Dodd-Frank Act – Americans mean business

When General Electric Company agreed last August to pay US$23.4 million to settle charges laid by the United States Securities and Exchange Commission (SEC) for its involvement in a US$3.6 million kickback scheme with Iraqi government agencies to win contracts to supply medical and water purification equipment, it was the latest of an impressive long list of multinationals that paid the price of Washington’s newfound resolve to crack down on corporate bribery.

The Americans now mean business. Largely dormant since becoming law in 1977, the U.S. Department of Justice (DOJ) and the SEC have over the past two years vigorously enforced the Foreign Corrupt Practices Act (FCPA), going so far as to launch sting operations while levying penalties unimaginable a couple of years ago.

The tone was set in late 2008 when Siemens, a global powerhouse in electronics and electrical engineering, paid a staggering US$800 million fine to U.S. authorities, and a similar amount to the German government.

Since then, “sky-high” penalties have come to be expected, points out Riyaz Dattu, an international trade lawyer with Osler, Hoskin & Harcourt LLP.Early this year, BAE Systems plc, one of the world’s largest defense contractors reached settlements totaling almost $500 million with the DOJ and the U.K. Serious Fraud Office to resolve longstanding corruption allegations.

This spring, German automaker Daimler AG paid $185 million in civil and criminal penalties to settle violations of the FCPA while Paris-based engineering and construction firm Technip SA agreed over the course of the summer to pay a $240 million criminal penalty and settled a related civil complaint filed by the SEC by paying a further $98 million in disgorgement of profits.

“They are essentially imposing severe penalties to make sure companies understand that they have to take their obligations extremely seriously,” noted Dattu, who advises on all aspects of economic sanctions, export and import controls, and anti-bribery laws. “The impact on a business is, however, far in excess of the penalties. There is the potential for derivative action by shareholders against the Board of Directors and officers of the company for not having complied with anti-corruption laws.”

With the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act during the summer, the pressure to adopt corporate compliance programs aimed at rooting and avoiding violations of anti-corruption has multiplied. Passed to remedy perceived weaknesses in the U.S. regulatory system that led to the near collapse of the U.S. financial markets in 2008 and scandals such as the Bernie Madoff Ponzi scheme, the Dodd-Frank Act provides the SEC with more enforcement tools, wider jurisdiction, including the ability to bring aiding and abetting claims, and most notably introduces an eye-catching whistleblower bounty. All of which should cause concern for Canadian companies even though the full impact of the new law has yet to be determined.

“It’s a broad change in regulatory and enforcement powers that will impact every company that touches the U.S.,” remarked John Keefe, a partner at Goodmans LLP litigation group who specializes in commercial disputes, white collar crime and securities fraud. “The Dodd-Frank Act reinforces the SEC’s ability to exercise its enforcement powers against foreign companies where there is a substantial impact on the U.S. They’ve always had a very broad view of their jurisdiction.”

Too broad, assert international trade experts. In addition to the SEC’s current right to bring aiding and abetting claims under the Securities Exchange Act of 1934, the Dodd-Frank Act now gives the regulatory body the power to lay similar claims under the Securities Act of 1933 and the Investment Advisors Act of 1940. Laying bare their resolve to combat corruption, these new amendments were added to the Dodd-Frank bill within 24 hours after the U.S. Supreme Court ruled in Morrison v. National Australia Bank that U.S. courts do not have jurisdiction over foreign shareholders who purchase from foreign issuers on foreign exchanges even if the conduct had an impact in the U.S.

The amendments are expected to have sizeable impact. It gives the U.S. district court jurisdiction to hear cases initiated by the SEC involving securities fraud and corruption and bribery, if the conduct occurring outside the U.S. had a “foreseeable substantial effect within the U.S.” – new terms that have yet to be defined by the courts. And it may be some time before they do so because most companies facing FCPA charges settle “because they can’t afford the legal expenses and the risk of losing in an American judicial system,” said Keefe.

A provision introduced in the Dodd-Frank Act that has not drawn not much attention but may have a significant impact on advisors such as lawyers involves the SEC’s ability to bring aiding and abetting claims, added Keefe. The provision enables the SEC to go after individuals who provided the principal culprit “knowingly or recklessly” with substantial assistance. “It’s a fairly broad concept that has implications for advisors to companies that may be impacted by this legislation,” remarked Keefe.

The introduction of a whistleblower bounty in the Dodd-Frank Act is perhaps the clearest signal that the U.S. is staunchly committed to fight corporate corruption. Another tool in the government’s arsenal, the new provisions allow whistleblowers to receive an amount of up to 30 per cent of the fines collected in any settlement that exceeds $1 million. The amount of compensation is determined by the SEC based on the significance of the “original information” provided by the whistleblower, and the level of cooperation provided by the individual.  The provisions also provide expanded protections. Besides protecting whistleblowers from retaliation from their employers, it allows them to remain anonymous throughout the entire process.

Whistle blowing programs are highly effective. When the U.S. Internal Revenue Service introduced a substantially similar program in 2008, its claims skyrocketed from 83 in 2007 to 1,890 in the space of a year.

“The whistle blowing provisions are going to have a huge impact, and there’s a number of significant questions that remain unsolved,” said Dattu, “To the extent that a company has a compliance program, you want to ensure that the individual within the company who believes that there is a violation or potential violation will report up the chain to the audit committee to the board. At this time the concern is that some of the whistleblowers may feel it is more lucrative for them to go directly to the U,S, authorities.”

In a cut-throat business environment, the whistle blowing provisions could even be perceived to be a competitive tool, and prompt companies to launch whistle blowing claims against their competitors, asserts John Boscariol, the head of McCarthy Tétrault international trade and investment law group. “If they see their competitors bribe foreign officials in order to get contracts, you are going to see them coming forward and laying complaints,” said Boscariol. “Companies are going to be seeing this as another way of dealing with competitive issues if they feel that they’re losing contracts because they’re not paying bribes.”

But there’s more. The whistle blowing provisions will likely also lead whistleblowers to retain their own lawyers – a scenario that will no doubt raise issues over conflicts of interest and privilege as well as having the potential of hindering investigations companies may conduct, said Dattu. “There’s a great deal of consternation about this provision, understandably so, because there are a lot of unanswered questions,” added Dattu.

Canadian firms have yet another reason to adopt compliance programs. As of April 2011, the U.K. Bribery Act will come into force, and it gives the authorities far more scope and power than the U.S. FCPA legislation. It also creates a positive duty to establish compliance programs to prevent bribery, said Dattu, adding that many Canadian companies will “get caught up in the U.K. bribery legislation” because they use the U.K. as a base for mining activities in Africa or business activities in South East Asia.

But in spite of the growing concerted effort by increasing numbers of governments around the world to fight corruption, and despite the astronomical fees levied against many corporations, far too many Canadian companies fail to realize how vulnerable they may, said Boscariol.

“There are a lot of companies, some of them large, that still haven’t absorbed this,” said Boscariol.  “They say we understand that there are these laws in place but we simply can’t do business without paying these amounts. So despite the announcements of large settlements, that hasn’t changed for some. It eventually will. It’s going to take a bit more time. But I see that resistance out there.”

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