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As U.S. companies continue to expand into overseas business markets, the Securities and Exchange Commission (SEC) is stepping up its scrutiny of suspected violations of the Foreign Corrupt Practices Act (FCPA), 15 U.S.C. 78dd-1 et seq. Enforcement of the FCPA is divided between the U.S. Department of Justice (DOJ) and the SEC. DOJ is responsible for criminal investigations and prosecutions of FCPA violations, as well as investigations of private companies. The SEC is responsible for civil investigations and prosecutions of publicly owned companies and their employees or agents. The FCPA contains two substantive provisions: a prohibition against bribing foreign officials in order to secure or retain business, and record-keeping, internal controls and accounting rules designed to guard against such illicit activities. Recent SEC settlements demonstrate that the agency, with the assistance of DOJ, is seeking more aggressive remedies against FCPA violators. See, e.g., SEC v. The Titan Corp., Lit. Release No. 19078 (March 1, 2005); In the Matter of GE InVision Inc., Lit. Release No. 19078 (Feb. 14, 2005); SEC v. ABB Ltd., Lit. Release No. 18775 (July 6, 2004). As a result of these recent developments, a renewed emphasis on FCPA compliance is warranted. This article provides an overview of the relevant SEC settlements and recommends that companies adopt several compliance measures to prevent and detect FCPA violations. The SEC’s recent regulatory settlements On March 1, the SEC and DOJ announced the filing of parallel civil and criminal actions against The Titan Corp., charging Titan with violating the anti-bribery and books-and-records provisions of the FCPA. The SEC’s complaint alleged that, from 1999 to 2001, Titan paid more than $3.5 million to its agent in the African nation of Benin, who was known at the time by Titan to be the business advisor to Benin’s president. Titan allegedly failed to conduct any meaningful due diligence into the background of its agent, either before his retention or thereafter, and also failed to ensure that the services to be performed by the agent, and described in his invoices, were in fact provided to Titan. According to the complaint, Titan made these payments to assist the company in its development of a telecommunications project in Benin and to obtain the Benin government’s consent to an increase in the percentage of Titan’s project-management fees for that project. The SEC’s complaint also alleged that, from 1999 to 2003, Titan improperly recorded payments in its books and records, directed agents to falsify invoices submitted to Titan, and failed to devise or maintain an effective system of internal controls to prevent or detect other FCPA violations. Titan pleaded guilty to violating the books-and-records and bribery provisions of the FCPA pursuant to a plea agreement with DOJ. In addition, without admitting or denying the allegations in the SEC’s complaint, Titan consented to the entry of a final judgment permanently enjoining it from future violations of the anti-bribery, books-and-records and internal-control provisions of the FCPA, requiring it to disgorge $12,620,000 and to pay $2,859,195.47 prejudgment interest. Titan was also required to pay a $13 million criminal penalty. Titan represents the largest combined penalty and disgorgement to date under the FCPA and is reflective of the increasingly vigilant FCPA enforcement activity that has taken place in the past year. For example, in a February 2005 case against GE InVision Inc., the SEC alleged that from at least June 2002 through June 2004, GE InVision employees, sales agents and distributors pursued transactions to sell explosive-detection machines to airports in China, the Philippines and Thailand. According to the SEC, in each of these transactions, GE InVision was aware of a high probability that its foreign sales agents or distributors made, or offered to make, improper payments to foreign government officials in order to obtain or retain business for GE InVision. Despite this, GE InVision allegedly allowed the agents or distributors to proceed on its behalf. The SEC also charged that GE InVision improperly accounted for certain payments to agents or distributors and failed to have an adequate system of internal controls to detect and prevent violations of the FCPA. Without admitting or denying the SEC’s allegations, GE InVision consented to an administrative order requiring it to pay $580,000 in disgorgement and $28,700 in prejudgment interest. GE InVision also consented to a final judgment requiring it to pay a $500,000 civil penalty. In another recent case, ABB Ltd., a foreign issuer, was charged by the SEC with violating the anti-bribery, books-and-records and internal-accounting-controls provisions of the FCPA. The SEC alleged that, from 1998 through early 2003, ABB’s U.S. and foreign-based subsidiaries doing business in Nigeria, Angola and Kazakhstan offered and made illicit payments totaling more than $1.1 million to government officials in these countries. According to the SEC’s complaint, ABB’s payments were made in order to assist ABB’s subsidiaries in obtaining business. The SEC’s complaint also charged that ABB improperly recorded these payments in its accounting books and records, and lacked any meaningful internal controls to prevent or detect such illicit payments. Without admitting or denying its allegations, ABB consented to the entry of a final judgment requiring it to pay $5.9 million in disgorgement and prejudgment interest, and to pay a $10.5 million penalty, which was deemed satisfied by two of its affiliates’ payments of criminal fines totaling the same amount in parallel criminal proceedings brought by DOJ. Titan, GE Invision and ABB collectively demonstrate that the SEC (with DOJ’s assistance) is stepping up its FCPA enforcement in several ways; namely, the agency is beginning to seek disgorgement of the revenue stream derived from foreign bribes, impute liability on U.S. companies for the illicit actions of their subsidiaries and unaffiliated agents, and hold U.S. issuers accountable for deficient or nonexistent FCPA policies. (SEC actions for disgorgement are equitable in nature and are not governed by any statute of limitations. Hence, when a contract formed in violation of the FCPA has been profitable for an extended period of time, the potential disgorgement obligation for a corporation could be substantial.) The combination of these changes in enforcement policy is a clear signal that U.S. companies should closely monitor their foreign affiliates and those entities with whom they do business abroad, as well as evaluate their current FCPA compliance policies and internal controls to ensure that they are designed to prevent and detect FCPA violations. The following are suggested components to a successful FCPA compliance system: Establish adequate oversight of the FCPA policy by the company’s board of directors and senior management, and make it clear to company employees that senior management is personally committed to compliance. Prepare and distribute an FCPA manual (written in plain English) that includes information and guidance regarding the FCPA. The manual should make employees aware of activity that is prohibited by the FCPA, identify situations where prohibited activity is likely to arise, provide guidance as to how to prevent violations of the FCPA and describe the means by which possible violations of the FCPA should be reported to management and/or addressed. Employees should acknowledge in writing that they have reviewed and understand the manual’s contents. Provide FCPA training programs for employees, whether based in the United States or overseas. Designated compliance officers should be responsible for the training of employees at domestic and foreign subsidiaries. Insist that foreign business partners provide yearly certificates of continued FCPA compliance. Review existing accounting and record-keeping procedures by internal auditors and outside accounting firms to ensure compliance with the FCPA’s accounting provisions. In this context, particular attention should be paid to the accounting procedures of foreign subsidiaries. See Timothy A. Diemand and David B. Fein, “Companies Face Scrutiny and Penalties Under FCPA,” Conn. L. Trib., Jan. 19, 1998, at 12-13. Scrutinize overseas business activity Consider including FCPA warranties in contracts with foreign agents and/or companies, such that all parties represent that they understand the provisions of the FCPA and that they will not undertake any action that will circumvent or violate the act. Also, review the business laws and practices of foreign countries in which business is done to identify any potential FCPA issues. Id. Designate senior personnel to review monthly funding requests of foreign agents and sales representatives for reasonableness. Adopt and take appropriate disciplinary measures for FCPA violations or failures to detect violations of the FCPA or company policies. Scrutinize sales to a government or government-owned entity. In enacting any FCPA policy, understand that the SEC and DOJ consider a company’s awareness and monitoring of the ultimate recipient of third-party payments essential to adequate compliance under the FCPA. Derek M. Meisner is of counsel to Kirkpatrick & Lockhart Nicholson Graham, practicing in its Boston office. His practice focuses on representing clients in SEC and National Association of Securities Dealers investigations, litigating securities cases and conducting internal investigations. He also conducts FCPA compliance training for public and private companies. He can be reached at [email protected]. Eileen E. Pott, an associate at the firm, assisted in preparing this article.

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