The U.S. Department of Justice has its eye on the construction industry, which should be preparing for a surge in investigations and enforcement actions under the Foreign Corrupt Practices Act and False Claims Act.
Former federal prosecutors, criminal defense attorneys and construction and government contracts lawyers say the DOJ’s recent actions, including a multimillion-dollar bribery case against the former execs of New Jersey-based Cognizant Technology Solutions Corp., signal that the agency is aggressively expanding its FCPA and qui tam enforcement beyond the more traditional health care and pharma sectors.
The target-rich environment of the construction industry has become “the frontier right now on corruption and bribery and fraud enforcement,” said Atlanta-based Alston & Bird partner Paul Monnin, a former assistant U.S. attorney in Georgia who served as deputy chief of the economic crimes section.
Large construction and infrastructure projects typically involve deep pools of cash that flows along chains of subcontractors in which each link is an opportunity for wrongdoing. Place the project in a foreign jurisdiction where government officials might expect bribes for building permits and it’s a recipe for serious risk.
“We’ve seen an uptick in major infrastructure projects and those are generally in the developing world, which has the highest corruption risks. There’s risk around every corner in one of these projects,” said Dan Shallman, a partner at Covington & Burling in Los Angeles. He’s a former federal public corruption prosecutor who now defends companies against FCPA and qui tam actions.
U.S.-based construction firms doing business in a foreign country also face substantial risks when entering into joint ventures with local companies that are “unsophisticated and used to doing business using bribes,” according to Chris Roux, who co-leads Alston & Bird’s construction and government contracts team.
“A substantial amount of due diligence needs to be done by the U.S. company to understand who it is working with, and to ensure there are financial controls established in order to ensure that monies cannot be used inappropriately,” he wrote in an email.
On the FCA side of the enforcement coin, lawyers for whistleblowers are becoming increasingly interested in design and engineering cases involving express certification liability, e.g., owners of public construction companies certifying billing records as being accurate, according to Monnin.
“That is like an arrow that is just fired right at the heart of the company. You’re certifying that it’s accurate based on the contract and what you were supposed to be able to bill,” Monnin said. “You have instances in which a bidder will come in and lock itself into a particular budget or fee and then they start robbing Peter to pay Paul. From the DOJ side, it’s kind of like shooting fish in a barrel.”
Asked if the government was targeting specific areas within the construction industry, DOJ spokeswoman Nicole Navas Oxman wrote in an email that the agency “follows the evidence—we don’t target specific areas.” She also stated that statistics on anti-corruption enforcement efforts related to foreign construction projects were unavailable.
‘This is the brave new world we’re in’
In the Bond Building in Washington, D.C., home of the DOJ’s criminal fraud section, Monnin said he’s observed “a ton of new faces, a ton of younger people who come out of big sophisticated shops in New York and D.C. where they’re not afraid of big document cases and they’ve been on the defense side of these FCPA cases.”
These new faces are apparently an integral part of the enforcement wave approaching the construction industry, which primarily wants to know about the extent of its standard of care in overseeing the activities of subcontractors.
“That’s the conversation with the FCPA,” Monnin said. “‘What’s the standard of care here? How much do we have to audit or review the invoicing that we’re getting from our subs to ensure that cash pools aren’t being created to allow those subs to pay bribes?’ And the response from the government tends to be that this is the brave new world we’re in.”
The savviest companies have developed internal compliance programs and robust internal compliance structures as part of a systematic approach to dealing with and minimizing their third-party risks, which are “coming from every direction,” Shallman said.
“What the best companies do is they’ll have an intake procedure … for approval of contracts that are then scored based on different risk factors and put into different buckets based on those scores,” he added. “More and more are using data analytics to identify potentially problematic vendors and invoices and payments. That’s something we’re going to continue to see more of.”
Company execs and legal departments also must be diligent in documenting compliance efforts, Monnin said. He routinely advises his clients to keep records of any owner-directed changes related to a construction project.
“My best advice to in-house counsel in this environment is to have your compliance procedures, as much as possible, wrap around how you record your time, how you bill for your time and what representations you’re making as to accuracy and how good your accounting controls are there,” he said.
‘How good was your compliance program?’
If a company ends up on the DOJ’s corruption radar, prosecutors are going to want to know about the compliance efforts and procedures that were in place to prevent wrongdoing and address issues after they arose. And they’re going to “put a premium on early detection and early reporting,” according to Shallman.
“The questions prosecutors are asking is that we understand that things can happen, but what did you do to prevent them from happening? How good was your compliance program?” he said. “The second part of it is what did you do when you found out?”
Shallman added, “Those are the two sides of the coin that law enforcement is going to look at in deciding how to treat a company.”
A former assistant chief of the FCPA unit in the DOJ’s fraud section, Jason Jones, now a partner at King & Spalding in Washington, D.C., said companies on the hot seat also need to show that they have taken steps to prevent missteps from happening again, whether it be disciplining employees or implementing new compliance procedures.
“Once you do those things and go into the DOJ, they’ll be much more receptive to your presentation,” he said. “They want to know it’s not going to happen again and that you take it seriously.”