Chiquita Brands’ Troubles With The Foreign Corrupt Practices Act (FCPA) In Colombia – Part One – The FCPA Explained
Former FARC hostage Keith Stansell sued Chiquita Brands International, after being held more than 2000 days in captivity held by leftist guerillas of the FARC (Revolutionary Armed Forces of Colombia).[i] Stansell alleges that Chiquita Brands made corrupt payments to the FARC – bribes, in his view; extortion, according to Chiquita and its Colombian counsel, in order to ensure the safety of Chiquita’s workers at its more than 200 banana farms in Colombia.
The FARC shot down a plane carrying Stansell and three Northrup Grumman employees. Thomas Janis, the pilot, died, and the other two were force-marched into the jungle and captivity after the plane crash. Stansell’s complaint against Chiquita joins complaints filed by some of Janis’s heirs and nearly 200 plaintiffs.
Chiquita has paid a fine – US$25 million – and made other agreements with the Department of Justice, for allegedly corrupt payments to the FARC’s mortal enemy, the paramilitary Autodefensas Unidas de Colombia (AUC). With the considerable defense of Chiquita mounted by now-Attorney General Eric Holder (when he was in private practice), the Company did not have to pay the $75 million first demanded.
“Sixty Minutes” ran a tough story on the case. Chiquita faces liability to sympathetic plaintiffs – it lost a motion to dismiss their case decided by a judge who is hearing numerous complaints against Chiquita that have been consolidated for pre-trial treatment. These new plaintiffs are represented by litigation powerhouse Boies Schiller & Flexner’s Lee Wolosky, a former White House counterterrorism official in both the Clinton and second Bush administrations. In addition, there are shareholder derivative actions lodged against Chiquita Brands.
The Chiquita cases teach a lot about risks that companies face – and can and should avoid. This article provides information about compliance with the Foreign Corrupt Practices Act (FCPA) and its aggressive enforcement, and outlines best practices to avoid liability. In Part II, I look at Colombian FCPA cases, and in Part III I take a detailed look at the Chiquita allegations and the findings of it special litigation committee investigation. The conclusion, Part IV, will summarize the very unique nature of the Chiquita facts while cautioning that active compliance efforts are nevertheless necessary in Colombia as elsewhere.
Some Background About The FCPA
The Law’s Requirements
The U.S. Department of Justice’s anti-corruption efforts are centered on the Foreign Corrupt Practices Act (“FCPA”). This law, first passed in the late 1970’s, has been reinvigorated by aggressive enforcement in recent years.
The FCPA has three main parts. The first prohibits bribing foreign government officials. The second requires accurate books and records. The third requires appropriate internal controls to prevent bribery and to preserve records.
These parts function independently. If bribes are paid, that violates the first part of the FCPA and can result in prosecution. If payment of that same bribe, however, is not reflected on the company’s books, the company and its personnel can be prosecuted additionally for violating both the FPCA’s books and records provision and its internal controls’ provision.[ii]
The FCPA does not set a minimum; it has no materiality requirement. Even what some might consider just a “small” bribe, or one made to lower level government officials (including employees of state-owned enterprises), can be sufficient to subject the company to criminal prosecution under the FCPA.
High Prosecution Priority
By 2009, according to comments made by Mark Mendelsohn, the DOJ deputy chief overseeing FCPA prosecutions, as reported in the Wall Street Journal, there were already over 120 open Department of Justice (“DOJ”) investigations into possible FCPA violations,[iii] and between 1998 and 2008, over 60 multinational companies (and numerous more company executives) have been prosecuted for violating this federal law — the majority in the last five years. (The DOJ does not make any ongoing tabulation of open cases available to the public. Therefore I am not aware of how much this number has grown since his comments.) In the previous two years, the DOJ and the Security and Exchange Commission (“SEC”) settled FCPA enforcement actions against some of the world’s largest companies — and prosecuted corporate executives — for bribery schemes in such far-flung countries as Honduras, Egypt, Iraq, Haiti, Malaysia, Korea, Bangladesh, Yemen, and of course China. Settlement terms included the largest fine ever paid by a U.S. corporation in an FCPA action — Halliburton Co.’s February, 2009 agreement to pay – along with its subsidiary Kellogg, Brown & Root LLC (“KBR”) – $579 million in combined DOJ and SEC penalties and disgorgement, primarily for bribes paid to Nigerian officials to secure contracts worth approximately $6 billion for the building and expansion of liquefied natural gas facilities in Bonny Island, Nigeria. The violations were primarily committed – not by Halliburton or KBR itself – but by an international joint venture which included KBR.[i] KBR’s former chairman and CEO, Albert “Jack” Stanley, pled guilty to conspiracy to violate the FCPA and conspiracy to commit mail and wire fraud, and faces seven years in prison and restitution of over $10 million. (Albert Jackson Stanley Plea Agreement, September 3, 2008). Only three months earlier, in December 2008, German corporation Siemens agreed to the largest FCPA settlement ever: $1.6 billion in combined SEC and DOJ penalties – also for bribing Nigerian officials to secure Bonny Island contracts.[ii]
Managing FCPA Risks – Best Practices
How is the market dealing with FCPA risks? The well-advised companies with operations in Colombia, as in a large number of countries, have effective anti-corruption policies backed by robust training, auditing, and monitoring systems to prevent improper payments and keep excellent books to prove it. Indeed, Chiquita’s internal policies and controls went a long way toward preventing improper payments and relieving the effect of the circumstances that got away from the company. The state of the art is reflected by those companies that have undergone due diligence and entered into financing arrangements with the International Finance Corporation (IFC) (see articles here).
With the assistance of experienced outside counsel, there are several key steps companies with far-flung operations can take to minimize FCPA exposure. My partner Scott Peeler offers this advice:
- Internal Compliance Controls – These measures focus on “red flags” that may exist in a company’s books and records, such as unusual payment patterns to outside consultants or foreign officials that conduct business with the company. Corporations must recognize when they are doing business in a country with a history of corruption, their controls and monitoring activities must be much stronger than in other parts of the world. Companies should set up hotlines or other confidential reporting mechanisms to encourage employees to alert the company to potential illegal activities of any kind, including the payments of any form of bribe.
- Training – Employees and management worldwide should be trained about the scope of the FCPA and the potential consequences for violating it. Employees should be trained in their native language to guarantee that they understand the complexities of the law and how it can be applied in many different situations around the globe. In addition, the company’s code of conduct should include language about the FCPA and be translated into the employees’ native language to insure they understand this critically important law.
- Interviews – A company should interview employees and consultants to determine which persons have connections to, and transact regularly with, foreign officials (including employees of state-owned enterprises). Intense screening and background checks should be done on these employees to monitor their ongoing contacts with foreign officials.
- Compliance Officers – A large company with operations in many different countries, especially those with a history of corruption, should hire compliance officers familiar with the FCPA and other countries’ anti-corruption provisions who can ensure that a company’s activities are being accurately reflected in the books and records.
- Due Diligence – To avoid successor liability in a merger or acquisition, anti-corruption due diligence of the target company should be as complete as possible before the deal closes. Voluntary disclosure of pre-acquisition FCPA violations, either to the SEC or DOJ, has led to favorable settlements for several corporations.
- Internal Investigations. Once possible violations are detected, it is vitally important to involve outside counsel who understands the nuances of the FCPA and can help spearhead an internal investigation and an intelligent and practical legal strategy. Internal investigations – coupled with enhanced compliance measures – are often the key to determining a proper course of action.
Disclosing FCPA Violations
There has been a huge increase in the number of U.S. companies making public or private disclosures of their actual or suspected FCPA violations. The FCPA does not establish disclosure requirements of violations, voluntary or otherwise, nor does it set disclosure requirements for US public companies. Rather, companies make disclosures in order to avoid civil and criminal liability for omitting material information in their public disclosure documents, and they also make voluntary disclosures to the DOJ or SEC in order to avoid prosecution or to reduce potential civil and criminal penalties.
Is disclosure devastating to a company? It’s all relative, as non-disclosure is fool’s errand. If someone beats the company to the disclosure it can result in significantly higher penalties and the loss of some control over the company in the post-fine time period. This can happen as the result of a press report or a whistle-blower.
Disclosure can instead manage the damage. Disclosure permits the company the widest available flexibility under the circumstances in negotiating with the DOJ an agreement to install a monitor to detect (or, better said, prevent) future improper payments.
Some insight on corporate disclosures relating to doing business in Colombia can be gained from the following resources.
FCPA 10K disclosures: oil and gas exploration company Apco provides more insight into this risk by stating that it has significant operations in Colombia, where there has been a 40-year conflict between the government and anti-government armed insurgent groups. Accordingly, “the ability of the Colombian government to maintain security in the areas where we have operations may not be successful and there is no assurance that guerilla related violence will not affect our operations in the future, resulting in losses or interruptions of our activities.” Should one think that Canadian companies do not run similar risks in the global economy, Calgary-based Gran Tierra’s recent 10-K contains a similar disclosure.
Corporate Compliance Monitors
The DOJ’s Assistant Chief in the Criminal Division’s Fraud Section in charge of FCPA activity is Charles Duross, who the DOJ quoted on its website recently in a piece entitled “Corporate Compliance Monitors Are Here To Stay.” Duross spoke at the invitation of my law firm, Arent Fox LLP, at a public seminar on FCPA in Washington, where he said corporate compliance monitors will continue to be used in deferred prosecution and plea agreements, but that the department is sensitive to the concerns of businesses.
“Corporate monitors are not going away,” Duross said. “But I think we’ve become more sophisticated and refined with our use of them. We’re wary of corporate monitors gone wild. We don’t put monitors in to ruin a company.”
Duross’ comments came during a panel discussion on the Foreign Corrupt Practices Act Thursday morning. Duross, who is an Assistant Chief in the Criminal Division’s Fraud Section, was joined by Cheryl Scarboro, the chief of the Securities and Exchange Commission’s FCPA team, for a wide-ranging discussion of the statute moderated by my Arent Fox partner Andrew Kaizer.
(A full recording of the Arent Fox FCPA event is a must-hear.)
Not to be outdone by its sister enforcement agency, the DOJ recently instituted a group of related cases in California federal court which showcase its newest tactic of expanding anti-bribery prosecutions beyond the traditional application of the FCPA. Valve manufacturer Control Components, Inc. pled guilty to charges that it violated not only the FCPA but also the Travel Act (18 U.S. C. §1952). (Press Release, Control Components Inc. Pleads Guilty to Foreign Bribery Charges and Agrees to Pay $18.2 Million Criminal Fine, July 31, 2009, (“CCI Press Release”) available here.) Six former CCI employees were also indicted under both the FCPA and the Travel Act, but have pled not guilty. The Travel Act prohibits travel between states or countries – or using an interstate facility – in aid of any crime. (18 U.S. C. §1952.) Importantly, however, the underlying crime triggering the violation need not be a federal crime. In the case of CCI, the DOJ alleged that they violated or conspired to violate a state law – California Penal Code section 641.3, which prohibits solicitation or payment of bribes of more than $1,000 anywhere. (Cal. Pen. Code § 641.3(a)). The DOJ alleged that CCI employees traveled to Malaysia and the United Arab Emirates, where they paid approximately $1.95 million in bribes to officers and employees of foreign and domestic privately-owned companies, in order to obtain or retain business for CCI. (CCI Press Release.) In other words, through the Travel Act, the DOJ was able to use California’s state anti-corruption law to expand the scope of federal anti-corruption enforcement from its original targets (bribes to government officials) into the realm of commercial bribery (bribes not involving government officials).
Key FCPA Resources
The Department of Justice website provides the following useful links for more information about the anti-corruption laws:
A summary of the Anti-Bribery Provisions of The Foreign Corrupt Practices Act - U.S. Departments of Commerce and Justice.
Foreign Corrupt Practices Act- U.S. Department of Justice, Criminal Division, Fraud Section
Unofficial FCPA Translations
Below are links to unofficial translations of the U.S. Foreign Corrupt Practices Act in Spanish, Arabic, Chinese and Russian. The goal of providing these unofficial translations is to increase the general awareness and understanding of the FCPA by U.S. exporters and their trading partners. For particular FCPA compliance questions relating to specific conduct, you should seek the advice of counsel as well as consider using the Department of Justice’s Foreign Corrupt Practices Act Opinion Procedure, found here. Only the official, English-language version of the statute, found here, should be relied upon for such purposes.
State Department brochure, Fighting Global Corruption: Business Risk Management
International Conventions and Initiatives
OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions (text, commentaries, and related instruments)
[ii] One defense to an anti-bribery allegation is that the bribe is allowed under the laws of the country wherein the transaction occurred. This defense, however, is seldom – if ever – applicable.
[iii] Dionne Searcey, U.S. Cracks Down on Corporate Bribes, Wall Street Journal, May 26, 2009, available at http://online.wsj.com/article/SB124329477230952689.html.
[i] Securities and Exchange Commission Litigation Release No. 20897, Feb. 11, 2009; Kellogg Brown & Root LLC Pleads Guilty to Foreign Bribery Charges and Agrees to Pay $402 Million Criminal Fine, Department of Justice Press Release, Feb. 11, 2009.
[ii] Securities and Exchange Commission Litigation Release No. 20829, Dec. 15, 2008.