Enforcement of the Foreign Corrupt Practices Act (“FCPA”) has strengthened over the past several years and seems unlikely to abate in 2011. A significant component of this FCPA enforcement trend is a continuing focus by the United States Department of Justice (“DOJ”) and the Securities and Exchange Commission (“SEC”) on the telecommunications industry. Two features of the telecommunications sector make it especially ripe for FCPA enforcement: First, in order to operate in a foreign country, a telecommunications provider will have to obtain a number of licenses, permits and other government authorizations. Repeated contact with a foreign government as a regulator gives foreign officials many chances to request or demand – directly or indirectly through agents, consultants and other third parties – improper gifts or payments in return for these government authorizations. Second, many prospective purchasers of telecommunications products or services around the globe are state-owned or controlled entities. Employees of state-owned or controlled entities, however, are foreign officials for purposes of the FCPA, and improper payments to employees of these entities to secure sales violate the FCPA.
Reflecting this focus on the telecommunications industry, on December 27, 2010, the DOJ and SEC announced the seventh-largest FCPA settlement of all time against Paris-based telecommunications company Alcatel-Lucent S.A. (“Alcatel-Lucent”).2 In all, Alcatel-Lucent and three subsidiaries will pay $92 million to the DOJ and $45 million to the SEC to resolve the charges arising from payments made to foreign officials in order to win business in Costa Rica, Honduras, Malaysia and Taiwan. According to the charging documents, the company also hired agents without proper controls in Kenya, Nigeria, Bangladesh, Ecuador, Nicaragua, Angola, Ivory Coast, Uganda and Mali. Overall, the charging documents assert that Alcatel-Lucent won more than $450 million in contracts, from which it earned $48.1 million in profit, as a result of improper payments to foreign officials.
In an unprecedented move, during settlement negotiations Alcatel-Lucent unilaterally pledged to stop using third-party sales and marketing agents in conducting business worldwide. The government highlighted that the pledge was unsolicited and made on the company’s “own initiative and at a substantial financial cost.”3 Unless carefully controlled and monitored, third-party agents have proven to be central players in many FCPA cases in the telecommunications sector and beyond. Notwithstanding this significant voluntary concession, however, the DOJ and the SEC each charged the parent company and all three subsidiaries with violating the internal controls and books and records provisions of the FCPA. In addition, the SEC charged the parent company, and the DOJ and the SEC each charged the three subsidiaries, with violating the FCPA’s anti-bribery provision.
II. Recent Enforcement Trends
The Alcatel-Lucent case, along with several other recent enforcement actions against telecommunications companies, reflects three significant trends that also are apparent in the broader FCPA context. First, both civil and criminal fines have grown significantly. Second, FCPA cases in recent years increasingly have focused not only on companies but also on the individuals responsible for making or approving the improper payments. Third, voluntary disclosures by companies of their own FCPA violations – including many that now are discovered through due diligence in mergers and acquisitions – are a major source of enforcement actions.
A. Large Criminal and Civil Fines
Alcatel-Lucent’s $137 million fine is but one example of numerous recent headline-making fines, as the DOJ and SEC have pursued significant criminal and civil fines for FCPA violations both within the telecommunications industry and generally. Although much attention was paid to the largest monetary sanction ever imposed in an FCPA case, when Siemens AG – one of the largest engineering and telecommunications companies in the world – resolved FCPA charges with the DOJ, the SEC and the Munich Public Prosecutor’s Office with multiple guilty pleas and the payment of $1.6 billion in fines, many other telecommunications companies have paid substantial penalties for FCPA violations in recent years. Large global firms are not the only targets, however, and several smaller telecommunications companies have been scrutinized by the DOJ and the SEC. In the period from the Siemens to the Alcatel-Lucent settlement, three smaller telecommunications companies paid substantial fines to settle FCPA charges.4 In April 2009, for example, eLandia International Inc. (“eLandia”), a Florida-based information and communications technology company that acquired Latin Node Inc. (Latin Node”), a Florida provider of wholesale telecommunications services using Internet protocol technology, paid a $2 million fine to the DOJ to settle FCPA charges arising from Latin Node’s pre-merger conduct, and in December 2009, UTStarcom Inc. (“UTStarcom”), paid $3 million to settle FCPA charges with the DOJ and the SEC. Although on their face these fines would appear to be far smaller and less significant than the $137 million fine paid by Alcatel-Lucent, the fines paid by eLandia and UTStarcom in many respects had far greater impact on those much smaller companies. As compared to annual revenues and profits, for example, the magnitude of the fines paid by eLandia and UTStarcom was roughly two to three times greater than the impact of the fines paid by Alcatel-Lucent. Whether for large telecommunications giants or smaller niche players, the impact of substantial FCPA fines cannot be overstated.
B. Aggressive Prosecution of Individuals
As with FCPA prosecutions generally, the government has focused increasingly on the involvement of individuals in FCPA cases in the telecommunications sector. For example, an important part of the Alcatel-Lucent case concerns the involvement of former Alcatel executive Christian Sapsizian, a French citizen who was the company’s Deputy Vice President for Latin America. Sapsizian pleaded guilty to causing Alcatel to wire $14 million in “commission” payments to a consultant, who then transferred $2.5 million to a government official in Costa Rica, and in September 2008 was sentenced to 30 months in prison.5 His co-defendant Edgar Valverde Acosta, Alcatel’s senior country officer in Costa Rica, remains at large.
Another recent case involving Telecommunications D’Haiti (“Haiti Teleco”) – Haiti’s state-owned telecommunications company and sole provider of landline telephone services to and from Haiti – likewise reveals the U.S. government’s increasing focus on prosecuting individuals for FCPA violations. In that case, the government has charged eight individuals but has not yet pursued the companies involved. The former controller of Terra Telecommunications (“Terra”), a Miami telecommunications company, and the president of a shell company that served as an intermediary between Terra and Haiti Teleco pleaded guilty to conspiring to violate the FCPA and the federal money laundering statute. In January 2011, the Terra controller was sentenced to two years in prison, and in July 2010 the intermediary received a prison sentence of nearly five years.6 In February 2010, the president and director of Fourcand Enterprises, Inc. pleaded guilty to money laundering charges, admitting that he received funds from U.S. telecommunications companies for the benefit of an official of Haiti Teleco. Terra’s president and executive vice president, and the president of another shell company allegedly used to funnel bribe payments from Terra to Haiti Teleco, await trial on February 28, 2011, on wire fraud and money laundering counts. Interestingly, the DOJ also charged the foreign officials who allegedly received the bribes with participating in the money laundering conspiracy.7
C. FCPA Issues Arising from Mergers and Acquisitions
In recent years corporate executives have become increasingly concerned that the target of an acquisition or merger may bring FCPA liability along with it. For example, in the Alcatel-Lucent merger, both parties came to the table with pre-existing FCPA issues. In the merged company’s recent settlement, the majority of the alleged improper conduct was committed by Alcatel entities prior to the 2006 merger. On the other hand, in December 2007, only a year after the merger, Lucent settled FCPA charges with the DOJ and SEC for $2.5 million based on pre-merger promotional payments to Chinese government officials.
Likewise, soon after eLandia acquired Latin Node, eLandia discovered prior FCPA violations committed by Latin Node. eLandia immediately self-reported the violations and conducted an internal FCPA investigation, the results of which it shared with the DOJ. Subsequently, Latin Node pleaded guilty to one count of violating the FCPA’s anti-bribery provisions. The Latin Node case is significant because it is the first FCPA enforcement action ever filed arising entirely from pre-acquisition conduct that was unknown to the acquirer when the transaction closed. While the plea agreement reveals that the acquiring company received substantial credit for its voluntary disclosure and subsequent cooperation, the company nonetheless was required to pay a $2 million criminal fine that represented, as described above, a very substantial percentage of the revenues and profits of the acquiring – never mind the acquired – company.
The pace of FCPA enforcement shows no signs of slowing. Both the DOJ and SEC have dedicated additional resources to increase substantially their FCPA enforcement activity, and they appear to have their eyes firmly on the telecommunications industry.