Going Global: The Legal Perils Multiply
from July/August 2007
Dateline America 2007
Federal regulators increase penalties and step up their pursuit of companies that violate the Foreign Corrupt Practices Act by bribing foreign officials to obtain or retain business.
Dateline Europe 2006
Spurred by the European Commission’s increasing antitrust crackdowns, private class-action lawsuits are filed in France, Belgium, and the U.K. against companies accused of price-fixing and cartel activity.
Dateline Asia 2005
Japan and South Korea are among the countries adopting or strengthening formal leniency programs that give trade-law violators a get-out-of-jail-free card in exchange for ratting out their co-conspirators.
For companies priding themselves on ethical behavior, evidence that the world is becoming more difficult for unprincipled competitors would seem to be good news—and it is. But that’s not the whole story. Even companies that aspire to above-board business practices can find it hard to tiptoe through the ever-expanding maze of laws and regulations governing their employees and agents around the globe. Simply opening an overseas sales office can leave a U.S. corporation subject not only to the laws of the United States and the host nation, but also to supranational entities such as the European Union, the World Trade Organization, and the International Monetary Fund.
More than ever, directors have a duty to understand the legal risks their companies incur in operating internationally, and to make sure safeguards are in place to manage and minimize them. “The board has to be involved, because ultimately the board is responsible,” says Jeffrey Stone, a Chicago-based partner with the multinational law firm McDermott Will & Emery. “The challenge is to know the right questions to ask and to push hard for good answers.”
For starters, as a director you must make sure your company has a global code of conduct that is clearly communicated to all employees and supported just as clearly by top management. Also, that it has a Foreign Corrupt Practices Act (FCPA) compliance program. “U.S. enforcement authorities expect the senior people doing compliance to have dotted-line reporting to the audit committee of the board, so they can go directly to the board if they feel there’s an issue deserving of its attention,” says attorney Lucinda Low, a partner and head of the FCPA practice at Steptoe & Johnson in Washington, D.C. Other crucial areas that require board oversight depend heavily on the company’s international legal talent.
Your general counsel needs people who are able to identify all the legal requirements relevant to your company’s business abroad and to appreciate the nuances of how those laws are, or are not, enforced. For example, Russia and many of the former Soviet republics suffer from endemic corruption and legal systems that are in constant flux—traits shared to greater and lesser degrees by a lot of developing countries. Other venues present risks simply because they have legal principles foreign to people in the West. These include Middle East countries with legal systems based on Sharia law, which derives largely from the teachings of the Koran, or on an amalgam of Sharia and Western law.
Searching for outside help, your general counsel may consider big multinational law firms as well as local outfits. In either case, the most critical factor, says Stone, is finding a firm that has successfully handled matters similar to yours in the jurisdiction where you’re doing business. A big multinational might be right for a complex cross-border mergers-and-acquisitions transaction, for example, while a local firm in Istanbul might be better for overseeing the establishment of your first sales office in Turkey.
With a big firm or a small, Stone says, you should expect its attorneys not only to understand the explicit legal requirements of doing business in the foreign jurisdiction, but also to have an insider’s knowledge of how to get things done on a practical level while staying within the law. That can mean knowing who the movers and shakers in the foreign country are, what the protocols are for meetings, and whose approvals will be necessary to get permits. “This is particularly true in Asia, the Middle East, and Africa,” says Stone. Even the routine task of hiring foreign workers can be a legal pit for companies not on top of local custom and law. Attorney Fred Shaheen, a partner in Greenberg Traurig and national chairman of its government contracts and export controls practices, offers an example: In some Middle East countries, construction workers are typically third-party nationals from the Philippines. Local rules for how those workers can be hired, paid, or terminated are often very different from the rules for natives.
Jerry Okarma, vice president, secretary, and general counsel of Johnson Controls Inc., a Milwaukee manufacturer of automotive components and building control systems, says it’s also important that a foreign firm understand your company and its corporate culture. While it’s not always possible for your in-house counsel to have a face-to-face meeting with an attorney being hired for an overseas assignment, Okarma and others say that sit-downs are imperative for large or critical matters, and sometimes an onsite visit is too. Michele Coleman Mayes, now senior vice president and general counsel at Stamford, Connecticut, postage-meter maker Pitney Bowes Inc., was once part of a team hunting for legal counsel to represent Colgate-Palmolive on trademark issues in India. On a trip there, they began to check out firms, including one that had sent an impressive brochure about its trademark practice. The brochure, it turned out, was its only impressive feature. Mayes and her colleagues set out to visit the firm and had to make their way down a dead-end alley in a ramshackle neighborhood, and then climb over a bunch of dogs and up a rear flight of stairs to a tiny law office. Says she: “We could barely contain our disbelief.” They took their business elsewhere.
Corporate attorneys widely agree that the best way to avoid unwelcome surprises when hiring a firm to represent you overseas is to insist on referrals from lawyers you know. “Word of mouth is the mantra,” Shaheen says. “If you can’t find somebody you trust who’s used them before in the region where you’re doing business, don’t hire them.”
M&A work presents special challenges. “You can’t work too hard on due diligence with an international merger,” says Laura Stein, senior vice president, corporate secretary, and general counsel of Clorox Co., a manufacturer of bleach and other household products. “In addition to making sure the deal makes sense from a business standpoint, you’ve got to make sure it works from a compliance standpoint—that you’ve checked all the technical and regulatory compliance matters and any employment matters they might have, like hidden liabilities with pension benefits.”
“Don’t just pull up a Dun & Bradstreet report or Google them,” says Shaheen. At a minimum, he says, U.S. law requires companies to learn whether the principals of any organization they want to do business with are on the “specially designated nationals and blocked persons” list maintained by the Treasury Department’s Office of Foreign Assets Control; U.S. citizens are generally prohibited from having business dealings with any person or entity on the list. A more thorough vetting, he says, would include hiring a private international investigative firm to do a background check in the home country of the potential partner and its officers, including a review of police and court records and local newspaper files.
Beyond that, says George Terwilliger, partner and head of the corporate defense and special litigation group in the Washington, D.C., office of White & Case, any company making an acquisition or entering into a joint venture overseas should perform due diligence not only on its primary partner but also on anybody with whom the partner may have a third-party marketing or sales arrangement. That’s because, he says, “in many parts of the world the sales and marketing function is performed in whole or part by distributors, sales agents, or some other third party, and those are circumstances that experience has shown are rife with risk for corrupt payments.” The Foreign Corrupt Practices Act can be tough on companies that fail to vet their partners well. “The FCPA flows down to every one of your foreign subsidiaries operating abroad, even the smallest subsidiary you own,” says Lucinda Low. In fact, adds Stein, small international businesses that generate small percentages of corporate profits can sometimes be particularly prone to problems, because they tend to get less attention from management.
Indeed, Johnson & Johnson, a corporation known for commitment to ethical behavior, announced in February that some of its foreign units might have made improper payments in connection with the sale of medical devices in two “small-market countries.” The company alerted the Department of Justice and the Securities and Exchange Commission, the two federal agencies charged with enforcing the FCPA. It also accepted the resignation of the executive responsible for those business units, 55-year-old Michael J. Dormer, although it gave no indication that Dormer knew anything about the payments.
Not only do you, as a director, have a fiduciary duty to shareholders to see that your company operates within the law, but the regulators could go after you personally if your company acts illegally. Criminal penalties for violating FCPA anti-bribery provisions can range up to $100,000—plus as much as five years’ imprisonment—for officers, directors, employees, and agents.
Low says she’s not aware of any cases yet in which directors have been charged or fined, but adds, “I don’t think, in the current environment, that can be ruled out.” The Justice Department and the SEC, she says, “are looking very closely at the way corporate boards, and in particular audit committees, are exercising their responsibilities. If they find that there’s a lack of oversight with respect to these issues or the company’s compliance program, or that there’s open participation in corrupt practices, there is no question in my mind they would go after boards just as they would go after senior management.”
To be prosecuted, Terwilliger says, directors would have to have had some knowledge of the illicit behavior, and while simply turning a blind eye might meet that standard, it could be difficult to prove. However, Terwilliger, who is a former U.S. deputy attorney general, also says that directors could be targeted by a shareholder lawsuit if they didn’t deal aggressively with suspected violations of the FCPA, since that could present a direct risk to corporate revenues. In 2005 the SEC settled a case in which defense contractor Titan Corp. (now part of L3 Communications) allegedly gave more than $2 million, through its agent in the African country of Benin, to the election campaign of Benin’s then-incumbent president. Since that time, Titan and its individual officers and directors have been hit with two class-action lawsuits arguing that the FCPA violations harmed shareholders.
One way to minimize damages is to voluntarily report to Justice and the SEC any suspicions of illegal activity, as Johnson & Johnson did. That’s become a common strategy, in part because the government has said it will result in a “real, tangible benefit,” says Terwilliger. Both the SEC and the Justice Department have made it clear that they expect companies to aggressively investigate and disclose suspected FCPA violations. They also expect boards and especially audit committees to “step out smartly and independently to investigate” if the company does not, he adds. The message seems to be getting across. According to the law firm Gibson Dunn & Crutcher, headquartered in Los Angeles, 17 of the 20 newly disclosed FCPA investigations over the past two years stemmed from company disclosures—a sharp turnabout from the early 2000s, when most were initiated by the government.
Increasingly, says Low, the U.S. government is expanding its application of the FCPA beyond straightforward bribes-for-business cases. In 2004, for example, Kenilworth, New Jersey, pharmaceutical company Schering-Plough Corp. agreed to pay a civil penalty of $500,000 for violations of the internal-controls provisions of the FCPA. Without the knowledge of any of Schering’s U.S. employees, the company’s Polish subsidiary had made donations to a charitable foundation headed by a Polish government official. The donations were allegedly intended to induce the official to buy Schering-Plough pharmaceuticals for a government health fund.
U.S. companies have also been penalized by tougher laws abroad. Since taking office in 2004, the European Union’s top antitrust regulator, competition commissioner Neelie Kroes, has made fighting cartels a top priority of her five-year term. Dow Chemical was among five companies hit with a total EU fine of $682 million last November for fixing the price of synthetic rubber between 1996 and 2002. Last September an EU high court upheld fines levied by the commission against three companies found to have fixed prices for a chemical cleaning product, including Archer Daniels Midland Co., which was fined $12.9 million. And the EU’s battle with Microsoft continues. The EU fined the software giant $613 million in 2004 for, in the EU’s statement, abusing the “near monopoly” of the company’s Windows operating system, and last summer it hit Microsoft with another $371 million fine after claiming that the company hadn’t lived up to the terms of the EU’s 2004 directive to disclose more information about Windows to other software companies. It has threatened still more fines of as much as $1 billion against Microsoft, alleging again that the company hasn’t fully complied with the 2004 order and that it is overcharging competitors for information needed to make their products compatible with Windows.
In February the European Commission hammered four manufacturers of elevators, including United Technologies Corp.’s Otis Elevator subsidiary, with a record fine of E992 million (about $1.3 billion) for operating what the commission said were cartels to install and maintain elevators and escalators in Belgium, Germany, Luxembourg, and the Netherlands. Financial penalties have gotten stiffer for FCPA lawbreakers too. U.S. components of London-based energy-services provider Vetco International Ltd. agreed in February to pay a record $26 million in criminal fines for giving $2.1 million in bribes to Nigerian officials to obtain preferential customs treatment. Low suspects that the $26 million will not stand as the biggest FCPA criminal penalty for long. Federal regulators are already involved in a number of investigations where the potential penalties could go significantly higher, she says, including a probe of the government contractor Halliburton Co. in connection with a multibillion-dollar contract to build energy facilities in Nigeria.
The message is blunt: If you’re not convinced that your company has adequate controls in place to avoid the legal pitfalls of operating abroad, call your general counsel in now for a little—make that a long—chat. The skin you save could be your own.
