medical devices company that paid routine bribes in the form of cash, computers, and appliances to Mexican officials – all referred to internally as “chocolates” -- to obtain contracts with public hospitals. When the Securities and Exchange Commission (SEC) and Justice Department investigated, they clamped down hard on the bribery scheme, resulting in penalties and interest totaling $7.4 million dollars. See more about the Orthofix case here. Summarizing the company’s lax attitude to compliance, the SEC noted, “Once bribery has been likened to a box of chocolates, you know a corruptive culture has permeated your business.” See here.
Recent business headlines increasingly show that what companies are “gonna get” when they violate the FCPA through unlawful international payments are large and sometimes crippling fines. Since 2008, companies have paid about $5 billion to settle FCPA cases. In 2013, 12 companies paid $731 million. In 2012, settlements totaled $259 million, in 2011 they were $508 million, in 2010 $1.8 billion, in 2009 $644 million, and in 2008 $890 million. See here at page 1220.
In virtually all instances, the penalties and related costs will far exceed the alleged pecuniary gain from the companies’ bribing activities. In addition to the fines themselves, stock prices fall, criminal investigations are launched, company and personal reputations are destroyed, companies are forced to implement much more costly compliance programs, they are subject to permanent injunctions, ongoing reporting obligations, and oversight, and they become the target of shareholder lawsuits. A UBS analysis indicated that typical FCPA investigations last from two to six years
Walmart’s FCPA Woes
If those statistics don’t make companies think twice about the efficacy of their compliance programs, the case of Walmart clearly should. In 2012, the New York Times, in a Pulitzer Prize-winning article, broke a story that Walmart had paid $24 million in bribes to speed up the regulatory process and open stores in prime locations. The article noted that, rather than addressing the bribery as a compliance issue, Walmart’s top managers attempted to cover it up after learning about it.
In addition to U.S. investigations being conducted by the Department of Justice and SEC, Mexican authorities are also looking into the matter. The probe has also expanded to other countries, including China, India, and Brazil, and Walmart is facing an avalanche of shareholder lawsuits. Members of Congress have also become interested and are looking at the possibility of tax evasion, money laundering, and other questionable financial behavior.
But, Walmart’s troubles do not end there. The company recently reported that it has spent nearly half a billion dollars in the past two years on legal fees, investigation costs, and related expenses, no doubt making it the most expensive FCPA probe ever. And, earlier this year, it projected in an earnings statement that it would spend another $200 million to $240 million in probe and compliance costs during its 2015 fiscal year. According to Walmart’s CFO, “Our process of assessing and responding to the governmental investigations and the shareholder lawsuits continues.” He added that, “While we believe that it is probable that we will incur a loss from these matters, given the ongoing nature and complexity of the review, inquiries, and investigations, we cannot reasonably estimate any loss or range of loss that may arise from these matters.”
Tips for International Businesses
How can your company avoid becoming the next Walmart?
Ensure that you have effective compliance policies and procedures in place
Re-examine the efficacy of your compliance program on an ongoing basis; too many companies go through the motion of implementing policies and procedures but never follow up to assess how they are being adopted across the company
Train employees to avoid corruption – it is essential to create a culture of compliance that goes well beyond policies and procedures
The message starts at the top: the highest levels of the company must continually reinforce the importance of compliance, including through their attention and actions. Compliance must be discussed at senior levels of the company
A growth at all costs environment is not conducive to a compliance culture
Provide adequate resources to your compliance efforts. It is tempting when cutting expenses to shortchange compliance. Clearly, as the Walmart case shows, that strategy can quickly become penny-wise and pound foolish.
When a problem is suspected, seek outside and independent advice. Many companies have committed the classic mistake of leaving an investigation in the hands of the very same internal team that may have committed an infraction or have a stake in its outcome.
Nextant partners have broad compliance experience and have developed a number of programs for multinational companies of all sizes. Its partners have practiced in leading international law firms and have held executive and legal positions at a Fortune 100 company, where one partner served as secretary to the Audit Committee of company’s board of directors.
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Scott Hoing is a founding partner of Nextant LLC, a consulting firm specializing in assisting companies expand their businesses in international markets, with a strong focus on Latin America. Scott practiced as an attorney in a leading international law firm in Washington, D.C. and London, concentrating on international economic regulation and transactions. He also held positions as an executive and associate general counsel of a Fortune 100 company, where he served as secretary to the Audit Committee of its board of directors. Scott’s expertise centers around business and legal strategy development, regulation and compliance.
Scott's email is: shoing@nextant.com
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