Last month the DOJ brought its first two corporate FCPA enforcement actions of the Trump Administration. The DOJ issued “Declinations with Disgorgement” under the FCPA Pilot Program to two U.S. based subsidiaries of German engineering and gases company Linde and to Boston-based engineering company CDM Smith. The Pilot Program was initiated in April 2016 as a one year program to encourage companies to self-disclose potentially criminal conduct under the FCPA, cooperate with the DOJ, remediate issues and disgorge profits in exchange for mitigation credit or a declination of enforcement^[1]. The DOJ announced in May 2017 that it would continue the Pilot Program while it assesses it for a final decision on its permanence.   

According to the declination letters, the companies qualified for a Pilot Program declination based on their timely and voluntary self-disclosure; thorough and comprehensive investigation; full cooperation (including providing all known relevant facts about the individuals involved in or responsible for the misconduct); compliance program and internal accounting controls enhancements; full remediation including termination/disciplinary actions against employees involved in the misconduct; and disgorgement of profits derived from the misconduct.

Linde

Linde acquired U.S.-based Spectra Gases (Spectra) in October 2006 pursuant to an “earn-out” agreement whereby three Spectra executives continued to manage Spectra for three years before receiving the earn-out payment. In November 2006, Spectra purchased a boron column from National High Technology Center (NHTC), a state-owned entity in the Republic of Georgia. The Spectra executives had previously agreed to give 75% of the profits of the gas produced by the boron column to companies controlled by NHTC officials in return for their help in ensuring that Spectra was chosen as the purchaser of the boron column in the first place. The remaining 25% of the profits went to Spectra.

Linde did not discover the corrupt arrangement, which lasted for over 3 years, until after it had dissolved Spectra pursuant to the earn-out agreement in January 2010 and became Spectra’s successor-in-interest. The declination letter does not specify when or how Linde discovered the corrupt arrangement; once it did, however, it withheld the earn-out payment intended for the Spectra executives, along with payments to the companies controlled by the NHTC officials. As part of the declination, Spectra agreed to disgorge approximately USD 6.4 million in profits it received before dissolution of Spectra and approximately USD 1.4 million in profits received after dissolution of Spectra. It also agreed to forfeit USD 3.4 million in corrupt proceeds owed to companies controlled by the NHTC officials. 

CDM Smith

CDM Smith also received a Pilot Program declination in June and agreed to disgorge over USD 4 million in profits. The DOJ investigation found that between 2011 and 2015 employees and agents of CDM Smith and its India subsidiary paid USD 1.18 million to government officials at the National Highways Authority of India (NHAI) and to officials in Goa for a water project contract. Bribes to the NHAI were paid through sub-contractors that provided no legitimate services. Notably, all the senior management at CDM Smith India were aware of the bribes and approved or participated in the misconduct. 

The Company also voluntarily reported to the World Bank that it had failed to disclose a sub-consulting contract and to seek approval in connection with a World Bank financed project in Vietnam as required by contract. The World Bank “conditionally non-debarred” CDM Smith and its affiliates for 18 months, during which time the Company will continue to be eligible to participate in World Bank-financed projects provided it meets the terms of the settlement, including adopting a corporate compliance program consistent with the World Bank Group Integrity Compliance Guidelines.

In addition, the NHAI recently announced that it had initiated an internal probe into bribes paid to its officials by CDM Smith. Recent press reports also indicate that the state government of Goa referred for inquiry to the State Chief Secretary the allegations of potential bribes paid by CDM Smith in connection with the water project in Goa. 

Key Takeaways

• DOJ Pilot Program. It is too early to say whether the Linde and CDM Smith actions are a signal of the future of FCPA enforcement under the Trump Administration. Regardless, after seven declinations since the initiation of the Pilot Program and a clear message that the Program will continue in the near term, it appears to be a real option for companies that discover potential FCPA violations and that are prepared to self-disclose, cooperate, remediate misconduct and pay disgorgement.

• Oversight over Foreign Subsidiaries and Operations. Both Linde and CDM Smith failed to identify and remediate the illicit activities of their foreign subsidiaries and operations. FCPA liability and reputational impact can flow to the parent as a result of misconduct of foreign subsidiaries and operations. It is therefore essential that companies maintain active oversight over their foreign subsidiaries and operations, especially in high risk jurisdictions. Oversight can take the form of financial and other audits, compliance reviews, local risk assessments, reporting lines into the parent, frequent communication, site visits and, in some cases, centralised systems for enterprise risk management, procurement and compliance. 

• Importance of Anti-corruption Due Diligence, Reviews and Audits. The Linde declination letter does not specify how Linde discovered the bribery scheme (or indeed whether it undertook pre-acquisition FCPA due diligence on Spectra or post-acquisition review and audits). The letter does indicate that it took Linde at least three years after acquiring Spectra and enough time after dissolving Spectra to generate USD 1.4 million in profits to identify the scheme. The case highlights the legal and commercial consequences of failing to identify misconduct early on by conducting pre-acquisition due diligence and thorough post-acquisition reviews and audits.

• Use of Third Parties to pay Bribes. Bribes paid by CDM Smith to government officials were funneled through sub-contractors that provided no legitimate services to the company. Because use of third parties to conceal bribes to government officials is a common theme in enforcement actions, taking steps to reduce the risk posed by them is critical, including by risk-based due diligence, anti-corruption contractual provisions, anti-corruption training and, importantly, monitoring.

The Linde declination letter can be found here and the CDM Smith declination letter can be found here.

^{[1] The companies that received the first three declinations under the Pilot Program paid disgorgement as part of parallel Securities and Exchange Commission (SEC) FCPA enforcement actions. The DOJ introduced “Declinations with Disgorgement” in September 2016 for two companies for which there were no parallel SEC enforcement actions.}