Organizations doing business in the United States are well aware that they can be investigated for violating U.S. laws and regulations, that they can be fined for illegal behavior and that their executives can be prosecuted. In recent times, however, a trend has emerged whereby prosecuting authorities are seeking and imposing unprecedented fines, which would have been unimaginable a mere decade ago. A second and even more unsettling trend is that prosecutors are seeking to preclude companies found to have committed criminal activity from doing business in or with the United States. Although "debarment" or "de-listing" has long existed, the perceived willingness of the United States to impose this type of sanction has picked up at an alarming pace.
In 2011, Stanships Inc. and three related companies involved in owning and operating a fleet of vessels pleaded guilty to various violations of U.S. law related to bypassing pollution control equipment. The defendants agreed to a $1 million penalty and a ban on doing business in the United States for five years. In an unprecedented move under maritime law, the controlling corporate officer of the various entities was also banned from owning or managing any ships that trade with the United States. This settlement is part of a series of cases over the past 10 years in which six foreign shipping companies were assessed fines of several million dollars per company and banned from doing business in the United States, sailing in U.S. waters and docking in U.S. ports.
These cases have not garnered the attention of the general public, because the defendants tend to be small, privately held companies. However, the action is significant given the amount of shipments to and from the United States and the connectivity of international trade. These cases also portend worse fates that await larger companies accused of significant regulatory violations.
In September 2012, Standard Chartered Bank, Britain's second largest bank, agreed to pay $340 million to the New York Department of Financial Services for allegedly conducting at least $250 million in business with the government of Iran. Subsequently, in December, Standard Chartered settled with the federal government for $327 million over similar allegations.
These settlements are believed to have been driven, at least in part, by a formal proceeding initiated by the New York Department of Financial Services to suspend and revoke Standard Chartered's license to do business in New York. Any revocation or suspension of its license in the United States would have been more damaging than the payment of these fines.
The culmination of this trend is the U.S. Environmental Protection Agency recently suspending BP from receiving new government contracts following a record $4.5 billion settlement over the 2010 Macondo oil spill in the Gulf of Mexico. Government contracts are extremely important to oil companies and fuel suppliers in the United States. While the suspension does not affect existing agreements BP may have with the government, the EPA did not state when the ban on new contracts will end. In fact, the suspension could last until legal proceedings are completed, and BP can provide sufficient evidence of its business integrity and compliance with federal standards—likely after the military has entered into a new round of supply contracts and after the sale of critical lease rights in the Gulf of Mexico. If BP is not able to restore its "business integrity" in the eyes of the U.S. government before these events, it potentially stands to lose out on billions of dollars as the largest supplier of fuel to the U.S. military and as a significant driller on federal lands and waters.
This trend of suspending companies from doing business with or in the United States is a metaphorical crossing of the Rubicon for U.S. enforcement authorities. While all of these cases involve settlements with foreign companies, the U.S. authorities do not limit significant penalties only to foreign companies. Rather, it would appear that without a constituency to lobby in the United States, foreign entities may find it difficult to fight the imposition of these severe penalties. Of course, companies that do not run afoul of U.S. regulations and standards should not be concerned with the threat of suspension and debarment. However, with the ever-increasing number of financial, environmental and energy regulations in the United States, this is easier said than done.
Correspondingly, it is critical for companies to have internal compliance programs in place, which are well-funded and applied robustly. Such compliance programs include the development of standardized operational compliance procedures, policies, standards of conduct, and safeguards and written guidance that inform employees of all legal requirements applicable to their positions and the risk exposure for non-compliance. The initial element of such a program is commitment and leadership by company management, which requires communication of the importance of compliance to the organization, commitment of sufficient resources for training employees in their compliance responsibilities, and instillment in all employees to exercise due diligence in all business conduct, while at the same time remaining mindful that they should report all potential violations to their supervisors before considering self-reporting to authorities.
Once management buy-in has occurred, the Department of Commerce has set forth eight other elements of properly functioning compliance program: (1) continuous risk assessment; (2) written compliance manual; (3) training; (4) cradle to grave compliance for each line of business; (5) recordkeeping; (6) monitoring and auditing; (7) reporting violations; and (8) implementing corrective actions.
After the commitment to fund a compliance program, the most time and cost intensive element is the development and implementation of a written compliance manual. For a company with lines of business in financial services, commodity trading or resource extraction and production, such compliance manuals can involve the examination of thousands of regulations and likely will take the form of individualized volumes applicable to very specific types of business activities. While developing and implementing such a compliance program can be expensive, the alternative is even worse—just ask BP.
Ronald Zdrojeski is a partner in the New York office of Sutherland Asbill & Brennan and David McCullough is an associate in the firm's Washington, D.C. office.