It may come as no surprise that doing business in China holds a high risk of Foreign Corrupt Practices Act (FCPA) violations. However, the record-setting numbers of FCPA enforcement actions seen in 2016 placed Mexico in a close second.
With increases in multi-jurisdictional anti-corruption enforcement, the FCPA Pilot Program and a number of new Mexican statutes signed into law, those doing business in Latin America may want to take note.
After six years of relatively consistent (and somewhat low) FCPA enforcement numbers, the Department of Justice (DOJ) and Securities Exchange Commission (SEC) have made 2016 a precedent setting year. A combined total of 53 actions - more than double those of the last four years - brought over $2 billion in U.S. corporate fines and billions more in fines by foreign regulators. While 22 of the of 53 FCPA enforcement actions prosecuted in 2016 involved FCPA violations in China, Mexico followed close behind with nearly 17% of the enforcement actions last year.
FCPA Books and Records and Internal Controls Violations
On August 11, 2016, Houston-based Key Energy Services, Inc. agreed to pay $5 million to resolve allegations that, between 2010 and 2013, its Mexican subsidiary, Key Mexico, paid an unauthorized contract employee of Mexico’s state-owned oil company, Petróleos Mexicanos (“PEMEX”) $229,000 in exchange for advice and inside bidding information it then used to win contracts with PEMEX in violation of the FCPA books and records and internal controls provisions.
When a bribery charge cannot be established, regulators often appeal to FCPA accounting provisions. The FCPA books-and-records provision requires issuers to keep accurate books, records, and accounts that accurately and fairly reflect the issuer’s transactions and disposition of assets in reasonable detail.
The FCPA internal controls provision requires that issuers maintain reasonable internal accounting controls aimed at preventing and detecting FCPA violations. Improper payment is not required to show inadequate records or faulty control for a violation of accounting provisions.
FCPA Anti-Bribery and Money Laundering Violations
On December 27, 2016, Company President Douglas Ray, Director of Maintenance Daniel Perez, General Manager Kamta Ramnarine and third-party agent Victor Hugo Valdez Pinon pleaded guilty to conspiring to bribe Mexican aviation officials for government-owned aircraft maintenance and repair contracts.
Two Mexican government officials, Ernesto Hernandez-Montemayor and Ramiro Ascencio-Nevarez, pleaded guilty to conspiring to launder the proceeds of those contracts.
The Houston aviation services company made over $2 million in payments to secure aircraft repair, maintenance and overhaul contracts with government-owned Mexican customers. Though, as foreign officials, Hernandez-Montemayor and Ascencio-Nevarez are not directly governed by the FCPA, they can be charged with money laundering ancillary to the bribery.
Nevarez was sentenced to 15 months in prison on May 27, 2016. Ramnarine, Perez, Ray, Valdez Pinon and Hernandez-Montemayor are scheduled to be sentenced early this year.
Under the FCPA anti-bribery provisions, it is illegal for an “issuer,” “domestic concern,” “agent acting on behalf of an issuer or domestic concern” to corruptly offer or provide money or anything of value to foreign government officials, foreign political parties or public international organizations with the intent to obtain or retain business.
Issuers are any business entity registered under 15 U.S.C. § 78l or required to file reports under 15 U.S.C. § 78o(d). Foreign issuers with American Depository Receipts listed on a U.S. exchange are issuers under the FCPA. A domestic concern is any U.S. citizen, national, resident or business entity that is organized under the laws of a U.S. state or has a principal place of business in the U.S.
Trends Contributing To FCPA Enforcement In 2017
A number of recent trends in the FCPA arena could contribute to continued increases in the number of FCPA enforcement actions with Mexico and other nations in 2017:
Increased Multi-Jurisdictional Anti-Corruption Focus
The DOJ FCPA Unit is ever increasing its work with foreign counterparts. In 2016, a significant number of anti-corruption enforcement actions were organized involving both U.S. and foreign regulators, a trend expected to continue in 2017.
Mexico’s General Law of Administrative Responsibilities
In July 2016, Mexican president Enrique Peña Nieto signed several new anti-corruption statutes into law, including the General Law of Administrative Responsibilities, the General Law of the Anti-Corruption System and the Federal Accounting and Accountability Law. Taking effect in July 2017, the General Law of Administrative Responsibilities holds companies liable for several bribery-related offenses.
Penalties for violations include fines totaling double the financial benefit ($6 million if there is no financial benefit), suspension, debarment, damages and dissolution.
The law allows corporate entities to mitigate damages if they have a specific integrity policy in place. This integrity policy must include a manual of procedures describing the chain of command, responsibilities, adequate and effective control, monitoring, and auditing systems, a code of conduct, adequate whistleblower complaint procedures, compliance training, and human resources policies to prevent hiring individuals who pose a threat to company integrity.
FCPA Pilot Program
In April 2016, the DOJ executed its FCPA Pilot Program to “provide greater transparency in expectations for mitigation credit for voluntary self-disclosure, cooperation, and remediation in FCPA investigations.”
Under the FCPA Pilot Program, companies that voluntarily self-disclose misconduct, cooperate with investigators and remediate the activity may be eligible for a declination of criminal prosecution. Companies that self-disclose are eligible for up to a 50% reduction of U.S. Sentencing Guidelines fines.
Ensuring Your FCPA Compliance
The substantial increase in the number of FCPA enforcement actions for 2016 suggests that DOJ and SEC are stepping up their game. In 2016, the SEC set a record 32 FCPA enforcement actions, the most in the 39-year history of the statute. It will be important to examine your FCPA compliance moving into the new year.
Published by the International Organization for Standardization (ISO) on October 14, 2016, ISO 37001 - “Anti-Bribery Management Systems Requirements” provides guidelines that “specify requirements and provide guidance for establishing, implementing, maintaining, reviewing and improving anti-bribery management systems.”
The requirements outline standards for training, policies and procedures, compliance function, risk assessments, internal controls, due diligence, reporting and continuous monitoring. ISO states that the standards are “generic and are intended to be applicable to all organizations,” should be tailored to address companies’ specific risks and circumstances.